Claims-made policy example
Imagine you’re a carpenter hired to install bookshelves. You have professional liability insurance to help protect you and your business from any errors or mistakes you may make on the job.
Once you finish the job, you decide to step away from carpentry to change careers. You let your insurance lapse but… whoopsie! The bookshelf breaks, causing damage to your client’s home, and your installation is to blame.
Even though you had insurance during the project, because professional liability is a claims-made insurance policy — and you no longer have that coverage — you won’t have help paying for the damage. (Unless you have tail coverage.)
Claims-made vs. occurrence-based policies
Not all insurance coverages are claims-made policies. Many other types of coverages are offered as occurrence-based policies. (They’re both a form of liability coverage, however.)
With occurrence-based policies, if an incident happens while your coverage is active, you can get protection from it, no matter when the claim is filed.
For example, say you have an employee who suffers an injury on the job. Workers’ compensation can help cover their medical expenses, recovery, and any lost wages at the time of the injury.
Suppose that employee comes back years later with further medical issues that they claim stem from the original injury. You can still file a workers’ comp claim with your original insurer — even if you’ve switched insurance carriers.
In general, insurance is split between these two types of policies. Some of the most common claims-made coverages are:
Some of the most common occurrence-based policies are:
It might seem like occurrence policies are superior to claims-made policies, but that’s before you fully understand the benefits of claims-made policies.
Because occurrence-based policies are so much broader and can cover you well beyond the end of your coverage, claims-made policies are generally less expensive than occurrence coverage.
The other thing to know is that you can opt to make your claims-made policies cover you for as long (or short) as you want.
Tail coverage and prior acts coverage
Tail coverage and prior acts coverage are endorsements (or riders) that you can add to a claims-made policy to expand your coverage window.
With tail coverage, you can extend your coverage beyond your policy’s expiration date. This extension can be for a few days or up to your whole lifetime.
So in our first example with the unfortunate bookshelves, if you had purchased tail coverage for the next few years, your insurer could help pay for the damage, even though your policy had lapsed.
Prior acts coverage is the flip side of tail coverage. If you switch insurance companies, your new policy will only give you coverage from the date you sign up — unless you add prior acts coverage.
With prior acts coverage, you can essentially back-date your insurance start date. Depending on your insurer and your needs, this might cover the last few years or your entire career thus far.
Don’t be afraid of claims-made policies; they’re super common. Plus, with the ability to add tail coverage and prior acts coverage, you can get the protection you want, no matter when an incident occurs or a claim is filed.
Understanding your insurance with NEXT
Being covered is one thing; knowing how your coverage works is nearly as important. At NEXT, we’re 100% dedicated to small businesses, so we want you to understand your insurance and only get the coverage you need.
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