Compiled by, Arthur G. Richards, ARM (11/2004)
Claims-Made Coverage:
Claims-made coverage is based on the date the medical incident is reported to the insurer.
Claims-made contracts provide coverage for claims reported to the insurer while the policy is in force. The policy covers professional services rendered on or after either (1) the policy inception date or (2) an earlier "retroactive date". The retroactive date is a date mutually agreed upon by the insurer and the insured. Thus, a claims-made policy may provide coverage for professional service from a retroactive date (which can be prior to the policy inception date) through cancellation or expiration of the policy, so long as the claim is reported to the insurer during the policy period.
Coverage Triggers:
Claims-made coverage can be written with either a "Formal Demand" or a "Formal Demand/Incident Sensitive" coverage trigger. Coverage under a Formal Demand form is triggered when the insurer receives a formal demand for money (or services) from a plaintiff's attorney. Coverage under an Incident sensitive form is triggered when the insurer receives a written medical incident report from the insured describing a circumstance, which may subsequently give rise to a claim.
Claims Made Steps:
Claims-made coverage is less expensive than occurrence coverage during the first few years. Each year, as the policy is renewed the premium increases to compensate for the increased risk of receiving claims from the previous coverage years.
Premium increases, often called "steps," reflect the insured's increased exposure to this liability. Step increases usually cease after five years from the retroactive date and become "mature."
First year premium for most insurance companies is based on 35% of the mature premium. Second year is usually 60% of mature. Third year is 80% of mature and Fourth year is 92% of mature. Assuming no company rate increases or changes in profile or claims experience at year Five the premium would cease to increase.
Tail Coverage:
Due to cancellation or non-renewal, an additional premium to purchase an Extended Reporting Endorsement (commonly called "tail coverage") is required. Tail coverage provides protection for claims reported after the claims-made policy expires.
Keep in mind that letting a Claims Made contract expire without obtaining an extended reporting endorsement leaves the physician without coverage (Bare) for any claims filed after policy termination (for medical incidents occurring on of after the retroactive date/policy inception date and before the policy expiration date).
Changing Carriers:
When one is insured by a claims-made contract, switching insurance carriers can be tricky due to the prior acts/tail coverage issues. If the new carrier will offer retroactive coverage, it is usually preferable to buying tail. The new carrier provides retroactive coverage (at an additional premium) over the old policy by assuming the previous policy's retroactive date. The new carrier accepting the old retroactive date eliminates the possibility of a gap in coverage, as the new carrier is now obligated to respond to any claim stemming from a medical incident occurring on or after the retroactive date (as long as it is filed during the new policy term.
An added benefit: Purchasing retroactive coverage from the new carrier is usually less expensive than purchasing tail coverage from the old carrier.
Earned Premium:
When coverage is bound there is earned premiums that may not be pro-rated and could be fully earned. Many policies have a minimum earned premium of 25%. Some have fees that are fully earned regardless of cancellation date.
