Short-duration insurance contracts are issued on either a loss occurrence or claims-made basis. Under a loss occurrence insurance policy, a loss event that occurs during the contract period will be covered by the insurance contract, regardless of the length of time between the date of loss and the date reported to the insurance entity.Conversely, in a pure claims-made insurance policy, a loss event that is reported to the insurance entity during the contract period will be covered by the insurance contract, regardless of the date of loss. Typically, a retroactive date is established in the insurance contract, whereby loss events occurring prior to the retroactive date are not covered. All subsequent renewal policies will use the same initial retroactive date.
Insurance contracts are generally issued on a claims-made basis when the date of loss may be difficult to determine or when the loss may span over a long period. A claims-made policy mitigates potential coverage disputes because the date of loss is generally not relevant to the determination of coverage. Typically, professional liability insurance contracts (e.g., directors’ and officers’ liability insurance and medical malpractice insurance) are issued on a claims-made basis.
In practice, many claims-made policies have endorsements (e.g., extended reporting period provisions or extension of the policy in force period – commonly referred to as “tail coverages”) that allow for varying occurrence characteristics to be introduced into the policy. The tail coverage may be for a definite or an indefinite period. The effect of adding tail coverage to a claims-made policy may, in substance, create an occurrence insurance policy. Furthermore, if a policy gives the insured a unilateral option to purchase tail coverage at a premium not to exceed a specified fixed maximum, we believe the entity should record liabilities as if it was an occurrence-based policy.
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