Occurrence vs. Claims Made Insurance Policy Considerations for Construction Professionals

Recently, several insurance and construction professionals have contacted us regarding the differences between claims made and occurrence based commercial general liability (CGL) insurance policies. A brief explanation of the key differences is provided below.

An occurrence based CGL policy is insurance coverage for a fixed window in time (determined by the policy effective dates) that covers claims made by third parties for bodily injury and/or property damage (subject to policy terms and conditions). This means that even if a claim is made 25 years after expiration of the policy (provided the statute of limitations and/or repose has not expired), an occurrence form CGL will respond if the claim occurred during the effective dates of the policy. This is true even if the occurrence based CGL policy is not renewed and an insured never purchases another policy. This is by far the most common and simple way to insure construction risks.

On the other hand, a claims made policy has several variables and restrictions to consider. First, a claims made policy does not create a fixed window in time for coverage purposes. A CGL claims made policy provides coverage for claims made by third parties for bodily injury and/or property damage (subject to the policy terms and conditions) only if, at the time the claim is made, the policy is currently in effect and the claim occurred after the retroactive date of the policy. The retroactive date of a claims made policy is negotiable and should go back in time to cover the earliest date of activity that could give rise to a claim. Even more problematic is that when an insured discontinues coverage or purchases a policy with another carrier, coverage may completely evaporate (save for any reporting tail included with the policy, typically 30-90 days) unless the retroactive date is maintained on subsequent policies. Furthermore, if an insured maintains coverage with the claims made policy carrier for a long period of time, the policy premium most likely will continue to rise as more time on the risk is accumulated from the retroactive date to the present day.

A claims made policy is often attractive to potential insureds because it appears less expensive initially. In the long term, a claims made policy may cost more than an occurrence policy and provide less reliable coverage. Additionally, there are a number of risks related to moving coverage from one carrier to another or otherwise having their coverage discontinued or non-renewed. Policyholders who have a claims made policy should be aware that they may be able to purchase an extended reporting period to limit the risks related to discontinuation of a claims made policy.

The attorney who drafted this entry is no longer with the firm. For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com