Malpractice Insurance 101: Claims-made vs. occurrence coverage
By Stuart Benas, CIC and Bruce E. Bennett, Ph.D.
May 1, 2010
You have decided that you are going to start a private practice and are ready to take a major step into running a business. One component of that business will be to make sure you have adequate professional liability insurance. Very few psychologists, 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 article is to acquaint early career psychologists 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 buy?
There are two basic types of professional liability insurance policies — “occurrence” and “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 and 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 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. 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 percent of your last year’s premium.
The cost of the tail is a onetime fee. The tail permits the insured to report claims for incidences 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 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.
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 be-cause the policy issued by the new company may have specific exclusions that significantly alter coverage once a switch is made.
From a pricing viewpoint, occurrence policies are more expensive than claims-made policies because they provide coverage for incidents that occurred during the policy year regardless of when the claim is reported. The occurrence policy provides a separate limit for each year protection is purchased.
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 when the incident occurred to when it becomes a claim.
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. 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.
You might ask “Which policy 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 practice.
If you are worried that your current insurance company may go into receivership (the insurance equivalent of bankruptcy) you can move your claims-made 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.
What is important is that you understand how the policies work and make an informed business decision. It is extremely important that you take the time to read the policy and call your agent or broker if you have questions about what is and what is not covered.
Stuart Benas, CIC (certified insurance counselor), is supervisor of field underwriting for the APA Insurance Trust. He may be reached at firstname.lastname@example.org.
Bruce E. Bennett, Ph.D. is CEO of the APA Insurance Trust. He may be reached by e-mail at: email@example.com.
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