Claims-Made Policy: Definition, How It Works, and Coverages

What Is a Claims-Made Policy?

A claims-made policy refers to an insurance policy that provides coverage when a claim is made against it, regardless of when the claim event occurred. A claims-made policy is a popular option for when there is a delay between when events occur and when claimants file claims. However, the policy only covers claims made while the policy is active. Businesses often carry claims-made policies or occurrence policies, which extend coverage for claims made on inactive policies if claim events occurred when the policies were active.

Understanding Claims-Made Policies

A claims-made policy is a type of insurance policy most commonly used to cover the risks associated with business operations. For example, these policies are often used to cover the potential for mistakes associated with errors and omissions (E&O) in financial statements. They are also used to cover businesses from claims made by employees, including wrongful termination, sexual harassment, and discrimination claims.

Claimants may make claims against a policy months after the claims' event takes place. This type of liability is referred to as employment practices liability and may also cover the actions of directors and officers of the business.

Insurance companies may also offer claims-made and reported policies, which most find less desirable than a standard claims-made policy because claims must be reported during the policy period to be covered. This reduces the amount of time that a business can expect to be covered, which can be a problem in situations when many months pass between the claim event and the claim filing.

Claims-Made vs. Occurrence 

Nearly all liability policies fall into one of two categories: claims-made or occurrence.

A claim made while the policy is in force triggers coverage for a claims-made policy. The insurance company is obligated to defend the policyholder and pay for the claims. The insurance policy will include a specified period in which coverage applies, and any claims made during that time are covered under the policy. This type of trigger is different from an occurrence policy, which is based on the time in which the claim event occurred since the occurrence policy trigger only covers claims that come from incidents that fell during a specified period. Occurrence policies don’t specify when the accident must take place, as long as the injury or damage it causes occurs during the policy period.