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Medical Malpractice Insurance

How to Choose Medical Malpractice Insurance

Medical malpractice insurance falls into three categories: claims-made, occurrence and claims-paid coverage. The most common type of policy is claims-made coverage.

Claims-Made Coverage

Claims-made policies cover policyholders for alleged acts of malpractice that take place and are reported to the carrier during the policy period. Claims-made policy premiums are relatively low for the first few years due to the fact that there is often a significant lag between when a treatment is administered and the filing of a claim resulting from that treatment. Because of this, claims-made premiums are structured to increase each year that the coverage is in continuous force until the risk presented approximates a "mature" risk. This is usually in years 5, 6, or 7 for individual physicians.

As a result, one advantage of claims-made coverage is that premiums are based on actual past and current experience. Policyholders therefore do not pay premiums for future liability that is difficult to project.

Another advantage of claims-made coverage is that it enables physicians to increase liability limits when necessary. For example, the limits of liability in effect at a policy's inception may not be enough to cover a settlement incurred today. In this case, the physician may which to increase his or her limits of liability. The most desirable claims-made policies establish the limits of liability available to the policyholder as those in effect at the time a claim is reported rather than those in effect at the time the incident occurred.

Since claims-made policies only cover claims reported, and arising from, incidents that occurred while that policy is in effect, policyholders must be wary when switching carriers or otherwise terminating coverage. When terminating a claims-made policy with one carrier, physicians should obtain either "tail" coverage (extended reporting coverage) from their old carrier or retroactive (prior-acts) coverage from their new carrier. Both of these coverages insure against claims reported after the end of the original policy period for incidents that occurred while that policy was in effect.

When purchasing a claims-made policy, prospective insureds should look for a guaranteed right to purchase tail coverage. They should also verify the length of time that tail coverage will be available since some companies offer tail coverage only for a fixed number of years. Another feature to look for is tail coverage that is provided at no charge upon retirement for permanent and total disability and in the event of death.

Tail Coverage

Premiums for tail coverage are determined by a doctor's specialty, territory, limits of liability and length of continuous claims-made coverage. Tail coverage gets more expensive the further back in time it must provide coverage since the liability assumed by the carrier becomes greater. It is usually a percentage of the insured's prior years premium.

Prior Acts ("Nose") Coverage
Prior acts coverage provides similar protection as reporting endorsement coverage. However, unlike a "tail," nose coverage is purchased through the new insurer.

Occurrence Coverage

An occurrence policy insures for any incident that occurs while the policy is in effect, regardless of when a claim is filed. Under an occurrence policy, insureds pay premiums that take into account not current experience, but future projections as well. Such claims are called "incurred but not reported" (IBNR). Occurrence insurance rates can vary significantly because of the difficulty in projecting future claims expenses. Under an occurrence policy, the limits of liability are those in effect when the incident occurred.

The advantage of an occurrence policy is that neither retroactive (prior acts) nor tail coverage is needed when terminating coverage.

Claims-Paid Coverage

Claims-paid coverage is often used by Trusts. Under a claims-paid policy, premiums are based only on claims settled during the previous year and projected for the current year. Claims-paid policies are generally assessable for a number of years after the policy has been terminated. In addition, claims-paid policies usually have restrictive claims "triggers," under which a claim is not considered formally made until a "Summons and Complaint" is received. As a result, policyholders changing from claims-paid coverage to claims-made coverage might find it difficult to obtain retroactive (prior acts) coverage from the new carrier. Physicians leaving a claims-paid carrier will most likely have to purchase expensive tail coverage from that claims-paid carrier.

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