Many businesses purchase a claims-made product liability policy thinking it’s cheaper than an occurrence-based policy.
On the surface, claims-made policies can be cheaper than the superior occurrence-based policies. However, if we closely examine a claims-made policy we see it can cost more in the long run. Many agents don’t share this for one of two reason. They don’t understand claims-made policies or know most applicants focus on the short-term cost. Obviously, it’s easier to make a sale by having the lowest premium cost.
The first question that comes to mind is why are claims-made policies initially cheaper than occurrence-based policies? One answer is insurance carriers can opt to cut their losses if a product is defective and has the potential to cause bodily injury or property damage. For a claim to be covered by a claims-made policy, both the incident involving your product and the claim must take place during the policy period or Extended Reporting Period.
With an occurrence-based policy, you only have to have an incident or occurrence during the policy period in order to be covered. Say you released a defective batch of products into the market causing a product recall. Or you had a claim reported to your insurance carrier. Your claims-made insurance carrier could cut their losses by canceling or not renewing your policy. You’d be without coverage with defective products in the market and occurrences of bodily injury or property damage have taken place. The uncovered legal defense costs would likely bankrupt most small to medium-sized businesses.
Another reason they may initially be cheaper could be a recent policy retro-date. A retro-date is usually established as the first effective date of your first claims-made policy.
If an incident occurs prior to the established retro-date on a claims-made policy, there’s no coverage for bodily injury or property damage. A retro-date of less than three years old means there’s a limited quantity of your products in the marketplace. Your insurance carrier typically is providing a discounted premium for this.
Once your retro-date is older than 3 to 5 years, the carrier may see that as too many years of your products being added to the market. That makes for a higher probability of more occurrences involving your products. At this point your policy may start to equal or exceed the premium of an occurrence-based policy. By 6 to 8 years, your premiums could be much higher than a comparable occurrence-based policy. You also may find it impossible to switch policies because no other insurance carriers will pick-up the retro-date of your policy.
When you first buy a claims-made policy, the premiums will be cheaper than a comparable occurrence-based policy. However, the longer you own a claims-made policy, the more likely your premium is going to increase. It will eventually be higher than an occurrence-based policy.
It’s critical you not lose the retro-date of your claims-made policy by letting your policy lapse. Or when changing policies because you’ll lose all of your coverage for any incidents involving your products. A good risk manager will advise you to never assume that never having had any claims doesn’t meant you won’t in the future.
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