MALPRACTICE INSURANCE
CLAIMS MADE vs. OCCURRENCE POLICIES
Professional Liability and Malpractice Insurance Lecture
Jeff Nicholson, PA-C, PhD
What follows is a description of the various issues relating to this topic.
Where a policy is written on a "claims-made" basis, this means that the policy in force at the time a claim against you is made will pay for losses, regardless of when they occurred in the past. (Assuming no retroactive inception date restriction).
With an "occurrence" based policy, even though the policy may have expired, provided the policy was in force at the time that the bodily injury or property damage occurred, a claim can still be made against it.
Both forms of coverage have advantages and drawbacks, depending on the circumstances. It is difficult to predict whether, in any particular instance, it will be advantageous to insure using one form or the other. Only in hindsight can a judgment be made.
Advantages of "occurrence" policies
* "Occurrence" policies are sometimes like "money in the bank," in that you can go back to old policies, years after they have lapsed and put a claim against them for incidents that happened while they were in force. Old policies should never be thrown away. They should be kept in a place of safekeeping.
* You don't have to worry about canceling an "occurrence" policy and moving to a different insurer. Coverage remains locked in for incidents occurring while the policy was in force, so long as the insurer is in business. In contrast, once a "claims-made" policy is cancelled, it is possible that purchasing insurance for past events will become difficult, expensive or perhaps not possible.
* Sometimes courts will find occurrences in successive policies if there is continuing harm. This can have the effect of accumulating limits over a period of years. With "claims-made," only one limit applies; that in force when the claim is actually made.
Disadvantages of "occurrence" policies
* Insurance companies who wrote policies in previous years may no longer be around. With "claims-made" policies, the insurer is much more likely to be around when a claim becomes payable. The length of time between an occurrence and resolution in court can be 20 or more years. An insurer in business 20 years ago may not be in business today. The only way to mitigate this risk with "occurrence" insurers is to change to a different one every few years so that you do not keep "all your eggs in one basket."
* The limits on an "occurrence" policy are likely to be inadequate if a claim is made twenty years after a policy has expired. With "claims-made" it is easier to arrange a limit which is adequate for today's exposures.
For malpractice exposures written on an "occurrence" basis it is important to arrange limits which are somewhat more than is necessary in order to meet tomorrow's exposures. On a "claims-made" basis, one does not need to project twenty years or more into the future when setting limits; 7 years is usually the longest time it takes for a case to go through the court system, so even though you still need to project into the future, the length of time is much less.
Advantages of "claims-made" policies
* Limits can be predicated on today's exposures more accurately than with "occurrence" policies, so there is less likelihood of being underinsured.
There are advantages to some "claims-made" policies in addition to normal "claims-made" advantages as follows:
* Previous inadequate "occurrence" basis limits can be topped up retroactively.
* Previous inadequate coverage or more restrictive terms exceptions and conditions can be broadened out retroactively.
* The above two advantages can be made to apply whether the insured was previously on either "occurrence" or "claims-made" policies.
Disadvantages of "claims-made" policies
* Coverage is triggered by an actual claim for damages, not a notice of an "occurrence" or "incident." However, the date of the occurrence or incident must be more recent than the retroactive date of the policy. This retroactive date determines the cut-off date for claims: if the incident occurred before the retroactive date, the insurer has no obligation and the insured no coverage. While the claim has to be made during the policy period, the occurrence which gave rise to the claim has to fall after the retroactive date of the policy. A "claims-made” policy wording covers as follows:
This insurance does not apply to "bodily injury" or "property damage" which occurred before the retroactive date, if any, shown in the Declarations.
A "claims-made" policy can have:
* No retroactive date (the broadest coverage).
* A retroactive date that pre-dates the policy inception date (this may range from days to years). Ideally, it should go back at least to the expiration date of your last "occurrence" policy. If it goes back further it can be designed to provide top-up cover in the case of different limits.
* A retroactive date that is the same as the policy inception date - this is the most limited coverage and excludes any claim for damages that occurred prior to the policy inception. It is acceptable only if prior to this policy "occurrence" coverage was in force or full "tail" coverage has been purchased on any previous "claims-made" policy.
Ideally, you want no retroactive date or one that includes the entire period that you have had "claims-made" coverage. Anything less makes you self-insured for any claims for injuries or damage that occurred during prior claims-made policy periods which you have not reported to your insurer at the time of the occurrence (unless such claims are covered by supplemental "tail" coverage).
* The first claim for damages determines which policy applies. If a person first makes a claim for medical payments in 1986, then files for additional damages in 1988, both claims activate the 1986 claims-made policy.
* With "claims-made" basis of coverage, should the policy ever be allowed to lapse or be cancelled, the insured is generally given the option of purchasing coverage, for a period of limited to 36 months following expiry of the policy (extended reporting period). Any "claims-made" during this 36 month period would then be covered. With "occurrence" policies you don't have to worry about past incidents when lapsing coverage or changing insurers.
* If coverage terms ever become more restrictive on subsequent renewal of a "claims-made" policy, the new terms apply retroactively to the original retroactive or inception date.
Limits of Liability and need to project into the future
For "occurrence" based coverage, I suggest buying much higher limits than with claims made, bearing in mind that an incident today may not be ruled upon in court for, at the low end, a few years, and at the high end, for over twenty years. It is difficult to predict what the amount of the awards will be at some time in the future. It is therefore advisable to choose a limit that is somewhat in excess of the amounts being awarded for single injury cases today. For "claims-made" coverage a lower limit is more likely to be adequate.
Changing Policies
When arranging coverage, consider:
If you switch from "occurrence" to "claims-made" coverage. If you switch from "occurrence" coverage to a "claims-made" policy with a retroactive date being the same as the date of the change, and then 1 year later you buy another "claims-made" policy from another insurer, be sure that it picks up coverage dating back to the date when you first changed from "occurrence" to "claims-made." Otherwise, you will need full "tail" coverage on the expiring "claims-made" policy to protect you from future claims that occurred during this period but were not reported as occurrences. Ideally, the retroactive date of any new "claims-made" policy should be the expiration date of the last "occurrence" policy.
Switching "claims-made" policies and carriers. When a "claims-made" policy expires, so does its coverage, even for injuries that occurred during the policy year(s), but were not reported. The Extended Reporting Period ("tail" coverage) provided by the policy, extends the reporting time for occurrences during the policy period.
Once an Insured is hooked on a "claims-made" policy it is difficult to get off. The Insured is given a 90 day "tail" coverage extension which can sometimes be extended to 1 / 5 years, and even this is at the option of the Insurer, and is not under the control of the Insured.
90 days, or even 1 year, is simply not enough on “long "tail" business, to catch all the claims, which may be made at a future date; particularly when claims may be forthcoming twenty years or more after the occurrence takes place.
The only effective answer to the problem is to either leave the cover with the "claims-made" carrier, who will likely maintain retroactive cover back to the date when the first change over from “occurrence” took place, or purchase prior acts coverage from the replacement "occurrence" basis insurance company.
To purchase "tail" coverage from the existing “claims-made” insurer, might only provide the insured with 5 years coverage which is not enough. 5 years may not even be available, and if it is, it may be expensive.
Notifying the insurer of an occurrence does not trigger coverage; an actual claim for damages must be made. The question whether you have coverage for a claim will depend on many and often complex factors, such as
1. the retroactive date of your present policy;
2. the "other insurance" clause of your present policy - if the incident was reported under a previous policy, your present policy may not cover at all or only on an excess basis,
3. "tail" coverage,
4. the status of the aggregate limit of the policy that applies.
"Tail" coverage
Claims made policies usually only provide a 90-day extended reporting period beyond the expiration of the policy during which claims that occurred during the policy period can be reported.
"Claims-made" policies can sometimes be broadened to provide the following extensions to the standard 90 days "tail" coverage
Basic "tail"
(Extended Reporting Period) extends for five years after the policy expiration date. It does not restore the policy limit and is quite limited in scope; it only covers claims due to occurrences (1) that the insured reported during the policy period or 60/90 days thereafter, (2) that occurred after the retroactive date in the policy to which the "tail" coverage is attached, (3) that are not covered by any other policy when the claim is made, and (4) if the aggregate limit of the policy is not yet exhausted.
The purpose of the basic "tail" (also called Extended Reporting Period) is to fill gaps in coverage when, for example:
1. the insurer cancels a claims-made policy and the insured cannot find a replacement;
2. the insured retires from business or from a certain operation;
3. the insured changes carriers or switches from a claims-made policy to an "occurrence" policy -- and vice versa;
4. the claims-made policy is renewed subject to a later retroactive date;
5. a renewal claims-made policy is modified with a "laser" endorsement. ("laser" endorsements added to claims-made policies that exclude specific accidents, products, or locations. Because the exclusions are very narrow, they were thought to resemble a laser.)
Full (Supplemental) "tail"
A policy with full "tail" coverage comes close to an "occurrence" policy. It excludes incidents that occur after the policy to which the "tail" is attached has expired or that occurred prior to the retroactive date of that policy. For claims arising from reported occurrences, coverage begins five years after the policy period when the basic "tail" ends; for all other claims, sixty/ninety days after the policy period (to prevent overlapping with the Basic "tail").
The cost for full "tail" coverage is usually 200% of annual premium. The "tail" premium will restore the original general and the products-completed operations aggregate limits of the policy. The option to purchase full "tail" coverage is guaranteed, even if the policy is canceled.
Full "tail" coverage is essential (1) when an insured retires from business, or (2) when the insured changes insurers or policies and the new policy has a later retroactive date. When changing insurers, the insured must carefully weigh the new insurer's promise of cheaper coverage (due to its limited exposure) against the cost of purchasing "tail" coverage from the old carrier.
The policy provision for "tail" coverage usually reads:
We will provide one or more Extended Reporting Periods ... if:
1. This Coverage Part is cancelled or not renewed; or
2. We renew or replace this Coverage Part with other insurance that:
i. Has a retroactive date later than the date shown in the Declarations of this Coverage Part; or
ii. Does not apply to "bodily injury" or "property damage" on a claims-made basis.
Limitations of "tail" Coverage
The five-year or basic "tail" is sometimes free of charge but covers only those claims that have been reported during the policy period or 60/90 days thereafter and while the original limit is not yet exhausted. Supplemental "tail" coverage must be purchased to cover claims that were not reported during this period.
Both "tail" coverages apply only to claims stemming from injuries or damage that occurred during the policy period back to the retroactive date. It does not cover claims that occurred prior to such date, nor after the policy expires.
"Tail" coverage is considered excess if any other policy (whether primary, excess or contingent) applies.
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