We’ve recently heard from some of our members that they are being offered malpractice insurance policies that seem too good to be true (TGTBT). Once these members were able to provide us with copies of what they were being offered, we determined they weren’t being provided with all of the details they needed in order to make an informed decision about what they were actually buying.
In many of the situations we reviewed, members were being offered policies based on price alone. Because most CRNAs are not experts in malpractice insurance, they rely on insurance agents for advice. Unfortunately, the advice from these agents can be self-serving.
Occurrence OR Claims-Made?
Where price is the primary selling point, these agents are only offering claims-made polices. In situations where our members already had an occurrence policy in place, these agents failed to disclose to our members that they were changing their coverage from an occurrence policy to a claims-made policy. These agents are allowing our members to think they are purchasing comparable policies at a lower price without revealing the significant and material differences between the two types of policies.
In order for you to make an informed decision about any malpractice insurance policy you might buy, it’s important not only to have a basic understanding of how claims-made and occurrence policies differ, but also how each type of policy is priced.
An occurrence policy covers you for an incident that occurred while the policy was in force. As long as the incident that brought rise to the claim occurred during the policy period, the policy provides an unlimited time period in which to report claims. In effect, an occurrence policy offers permanent coverage for incidents that occurred during the policy period. This is even true after the policy has lapsed or has been cancelled. For an incident to be covered under a claims-made policy, it must meet two criteria. First, just like an occurrence policy, the incident in question must occur while the claims-made policy is in force. Second, the claim must also be made while the policy is still in force. Claims which are made after the coverage period ends will not be covered, even if the incident occurred while the policy was in force.
So how do you protect yourself from claims after your claims-made coverage has ended? This is where claims-made coverage starts to get complicated.
You have the option of purchasing an extended reporting period endorsement when a claims-made policy comes to an end. This endorsement, often called a “tail,” allows for additional time in which to report claims after the policy has ended. If no tail is purchased after a claims-made policy has ended, you have no coverage available to you whatsoever for any claims that might come up for the period of time you were covered by your claims-made policy.
The coverage differences described above impact how each of these policies are priced. With an occurrence policy, there’s never a need to buy a tail; it’s already built into the policy. As such, occurrence premiums remain level over time and do not change year to year.
Claims-made premiums start out lower than occurrence premiums. Why is this? Because both the incident and the claim must happen during the policy period, the claims-made insurance company has little risk of a claim being reported and paid out the first year a new policy is in force. Because the risk is lower for the claims-made insurance company in the first year, the premium is less. As the policy continues to renew every year, the period of coverage expands, and the insurance company’s risk of loss increases. That’s why claims-made premiums “stair-step up” over a four-year period and are equivalent to occurrence premiums by the fifth year. While claims-made premiums may appear less expensive than occurrence premiums, this is not the case once you factor in the cost of the necessary tail. It’s worth noting that, while AANA Insurance Services does offer claims-made policies, we believe occurrence policies offer more protection for our members. In our opinion, a claims-made policy is a deck stacked in the insurance company’s favor.
Unlike an occurrence policy which provides an unlimited period of time in which to report claims, once a claims-made policy ends you must buy a tail if you want additional time in which to report claims. If you don’t buy a tail, the insurance company is off the hook; it’s as if there was never any insurance in place.
Claims-made insurance is like “renting with the option to buy.” The premium you pay when the claims-made policy is in force is the “rent.” When the need for the claims-made policy ends, you have to purchase the tail in order to exercise your “buy option.” Again, if you elect not to buy the tail, you have no coverage available to you, and it’s as if you never had any insurance in force.
This is not the case with occurrence coverage. Since you receive an unlimited period of time in which to report claims under an occurrence policy, you are truly “buying” the policy and not just “renting” it. And the additional financial coverage that’s available from an occurrence policy as compared to a claims-made policy becomes obvious when you consider how differently limits of liability are provided under each policy.
Occurrence coverage offers greater limits of liability than claims-made. Each occurrence policy provides the policyholder with a separate set of limits for every policy year. During the annual policy term, a policyholder with occurrence coverage will typically have limits of $1 million per claim and $3 million in total. If that same individual has an occurrence policy in force for five years, there would be $15 million (3 million times five years) in total aggregate limits available.
Unlike occurrence policies, claims-made policies are considered continuous. Consider a claims-made policyholder who has limits of $1 million per claim and $3 million in total. Whether this policyholder has a claims-made policy in force for one, five, or 10 years, this individual would have only $3 million in total aggregate limits available over the period of time they had claims-made coverage in force.
Sometimes the agents selling these TGTBT policies do disclose that they are only offering claims-made policies. However, some of the agents don’t provide complete coverage information about these policies.
In offering these TGTBT claims-made policies, some agents are telling our members that as long as they keep their policies in force with them for five years, they will get a free tail. This is true, but only in part.
The circumstances in which these TGTBT policies offer free tails are very limited. The following language has been taken from one of these TGTBT policies: “In the event the policyholder dies, becomes permanently and totally disabled, or retires during the policy period, an Extended Reporting Period (tail) will be granted at no additional premium.”
But under these TGTBT policies, it’s not just a matter of simply retiring. Based on the same policy as described above, the policy goes on to say that the retiring policyholder will only receive the free tail if he or she “has reached the age of 55 and has been continuously insured by the insurance company on a claims-made basis for a minimum of 5 years.”
So, as it turns out, simply having a claims-made policy in force for five years does not qualify you for a free tail under these TGTBT policies. You only qualify for free tail if you die, become permanently and totally disabled, or retire after the age of 55 and have had a policy in force for at least five years.
As a point of reference, the claims-made policies offered by AANA Insurance Services also provide for free tails for death and permanent and total disability. When it comes to retirement, though, our polices are actually better than the TGTBT policies. The policies we offer have no age requirement for retirement, and the claims-made policy we offer from Medical Protective only requires that you have a policy in force for a minimum of one year in order to get a free tail at retirement.
The companies that offer these TGTBT policies are almost always non-admitted insurance companies. Because non-admitted companies are virtually unregulated, these companies can increase the percentage they charge for tails so what you think you’ll eventually pay for the tail when you end your claims-made policy could actually turn out to be significantly more.
If you end one of these TGTBT policies for any reason other than death, disability or retirement, you have to buy a tail if you want additional time in which to report claims after your policy has ended. This is true whether you’ve had the policy in force for seven months or seven years.
The cost for an unlimited tail from the companies represented by AANA Insurance Services is 100 percent of the current year’s policy premium. First of all, it’s very unlikely that one of these TGTBT insurance companies would even offer an unlimited tail. Next, the cost for a TGTBT tail will be more.
For these TGTBT policies, the normal charge for a one-year tail is typically 100 percent of the current year’s policy premium. For a three-year tail, it is 150 percent, and for a five-year tail, it can be 200 percent. If you work with patients under the age of majority, you can’t depend on the statute of limitations, and probably anything less than an unlimited tail could be useless.
Unless you die, become disabled or retire, you are going to have to purchase a tail if you have a claims-made policy.
To determine the true cost of one of these TGTBT policies, you need to include the eventual cost of the tail. Once you know the true cost of that TGTBT policy, you will realize both the claims-made and occurrence policies offered by AANA Insurance Services are much more cost effective and, more importantly, will offer you an unlimited period of time in which to report claims.