Why conventional insurance is occurrence-based

Most consumers of insurance products expect their policy will pay out for a claimable incident which occurs during the policy period – that is, during the period for which premiums are paid. Accordingly, if a fire or accident occurs the day after the policy period ends, it will not be covered under the relevant policy, unless the policy has been renewed. These are examples of occurrence-based insurance.

Such insurance is suitable for situations where knowledge of an insured event – for example, a fire or motor vehicle accident – is likely to quickly follow the event itself, so that in most cases a claim on the insurer will be lodged during the policy period or soon after it ends.

However, certain types of insurance cover are more typically provided on a different basis. For example, sometimes ships and cargoes may be insured on a “lost or not lost” basis, and professional indemnity insurance is usually provided on a “claims made” basis.

“Lost or not lost” means the parties (insurer and insured) do not know whether the subject-matter of the insurance is still in good condition at the time when cover commences, but nonetheless agree the insurer will honour a valid claim even if the incident giving rise to the claim occurred before cover commenced. This is a useful type of cover, or policy extension, where, for example, a ship or cargo is at sea and there is no easy way to be sure of its condition. In earlier times, when communication with ships at sea was limited, such policies were quite common. Nowadays, they are less common in relation to ships, but are still sometimes used for cargoes – as the condition of a cargo may not be evident until the ship or aircraft arrives at its destination.

Claims made insurance policies only cover claims lodged within the policy period, or, in some cases, within a defined period after the policy period ends. Such policies are typically used for types of cover where a claim might occur many months or years later, when a loss becomes known. For example, in the case of an architect’s professional indemnity cover, a problem with the design of a building (arising from the architect’s negligence) might not become evident until after a major weather event, or from the cumulative effect of normal weather patterns, perhaps many years later. In this case, the loss should be covered by the policy in force when the claim is notified, not the policy for the period during which the negligence occurred.

Could more common insurance covers, such as house and car insurance, be conducted on a “lost or not lost” or “claims made” basis? The simple answer is no. Insurers will usually only grant lost or not lost cover where they are satisfied the subject-matter of the insurance is probably in good order and condition – such as where they can see a Bill of Lading proving a cargo was in good condition when loaded onto a ship – but where there is nonetheless some uncertainty shared by both insurer and insured. In the case of a house or car, or other land-based asset, its condition at a point in time (when the insurance cover is being arranged) can more easily be ascertained.

Similarly, an insurer will not issue a claims made policy for an asset that is known to be already lost or damaged

– although an architect’s future professional liability risk (arising from current projects) cannot be fully ascertained immediately, the destruction of a physical asset can usually be confirmed at any time. However, as in the case of some shipowners and exporters, certain businesses will have unusual insurance needs, where legal or other professional assistance is required to negotiate the insurance cover and terms. In particular, claims made policies are founded upon the parties having a shared knowledge of all relevant facts, and legal advice should be sought if there is any doubt about whether specific circumstances need to be notified to a prospective insurer.

If you have any questions, please contact our Insurance Law Team.