Occurrence Policy

Occurrence Policy: What It Is, How It Works, Pros and Cons

Key takeaways

• An occurrence policy covers claims for injuries or damages that happened while the policy was in force, even if the claim is filed years later.
• It’s useful for exposures that produce delayed harm (e.g., chemical exposure).
• Unlike claims-made policies, occurrence policies respond based on when the event occurred, not when the claim is reported.
• Insurers often impose coverage limits or caps; occurrence coverage is typically more expensive than claims-made coverage.

What is an occurrence policy?

An occurrence policy is a form of liability insurance that pays for claims arising from incidents that took place during the policy period, regardless of when the claim is actually filed. If the triggering event occurred while coverage was active, the insurer may be responsible even if the policy has since expired.

An “occurrence” is generally defined as an accident, including continuous or repeated exposure to substantially the same harmful conditions.

How it works

• Coverage is tied to the date of the incident, not the claim date.
• If harm from an incident becomes apparent years later, a claim can still be made against the original occurrence policy.
• Insurers commonly set limits on coverage. One common structure is an annual limit that can effectively accumulate over multiple policy years (for example, five years of coverage with a $1 million annual limit could provide up to $5 million in aggregate protection for incidents that occurred across those years).

Occurrence vs. claims-made

• Claims-made: Pays only if the claim is reported while the policy is active. To cover claims reported after cancellation, a policyholder must buy an extended reporting period (ERP) or “tail” coverage.
• Occurrence: Pays for incidents that occurred during the policy period, even if the claim is filed later. No tail is required to cover later-reported claims arising from the covered period.

Claims-made forms are common for professional and executive liability products (e.g., errors and omissions, directors & officers), while occurrence forms are more typical for general liability and risks with latent injuries.

Typical uses and examples

• Latent injury risks — exposures that may not produce immediate symptoms, such as toxic chemical exposure or asbestos-related claims.
• Employers and former employees — occurrence policies can cover both for events that happened while the policy was active, even after someone leaves the company.
• General liability scenarios where the timing of discovery or injury is uncertain.

Advantages

• Long-term protection: Claims arising from covered incidents can be made long after the policy has expired.
• Predictable premiums: Premiums tend to remain stable unless the insured’s risk profile changes.

Disadvantages

• Higher cost: Occurrence policies are generally more expensive than claims-made equivalents.
• Availability: They can be harder to obtain in certain markets or for certain risks.
• Potential underinsurance: A policyholder may underestimate future exposure and face significant uncovered liability if limits are insufficient.

Summary

An occurrence policy provides durable protection for incidents that happen during the policy period, making it well suited to risks where harm may surface long after exposure. It contrasts with claims-made policies, which require claims to be reported while coverage is active (or during an extended reporting period). When choosing between the two, consider the nature of the risk, expected latency of claims, premium cost, and whether limits adequately reflect potential future liability.