September 2005

Claims‑made policy a clear choice for DCs

by Timothy Feuling

One of the most confusing questions about professional liability insurance is which is better: a claims‑made policy or an occurrence policy. The reason for the confusion is that, in a malpractice case, there are two important dates involved: 1) the date on which the claim was made, and 2) the date on which the incident took place.

Let's look at a case in which a patient you cared for a year ago sues you (makes a claim) today. If you've changed insurance companies in the past year and you now have an occurrence policy, that policy won't cover the claim. You'll have to go back to the insurance company you had when you cared for the patient ‑‑ and hope the company is still in business!

That's because an "occurrence" policy provides coverage only for incidents that occur while the policy is in effect. If the incident "occurred" before you got the policy, your insurance policy doesn't protect you.

A "claims‑made" policy, on the other hand, provides coverage for any claim that is reported while the policy is in effect, back to the specified retroactive date.

Because of the uncertainty of so many insurance companies today, most professionals are taking out claims‑made policies. With a claims‑made policy, they don't have to try to keep track of which company insured them back when they saw the patient. And they don't have to worry about a former carrier's financial situation ‑‑ they know they are covered by their current insurer.

There are other benefits as well.

One major benefit is cost. For most professionals, the cost of a claims‑made policy will be lower than an occurrence policy. A claims‑made policy starts out much lower, then increases each year until it reaches "maturity" (usually after four years).

In the cost comparison chart shown here (which uses a sample premium for example purposes ‑‑ actual premiums would vary), a claims‑made policy would cost $1,660 less during the first four years, and $136 each year thereafter. Some companies ‑‑ most notably, Chiropractic Benefit Services ‑‑ issue prior‑acts coverage at no cost. When you retire (at age 52 or older), CBS provides free "tail" coverage as well, to cover you for any lawsuits that might be filed after you retire for incidents that took place while you were still in practice.

Another important consideration is the "limits of liability" factor. In the past, many policies were written with $100,000/$300,000 limits of liability. As time went on, these just weren't high enough to keep up with skyrocketing claim amounts. Most professionals started opting for $1 million/$3 million limits, to make sure they were protected from the million dollar lawsuits that are so common today.

With a claims‑made policy, your "limits of liability" are the amounts specified in your current policy ‑‑ not the outdated and possibly inadequate limits you had back when you cared for the patient.

The advantages of a claims‑made policy are so numerous and strong that many professional organizations recommend them to their members. For instance, the Clinical Social Work Federation tells members, "claims‑made coverage is more flexible. You can adjust your coverage limits each year (up or down) to meet the legal, social and economic climates of the year. Claims‑made premiums are also more fair and accurate, because they are based on known claims reported to the company during the previous five years. And, because all claims resulting from a professional service are not reported until five or more years have passed, the first four years of the claims‑made coverage have proportionately lower premiums."

In an article for the Los Angeles County Bar Association (County Bar Update, November 2001, Vol. 21, No. 10), Paul F. Mahaffey, CPCU, noted that claims‑made policies have a few other, less obvious benefits. "The ability to review claims experience each year gives the insurer the opportunity to preserve its financial integrity by adjusting rates on a timely basis, reflecting actual experience. This benefits not only the insurer but also the insureds who expect and deserve financial responsibility from the insurer in return for the premiums paid," he said.

"Claims‑made policies also offer other advantages to insureds. Premiums for today's coverage need not be loaded to provide for future unknown claims (IBNR) or for the inflated costs of handling such claims. Tomorrow's claims are paid with tomorrow's premiums. As a result, premiums charged for claims‑made coverage are lower than properly‑rated occurrence coverage, since there is no IBNR," Mahaffey added.

Finally, he warned that, "Occurrence policies mislead insureds into believing that they have adequate protection 'forevermore', when in fact the limits of liability they buy today are likely to be inadequate for five or ten years from now."

Taking all these factors into consideration, it's clear to many professional liability experts that the claims‑made policy is the best choice available today.

 (Timothy J. Feuling, president of Chiropractic Benefit Services (CBS), assists doctors in maximizing their practices through the proper choice of insurance and related services. Doctors may contact him with questions, comments, and requests for insurance quotes by phone at 800‑883‑0412 or by e‑mail at tfeuling@cbsmalpractice.com. NOTE: Doctors can qualify for free prior‑acts coverage when switching to a Chiropractic Benefit Services program from a claims‑made policy from another carrier. For more information, or for a free rate proposal and policy comparison, contact CBS at 800‑883‑0412 or fill out a CBS Quick Quote request at the CBS website, www.cbsmalpractice.com.).