Claims Made Vs. Occurrence Medical Malpractice Insurance Policies

“In the olden days” all Medical Malpractice Insurance policies were “occurrence” policies. Policies were written for a one-year term and covered any claims that arose from treatment during that one-year term even, if at the time the claim was made, the insured was no longer with that company.

This ended in the 1970’s because Medical Professional Liability companies (particularly St. Paul Insurance Company) were writing policies with premiums based on claims histories of the 1960’s and 1970’s and paying out claims years later based on burgeoning jury awards. The premiums they had charged when the policies were issued did not cover the losses at the levels that were paid years later when the claims were resolved. The country’s largest writer of physicians’ liability insurance, St Paul, did not have a quick fix and withdrew from the market entirely, creating a medical malpractice insurance crisis.

Smaller regional carriers were formed to close the gap. St. Paul later reentered the market and, long story short, Medical Malpractice markets shifted to claims made coverage, which allowed companies to later adjust their pricing to meet new concerns by having a “last shot” at more premiums through the need for “tail” insurance. A claims made policy is an incomplete policy form that offers coverage from a start date (called a “retroactive date”) through subsequent renewals, as long as the insured keeps paying premiums or if the insured switches companies, as long as the new company picks up the original retroactive date, and the insured keeps paying premiums. If, however, the insured stops paying premiums or switches companies without the new company picking up the previous retroactive date, coverage for previous acts (“prior act coverage”) ceases unless that coverage is completed by acquiring a “tail”. With most policies offered to physicians in the standard market, a free tail is available for death or disability without any waiting period and for retirement usually after a waiting period of one to five years and sometimes after reaching a minimum retirement age. Free tails are usually not available to facilities and the tails that are available are usually offered at a steep premium and extend the time for filing claims for only one to ten years (usually 1-5 years).

It would seem almost intuitive that the best available medical malpractice policy is the occurrence policy and that would be true if we don’t consider the price. Occurrence policies are priced at a level premium year to year. Claims made policies start off at a low first-year premium and increase each year, usually until the fifth year, when they reached their “mature” level premium. The savings in premium over those five years can equal approximately 125%-170% of the mature premium so with claims made coverage, you get a year and a quarter or more of coverage free, compared to occurrence coverage and that is true unless you get stuck having to pay for a tail which can cost anywhere from about 180% to 250% of the mature fifth-year premium.

There are other considerations, such as whether the claims made Medical Malpractice Insurance policy has a “demand” or “incident” trigger, but those issues will be discussed in our next blog post. All other things being equal, the choice between claims made and occurrence coverage depends largely on whether an insured will qualify for a free tail. If a free tail is likely, claims made is usually the way to go. Let’s look at a real case example for a Maryland Radiologist with a company that offers claims made and occurrence coverages. The chart below shows this company’s annual premium for limits of $1,000,000/$3,000,000 for claims made (I) and occurrence (II) policies, the cumulative savings of claims made over occurrence (III), what the tail cost would be at the end of each year (IV) and the cumulative price difference if a tail is purchased at the end of that year (V). Remember, you only pay a tail once for any number of years of claims made coverage.

Year I Occurrence II Claims Made III Cumulative Savings IV Cost of tail this year Extra cost if a tail is purchased
1 $17,645 $5,379 $12,266 $17,693 $5,427
2 $17,645 $10,084 $19,827 $26,539 $6,712
3 $17,645 $13,615 $23,857 $32,068 $8,211
4 $17,645 $15,127 $26,375 $35,386 $9,011
5 $17,645 $16,587 $27,433 $35,386 $7,953
6 $17,645 $16,587 $28,491 $35,386 $6,895
7 $17,645 $16,587 $29,549 $35,386 $5,837
8 $17,645 $16,587 $30,607 $35,386 $4,779
9 $17,645 $16,587 $31,665 $35,386 $3,721
10 $17,645 $16,587 $32,723 $35,386 $2,663

Different companies may have higher or lower first four year premiums and tail factors. A qualified Medical Malpractice Insurance Broker can do these comparisons for any companies you are considering.

As can be seen from the chart above, in the first five years, this Radiologist would save $27,433 on claims made premiums and, if a tail needs to be purchased, the extra cost over the claims made savings would be $7,953. After ten years, the claims made savings is $32,723 and, if a tail needs to be purchased, the extra cost over the claims made savings would be $2,663. The claims made savings to this Radiologist, if a tail is not needed because of qualification for a free death, disability or retirement tail increases each year by $1,058.

Of course, this does not take into account the additional dollars that accrue from investing the savings. Nor does it consider the shock value of having to come out of pocket at one time with a lump sum payment of as much as $35,386, if a tail has to be purchased (or approximately $180,000 for a Maryland OB).

So how do we select which medical malpractice policy form to take? Surgery Centers and Ambulatory Care Centers should always opt for occurrence coverage unless they need the savings of the first few years of lower premiums to operate, because there ordinarily are no free tails for facilities and tails are always based on current premiums. If rates are dropping so will the tail cost but one never knows. A tail could be needed because the facility is closing, or has lost its coverage due to claims or market conditions and may be unable to get retroactive coverage from a new carrier. In those cases the tail can be expensive and may be limited. So I recommend that facilities go with occurrence coverage if it is available. Physicians and Allied Practitioners who know they are going to work at a location for a short time and will not be able to take coverage with them are better off with occurrence. Physicians and Allied Practitioners who plan to stay at one location for a long time, and can bank the savings against unexpected needs to purchase a tail, are better off with claims made coverage and its significant savings over occurrence coverage.

Stay tuned for a discussion on “demand” and “incident” triggers in claims made Medical Malpractice Insurance policies, an important consideration in reviewing competitive offerings.