What Is an Occurrence Policy?

An occurrence policy covers claims made for injuries sustained during the life of an insurance policy. Under these types of contracts, the insured party has the right to request compensation for damages that occurred within the timespan that the policy was active, even if several years have since passed and the insurance agreement is no longer in force.

Key Takeaways

  • An occurrence policy covers claims made for injuries sustained during the life of an insurance policy, even if they're filed after the policy is canceled.
  • They cater specifically to events that may cause injury of damage years after they occur, such as exposure to hazardous chemicals.
  • An occurrence policy is an alternative to claims-made ones, which provide benefits only if a claim is filed while the policy is active.
  • Insurers typically place a cap on the total coverage offered through occurrence policies.

Understanding Occurrence Policies

Liability insurance policies generally fall into one of two categories: Claims-made or occurrence. The latter offers protection against financial loss on incidents that happened while the policy was in effect, regardless of when they're flagged and became apparent. In other words, it's possible to file a claim later, long after the contract has expired, provided there's evidence that its cause or triggering event took place during the period the insurance was active.

Occurrence policies cater specifically to events that may cause injury of damage years after they occur. For example, if an individual is exposed to hazardous chemicals, a significant amount of time could pass before he or she falls ill.

Occurrence coverage will usually cover the employer and the former employee for life. Years can pass before the injuries or damages become evident, and the policyholder is still protected, even after stopping insurance or switching to another provider.

In insurance, an occurrence is defined asan accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Insurers typically place a cap on the total coverage offered through such a policy. One form of cap limits the amount of coverage offered each year but lets the coverage limit reset each year. For instance, a company that purchases five years of occurrence coverage with an annual cap of $1 million will allow the policyholder to have up to $5 million in total coverage.

Occurrence Policies vs. Claims-Made 

Claims-made insurance only pays out if a claim is filed while the policy is active. That means if you cancel protection and then ask for compensation, you won’t be given it—unless an extended reporting period (ERP) or “tail coverage” is purchased.

Business insurance policies are often offered as either a claims-made policy or an occurrence policy. While the claims-made policy provides coverage for claims when the event is reported, the occurrence policy provides coverage when the event occurs.

Claims-made policies are used to cover the risks associated with business operations, such as the potential for mistakes associated with errors and omissions in financial statements. They are also applied to cover businesses from claims made by employees, including wrongful termination, sexual harassment, and discrimination allegations. This type of liability is referred to as employment practices liability (EPLI), and might also cover the actions of directors and officers of the business.

Until the mid-1960s the claims-made wording didn’t exist, and into the early to mid-1970s its use was sporadic. The occurrence form now dominates, except for most professional and executive liability exposures, where claims-made policies rule.

Advantages and Disadvantages of an Occurrence Policy

The most obvious benefit of an occurrence policy is that it offers long-term protection. As long as coverage is in place when the incident occurred, it’s possible to make a claim on that period years into the future.

Another advantage is that occurrence policy costs tend to be fixed. Premiums generally don’t increase unless the risk profile of the insured changes.

On the downside, occurrence policies are, understandably, more expensive than claims-made ones. Occasionally, they can be harder to come by, too.

There’s also the risk that a company taking out such a policy underestimates the level of damages it could incur later on down the line, forcing it, as a result, to pay out a chunk from its own pocket.