Article

Choosing claims made or occurrence based coverage can have a significant impact on your captive insurance company. This choice impacts not only the way claims are handled, but also the long-term financial strategy, premium structure, and risk management philosophy of the captive. Understanding the differences between these two coverage types is essential for any organization seeking to maximize the value and control offered by a captive insurance program.

Occurrence Coverage: Long-Term Protection and Simplicity

Occurrence coverage is often described as the more straightforward of the two options. Under this model, a policy will respond to claims arising from incidents that take place during the policy period, regardless of when the claim is actually reported. For example, if a workplace accident occurs in 2022 while the policy is active, but the resulting claim isn’t filed until 2026, the 2022 occurrence policy would still provide coverage. This feature is especially valuable for risks that may not manifest immediately, such as environmental exposures, latent injuries, or product defects—so-called “long-tail” claims.

Because occurrence coverage promises protection for incidents that happened during the policy period, even if the claim surfaces years later, it offers a sense of continuity and peace of mind. There’s no need to purchase additional “tail” coverage to extend protection after the policy ends. Each year’s policy stands on its own, with its own limits and aggregates, which reset annually. This structure is particularly well-suited for industries like construction, manufacturing, and environmental services, where claims may arise long after the original event.

However, the simplicity and long-term protection of occurrence coverage come at a price. Premiums are typically higher, reflecting the insurer’s extended exposure and the uncertainty of future claims. For some lines of coverage, such as certain professional or executive liability risks, occurrence forms may not even be available, as the potential for delayed claims is harder to quantify.

Claims Made Coverage: Flexibility and Cost Efficiency

Claims made coverage, on the other hand, is structured around the timing of the claim rather than the timing of the incident. A claims made policy will only respond if the claim is both made and reported during the active policy period, or within a specified extended reporting period if such “tail” coverage is purchased. The critical date is when the claim is brought, not when the underlying event occurred. Most claims made policies also include a “retroactive date,” meaning only incidents that happen after this date are eligible for coverage.

This approach is common for professional liability, directors and officers (D&O), errors and omissions (E&O), and medical malpractice insurance. The primary advantage is cost: because the insurer’s exposure is limited to claims reported within the policy period, premiums are generally lower, especially in the early years of a captive program. Claims made coverage also allows for more precise management of coverage as risks evolve or as the business changes.

However, claims made coverage requires careful administration. If a policy is canceled or not renewed, and a claim is made later, there is no coverage unless the insured has purchased an extended reporting period—commonly known as “tail” coverage. Businesses must also be diligent about tracking retroactive dates and ensuring that claims are reported promptly. Aggregate limits apply to all claims reported during the policy period, which can lead to coverage exhaustion if there are multiple large claims.

Choosing the Right Coverage for Your Captive

The decision between occurrence and claims made coverage should be guided by the nature of your business’s risks, industry norms, and your organization’s appetite for administrative complexity versus upfront cost. Occurrence coverage is generally preferable when your business faces risks with the potential for delayed discovery or litigation, such as environmental liabilities or product defects. It is also ideal if you value simplicity and want to avoid the need for tail coverage, even if this means paying higher premiums.

Claims made coverage, by contrast, is best suited for professional, executive, or medical liability risks, where claims are more likely to arise from actions in the past but be reported in the future. It offers lower initial costs and greater flexibility, which can be attractive for new captives or businesses with a limited claims history. However, it demands a higher level of administrative vigilance to avoid gaps in coverage.

Feature	Occurrence Coverage	Claims Made Coverage
Trigger for Coverage	When incident occurs (during policy period)	When claim is made and reported (during policy)
Coverage for Late Claims	Yes, if incident was during policy period	Only if claim is made while policy is active
Need for Tail Coverage	No	Yes, if protection needed after policy ends
Premium Cost	Higher	Lower (initially)
Common Uses	General liability, auto, umbrella	Professional liability, D&O, E&O, malpractice
Policy Limits	Reset annually	Aggregate for policy period
Administration Complexity	Lower	Higher (requires tracking retro dates, tail, etc.)

When to Use Each Type

Occurrence coverage should be used when your organization is exposed to long-tail risks and values straightforward, long-term protection. Claims made coverage is most appropriate for professional or executive liability exposures, or when cost control and flexibility are top priorities, and your team is equipped to manage the additional administrative requirements.

Ultimately, the choice between claims made and occurrence coverage is foundational to the success of your captive insurance program. By aligning your coverage structure with your risk profile and business objectives, you can maximize both control and financial performance, ensuring your captive delivers the greatest possible value over the long term. Communication with your broker will be paramount in the decision surrounding which coverage will be best suited for your captive insurance insurance company. C.I. coordinates with your broker, and all other service providers to ensure your captive strategy is optimized.