Liability Coverage Types

Question: We are shopping for new malpractice coverage. Should we get claims-made or an occurrence policy?

Answer: It depends what you are looking for. Here is a description of the difference.

A claims-made policy covers claims when they are made, but jacks up premium costs annually. The added cost covers the added risk of claims being filed for occurrences that happened years ago, before the physician had a policy with the insurance company in question.

So, a claims-made policy taken by a physician in his first year of practice covers him for any claims that both occur and are reported in that year. The next year, his premiums will increase, as he is now at risk for errors made his first year that aren't reported until the second year. Premium costs continue to rise annually for four to five years, spreading out the cost of coverage. Annual increases can vary; you have to accept the uncertainty.

If you cancel a claims-made policy, you'll need to purchase a "tail" - coverage for claims reported after the policy period. Tail policy prices can range from 125 percent to 200 percent of the last annual premium paid by the insured.

Over time, claims-made policies are more expensive than occurrence-form coverage, but the initial premiums are low.

Occurrence-form policies cover you for incidents that occur during the life of the policy no matter when the claim is reported.

Costs and liability limits are set, and there is no need for tail coverage, as this risk is built into the premium costs. So it's easier to change insurers if you have an occurrence policy since you don't suffer the added cost of the tail.

Occurrence coverage, then, costs more at first, but you know what your costs will be over time. Like claims-made coverage, occurrence policies may have premium increases, based upon a carrier's pricing structure.

Many occurrence-form insurers are now offering "prior acts" coverage, a one-time payment that lets you switch from claims-made to occurrence.

You might also find the American Medical Association's guidance useful. Go to www.amaassn.org/physlegl/legal/profins.htm.