Key Terms

The first day that a claims made policy was purchased by an insured becomes the retroactive date. This date will appear on subsequent claims made insurance polices. The portability of a claims made policy is possible through the transfer of the retroactive date to the new carrier. That carrier will then provide prior acts coverage on the new policy. This type of coverage allows you to transfer potential past unknown liabilities from one carrier to another. If you stop practicing medicine and / or stop renewing your claims made policy, you will need an extended reporting endorsement know as the tail coverage. Most carriers will offer free tail provisions provided you fulfill their requirements such as years with that insurer, age, and full retirement from medicine. If you have to purchase the tail coverage it can be up to 250% of your expiring premium.

 

Pros for Claims Made Coverage:

• Premium rates are very low in the early years of claims made coverage
• All insurance carriers will offer claims made policies
• If your current carrier is having financial problems, you can transfer the liability to a stronger carrier

Cons for Claims Made coverage:

• Not as easy to switch carriers as some other forms of coverage.
• If you lower your classification from surgical to non-surgical, your rate is blended (combination of higher premium and lower premium) until the previous surgical exposure is mitigated
• As you get closer to retirement, you may have met the requirements for a free tail, so if you switch carriers you would have to start over with the new carrier’s free tail provision requirements in order to receive a free tail
• The cost of a tail could be up to 250% of your expiring premium
• Your limit of liability (aggregate) is spread to cover from your retroactive date until today

Example:

You receive 5 claims today for incidents in 2010, 2011, 2012. Each claim is for $1M dollars. Your policy limit is $3M, so you would only be covered for up to $3M and you would be liable for remaining $2M This becomes very important if you are now covered by your tail. Most tails will only cover up to one times the aggregate.

 

Occurrence – the policy in force on the date of the event / when the event occurred, responds to the claim

Example:

You have an occurrence policy for the last 10 years. You submit a claim today for a patient treated in 2010, your policy from 2010 (your carrier from 2010) would cover the claim. In an occurrence policy, coverage is based on the event that triggers a claim rather than the claim itself. Any claim that is triggered by an event when the policy was in force will be covered, regardless of whether the policy is still in force when the claim is submitted. The policy / carrier covering you in 2010 would cover the claim.

Pros for occurrence coverage:

• You have individual limits of liability for each year of coverage for as long as the insurance carrier is in business.
  • Example: using the same example from above, if you receive 5 claims today for incidents in 2010, 2011, 2012. Each claim is for $1M dollars ($2M for 2010, $2 for 2011, and $1 for 2012), and your current limit of liability is $1M per claim, you would be completely covered because you have up to $3M aggregate for each year.
• There is no tail to purchase
  • Since there is no tail to purchase, your policy is easily switch from one carrier to another without worrying about your coverage

Cons for occurrence coverage:

• If you purchase occurrence coverage with a carrier that becomes insolvent (goes out of business), you are only covered to the limits of the state guarantee fund, which is usually around $300K per claim.
• Occurrence usually costs more upfront since there is no tail to buy ever
• Not as many insurance carriers will offer occurrence coverage because they are liable for that policy period forever

Modified Claims Made – reacts like a claims made policy, but is paid like an occurrence policy. The tail is basically pre funded, so you don’t have to ever purchase a tail. Many carriers have names like permanent protection policy or occurrence plus. Your policy will still show a retroactive date, like a claims made policy.

Pros for modified claims made coverage:

• Responds like a claims made policy but there is no tail to purchase
• Since there is no tail to purchase, your policy is easily transferred from one carrier to another without worrying about your coverage

Cons for modified claims made coverage:

• Your limit of liability (aggregate) is spread to cover from your retroactive date until today
  • Example: You receive 5 claims today for incidences in 2010, 2011, 2012. Each claim is for $1M dollars. Your policy limit is $1M per claim, so you would only be covered for up to $3M aggregate and you would be liable for remaining $2M. This becomes very important if you are now covered by your tail. Most tails will only cover up to the aggregate.
• If you purchase modified claims made coverage with a carrier that becomes insolvent (goes out of business), you are only covered to the limits of the state guarantee fund, which is usually around $300K per claim.
• Modified claims made coverage usually costs more since the tail is pre-loaded

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Terms to know when discussing claims made and occurrence policies

Limit of Liability / Aggregate Limit

This is the maximum amount a carrier will pay for all claims that occurred and were reported during a given policy period.
Therefore if your policy limits were $1M / $3M, you have up to $1M per claim, and up to a $3M for all claims in a given year.  This is known as the aggregate.

Gap in your Insurance / Gap in Coverage

In a claims made policy, after the policy period has ended and is not renewed, a physician needs to purchase an extended
reporting endorsement from the former carrier. This is also known as a “tail”. If the physician moves to another carrier, a tail
does not have to be purchased if the new carrier offers prior acts or “nose” coverage. If a tail is not purchased or a new carrier
does not offer prior acts coverage, then the physician is considered to have a “gap in coverage”. This can be a problem because

This physician would be liable for any claims that arise during the gap in coverage, and / or

A new carrier may refuse to provide new coverage if you have a previous gap, and / or

Some states will revoke your medical license

In states like New Jersey, it is required by law that the physician purchases a tail

Mature Premium

In a claims made policy the premium is developed using a step rating system. Since most claims tend to be filed 3, 4 and 5
years from an incident, the first two years of a new claims made policy will usually be 35% to 60% of the mature (full premium
rate). For example, you will hear carriers tell you, “You are 4th year claims made”. This means you are in your 4th year of
having a claims made policy and rate is usually around 90% of the mature premium. The mature premium is generally the 5th
through the 7th year. Once a physician reaches the mature claims made rate, they will remain at that level until a tail is
purchased or provided by their carrier, unless the carrier raises rates. If the physician is at the mature claims made rate, and switches from one carry to
another, they will remain at the mature rate, provided the new carry offers prior acts coverage.

Retroactive (Prior Acts) Coverage

Under a claims-made policy, this coverage provides insurance for claims arising from incidents that occurred while a previous
claims-made policy or policies were in effect, but that were not reported until that policy (or the last in a succession of policies)
was terminated. With retroactive coverage, the new policy covers such claims. With such coverage, purchase of tail coverage
from the previous carrier is not necessary. (See also “Tail Coverage.”)

Tail Coverage

In a claims made policy when a physician decides to stop practicing medicine, or switch to an occurrence policy form, they are
required to purchase an extended reporting endorsement know as the tail or tail coverage. Since a claims made policy
responds when a claim is made, if you no longer have an active policy, you would be liable for any claims that are presented
today for incidences that happened when you had a claims made policy. Therefore the tail coverage provides you with
protection for those previous years of exposure back to your retroactive date. Most carriers will offer free tail
provisions if physicians meet certain criteria, such as retirement, years with a carrier, death, or permanent disability. Tail
coverage is purchased from an insured’s previous claims-made carrier and is generally 125% to 200% of the prior year’s
premium.

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General Medical Malpractice Insurance Terms

Assets

All the property and financial resources owned by an insurance company. Admitted Assets are those assets that are liquid and
can be used to raise cash to pay claims. Non-admitted Assets are assets, such as real estate and other equipment that are not
easily made liquid.

Claim

A written notice that is received by an insured from a person or entity that advises that the person’s or entity’s intention is to
hold the insured liable for damages or injury covered by the insurance. A claim can include a demand for money or services
and the serving of a suit.

Claims Reserves

Funds set aside to satisfy those claims that have been reported to the company but not yet resolved or paid.

Claim Severity / Claim Frequency

When medical malpractice insurance carriers evaluate a physician to determine a premium price, they will review claims history
for frequency and severity. The more previous claims a physician has (frequency), will lead carriers to determine that more
claims will arise in the future. The severity of each claim refers to the amount of the settlement or financial liability resulting from
settling a claim.

Consent to Settle

In a medical malpractice insurance policy there will be a consent to settle clause or specifically state that there is no consent
to settle. This is extremely important because a consent to settle clause allows you, the physician, the right to refuse a
proposed settlement and go to trial. If there is a no consent to settle clause, the insurance carrier has the right to settle a case
without your consent. Beware the Hammer! (good article) Some carriers will have a Hammer Clause instead of a no consent
to settle clause. This is virtually the same as the no consent to settle clause, where they give you the option but put the
financial liability back on you if the case settles for more than the original agreement.

Date of Incident

The date on which a situation of alleged malpractice took place. Also called “date of occurrence.”

Date of Reporting

The date of reporting is the date on which the incident was reported to the insurance company.

Declaration Page

This is the portion of the policy that states information such as the name and address of the insured, the policy period, the
amount of insurance coverage, premiums due for the policy period, and any coverage restrictions.

Deductible

Allows the insured to pay an amount of the “first dollars” of a claim payment and to pay a lower premium for assuming this risk.
Sometimes due to claims history, carriers will force an insured to be responsible for a deductible.

Direct Written Premium

A carrier’s gross written premium

Dividend

A partial return of premium to policyholders.

Earned Premium

The portion of premium that applies to an actual coverage period. For example: You pay your entire year’s policy upfront for
$12,000. 8 months later you decide to cancel your policy, the earned premium is considered 8 months ($8000) and your
unearned premium is considered 4 months ($4000).

Endorsement

An amendment, sometimes referred to as a rider, added in writing to an insurance contract or policy. An endorsement could
include additional coverage or exclude certain coverage.

Excess Insurance

A separate insurance policy with limits above the primary (or “first dollar”) policy.

Expense Ratio

The expense ratio is calculated by dividing all expenses by net written premiums. Usually, but not always the lower number is
better. This is important because the expense ratio can reveal the true cost to produce and provide an insurance company’s
services. The expense ratio over time can reveal whether an organization is becoming more or less efficient in doing business.
For example: a company with a 20% loss ratio has 80 cents of every premium dollar available to respond to losses, while a
company with a 60% loss ratio only has 40 cents of every premium dollar available to respond to losses.

Experience Rating

The system of rating or pricing insurance in which the future premium reflects actual past loss experience of the insured.

Incident

An occurrence that the plaintiff claims has led to culpable injury. Incurred But Not Reported Losses (IBNR) – An estimate of
losses for incidents that have occurred during a policy period (usually a year) but have not yet been reported to the company.

Indemnity / Settlement

An insurance company’s payment to a plaintiff in settlement or adjudication of a claim.

Locum Tenens

A substitute physician who temporarily takes the place of a named insured policyholder or physician member of a medical
group. This coverage may be contingent upon the policyholder or member physician not practicing during the period in which
the Locum Tenens coverage is in effect.

Premium

The amount of money a policyholder pays for insurance protection.

Reinsurance

An agreement between insurance companies under which one accepts all or part of the risk or loss of the other. Most primary
companies insure only part of the risk on any given policy. The amount varies among carriers. The remainder of the policy
limits is covered by reinsurance entities. The less primary risk that the company insures, the more premium it has to pay to the
reinsurer to cover the remaining policy limits. In general, smaller companies are able to cover only a relatively small proportion
of the liability limit. This results in large premium payments to reinsurers. Larger companies can cover a large proportion safely,
thus reducing the payments they must cede to reinsurers, which indirectly reduces the cost of insurance to their policyholders.
Reserves – See “Claims Reserves.”

Risk Management

A systematic approach used to identify, evaluate, and reduce or eliminate the possibility of an unfavorable deviation from the
expected outcome of medical treatment, and thus prevent the injury of patients due to negligence and the loss of financial
assets resulting from such injury.

Standard Risk

A person who, by the company’s underwriting standards, is eligible for insurance without restrictions or surcharges.

Surplus Contribution

Surplus contribution is the amount of capital insureds must provide for a mutual company or reciprocal exchange during the
early years of the company’s operation. As the company stabilizes and grows in financial strength, earned surplus from profits
is added to the contributed surplus, and the contributed surplus can potentially be returned to the early policyholders.

Vicarious Liability

Liability for the acts of someone else.