Professional Malpractice Insurance
Litigation is a part of the every day life of the average business owner and has been over the past few years. This is particularly true with respect to malpractice suits against licensed professionals. This category of risk generally applies to:
- Other medical practitioners
- Certified Public Accountants
The importance of insurance coverage has risen based on two facts:
- The increasing size of judgments.
- Legal costs due to the increased incidence of claims.
It’s just as important to have coverage for access to legal representation as it is for indemnity with respect to claims.
There are two approaches to professional malpractice insurance – the more traditional “occurrence” policy and the “claims made” policy, which emerged during the malpractice crisis of the mid-seventies. There are significant differences between these two policy types, and it is important that professionals understand the differences so that they may select the best type of coverage for their practice.
An “occurrence” policy covers losses which occur during the policy period regardless of when a claim is reported. For example, if an incident occurred in 1999 and a claim related to that incident is made in 2001, the policy in effect in 1999 would provide the coverage. This is true even though the policy has expired at the time the claim is made. The limits of an occurrence policy remain available to cover claims reported not just during the policy period, but claims which may be reported at any time in the future.
Claims Made Coverage
A “claims made” policy covers those losses which are reported during the policy period regardless of when the incident occurred, so long as the insured has been continuously covered by claims made policies with the same company. It is possible to have an insurance company cover losses which arise from incidents occurring while the insured was covered by another insurance company, but the coverage must be specially negotiated – it is referred to as “prior acts” coverage.
When a claims made policy expires, coverage ceases to exist for any losses not reported by the date of expiration.
Because professional liability claims have a relatively long gestation period, it is extremely unlikely that all losses occurring during a given 12-month period will be reported within that same period. Pricing for the initial year is, therefore, low compared to the second year. During the second year, losses from the first year will be reported, and this causes the overall exposure to be greater. By the third year, claims will be made for incidents that occurred in both of the first two years. Premiums increase in each subsequent year as the number of expected claims increases.
This dynamic continues for about the first five years, when the exposure is considered to be mature. Premiums on a mature base then tend to stabilize. Subsequent premium increases relate to loss-experience rating or increases in exposure, rather than the claims made maturation process.
Possible Gaps in Coverage
So long as continuous coverage is maintained with the same carrier, everything runs according to plan. Once a policy is allowed to lapse or is cancelled by the carrier, however, the coverage ceases to exist. The insured will not be protected for losses which have not been reported as of the date the policy terminated, even though the losses may have occurred during the policy period.
To cover the gap, an insured must purchase an endorsement specifically providing for extension of the reporting period. This extension is commonly called “tail” coverage. Tail coverage has several drawbacks:
- It may not be available when needed
- It may provide coverage for a very limited period of time
- It is probably expensive
- The cost is unpredictable because circumstances change
Claims made policies have the additional drawback of accelerating the review and investigation of incidents. Incident reports are not considered to be claims, so it is necessary to determine which incidents will result in a claim and prepare loss reports on those incidents before the policy period has run.