Occurrence vs Claims Made

Occurrence vs Claims Made

Q: “As a professional CPA for the last five years, I’ve always insured my accounting business with professional liability insurance. However,  I’ve been experiencing a few “cash flow problems” lately and was wondering if I could cancel my policy this year, go uninsured (I’m downsizing my clients) then resume it next year when I relaunch my business. Is this a wise decision?”

Susan L.
Portland, ME

 A:  Susan, your question highlights a very big misunderstanding for a lot of insured professionals. I feel it is necessary to let everyone know so that they can educate themselves and prevent making this common mistake. I think everyone will think, “OK, this is fine, she made the decision to do it and she KNOWS she will be uninsured, and she will pick up the tab if she were to be sued this year.”

To truly know how Susan’s business will be affected, professional liability insurance (also known as Errors & Omissions insurance, or E&O) requires a deeper insight into her policy. We need to know if it is occurrence-based or claims-made policy. This will make a BIG impact on her coverage and premiums for when she wanted to be insured again.

Let’s first discuss what is occurrence based and claims made based.

• An occurrence-based policy protects you from any covered incident that occurs during the period while the policy is in effect. As long as the incident occurred during the period in which coverage was in force, an occurrence policy will respond to claims that come in, even after the policy has been canceled.
• A claims-made policy is provides coverage for claims when BOTH a) the alleged incident and b) the resulting claim happen during the period the policy is in force, and c) as long as the insured continues to pay premiums for the initial policy and any subsequent renewals. Once premiums stop, the coverage stops. Claims made to the insurer after the coverage period ends aren’t covered. This is true even if the incident occurred while the policy was in force.

So, if her policy was an occurrence based, then financial strategy is fine. It makes sense to do what she was intending to do. As a disclaimer: I am not advocating going this route; I would definitely advise against this!

If her policy was claims-made, then it’s a big no-no. It will open her up to a lot of potential risk. She was in business from 2010 to 2015—if she were to cancel her policy now, she would NOT have coverage for 2010-2015. If a mistake or error came up and her client decided to sue her during 2010-2015, she will NOT have coverage and will have to personally defend herself without insurance.

She is completely on her own:

• Any legal and defense fees are her own.
• Any liabilities and damages awarded on her own for ALL her work.
• Even if SHE RETIRED, she will still need to get tail coverage for 5 years to be completely in the clear for statute of limitations.

On the contrary, if her policy was occurrence-made, it would be the day she canceled but her previous work will always be covered.

So, please read your policy or have a trusted personal risk manager to help you understand the differences and guide you. Not to mention professional liability is not protected under a corporate shield like general liability is. She will open up her own assets to risk.

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Hopefully, Susan’s question helped illuminate some crucial information for insuring your business. If you’re still looking for the best type of insurance for your business, the advisors at RiskBlock can help steer you towards the best insurance coverage so that you remain covered no matter what.