Occurrence vs. Claims-made Coverage

There are two types of coverages available in medical professional liability insurance: claims-made and occurrence. Your clear understanding of both types of coverage is essential to making a fully informed decision on which type of coverage to buy. Some carriers offer only claims-made. Others offer both, but may limit access to occurrence coverage to a few medical specialties. Subject to underwriting approval, both occurrence and claims-made coverages are available to all eligible individual insureds through the MMA.

There are several important differences between claims-made and occurrence coverage. Key among them are:

a. Timing of claim filings required to trigger coverage, and
b. How the limits work.

Occurrence Coverage Timing:

An occurrence policy protects you from any covered incident that “occurs” during the policy period, regardless of when a claim is filed. An occurrence policy will respond to claims that come in – even after the policy has been canceled – so long as the incident occurred during the period in which coverage was in force.

In effect, an occurrence policy offers permanent coverage for incidents that occur during the policy period.

Limits:

Occurrence limits “restore” each year so that claims paid for incidents arising from one policy year do not deplete limits available to cover claims from other years. Each year an occurrence policy is in force represents a separate set of limits. Ten years of coverage under a $1M/$3M occurrence policy could provide the insured protection for up to $30MM in claims (ten year combined annual aggregate limit).

Claims-made Coverage Timing:

Claims-made policies provide coverage for claims only when BOTH the alleged incident AND the resulting claim happen during the period the policy is in force. Claims made policies provide coverage so long as the insured continues to pay premiums for the initial policy and any subsequent renewals. Each succeeding year the policy is continuously renewed, the “coverage period” is extended. Once premiums stop the coverage stops. Claims made to the insurance company after the coverage period ends will not be covered, even if the alleged incident occurred while the policy was in force.

A claims-made policy will cover claims after the coverage period ONLY if the insured purchases extended reporting period or “tail” coverage.

Limits:

Claims-made limits DO NOT “restore” each year the way occurrence coverage limits do. The policy limits in place when the policy is purchased remain the single set of limits available to protect the insured from all claims that could arise from care provided during the years the policy is continuously in force. The insured does not have a separate set of limits for each year the policy is in force.

Step Factor:

Because both the incident and the claim have to be filed during the coverage period, the claims-made insurer has little risk of loss the FIRST year a new policy is in force. That is why the first year premium for claims-made coverage is lower. Each year the policy continuously renews, the coverage period expands, and the insurance company’s exposure to loss increases.  For the first four years a claims-made policy is in force, the premiums increase incrementally to reflect this increased risk. This process is known as the “claims-made step factor.”

Usually by the fifth year of claims-made coverage, the risk of loss levels off and the “step factor” reaches a “mature” claims-made rate. “Mature” claims-made rates are typically very close to normal rates for occurrence coverage.

Summary

Claims-made coverage has replaced occurrence as the most common type of policy offered by medical professional liability insurance companies. A number of factors are behind this evolution, including the fact that reduced carrier liability under claims-made can mean slightly lower premiums for insureds. Occurrence coverage, or “permanent” coverage, is increasingly difficult to find.

The important thing to understand is why the claims-made coverage costs less, whether you are purchasing it from the MMA or any other carrier. Don’t ever assume coverage under a claims-made or occurrence policy are the same, even if the limits are identical.

If you are considering a move from occurrence to claims-made coverage, be sure to seek professional legal advice to revise your partnership agreements, employment agreements, buy/sell agreements and other corporate contracts to specify who will be responsible for buying tail coverage.

Finally, be sure to appreciate the commitment you are making to stick with a single carrier when considering a switch to claims-made coverage. In order to keep coverage in force and avoid having to buy “tail” coverage you must renew with the same carrier year after year. If you ever have to leave, whether you choose to, or if the carrier non-renews you because of a claim, you will have to buy “tail” coverage and seek another carrier.