October 2006

DCs urged to switch to claims‑made policies now

by Timothy Feuling

Increasingly, insurance and risk management experts are urging health care professions to re‑evaluate their malpractice insurance policies and be pro‑active in switching to claims‑made policies.

In an article for Physician's News Digest, Barbara Smith, Senior Vice President/HealthCare Unit Manager, Commerce Insurance Services, advised: "As complicated as the switch from Occurrence to Claims Made may seem, with the proper planning the process can be made simpler. By planning ahead, the physician will be better served by making this decision on their own, rather than being forced into it by the changing market place."

Many associations providing malpractice insurance have already heeded that advice and switched to claims‑made coverage for their members. The Texas Medical Liability Insurance Underwriting Association, for instance, switched to claims‑made. When they made the announcement, they noted that "rapidly rising claim costs have caused private carriers to increase rates or leave the market. About 6,000 physicians are affected by the departure of eight carriers from the market."

The problem of carriers leaving the market ‑‑ or going out of business entirely ‑‑ has become a primary incentive to switch to claims‑made policies. As Ohio‑based Locum Medical Group explained to MDs: "On the surface the occurrence coverage looks better. History has shown that occurrence policies have often times had their risk misappropriated and did not include enough funding for current claims and future claims. Therefore, many of the companies that provided occurrence policies have become insolvent. "

It's hard to tell what the future will bring when it comes to the malpractice insurance industry but few experts are predicting rosy times. In fact, a report given at a Brookings Institute conference, referred to the "crisis" of malpractice insurance, noting that: "In several states around the nation, medical malpractice insurance has become either prohibitively expensive or totally unavailable."

You probably don't need to be convinced that the insurance industry is volatile, to put it mildly. But you still might be confused by what difference it makes when it comes to whether you need a claims‑made or an occurrence policy. In fact, if you're like most doctors, you may still be confused by the difference between the two types of policies.

Let's start at square one by looking at a simple example of a patient you cared for back in September of 2005. He didn't "get better" so he stopped coming to you. Instead, in May of this year, he went to an MD who told him he should never have gone to a quack chiropractor and suggested he see a lawyer. This August, he decided to sue you.

There are two very important dates in this case: the date the patient originally saw you (September 2005) and the date he makes his claim against you (August 2006).

If you have an occurrence policy, the company that insured you back in September 2005 would be responsible ‑‑ IF that company is still in business. That's not a remote possibility. It's a very real risk in today's volatile insurance market. In the past few years several companies have gone belly up and left their insureds holding the bag. Keep in mind, too, that years can pass between the time of the actual occurrence and the time a claim is made! A lot can happen you an insurance company during the interval.

If you have a claims‑made policy, the company insuring you when the claim is filed is responsible. If you had a different policy back when you saw the patient, the "prior acts coverage" obtained with your claims‑made policy would make sure the current policy still covers you.

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.

Even doctors who have full faith in their malpractice insurance company are finding reasons to switch to claims‑made policies. Lower cost is a particularly attractive incentive since 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 (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, Paul F. Mahaffey, CPCU, noted that claims‑made policies have a number of 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, as president of chiropractic Benefit Services, assists doctors in maximizing their practices through the proper choice of insurance and related services. Mr. Feuling is also available for speaking engagements at state conventions and other chiropractic events. Doctors may contact him with questions, comments, and requests for insurance quotes at 2950 N. Dobson Rd. Ste. 1, Chandler, AZ 85224, by phone at 800‑883‑0412 or by e‑mail: feuling@cbsmalpractice.com).