Commercial general liability (CGL) insurance, or business liability insurance, is most often purchased by entities such as real estate agents, general contractors, landscaping companies, and others of the like, to protect against any instances where bodily injury, property damage, or advertising injury may occur, which could result in an insurance claim that the business entity would be lawfully obligated to pay for.
Insurance companies may provide two different types of liability coverage—occurrence or claims-made—and each comes with its own set of advantages and disadvantages.
The limitations associated with each type of policy are largely dependent upon two factors:
- When an incident occurs
- When a claim is filed
Occurrence Policy: An occurrence policy protects a business from any covered incident that happens during the policy period, regardless of when a claim is reported. This type of policy will cover a business even if the claim comes in after the policy is canceled, so long as the incident occurred within the time frame enforced by the initial policy.
Example: Bob the business owner purchased an occurrence policy in 2010 but switched to a new form of coverage or insurance supplier in 2015. Bob gets sued in 2018 for an incident that occurred in 2012. In this instance, Bob is still covered by his original occurrence policy, because it was active at the time of the incident.
Claims-Made Policy: A claims-made policy provides coverage for claims that occur, and are reported, within the specific time period set forth by the policy. This means that if a policy is canceled, or a premium isn't paid, any claim that comes through will not be covered, even if the incident occurred during the period when the policy was active.
Example: Bob the businessman purchases a claims-made policy in 2010 and continues coverage through 2012, then cancels. He does not purchase any extension (tail coverage) on the policy’s original limits. In 2013, Bob is sued for an incident that occurred in 2011. Since the claims-made policy is no longer in effect, and he did not purchase tail coverage, Bob is the liable party obligated to pay for damages—not his old insurance carrier.
Tail Coverage, or, officially, an extended reporting period (ERP), is an additive option that becomes available only after a policy has been terminated. In effect, a 'tail' endorsement extends the limits of claims-made coverage indefinitely. For a claims-made policy to cover claims made after the expiration date, a tail can be purchased to protect the policyholder from past incidents, despite a claim being made post-policy cancellation.
Example: Bob the businessman purchases a claims-made policy in 2010 and continues coverage through 2012, then cancels. He then purchases 'tail' coverage. In 2013, Bob is sued for an incident that occurred in 2011. Since he was continuously covered at the time of the incident, and purchased extended coverage, his old insurance carrier is still liable to pay for the suit, even though the original policy is no longer in effect.
- An occurrence policy has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported.
- A claims-made policy only covers incidents that happen and are reported within the policy's time frame, unless a 'tail' is purchased.
To learn more about certificates of insurance and risk management, answer any other questions you may have about the difference between occurrence-basis and claims-made-basis insurance, or to Schedule a Demo of how BCS can help you and your business, Contact Us Today.