Claims-Made vs. Occurrence
A Claims-Made policy covers claims as long as they:
- Are reported during the policy period
- Are triggered by an event that occurred on or after the policy retroactive date
Both of the above conditions must be met in order to trigger coverage. The effective date of the first claims-made policy purchased by an insured becomes the policy retroactive date. This date will then appear on all subsequent claims-made policies. Consequently, it is possible to have a retroactive date that is earlier than the inception date of the insured’s most recent claims-made policy. The portability of the claims-made policy is secured by the transfer of the retroactive date from one insurance company to another. This is how the new company provides coverage on their claims-made policy for “prior acts.” The retroactive date feature of the claims-made policy makes the claims-made form the only type of coverage that allows you to transfer potential past unknown liabilities from one carrier to another. This is a very important benefit if you have any concerns about your current carrier and wish to move to another. Most companies writing the claims-made form will accept old retroactive dates as long as the prior carriers are still functioning insurance entities, however, this is subject to individual underwriting discretion.
A key feature of a claims-made policy is that the policy in force responds to claims made during the policy period regardless of when the treatment was rendered, as long as the triggering event occurred on or after the policy retroactive date.
For example: Claims-Made policy effective 10/1/03. Policy is held with no interruption in coverage for 10 years. In 2018, you submit a claim for an event that occurred in 2005. The policy in force in 2018 will respond, meaning that you will be covered up to the full limits of the 2018 policy.
With an Occurrence policy, coverage is based on the event that triggers a claim rather than the claim itself. Any claim that is triggered by an event that occurs when the policy is in force will be covered, regardless of whether the policy is still in force when the claim is submitted. With an Occurrence policy, however, the policy that responds is the policy that was in force on the date of the event.
For example: Occurrence policy effective 10/1/03. Policy is held with no interruption in coverage for 15 years. In 2018, you submit a claim for an event that occurred in 2005. The policy that will respond is the policy that was in force in 2005.
While many physicians like the fact that they are still covered even though their policy is no longer in effect, there are several risks to you with this policy type. Most serious is the risk that an insurer that was solvent in 2005 may no longer be solvent in 2018. In this case, the policy provides you no protection at all against the 2018 claim. Another risk is that the limits purchased so long before may be very inadequate in the current climate. In addition, changes in medicine may make the 2005 coverage insufficient – for example, it may not be broad enough to cover the 2018 claim.
Another problem with this policy form is the risk that multiple policies may be triggered for a single event, if it can be proven that the event occurred over a long period of time and crossed expiration dates. When this occurs it becomes difficult for insurers to determine who will defend or pay the claim. Unfortunately, this can also have negative consequences for you.
Claims-Made Policy with a prepaid Extended Reporting Period
This product has been given different names by different companies. Some carriers refer to it as Occurrence Plus and Permanent Protection. The fact is that this policy is not an Occurrence form. This policy type has all the features of the Claims-Made policy except that the purchase of the extended reporting period (Tail coverage), which is optional with a pure claims-made form, is no longer an option with this form. In this form the extended reporting period is charged for every year as part of the premium and is included in the coverage.
When you purchase this type of policy, you are buying a claims-made product, but you will not enjoy the premium discounts available in the early years of a claims-made policy. This is because the charges for the extended reporting period are already included in the premium charges you will be paying. You will not, therefore, need to consider whether you need to purchase an extended reporting period, or “tail” coverage, when your policy expires or is terminated, because it is automatically included in the price. Under the standard claims-made policy described earlier, you have the guaranteed right and option to purchase the optional extended reporting period. This is because the need to purchase the extended reporting period is a contingent liability. There are many reasons why you may not ever need to purchase this endorsement. For example, in the current market in New Jersey, this policy type is becoming more difficult to obtain, and its cost can be prohibitive.
What to look for in a Malpractice Insurance Carrier
Regardless of the type of company, prospective policyholders should evaluate the financial and operating strength of the company. One way to do this is to review the company’s A.M. Best rating. A.M. Best is an independent rating agency, which evaluates the adequacy of reserves, soundness of investments, control of expenses, and capital and surplus sufficiency of companies.
Another way to evaluate a company is to look at their annual report. The data in the report will give three important financial ratios that should be considered by a physician before selecting an insurance carrier. First, however, you need to understand the definitions used:
Net written premium – this is the amount shown on the annual report’s statement of income, after the company has paid for reinsurance
Surplus – it is important that an insurance company has sufficient financial resources to meet all current as well as expected future claims. Surplus is the sum of items shown on a company’s balance sheet under the heading “policyholder surplus.” Surplus represents the amount by which assets exceed liabilities and is the net worth of the company.
Premium to Surplus Ratio – using net written premiums and surplus you can calculate the “premium to surplus ratio” (P/S). Industry regulators and rating services suggest a ratio between 1:1 and 3:1.
Loss Reserves – establishing loss reserves is complex. There are two classes of claim reserves: indemnity reserves and expense reserves. Expense reserves are further classified as allocated loss adjustment expense (ALAE) reserves and unallocated loss adjustment expense (ULAE) reserves. This is money set aside to pay present and future claims as well as defense attorney fees or expert witness fees, and in-house claims operations.
Loss Reserves to Surplus Ratio – the ratio of loss reserves (including reserves for loss adjustment expenses) to surplus (R/S) indicates the company’s ability to cover unanticipated reserve deficiencies. Industry regulators recommend this ratio not exceed 4:1
Important Questions Physicians Should Ask
- Is the carrier licensed and admitted in the state in which coverage is requested?
- Is there a capital contribution requirement to become a policyholder?
- Am I, as a policyholder, or my carrier subject to assessments due to reserve inadequacies
- Is your company supported by a reinsurance arrangement?
- Can the carrier settle my claim without my consent?
- In the even of a claim, will I have input regarding legal representation or will the carrier dictate which law firms are available to me?
- Will I have access to the carriers’ decision markers? What avenues are open to me if I disagree with a decision by the carrier?
- Does the carrier offer claims and risk management services as part of the insurance product, or are these unbundled at a separate cost?
- Will the carrier cover my locum tenens?
- What tail provisions are available from your company? Are there any restrictive coverage covenants in your form for physicians that practice outside of the state coverage is requested?
- Has the carrier, in its history, ever left any jurisdiction or terminated writing new business for any reason?
- While third party industry ratings are a standard measurement, so is a company’s written premium to surplus ratio. What is the premium to surplus ratio for the carrier under consideration