What Is an Occurrence Policy?

What Is an Occurrence Policy?

Let me tell you directly: an occurrence policy is a type of insurance that covers claims for injuries or damages that happen while the policy is active, even if you file those claims years after the policy expires.

Under this kind of policy, you as the insured can seek compensation for events that took place during the coverage period, no matter how much time has passed since the policy ended.

Understanding Occurrence Policies

You need to know that liability insurance generally comes in two forms: claims-made or occurrence. With an occurrence policy, you're protected from financial losses due to incidents that happened while the policy was in effect, regardless of when you discover or report them.

This means you can file a claim long after the policy expires, as long as you have evidence that the triggering event occurred during the active period. These policies are particularly useful for situations where injuries or damages might not show up for years, like exposure to hazardous chemicals—if someone gets exposed and falls ill much later, the policy still applies.

Occurrence coverage typically extends to you as the employer and any former employees for life. Even if years go by before the damage becomes evident, you're still protected, whether you've stopped the insurance or switched providers.

Remember, in insurance terms, an occurrence is defined as 'an accident, including continuous or repeated exposure to substantially the same general harmful conditions.' Insurers usually set a cap on the total coverage for these policies. For example, one common cap limits the amount per year but allows it to reset annually—so if you buy five years of coverage with a $1 million annual cap, you could have up to $5 million in total protection.

Occurrence Policies vs. Claims-Made

Let me compare this to claims-made policies: those only pay out if you file the claim while the policy is still active. If you cancel the policy and then try to claim, you won't get compensation unless you've bought an extended reporting period or tail coverage.

Business insurance often comes as either claims-made or occurrence. Claims-made covers claims when the event is reported, while occurrence covers when the event actually happens. Claims-made policies are common for risks like errors in financial statements or employee claims such as wrongful termination, sexual harassment, or discrimination—this is known as employment practices liability, which can also cover directors and officers.

Historically, claims-made policies didn't exist until the mid-1960s, and their use was limited until the 1970s. Now, occurrence policies are more dominant, except in professional and executive liability where claims-made prevail.

Advantages and Disadvantages of an Occurrence Policy

The biggest advantage is the long-term protection it offers—as long as the incident happened during the coverage period, you can claim years later.

Another plus is that premiums for occurrence policies are usually fixed and don't increase unless your risk profile changes. On the downside, these policies are more expensive than claims-made ones and can sometimes be harder to find.

There's also a risk: if you underestimate future damages, you might end up paying out of pocket beyond the policy limits.