So, you’re looking at malpractice insurance options and being the smart provider that you are, you’ve got quotes for both Occurrence and Claims-Made policies in front of you. You like the idea of an Occurrence policy, but the Claims-Made quote is so much cheaper in the first few years. So, why not just start with the Claims-Made policy now and then switch to Occurrence when you’re a little further down the road?
Well, CAN you switch – Yes… but there are a few things that you need to be aware of before you make this choice.
There are 2 types of malpractice insurance that you can buy – Claims-Made and Occurrence. The easiest way for you to remember the difference between these 2 policy types is that the name describes how the coverage is triggered.
If you have an Occurrence policy, your malpractice coverage is triggered based on when the incident actually occurred.
If you have a Claims-Made policy, your malpractice coverage is triggered based on when the claim is made against you.
There are several key differences in these policy types but 2 of the most significant are the issue of TAIL INSURANCE and PRICE.
Occurrence coverage is the most flexible policy type available.
With this type of insurance, you only need to carry the insurance while you’re actively practicing. When you’re done, you simply cancel the policy and walk away. There is no need for tail insurance with an Occurrence policy.
If a claim is filed later on for a patient that you treated during the years when you were covered under the Occurrence policy, that insurance will respond to cover you for the event.
Occurrence coverage tends to be a little more expensive on an annual basis, as compared to a fully mature Claims-Made policy, but because you don’t have to buy tail insurance at the end, the long-term cost difference is nearly identical.
Now let’s look at Claims-Made coverage.
A provider who has Claims-Made coverage must carry the insurance while they are actively practicing, but once they cancel the policy, they must secure TAIL insurance. Tail covers a healthcare provider from their cancellation date into the future for any filed claims that may still be made against them for patients that they treated during the years when they were covered under the Claims-Made policy.
Claims-Made premiums start out at a low price in Year 1 and then the rate goes up every year for approximately 5 years, until it finally reaches the mature rate. After this time the price remains stable.
Tail insurance typically costs 1.5 to 2 times the mature premium, so when a provider is looking at the total cost for a Claims-Made policy, it’s important to look at the premiums you’ll be paying each year as well as the tail cost that you’ll be responsible for at the end.
So, when you’re comparing Claims-Made and Occurrence coverage those 2 key issues of tail insurance and price really come into play.
Let’s take a look at an example together… here is a chart with rates for Family Practice in Indiana.
We have Claims-Made on the left and Occurrence on the right. As you can see, the Occurrence premium is $8,169 each year. The provider will pay the same rate year over year and at the end of the term, when the policy is cancelled, the cost for tail insurance is ZERO, because… there is no need for tail insurance on an Occurrence policy.
So, the total out of pocket for 10 years on an Occurrence policy is $81,680.
The Claims-Made policy starts out at only $2,482 for the first year, but then the price goes up to $4,964 in Year 2, $6,516 in Year 3, $6,903 in Year 4, and it matures in year 5 at $7,757. The provider will pay that same mature rate of $7,757 every year after that going forward. And then when the policy is cancelled, tail insurance must be purchased. And the cost of tail for this policy is $15,514. So, the total out of pocket cost for 10 years on a Claims-Made policy is $82,920.
Most providers appreciate that the Occurrence policy DOES NOT have tail insurance to worry about. That’s actually a really big deal for the majority of doctors. Tail insurance is expensive and it can be a bit worrisome, so most providers would rather NOT have to deal with it at all. But, that Occurrence premium does cost a little more – especially when you’re comparing it to those first few years of the Claims-Made premium. And when you’re just starting out, budget can be an issue.
So, can you start on the Claims-Made policy and then just switch to Occurrence later on? Well, the simple answer to this is YES, but there are a few things that you need to be aware of…
1. Keep in mind that as soon as you buy a Claims-Made insurance policy the clock starts ticking for that tail insurance.
If you only carry the Claims-Made policy for 1 year and then want to switch to Occurrence, you can do so – but you have to buy tail for that 1 year that you carried the Claims-Made policy. No matter how long you carried the Claims-Made coverage, whether it’s 1 year, 10 years, or even just 1 day, you still have to be considerate of the tail insurance that will need to be obtained after you cancel in order for you to have ongoing protection for future claims for any services rendered during that time.
So, can you switch to Occurrence – Yes. But do the math. Is it worth it to carry a Claims-Made policy, knowing you’ll have to tail it out before you switch to Occurrence? Make sure you look closely before deciding if this is the right move for you.
2. Some carriers offer convertible options that allow you to switch a bit more easily.
A limited number of carriers now offer the ability for a provider who is on a Claims-Made insurance policy to convert that coverage to an Occurrence policy over the course of several years.
With this option, you can start out on the more cost-effective Claims-Made policy and then switch to an Occurrence policy down the road. When you convert your coverage, the carrier will give you a discounted tail, which can usually be paid off over the course of several years, but generally they’ll require that you stay insured with them for a period of 5 years or more. So, while this does give you an easier way to make the policy type change, there are some strings attached – so be sure to talk to your agent to make sure it’s the right fit for you.
And like before, it’s all about the numbers. So even if you’re considering a convertible option, make sure you add up the premium plus the cost of tail in order to determine if it’s a wise decision to make the swap.
Shopping around for malpractice insurance can be a complicated process and these types of detailed coverage conversations are really important to get right Day 1 – so be sure that you’re working with a knowledgeable malpractice insurance agent to help you make the right choice.