In the world of medical malpractice insurance, there are two types of coverage available: Claims-Made and Occurrence. It is important that you have a clear understanding of the coverage differences so that you can make an informed decision on which one is right for you. Although it can be a bit complicated, the easiest way to remember the differences is this: The names describe how the coverage is triggered.
Claims-Made coverage triggers based on when the claim is made against you. Occurrence coverage triggers based on when the incident actually occurred.
How it works: An Occurrence policy provides coverage for incidents that “occur” during the policy period, regardless of when the claim is reported to the carrier. The policy will respond to claims that are reported even after the coverage has been terminated, assuming the incident occurred during the time in which coverage was in force; therefore, there is no need for you to buy tail insurance after the policy is cancelled.
Limits: An Occurrence policy provides a separate limit for each year the policy is in force. Its limits “restore” year after year so that claims paid for incidents arising from one policy year do not deplete the limits for other years. Occurrence limits have a “stacking” effect, so 10 years of coverage under a $1M/$3M limit policy would provide you with $10M/$30M in the aggregate.
Pricing: Occurrence premiums are usually 5-10% more expensive than fully mature Claims-Made premiums. The rates are generally flat year-over-year and there is no “stepping up” in rate, as with Claims-Made coverage.
Example: An OB/GYN obtains an Occurrence policy starting on 1/1/2000 with a $1M/$3M policy limit. She renews the policy every year for 10 years at the same limit. On 1/1/2010 she cancels the coverage. On 7/1/2011, a claim is filed for a surgery that she performed on 3/1/2009. She is covered for this claim, even though it was filed after the policy was cancelled because the incident “occurred” during the time period in which she was insured on the Occurrence form. Let’s assume the claim settles for $500,000. How much coverage does she have left?
1/1/2000 – 1/1/2001 = $1M/$3M
1/1/2001 – 1/1/2002 = $1M/$3M
1/1/2002 – 1/1/2003 = $1M/$3M
1/1/2003 – 1/1/2004 = $1M/$3M
1/1/2004 – 1/1/2005 = $1M/$3M
1/1/2005 – 1/1/2006 = $1M/$3M
1/1/2006 – 1/1/2007 = $1M/$3M
1/1/2007 – 1/1/2008 = $1M/$3M
1/1/2008 – 1/1/2009 = $1M/$3M
1/1/2009 – 1/1/2010 = $1M/$2.5M (she still has a $1M per claim limit; but the aggregate has been reduced to $2.5M after the claim settlement – however, notice that none of the previous policy limits have been affected)
Benefits of Occurrence Coverage:
· Flexibility - No need for tail insurance
· “Stacking” policy limits
Disadvantages of Occurrence Coverage:
· Harder to find (not as accessible as Claims-Made)
· Higher price
· If the insurer goes out of business, you would have to rely on the Guarantee Fund to cover you, which usually provides lower limits and less than desirable services/defense capabilities.
· Concerns regarding whether the past policy limits are adequate (inflation)
How it works: A Claims-Made policy provides coverage when both the alleged incident and the claim happen during the policy period. Each year that the policy is renewed, the coverage period is extended. Once the Claims-Made policy is cancelled, you’ll need to either 1) continue the coverage with a new insurance company who is willing to pick-up your priors acts exposure or 2) obtain tail coverage (also called an ERP - extended reporting period). Tail insurance covers you into the future for any claims made against you for incidents that occurred back to the start of the coverage (the retroactive date). If tail insurance is not purchased, any future filed claims will not be covered – even if the incidents happened during the initial policy period.
Limits: Claims-Made limits do not “stack” as the Occurrence limits do, but rather, they “stretch” to cover the policy period as it extends year after year. After 10 years on a Claims-Made policy with $1M/$3M limits, you will have $1M/$3M limits. However, one advantage to the Claims-Made limit is that if the current level of coverage doesn’t seem sufficient, the limit can be increased and it will be retroactive to the inception of the coverage.
Pricing: Claims-Made premiums are less expensive than Occurrence premiums. The rate starts out very low (since the chances are low that there will be an incident and claim filed within the first year), but the premium “steps up” each year for approximately 5 years. After 5 years, the Claims-Made premium is considered mature, and will remain relatively flat thereafter. Tail insurance is typically 1.5-2 times the mature rate (unless coverage is cancelled before the policy matures; in that instance, the tail rate is less).
Example: An OB/GYN obtains a Claims-Made policy starting on 1/1/2000 with a $1M/$3M policy limit. She renews the policy every year for 10 years at the same limit. On 1/1/2010 she cancels the coverage and buys tail insurance. On 7/1/2011, a claim is filed for a surgery that she performed on 3/1/2009. She is covered for this claim, because she secured tail insurance and the incident occurred during the time period in which she was insured. Let’s assume the claim settles for $500,000. How much coverage does she have left?
1/1/2000 – 1/1/2010 = $1M/$2.5M (she still has a $1M per claim limit; but the aggregate has been reduced to $2.5M after the claim settlement; there is only 1 policy limit available for the entire tail period)
Benefits of Claims-Made Coverage:
· Lower price, especially in the first 4 years
· Flexibility – Increased policy limits and broadening coverage endorsements are retroactive
· Less uncertainty about insurer’s financial stability (coverage can be switched to another carrier and prior acts can usually be picked up by another company if the insurer starts to have financial difficulties)
Disadvantages of Claims-Made Coverage:
· Tail insurance required
· “Less” coverage than an Occurrence policy in the long-run
There is no right or wrong type of malpractice insurance to buy – it just depends on your unique practice situation, accessibility, and personal preference. Some carriers offer only Claims-made. Others offer both but may limit Occurrence coverage to certain medical specialties or geographic areas. If you’re not sure which policy type is right for you, ask a knowledgeable malpractice insurance agent to help you compare options and find the coverage best suited for your practice.