More Information Regarding the Claims-Made and Occurrence Professional Liability Insurance Policy Forms
You probably know that professional liability insurance is available in two forms - occurrence or claims-made. Both provide coverage - but you should also know that there are major differences between the two. By understanding the differences between the two types of coverage, you'll be a more knowledgeable buyer.
An occurrence policy provides coverage for an injury or damage that takes place during the policy period, regardless of when the claim is reported. Thus, an occurrence policy provides long-term insurance for any covered claim that may arise at any time in the future - up to the limits of the policy in force at the time of the incident that led to the claim.
Under an occurrence policy, the company underwriting the policy at the time of the incident would be responsible for paying any covered claims.
Let's say you purchased an occurrence policy from Adequate Insurance Company, with an effective date of January 1, 2004 and liability limits of $200,000. You elect to let the 1-year policy lapse at the end of 2004. You are then sued in 2006 for treatment you provided in June of 2004. Since your occurrence policy was in effect at the time of the incident, Adequate Insurance Company would respond to the claim, up to the $200,000 limit -- regardless of when the claim is filed.
Even if you left Adequate to purchase coverage from another company, Adequate would respond to covered claims that occurred while their policy was active, under the terms of that policy.
Claims-made coverage was introduced as an alternative form of coverage. Under a claims-made policy, coverage is provided for claims made against the policyholder and reported to the insurance company while the policy remains in force and during any applicable extended reporting period.
Under a claims-made policy, as long as the policyholder has maintained continuous coverage, the company underwriting the policy at the time the incident is reported would be responsible for paying any covered claims. This may not be the same company underwriting the policy at the time the incident occurred if the policyholder moved to a new insurer.
In the first few years, each time a claims-made policy is renewed, the premium increases automatically to take into account the likelihood of claims being reported from the current and previous policy periods. Generally, claims-made coverage is offered on an annual basis.
Let's say you purchased a claims-made policy from Adequate Insurance Company, with an effective date of January 1, 2004 and liability limits of $200,000. You elect to let the 1-year policy lapse at the end of 2004, and you do not purchase Extended Reporting Period (ERP, or "tail") coverage from Adequate. You are then sued in 2006 for treatment you provided in June of 2004. Since the complaint was filed after the policy period ended, and no ERP coverage was in place to extend your right to report claims, Adequate would not respond to the claim.
Weighing the Differences
Below, we've highlighted some of the major differences between occurrence and claims-made forms of coverage.
Claims-made - Advantages:
Pricing predictability. The price of claims-made coverage more accurately reflects current claim costs. And rates can respond to changes in claims trends or other factors that affect costs.
Lower initial premiums. Premiums in the first years are lower than occurrence coverage and increase over the next several years to reflect the increased likelihood of claims. Savings in the early years can provide a cash flow benefit for the insured.
Variable limits. Based upon availability and underwriting guidelines of the insurance company, current limits can be increased annually and would apply to unknown claims arising out of acts or incidents that happed during previous periods covered under the current policy. Then limits can be set to more realistically reflect today's claim conditions, because the current limits apply at the time the claim is made.
Insurance company evaluation. The financial stability of the insurance company can be examined each year to determine its ability to pay claims currently, rather than in the future.
Claims-made - Drawbacks:
Potential costs. Should the policy be discontinued by you or the insurance company, either the special Extended Reporting Period Endorsement or Prior Acts Coverage from a new carrier may have to be purchased. The Extended Reporting Period Endorsement could cost you up to two or more times the amount of your claims-made policy.
More things to remember. Because a claims-made policy provides coverage for only one year at a time, you need to pay special attention to any changes made to the policy on a annual basis. Changes may increase or reduce coverage under the policy.
Occurrence - Advantages:
Fixed costs. All premiums for each policy period are known up-front at the time the policy is purchased. There are no additional costs.
Long-term Coverage. Specific coverage periods will always provide coverage for covered claims, up to the limits of liability - regardless of future claims or market limitations.
Aggregate limits accumulation. Professional liability insurance usually has two limits: the first amount is the "per claim" limit, and the second amount is the "annual aggregate" limit. Each year, when the policy is renewed, there is a new aggregate limit assigned for that policy year. This new aggregate limit does not reduce the limit that applied to previous policy years. Thus, for each year of coverage, a separate aggregate limit applies to that year.
Mobility. The occurrence policy makes it easier to change insurance companies without additional costs or potential gaps in coverage - such as the need to purchase an Extended Reporting Period Endorsement or Prior Acts Coverage.
Occurrence - Drawbacks:
Pricing for future costs. Rates are based upon an insurance company's projections of claim costs in future years. Inaccurate projections can severely tax an insurer's ability to meet its future financial obligations - if the premiums charged are not adequate to fund the cost of claims. It's important to consider the long-term financial strength and stability of the insurance company issuing the policy.
Selecting adequate coverage. It may be difficult to determine whether liability limits purchased today will be adequate for future claim costs. Factors that decide the size of future claim costs include the impact of inflation, as well as other trends, such as high court costs.
Help Safeguard your Practice - options to consider
You may want to consider two options in the event you change from a claims-made policy with one insurance company to another - or your claims-made policy is cancelled, non-renewed or replaced by an occurrence policy.
Extended Reporting Period Endorsement
The first option, known as an Extended Reporting Period Endorsement, allows you to report a claim to your prior insurance company after the policy has ended. It provides insurance for covered claims that arise out of incidents that occurred during the policy period, up to the date the policy ended.
You must pay an additional premium for Extended Reporting Period coverage-possibly as much as two or more times your current year's premium. Some insurance companies offer this endorsement at no charge - if certain special policy conditions are met by the policyholder.
Prior Acts Coverage
The second option is known as Prior Acts Coverage. Many insurance companies - and those plans offered through HPSO -- offer this option to safeguard insureds who had claims-made coverage immediately prior to the current policy period, but with a different insurance company - and who did not purchase an Extended Reporting Period Endorsement from that company when the policy ended.
Prior Acts Coverage provides insurance against claims arising out of incidents that happened before the inception or effective date of a new policy. Some companies may charge an additional premium for this coverage.
Let's say you purchased a claims-made policy from Adequate Insurance Company, with an effective date of January 1, 2004 and liability limits of $200,000. At the end of 2004, you elect to move your coverage to Improved Insurance Company under your original Retro Date of January 1, 2004. You think Improved is a financially stronger company, and their policy offers higher limits of $250,000 and includes Prior Acts coverage. You are then sued in 2006 for treatment you provided in June of 2004. You would be covered, since the incident occurred while your coverage -- extended by the Prior Acts endorsement -- was in place. However, it would be Improved Insurance Company that would respond to the claim, and under the terms of the current policy - the higher limits of $250,000.
Once you moved your coverage to Improved Insurance Company, the ability of Adequate to pay claims is no longer an issue, as they are no longer responsible for paying claims under your policy.