Claims-Made vs. Occurrence: Why Your Liability Policy Might Not Pay

Why did my insurer deny my claim?

You've paid premiums for years, and the moment you file a claim, you get a denial letter. The reason is often a coverage trigger you never understood: whether your policy is claims-made or occurrence-based. I've seen too many business owners discover this the hard way. The fix isn't complicated, but it requires knowing what you're buying.

What's the difference between claims-made and occurrence coverage?

Occurrence policies cover incidents that happen during the policy period, even if you report the claim later. Claims-made policies, on the other hand, only cover claims that are both made and reported while the policy is active. This is a fundamental distinction, and it's especially important for professional liability insurance, which is almost always written on a claims-made basis (IRMI).

Does my general liability policy cover me if I get sued next year?

If you have general liability, you're likely on an occurrence form, so a claim arising from an incident that occurred while the policy was in force—even if you report it after the policy expires—should be covered. But don't assume that applies to every policy. Your professional liability, errors and omissions, or malpractice coverage probably works differently. That's a trap.

What is a retroactive date, and why should I care?

Claims-made policies often include a retroactive date. The retroactive date means you're covered for incidents that happen on or after that date, but not before (The Hartford). If you switch insurers and the new policy has a later retroactive date, you could lose coverage for past work. Always check that your retroactive date covers the start of your business or your prior policy's retroactive date.

What if I cancel my policy and a claim comes in later?

This is where extended reporting periods come in. A typical claims-made policy provides a 30- to 60-day extended reporting period, but you can buy a longer one for an additional cost (The Hartford). If you cancel or switch to an occurrence policy, you need that tail coverage. I've seen consultants pay thousands for a tail, but it's nothing compared to defending a claim on your own.

Does my general liability also cover professional mistakes?

No. General liability covers bodily injury and property damage, while professional liability covers financial losses from errors and omissions (IRMI). A slip-and-fall in your office is general liability; a mistake in the financial advice you give a client is professional liability. You need both. The Hartford explicitly recommends carrying both for full protection (The Hartford).

Is it true that defense costs come out of my policy limits?

For professional liability, yes—defense costs are typically inside the limit. For general liability, they're usually paid in addition to the limit (IRMI). This means a $1 million professional liability policy with $300,000 in defense costs leaves only $700,000 for a settlement. That's a critical difference when you're comparing quotes.

What's the biggest misconception about liability insurance?

That buying a policy is enough. I've had clients who thought their general liability covered everything, including their professional advice. It doesn't. And I've seen businesses with a professional liability policy that excludes bodily injury—so they had no coverage for a customer who tripped over a cable. The misconception is that insurance is a one-size-fits-all shield. It's not. It's a patchwork of coverages, each with its own triggers, limits, and exclusions.

What I'd actually do

Here's my blunt advice: if you're a professional—architect, consultant, tech, healthcare—you need both a general liability policy and a professional liability policy. General liability is cheap, averaging about $810 a year (The Hartford). Professional liability is more, but you can get technology E&O for about $146 a month (The Hartford). Don't rely on a Business Owner's Policy alone; it bundles general liability, property, and business income, but it typically doesn't include professional liability (The Hartford).

Also, when you buy any claims-made policy, insist on a retroactive date that goes back to your business's start or your prior policy's retroactive date. And if you ever switch carriers, buy extended reporting period coverage. It's the only way to avoid a gap.

Finally, read your policy's exclusions. E&O doesn't cover intentional misconduct or fraud (Cornell Law School Wex). Professional liability doesn't cover bodily injury (The Hartford). Knowing what's not covered is just as important as knowing what is.

You don't need to become an insurance lawyer, but you do need to know the difference between claims-made and occurrence. It could be the difference between a denied claim and a paid one.

Sources

• IRMI - Contractors Professional Liability and the CGL
• The Hartford - Professional Liability Insurance
• The Hartford - Errors & Omissions Insurance
• Cornell Law School Wex - Errors and Omissions