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Malpractice Insurance: Do I Need a Claims-Made or Occurrence Type Policy?

Malpractice Insurance: Do I Need a Claims-Made or Occurrence Type Policy?
8/22/2016

malpractice insurance: claims-made vs. modified claims-made policies
Malpractice claims are a bitter pill to swallow, jeopardizing the financial health of a practice and the reputation of a physician.  If a patient alleges your treatment or health advice caused them bodily injury or illness (even if unwarranted), you could be left with significant legal fees and settlement costs that put you and your NJ private practice at risk.  That’s why it’s important to have coverage and protection through the medical professional liability (malpractice) insurance policy best fit for your practitioner needs.

When deciding which policy to choose, it’s important to evaluate the coverage provided and costs of each type.  Below we describe differences between two of these medical professional liability insurance policies, claims made and “occurrence type” modified claims made.  While both policies cover defense and settlement costs from malpractice claims up to the coverage limits, there are differences in their tail coverage terms and premium costs.

Tail coverage, also known as extended reporting coverage, covers malpractice claims that are reported to the insurance carrier after the policy expires for incidents that occurred while the policy was still active.
 
What is a Claims-Made Insurance Policy?
A claims-made insurance policy covers a malpractice claim when both the alleged incident and the reporting of that incident occur within the policy period.  Tail coverage beyond a limited period of thirty (30) days is not included; however, most claims-made policies provide this extended reporting coverage free at retirement when certain requirements are met or when the policy is canceled due to death or permanent disability.

An additional benefit, the premium is discounted for the first few years.  As your chance of receiving a malpractice claim increases each year, your premium increases incrementally with it until the “mature” rate is reached.  This is referred to as a “step factor” (see example in Figure 1).

claims-made policy step factor example
Figure 1
 
What happens if you switch practices or insurance carriers?  To avoid a gap in coverage so you’re always protected, tail coverage can be obtained with payment.  This option doesn’t come cheap, often costing as high as 200% of your annual premium due in one lump sum.  Helpful tip: the money saved from lower premiums in the first few years can usually cover a large portion of this cost.

Another option when switching carriers is to purchase prior acts coverage with the new claims-made policy.  The date the prior acts coverage begins is known as the retroactive date.  The reverse of tail, this covers malpractice claims reported to the insurance carrier within the policy period for incidents that occurred prior to the policy start date.  By taking this option, however, the insurance carrier may not give you the “step factor” premium discounts.
 
Claims-Made Coverage Example
A physician was on the same claims-made policy from XYZ insurance company between January 1, 2013 and December 31, 2015.  The physician was sued for malpractice in March 2015 for treatment provided in July 2014. Because the treatment occurred and the lawsuit was reported to the insurance company within the policy period, XYZ will cover the claim.
 
What is an “Occurrence Type” Modified Claims-Made Policy?
An “occurrence type” modified claims-made insurance policy covers a malpractice claim regardless of when the claim is reported to the insurance carrier as long as the alleged incident occurred within the policy period.  The policy prepays tail coverage, adding the cost into your premium rate each year.  Because of this, there is no “step factor” premium discount in the first few years.
 
Modified Claims-Made Coverage Example
A physician was on the same “occurrence type” modified claims-made policy from XYZ insurance company between January 1, 2013 and December 31, 2015.   The physician was sued for malpractice in March 2016 for treatment provided in July 2015. Because the treatment was provided within the policy period, XYZ will cover the claim even though the lawsuit was reported to them after the policy ended.

What happens if you switch practices or insurance carriers?  Because tail coverage is already included, you don’t have to worry about a gap in coverage.  You’re covered even after terminating the insurance policy.  If a claim occurs years after the policy ended, however, the same amount of coverage you had while the policy was active is still applied (e.g., not adjusted for inflation).

To help decide which medical professional liability insurance policy to choose, it’s important to consider your risks, how long you plan to stay at your practice, budget, and other factors. Compare these with the coverages, features, and costs of each insurance policy or consult with a knowledgeable insurance agent to discuss your options.  With a policy best fit for your needs, you and your independent medical practice are better protected.

Looking for a medical professional liability insurance policy in New Jersey?  Conventus provides claims-made and “occurrence type” modified claims-made policies with additional coverages and services that improve practice performance and reduce liability risks. Learn about our insurance policy benefits for NJ private medical practices here >


Disclaimer: This article does not include information on occurrence policy, a third type of medical professional liability insurance.  Any descriptions of insurance coverages set forth above provide a broad overview of coverages only.  All coverages are subject to conditions, coverage limits, limits of liability, limitations, and exclusions as contained in the policy.