There are two types of malpractice insurance for physicians – Claims Made vs. Occurrence Coverage. Which is right for you?
Physicians need malpractice insurance and understanding if and how you are covered is possibly the most crucial element of your physician contract.
Very few physicians, especially those just getting started, have the financial resources to defend a malpractice claim. Legal costs alone can run into tens of thousands of dollars. Damages or settlements can be hundreds of thousands of dollars.
The purpose of this paper is to acquaint physicians and those who may be confused about insurance with an important issue to consider when shopping for professional liability coverage: What type of insurance should you choose?
Two Types of Malpractice Insurance
There are two basic types of professional liability insurance policies:
- “claims-made” coverage.
Purchasing insurance is a business decision and it is important to know what type of policy best fits your business needs.
An occurrence policy provides coverage for alleged incidents (injuries) that happened during the policy year regardless of when the claim is reported to the carrier.
The occurrence policy provides a separate coverage limit for each year the policy is in force. It does not matter if the policy is active when the claim is reported. It only matters that the policy was active when the alleged incident occurred. If the coverage limits are $1 million/$3 million, the insured would have up to $1 million to cover an incident that occurred during the policy year. The insured would have a total of $3 million to cover all claims that result from incidents during the year.
A claims-made policy covers the insured for an incident that occurred during the policy period and was reported as a claim while the policy remained in force.
When you start a claims-made policy, the original inception date, known as the retroactive date, becomes a permanent part of the claims-made policy. The retroactive date remains the same each year the policy is renewed. The renewed claims-made policy covers claims that come in during the policy year for incidents that occurred on or after the retroactive date. This is how past years are covered under the current policy. As long as you renew a claims-made policy, you will be continually protected for incidents that happen between the retroactive date and the policy expiration date. An incident that occurred prior to the retroactive date would not be covered. Therefore, it is important for the insured to renew the claims-made policy to maintain continuous coverage.
What is tail coverage
If the insured retires or is no longer practicing but wants to retain protection for the years insured under the claims-made policy, the insured can cancel the policy and buy the “extended reporting period” (commonly known as the tail). Generally, you can purchase the tail for a specified number of years. An unlimited tail, allowing claims to be reported anytime in the future, normally costs 175% of your last year’s premium. The cost of the tail is a one-time fee. The tail permits the insured to report claims for incidents that occurred during the time the policy was active (from the retroactive date to the policy expiration date). An incident that occurred when the policy was active but was reported after the policy was terminated, in the absence of the tail, would not be covered. Importantly, the tail will not cover incidents that occur after the policy is terminated.
One of the benefits of a claims-made policy is that changes to your current coverage or changes to the policy limits apply to past years as well. This is a positive benefit if the carrier expands coverage in the future.
Claims-made insurance can change insurance company
Another feature of a claims-made policy is that the insured can move coverage from one carrier to another carrier. If you have an active claims-made policy, you can apply to another insurance company that offers prior acts coverage for claims-made policies. Under this scenario, the new company takes the retroactive date from the old policy and endorses it onto the new policy. The new policy with the retroactive date from the previous policy now covers the same period of time as the old policy. It is important to compare policy features prior to changing insurance companies because the policy issued by the new company may have specific exclusions that would significantly alter coverage once the switch is made. From a pricing viewpoint, occurrence policies are more expensive than comparable claims-made policies because they provide coverage for incidents that occurred during the policy year regardless of when the claim is reported. And the occurrence policy provides a separate limit for each year protection is purchased.
Progressive cost increase until the policy matures after 5-7 years
Claims-made policies are initially significantly less expensive than occurrence policies. The premium for a claims-made policy is lowest during the first year because the policy only covers incidents that occurred in the first year and are reported as claims in that year. The premium increases during the second year because the policy now covers incidents that occurred during the first and second year as long as the claim is reported during the second year. The claims-made premium continues to increase as the policy matures for five to seven years when the premium usually stabilizes. The reason it takes a long time for the claims-made rates to mature is that several years can elapse from the time the incident occurred to the time the incident becomes a claim.
Free Tail Coverage in most claims-made insurance policies
If you have a claims-made policy for several years and buy the tail when the policy is terminated, the total cost begins to approach the rate of a comparable occurrence policy. Fortunately, many claims-made policies offer free tail coverage for death, disability, or permanent retirement, a feature that can result in considerable cost savings if you qualify.
Which insurance is better?
As noted above, each policy has its benefits. With a claims-made policy, you can increase your policy limits or add coverages as the need arises or as new coverages become available. The claims-made policy is more flexible and provides considerable cost savings during the early years. This could be important when you are starting a new practice.
If you are worried that your current insurance company may go into receivership (the insurance equivalent of bankruptcy) you can move your coverage to a financially stronger insurance company. If the carrier for an occurrence policy goes into receivership, switching to a new financially stronger carrier will not remedy the problem with the former carrier.
The occurrence policy has the advantage of permanency. You do not have to renew the policy to maintain coverage for a year you were insured. You have separate limits each year you were insured, so past claims will not erode the limits of future years of coverage.
If you are in a temporary job, you want occurrence coverage (or pre-paid tail or a modified claims policy). Think of the end in mind when signing an employment agreement or purchasing your own policy. How long will I work here? How long will I need coverage? Where will I relocate? All these things need to be discussed and thoroughly thought through before you sign that agreement or buy that policy.
Need help deciding on what insurance is right for you?
Contract Diagnostics provides physicians with contract review services across all states – this is our only craft. We are committed experts.
We only help providers (MD/DO/NP/PA/DDS) understand the details of their contract, and provide specific suggestions on how to negotiate the best contract possible, including a decision on which malpractice insurance is right for you.
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- Truely understand what you have. Don’t settle for someone telling you ‘it’s fine’ or ‘standard’
- Eliminate ambiguities with the language.
- Find creative ways to negotiate better terms for you.
- Identify additional things you should ask the employer (we will tell you HOW you can ask as well) about the language or policy.
Once your review with Contract Diagnostics is complete, you will know exactly what you need to know about your agreement and the malpractice section – one of the most important in the agreement. You will have a comprehensive understanding of what you can ask for to better balance your risk. Malpractice tail insurance can cost well over $100,000 – don’t skip this important section, or have a standard lawyer or attorney that doesn’t know these specific types of agreements.
If you need to talk to one of our physician contract review specialists, please book a 15 min. consultation call with one of us, it’s free.