Medical malpractice insurance jargon can be quite onerous for an individual who hasn’t spent his or her career learning the language of medical professional liability coverage. Consider the following phrases; retroactive date, mature premium, first year premium, tail coverage, nose coverage and extended reporting period. It’s probable that you have heard these used but you may not fully realize their significance to your claims-made policy, and more importantly their direct impact to your premium outlay. A basic understanding of the claims-made policy (and the language that comes with it) will help any physician, surgeon or medical professional when their next renewal rolls around.
Claims-Made Policies Work On This Basic Premise
The medical liability insurance policy must be in-force (active) when a claim is made. Additionally, the incident that caused the claim must also have taken place during the time that policy was active. However, this presents a significant problem. Medical malpractice insurance is written for a one year period and many medical malpractice claims take years to file from the date of an adverse incident. Ergo, most claims made policies would never pay out because the claim and occurrence most likely would not happen in the same policy period, leaving doctors unprotected and solely liable for any payments to plaintiffs.
Enter the “Retroactive Date”
The retroactive date solves this problem by establishing a date in the past, after which all the way to the end of the currently policy period, any incident resulting in a claim is covered. In other words, it extends the claims-made policy into the past and picks up risk (otherwise known as exposure) from previous years. For example, if a doctor has a retroactive date (also known as a retro date) of 1/1/01 for this year’s policy, he will be protected for any claim that is made this year for an incident that took place on or after 1/1/01. The coverage that is created by having a retroactive date is called “Prior Acts Coverage” or more informally, “Nose Coverage.”
The retroactive date creates more risk or exposure for the insurance company the further back in time it is established. If a medical malpractice insurance company is covering one previous year, there is less chance of a claim than the insurance company covering the previous 10 years. Eventually, this risk the insurance company assumes, by covering a longer period in the past, levels off due to a statute of limitations that prevents malpractice claims from being filed after a certain period of time after the incident that sparked the claim. When the risk reaches this apex (and the insurance company is charging a premium proportionate this maximum risk), the policy is said to be mature. Generally, a policy with 4-8 years of prior exposure (a retroactive date 4 – 8 years in the past depending on the state and company offering the coverage) will be mature and therefore charge the “Mature Premium.”
This excess exposure (or lack-there-of) gives way to the most attractive aspect of a claims-made policy; the extremely low premiums the claims-made policy boasts before it becomes mature. Remember, a claims-made policy that isn’t mature covers a relatively smaller exposure, and therefore costs less. For example, assume a doctor starts a new private practice. The first year, he buys a claims-made policy to cover only his first year, say 1/1/11-12/31/11. He will pay what’s called a “First Year Premium.” The next year, he renews his policy, he not only needs coverage from 1/1/12-12/31/12, but everything he did his first year needs to be covered as well, so his retroactive date is set for 1/1/11. Now the insurance company has two years of exposure they need to cover, therefore his premium rises. This will go on for a few years until the policy “matures” and the mature premium is paid. To get an idea of what the premium of a claims-made policy will be in each year, one needs to know the mature premium rates. Assume the mature premium is $10,000. Generally speaking, the first year premium will be roughly 25% of the mature premium, the second year will be 50% and the third year will be 75% or in this example $2,500, $5,000 and $7,500 respectively. The mature premium of a claims-made policy will cost about the same as a comparable occurrence policy (some are more or less expensive depending on where you practice). This savings in the first few years of a claims-made policy will save the doctor almost an entire year’s worth of premium.
Unfortunately, the Story Doesn’t End There
If it did, this would be the deal of the century in the medical liability field. If a doctor needs an active policy in-force when a claim comes in, what happens after he or she stops practicing? Remember claims can come in several years after the incident that caused them. If a doctor retires, takes a leave of absence or in any way ceases to have coverage for a current practice, is he or she going to be on the hook if a claim comes in? Not if “Tail Coverage” is purchased. Also known as an “Extended Reporting Period” or “ERP”, a tail is stuck on the rear (get it?) of a claims-made policy to cover any claims that are made while the doctor is not practicing. A doctor must pin the tail on the policy once he has stopped practicing. Tail coverage can cost, on average, anywhere from 150%-250% of the last policy year’s premium.
There is Good News Though
Many medical malpractice insurance companies offer free tails if certain criterion are met. Disability or death will generally earn a doctor a free tail, however many doctors feel that option is not cost effective. More prevalently, (and popularly) free tails are earned though retirement. Many companies give a free tail to clients who have been with insured with that company for more than 5 years. Utilizing this option, many physicians and surgeons are able to enjoy the significant savings in the first years of their policy without the burden of paying for it with a tail on the backside of their claims-made contract.
While there are many more nuances in a claims-made policy, having a basic knowledge of the claims-made policy will help you during your next renewal. Please confer with your professional medical malpractice consultant if you have additional questions or to see if this type of policy would be right for your specific situation.