What Is an Occurrence Policy — a practical guide
Summary
An occurrence policy is a form of liability insurance that covers injuries, property damage, or other losses that “occur” while the policy is in force, regardless of when the claim is actually reported. In contrast, a claims-made policy covers claims only if they are reported while the policy is active (or within an extended reporting period). Occurrence policies are commonly used for long‑tail exposures where harm may not appear until years after the triggering event (e.g., toxic exposure, latent disease, some product and environmental claims). (Source: Investopedia)
Why this matters
If an event that leads to a liability happens while you have occurrence coverage, you can file a claim later—even after the policy has lapsed or you’ve switched insurers. That feature affects risk planning, pricing, and decisions about buying “tail” or “nose” coverage when you change policies or carriers.
Key concepts
– Occurrence: Typically defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
– Claims-made: Pays only if the claim is presented while the policy is active (unless you purchase an extended reporting period/tail).
– Per-occurrence limit: The maximum the insurer will pay for a single covered event.
– Aggregate limit: The maximum the insurer will pay for all claims during a policy period (some policies reset per year; others have a single aggregate).
– Tail/ERP (extended reporting period): Extra period purchased with claims-made policies to report claims that arise from events during the policy period.
When to prefer an occurrence policy
– Long-tail liabilities: exposures where injury or damage can surface years later (asbestos, environmental contamination, chemical exposures, some product liabilities).
– When you expect to stop insurance or change insurers and want ongoing protection for past acts without buying a tail.
– When you want simplicity of knowing coverage depends on when the event occurred, not when it’s reported.
When claims-made might be chosen instead
– Professional liability (E&O), directors & officers (D&O), employment practices liability (EPLI), and other risks where insurers and buyers price and manage exposure differently—claims-made forms dominate these markets because they better control aggregate exposure and pricing over time.
– When you want lower initial premiums and can manage tail exposures by buying an ERP or through contractual arrangements.
Advantages of occurrence policies
– Long-term protection: Claims can be made years later if the event occurred during the policy period.
– No tail purchase required: You don’t need an extended reporting period to cover late-filed claims arising from events that occurred while the policy was active.
– Predictable coverage trigger: Coverage is tied to occurrence date.
Disadvantages of occurrence policies
– Higher premiums: Because the insurer retains exposure for events reported far in the future, occurrence policies typically cost more.
– Availability: Some lines (especially professional/executive liabilities) are primarily written on a claims-made basis.
– Potential underinsurance risk: If you underestimate possible future damages and buy inadequate limits, you may be liable for the remainder.
Practical steps for businesses and individuals
1) Identify the nature of your exposures
– List operations, products, services, and historical activities that could trigger long-delayed claims (environmental work, manufacturing, chemical handling, long-term occupational exposures).
– Classify exposures as short-tail (injury is immediate) or long-tail.
2) Decide which form is appropriate
– Prefer occurrence for long-tail risks or when you want protection for past acts without buying tail coverage.
– Consider claims-made for professional/executive risks where markets and pricing favor claims-made forms.
3) Estimate limits and retentions
– Prepare a realistic loss-run analysis or scenario modeling to estimate potential single-event and cumulative losses.
– Choose per-occurrence and aggregate limits that reflect worst-case plausible outcomes. Remember some insurers offer annual limits that “reset” each year; confirm whether total exposure is per-year or summative over the policy term.
4) Shop and compare offers
– Request quotes for both occurrence and claims-made options (if available) to compare premiums and terms.
– Compare not just price but limits, aggregate caps, definitions of “occurrence,” exclusions, and claims handling reputation.
5) When switching insurers: cover the gap
– If moving from an occurrence policy to a claims-made policy, know that future claims linked to past occurrences may no longer be covered—so evaluate your exposure.
– If moving from claims-made to claims-made, consider buying tail/ERP to report claims arising from past acts. If you move from claims-made to occurrence, check how retroactive dates and prior acts are handled.
6) Negotiate policy language
– Clarify the definition of occurrence and continuous exposure language to avoid disputes.
– Check how subcontractor actions, sudden vs. gradual pollution, and latent injuries are treated.
– Confirm whether defense costs are inside or outside limits, and whether there’s duty to defend.
7) Maintain records and incident reporting
– Keep detailed records of incidents, exposures, notices, contracts, and safety measures. These support claims that an occurrence happened during a covered period.
– Train staff on timely incident reporting and documentation—even if claim reporting isn’t required until much later, contemporaneous records are crucial.
8) Consider alternative risk financing if occurrence is unaffordable
– Self-insurance, captives, risk pools, or higher deductibles may be ways to manage long-tail exposure if occurrence premiums are prohibitive.
– Reinsurance can be used by large organizations to shift retained exposure.
9) Manage costs over time
– If you purchase occurrence coverage, maintain risk-control programs to limit future damages and potentially negotiate better renewal terms.
– If using claims-made, shop for reasonable tail pricing when leaving a carrier and compare tail vs. the cost differential for occurrence forms.
Practical checklist for buying or renewing occurrence coverage
– Does the policy define “occurrence” in clear terms?
– Are per-occurrence and aggregate limits adequate? Is there an annual reset or single aggregate?
– Are defense costs included or outside the limit?
– Are exclusions appropriate (e.g., pollution, professional services, cyber risks)?
– Does the policy cover subsidiaries, acquisitions, and prior acts?
– How does the carrier handle continuous or repeated exposure claims?
– What is the insurer’s claims-paying reputation and financial strength?
– What is the premium difference vs. claims-made and what’s the break-even considering tail costs?
Example scenarios
– Occurrence preferred: A manufacturing firm exposed workers to a chemical in 2010 under a policy that ran 2009–2011. An illness linked to that exposure is diagnosed and claimed in 2024. If the firm had occurrence coverage covering the year of exposure, the claim is likely covered even though the policy has long since lapsed.
– Claims-made preferred: A consulting firm buying errors & omissions insurance may choose claims-made because the market availability and price are focused on that form; the firm will manage tail risk on exit by purchasing ERP if needed.
Common pitfalls to avoid
– Failing to understand the difference between per-occurrence and aggregate limits—and how they apply across policy years.
– Letting a claims-made policy lapse without purchasing a tail when there’s meaningful risk of delayed claims.
– Relying on vendor or subcontractor insurance without verifying the policy form and period—vendor occurrence coverage that existed at the time of an incident may be the only protection.
Where to get help
– Work with a knowledgeable insurance broker or risk manager who can model exposures and explain market options.
– Use legal counsel to review policy wording and endorsements, especially for complex or high‑exposure industries.
Source
– Investopedia, “Occurrence Policy” (summary and definitions adapted from https://www.investopedia.com/terms/o/occurrence-policy.asp)
If you’d like, I can:
– Create a one-page checklist customized to your industry; or
– Run a short scenario analysis if you provide basic details about your exposure (industry, years of operation, types of potential latent harm).