Two basic types of triggers
Traditionally, the choice of trigger is a choice between Occurrence and Claims Made. The choice of a trigger is often based on practicability, legal requirements and traditions in the country where the liability policy is placed. In Denmark the claims made trigger is most common where the occurrence trigger is usually preferred in the other Nordic countries. Some countries also have legal restriction on the choice of trigger; for instance the occurrence trigger is not allowed in France and the claims made trigger is forbidden in the US states of New York and Massachusetts.
Occurrence
When did it occur?
There are a number of occurrence triggers. The three most common triggers are:
- Occurrence Exposure
This trigger places the time of the loss at the time of the proximate cause of the loss. The policy is triggered at the time the negligent act (or omission) occurred and the exposure to the loss thereby was initiated.
- Loss Occurrence
Loss occurrence policies are triggered for a loss that occurs during the time that the insurance is in force. Focus is on the moment when the action results in an injury and the time where the damage occurs.
- Manifestation
Manifestation policies are triggered at the objectively verifiable first discovery of a loss.
The timely difference between the triggers can be wide. Example: The foundation of a house is build with a defect concrete mix, so when the frost sets in the concrete crumples. However this consequence is not visible before later, when cracks appear in the surface of the house. In case of an occurrence exposure trigger, the claims should be filed on the policy in place when the house was constructed. In case of a loss exposure trigger the claim occurs in the wintertime when the concrete breaks and begin to course damage the rest of the house. Finally in case manifestation the claim will end up on the policy in place when the springtime comes and the cracks become visible.
Even though these are the most common occurrence definitions it is important to read the actual wording of the trigger carefully as variations of the trigger exist.
Advantages of the occurrence trigger
With an occurrence trigger the coverage is known, so in case limitations in coverage are later introduced they will not apply for the occurrence policies already in place but only for future periods. Also with an occurrence policy the Insured will (in principle at least) have eternal cover for the claims occurring in the policy period once the premium is paid. Should the Insured choose to change trigger to claims made, this will not result in claims falling between the two triggers, so the trigger change can be done without any transit clause.
Be aware, that the coverage may be limited by sunset clauses, so even if the claim occurs during the policy period it still has to reported within a certain time frame e.g. 10 years.
Disadvantages of the occurrence trigger
Many of the disadvantages with the occurrence trigger are based in the fact that there can be significant difference in time between the time of the occurrence of the claim and the time where the claim is actually filed on the policy. A problem with the occurrence trigger can be to actually define when the claim occurred. An example of this is continued exposure to a harmful condition where there is no definite time where the damage occurs. Another example is where a machinery has been serviced, repaired and generally worked on a number of time, and it is impossible to define which of the service visits actually caused the damage. This insecurity in defining the time of occurrence can also cause the insurance companies to spend resources on trying to define which policy period is relevant and who is covering the claim instead of spending the resources on actually handling the claim itself.
The Insured limit can be deflated by inflation, the insurance company may not exist anymore and the coverage of the policy may not match the juridical environment that exists when the claim has to be handled. From a more practical point, the policy can be lost and the Insured can have a problem with remembering and proving who they were insured with and on what conditions on the time the claim occurred.
Finally, just like the limitations will not affect already existing policies neither will any extensions in coverage or limits.
Claims made
Definition
A claims made policy is triggered at the time when a potentially injured party files a claim against the Insured.
Often the policy has a retroactive date, so even though the claim is made during the policy period it has to have occurred after the retroactive date stated in the policy. Usually this date is set at the inception of the first claims made policy and will remain unchanged even if the policy is later moved to another insurance company.
Advantages of the claims made trigger
Unlike with the occurrence trigger, it is generally not a problem to identify the relevant policy period. There is also a high probability that the insurance company exists and can honor the claim. There might still even be an ongoing relationship between the Insured and the insurance company, which may facilitate the handling of the claims. The persons that negotiated the policy in the first place are likely to still be around to give input of the intentions of the coverage in case of uncertainties.
The policy can be changed at every renewal making sure, that the coverage and limits are always up to date with the needs of the Insured as well as the legal environment they are operating in. The Insured will also have immediate access to any extensions on the coverage.
Disadvantages of the claims made trigger
One of the largest disadvantages is the fact the policy has to be renewed every year in order for the Insured to have coverage. Once the policy year is over, there will be no cover for the new claims that are made. So past claims made polices are “worthless” where occurrence policies should be kept in a safe place for years. Worst consequence of this is of course if the policy can’t be placed with any insurance company. Limitations in the coverage apply right away for all future claims made.
Should the Insured wish to change to an occurrence trigger, there is a risk of a claim falling between the policies; a claim that occurred before the trigger change but where the claim is made after the trigger change will not covered by any of the policies. In that case a special transit clause has to be inserted in the policy to provide cover for such claims.
Considerations
There is not one trigger that is generally better than the other. There is handful of objective pro’s and con’s and only by applying the characteristics and preferences of the actual insured company can the subjectively most optimal trigger be defined.
Rikke Rasmussen
