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Occurrence vs. Claims-Made Policies

 

Occurrence Policy

Covers a policyholder for any incident that occurs during the policy year, regardless of when a claim may be brought forth in the future.  For example:  Dr. Smith has an occurrence policy in 2006.  A patient files a claim against Dr. Smith in 2009 as a result of a procedure he/she performed in 2006.  This claim will be charged against Dr. Smith's 2006 occurrence policy regardless of who insures Dr. Smith in 2009.

A) Advantages

"Prior Acts" or "Tail" coverage is never needed as coverage continues for any claims that are reported in the future as a result of incidents that took place while the "Occurrence" policy was in effect.

B) Disadvantages

Prices of occurrence policies can run unnecessarily high as insurance companies find it difficult to project future losses on occurrence policies.  As a precaution, insurance companies generally error on the side of caution when setting occurrence premiums.  Throughout the nation, occurrence policies are becoming more and more difficult to obtain.

Claims-Made Policy

Covers the policyholder for any claims that are made against the policyholder during the policy year.  This is the case as long as the incident took place after the initial inception date (retroactive date) of the claims-made coverage.  Example 1:  Dr. Smith has a claims-made policy in 2005.  His/her initial inception (retroactive) date is 1/1/2005.  A patient files a claim against Dr. Smith in 2007 as a result of a procedure he/her performed in 2005.  This claim will be covered under Dr. Smith's 2007 claims-made policy as the incident took place after the retroactive date (1/1/05) of Dr. Smith's claims-made coverage. Example 2:  Dr. Smith has an occurrence policy in 2003.  Dr. Smith decides to switch to a claims-made policy in 2004.  A patient files a claim against Dr. Smith in 2005 as a result of a procedure he performed in 2003.  Since Dr. Smith had an occurrence policy in 2003, the claim will be covered by his 2003 malpractice insurance policy.  Another patient files a claim in 2005 as a result of a procedure he performed in 2004.  This claim will be covered under Dr. Smith's 2005 claims made policy as the incident took place after the retroactive date of Dr. Smith's claims made coverage.

A) Advantages

Savings. The cost of a claims-made policy is significantly cheaper than an occurrence policy for the first 4 years.  The savings are roughly 75%, 50%, 25% and 10% respectively for these years.  One can pocket or invest the savings that a claims-made policy offers over its lifetime to offset or account for the cost of a "tail" if one is ever needed.

Potentially eliminates former insurance company instability concerns.  For example: If a physician has a claims made policy, he can transfer his/her policy to a different carrier who will then be responsible for any incidents that took place after the initial (retroactive) date of claims-made coverage (prior acts coverage), thus eliminating legitimate concerns about coverage if a claim is brought forth against that physician stemming from the time period while he was insured with a now unstable carrier.  On a claims made basis, his new carrier (or current policy) would be responsible dating all the way back to his retroactive date of claims-made coverage. Those physicians who had occurrence policies with now unstable carriers have legitimate concerns should a claim be brought forth stemming from the period of time while they were insured with that carrier.  Being able to transfer the risk proves to be extremely advantageous, especially in Pennsylvania where we have seen carriers liquidated.

            B) Disadvantages

Tail Coverage costs.  When terminating claims-made type of coverage, one must secure tail coverage to protect against future claims brought forth stemming from the time period while they were insured on a claims-made basis.  However, various carriers provide free tails upon retirement past the age of 55 or 65 based upon the number of years one has maintained continuous claims-made coverage.  However, as opposed to years past, a Cat Fund surcharge is no longer applied to tail premiums, which in turn reduces the cost of tail coverage drastically.

 

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