The term “occurrence” seems simple enough, but when it’s used in insurance situations, it can lead to dangerous misunderstandings, says Kevin Forbes, sales executive with ECBM Insurance Brokers and Consultants.
“The term ‘occurrence’ has several uses in insurance contracts and can be a significant source of misunderstanding,” Forbes says, adding that it is important for policyholders to understand how occurrence is interpreted in their insurance program.
Smart Business spoke with Forbes about the importance of occurrence and how it can affect your insurance claims.
What is an occurrence?
When a claim is made, the first act an insurance company will perform is to determine if the claim meets the definition of an occurrence. An occurrence is defined in most liability insurance policies as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ Before any policy responds to a loss, the circumstances must meet the definition of occurrence in the liability policy.
Occurrence can also refer to the type of policy trigger, such as occurrence versus claims made. Finally, occurrence is used to define how the policy limits of insurance are paid.
What is the difference between a claims-made insurance policy and a per-occurrence policy?
There are two ways a liability policy can be written. An occurrence policy is written to cover incidents that take place during a specific time period, the policy period. It does not matter when the suit for damages is filed under these contracts, only when the occurrence that caused the loss takes place. This is what you would typically find on a commercial general liability policy and other public liability policies. Typically, these policies are written for companies where accident or loss exposure is of a specific nature and you can pinpoint the time it took place.
The other policy form is a claims-made coverage form. In these contracts, the coverage is triggered on the date the claim against the company is made. A long time can pass between the time of the occurrence and the actual filing of a claim. These forms are used for businesses that have losses that take place over a long period of time, including such exposures as pollution, pharmaceuticals, chemical exposures and similar operations.
How can occurrence affect an insurance claim?
Managing coverage triggers can be tricky. A company can be in business and make a product for 20 years and be insured under an occurrence form general liability policy for products liability during that time. Let’s assume that company no longer makes the product and discontinues insurance coverage in year 21. If a claim took place during the 19th year but it wasn’t filed against the company until two or three years after it ceased coverage, the policy in effect when the accident took (the year 19 policy) would still provide coverage to the policyholder.
A claims-made policy only covers claims filed during the policy period. Once the policy expires, so does coverage. In the example above, a claim filed after the contract expires would not have coverage, even though it was in force when the accident took place. There are ways to extend the coverage forms to provide a somewhat broader period, but there are still pitfalls that need to be managed.
