Claims Made vs Occurrence Malpractice Insurance

What is the difference between claims made and occurrence-based malpractice insurance? There are three main types of insurance for physicians. If they’re working for a big hospital network, that hospital may be self-insured. And in those scenarios, nine times out of 10, the physician does not have to worry about purchasing tail coverage. The next one is a claims-made policy. These are used mostly by private physician practices, and then if it’s a claims-made policy, someone may need to purchase tail coverage. And then the last one is occurrence. In an occurrence-based policy, no tail coverage needs to be purchased. Let’s break down claims made first, then occurrence. 

Claims Made vs Occurrence

An occurrence policy provides lifetime coverage for incidents that transpire during the policy period, regardless of when the claim is filed. This type of policy offers long-term protection, even after the policy has been terminated. In contrast, a claims-made policy only covers incidents that both occur and are reported within the policy’s active timeframe. To extend coverage for claims filed after the termination of a claims-made policy, one must purchase additional “tail” coverage. Understanding the differences between occurrence and claims-made policies is essential for choosing the appropriate insurance policy that meets an individual’s or organization’s specific risk management needs.

Claims Made vs Occurrence Malpractice Insurance

Occurrence malpractice insurance offers comprehensive coverage for incidents that transpire during the policy year, regardless of when a claim is eventually reported. This type of policy provides long-term protection, even if the policy is no longer active when the claim is filed. On the other hand, claims-made malpractice insurance only covers incidents if the policy is active both when the incident occurs and when the claim is reported. To maintain coverage for claims reported after the termination of a claims-made policy, additional “tail” coverage must be purchased. It is crucial for healthcare professionals to understand the differences between occurrence and claims-made malpractice insurance policies in order to select the appropriate coverage that addresses their specific liability concerns and risk management needs.

What is Claims-Made Insurance?

Let’s start with claims-made. A claims-made policy simply means a policy must be in effect when the claim is made. And how this affects a physician is they can terminate a contract, and then there could be some gap between the last patient they see and the last day a patient can sue them. In most states, the statute limitation on the malpractice claim is two years from when the patient either knows or should have known of the malpractice incident. If a physician leaves and then gets sued a year after leaving the employer, they need a policy that protects that gap. And that’s called tail coverage or extended reporting, gap insurance, but nearly everyone in the field calls it tail coverage.

Tail Malpractice Insurance

Who purchases it, and how much does it cost? Let’s go through that. The employer will almost always pay for the underlying policy. There’s an annual premium where payment must be made each year so that the physician is insured. The employer almost always pays that. If it’s a claims-made policy, who pays for tail coverage is simply based on the employment contract language. Most of the time, if a physician is working for private physician-owned practice, maybe a little smaller, under ten physicians, the physician will be responsible for paying the tail coverage. If it’s a claims-made policy from a hospital, then I would say the hospital pays for the tail if necessary. 

Cost of Tail

How much is tail for a claims-made policy? A good rule of thumb is it’s about twice what the annual premium is. So, it can vary. The longer the physician is with the same employer, the more expensive the tail will be. I would say it starts around 150% of the annual premium and can go up to 300% in some scenarios. Let’s just do some math quickly. 

Let’s say a physician is in primary care. I’d say usually the average is around 6,000 for their annual premium. If the physician was responsible for tail, and they’ve been with the employer for two or three years, their tail cost is going to be about twice that. So, they’re going to pay around $12,000 for tail. That’s a one-time payment. It’s not paid every year. You just pay one amount, which covers the physician for the gap we discussed. 

Certainly, this is something the physician can negotiate before signing the employment agreement. For some specialties, this can be an enormous chunk of money. OB-GYNs and some of the surgical specialties can have annual premiums of 20, 30, or 40,000. So, their tail costs can be above 50,000 up to 100,000 for an OB-GYN. Which is a significant amount of money for anybody. And that’s certainly not the amount of money most physicians want to pay once they leave. 

Negotiation Tips on Who Pays For Tail Insurance

So, who pays for that is certainly a big point of negotiation? Now, sometimes, an employer is willing to split the cost based on how long the physician has worked there. Maybe if a physician has worked for the employer for four years, they’re willing to either pay the entire amount or maybe it’s tiered. So, if they stay for one year, the employer will pay 25% and then stay for two years, 50, 75, 100%. That’s one way of working it if the employer is unwilling to pay the entire amount. That’s what claims-made insurance is. You do need tail coverage for that. And then, depending on the language in the contract, it will determine who pays for it. In occurrence-based insurance, you do not need tail insurance. 

What is Occurrence Based Insurance Policy?

An occurrence policy simply means a policy must be in effect when the malpractice incident occurs. In this scenario, someone is employed, and there’s a malpractice event while working for the employer, there’s an occurrence policy, and they’re good to go. Even if someone files a claim after they leave an employer, they’re still covered because there was a policy in effect when the claim occurred.

Why Choose One Over The Other?

Why would you get claims made? Well, it’s the price. An occurrence policy is generally about a third more expensive than a claims-made policy per year. If you add a $6,000 annual premium under claims made, you’d have about an $8,000 annual premium for an occurrence policy. Which one is better? Honestly, it’s not usually up to the physician. They’ll have to use whatever their practice uses at the time or what they’re offering. 

If a physician can choose one over the other, then they need to do some math, and it’s going to be based on how long they think they will be working for the practice. Let’s just do a scenario where a physician has a $10,000 annual premium and will work for an employer for five years.

Sample Computation For Claims-Made Policy

If claims made is a third less, let’s say they’re in the claims-made policy. They’re doing 10,000 a year. So, 10,000, 10,000, all the way, so 50,000 total annual premiums for the five years, they leave, and then let’s say their tail cost is 20,000, and they’re responsible for tail. It’s a total of 70,000, where normally the employer pays the underlying premium so that they pay the 50,000 there, and the physician is responsible for 20,000. 

Sample Computation For Occurrence Based Insurance

Now, let’s say the physician chooses an occurrence policy. If the underlying premium is 10,000 under occurrence, it would be a third more, so around 13,333. Multiply that times five. And that is about $15,000 more, a little bit more than if they had a claims-made policy over the course.

Verdict

Instead of spending 20,000 for tail, it’s 15,000 more by occurrence. So, they come out ahead using occurrence in that situation. And that would be a scenario where maybe the practices we’re willing to provide occurrence-based insurance, but you must pay the difference between what it would’ve been if it was claims made versus an occurrence policy. 

And so, in that scenario, you must do the math and figure out, alright, how long do I plan on being with the employer? What’s the tail cost likely going to be? How much more will I have to pay? If it’s an occurrence policy, figure out what works best for you. Normally, a scenario where the physician would have the ability to choose one over the other is if they were an independent contractor. In those scenarios, they will be responsible for paying the tail if it’s claims-made, and they will be responsible for paying for the underlying premium.

So, it’s up to them which policy they choose. In that scenario, it’s up to them how to decide what works best for them. As I said before, if they join a private physician-owned practice, it will most likely not be up to them.

Other Blogs of Interest

• How Does Tail Insurance Work?
• When Does a Physician Need to Pay for Tail Insurance?
• 3 Ways a Physician Can Get Out of Paying for Tail Insurance

What is Claims-Made Malpractice Insurance?

One of the most frequent things when reviewing a physician’s contract is malpractice insurance coverage, the differences between the different types, and then tail coverage. Today, I’m going to talk about what is claims-made malpractice insurance for physicians. Let’s just do some basics on what malpractice insurance is, specifically, what claims-made coverage is. Doctors are required to have medical malpractice insurance policy.

Who Usually Pays for Claims-Made Policy?

The employer will be the one that nearly always will pay for the underlying coverage. Every year they must pay a premium to the insurance company. If they continue to pay that premium, the doctor is covered for any of their activities for that employer.

Coverage Limits

Most of the time, the coverage limit will be 1 million, 3 million. That means 1 million per claim. And then no more than 3 million aggregate per year. If you’re having $3 million claims in one year, you have bigger problems than just insurance. You’re going to have some board complaints. You might have a database entry if they settle or lose a trial. So, if someone asks or is concerned about the aggregate medical malpractice insurance coverage limit, it’s a bigger problem than that.

3 Types of Malpractice Insurance

There are usually three types of insurance. 

Self Insurance

You have self-insurance programs. Some of the bigger hospitals and healthcare networks are self-insured, which generally means they have a lot of money set aside to pay claims out of. 

Occurrence Coverage

The second would be occurrence-based insurance. And that just means a malpractice policy has to be in effect when the malpractice event occurred. The benefit of occurrence-based insurance is you do not need tail coverage. The downside is it just costs a little bit more. Generally, occurrence-based insurance costs about a third more per year than a claims-made malpractice policy would. 

Claims-Made Policy

And then lastly, what we’re going to kind of detail today is claims-made insurance. A claims-made malpractice policy must be in effect when the claim is made. If you are with an employer and the agreement is terminated, and you leave, there will be a period called the statute of limitations from when a patient can still sue you. In most states, it’s two years. Even though you’re no longer with the employer, and it was a claims-made malpractice policy that ended when you left, you need gap coverage. 

Tail Insurance

Another malpractice insurance policy covers the gap between the last day you work for the employer and the last date where the statute limitations run. And that’s commonly known as tail coverage or tail coverage. You must buy tail insurance coverage if you had a claims-made malpractice policy. Let’s talk about that. 

Cost of Tail Insurance

Everyone wants to know, well, what’s the cost? A good rule of thumb is that tail insurance coverage generally costs about twice your annual premium. So, if you have a $10,000 annual premium, multiply those times two, and then you would have to pay $20,000 once your employment contract is terminated to cover your tail insurance coverage. That’s a one-time payment. You don’t have to pay it every year. It’s just that you pay all of it upfront, and then you’re covered for whatever it is. 

Some tail insurance coverage policies last longer than others. Generally, you want more than long enough to go past the statute of limitations. Most malpractice claims it’s when the patient either knows or should have known of the malpractice event. There is an infrequent period, but a patient would’ve no way to know about a medical malpractice event until years later. And so that’s kind of when tail coverage kicks in. 

Who Pays for Tail Insurance?

Who must pay for tail coverage? If you work for a hospital or healthcare network, most of them will be self-insured, but let’s just say they had a claims-made malpractice policy. They will generally pay for your tail. Most of the physicians who have to pay for tail coverage are employed with a private physician-owned group. I’d say it’s probably 75% of physicians who work for a smaller physician-owned medical facility that must pay their own tail. 

Is this something you can negotiate? Sure. A couple of thoughts on that. You can just ask them to outright pay for your tail. If they say no to that, which many of them most likely will, then you could also say, alright, well, let’s do it this way. Let’s say for every year that I am employed with you. You’ll agree to pay a quarter of my tail cost. If I finish out a year and then leave, you will pay a quarter of the tail. If I stay for two years, you’d pay half, and so on. And in that way, if I complete 4 years, the employer will pay for the entire tail. I find some employers understand that that is a fair way of doing things. And then you can kind of play with the percentages per year or how much each party pays.

But there are some creative ways of figuring out how to split the cost of the tail coverage with physicians and employers. Most of the time, physicians will not have the choice of either getting an occurrence-based malpractice policy or a claims-made malpractice policy. Whatever the employer or type of insurance the employer decides to go with, that’s the type of insurance the employee will have to use.

Can Physicians Choose Which Insurance To Use?

Usually, physicians can’t say, hey, I’d like an occurrence coverage if the employer decides to use claims-made. The reason why the employer uses claims-made is it’s cheaper. As I said before, an occurrence-based malpractice policy is about a third more expensive per year than a claims-made malpractice policy. So, if you’re the employer and you’re going to make physicians pay for their own tail, you’ll say, not only am I going to save a third per year on annual premium cost, but then I’m not going to pay for tail coverage either. Save them some money. 

There is a kind of math equation. Let’s say you did have the option of choosing occurrence or claims-made insurance. It will be based on how long you decide to be with the employer. If you have, say, a $6,000 annual premium and occurrence-based would be $8,000. So, $2000 more. The longer you are with the employer, the more that would make sense. Whereas if you’re with the claims-made malpractice policy, you’re paying $6,000 a year or the employer is, but in the end, the longer with your employer, the tail can sometimes be a little bit more expensive. So, you do need to do the math of, alright, if I’m paying a third more per year, at what point does it make sense just to pay if I plan on staying with the employer for ten years?

Well, that might make more sense to a claims-made malpractice policy. Whereas if you’re there for a shorter period of time, maybe an occurrence base malpractice policy makes more sense as well. This certainly is something that you can negotiate in an employment contract. 

Why Who Pays for Tail Insurance is a Big Deal?

And I do think it’s something that most physicians feel is important. It’s also specialty-dependent. I mean, if you’re primary care and you’re paying $6,000 in your annual premium, then $12,000 for tail coverage isn’t that big a deal. Let’s say surgeons, or if you’re an OB-GYN and you’re paying $50,000 a year for your underlying coverage, and you must leave. Your tail coverage is a hundred thousand dollars, well, that’s certainly something that’s going to get your attention, and you may need to discuss the employer.

A couple of ways of getting out of having to pay for tail coverage: one, obviously to negotiate, so the employer agrees to pay for it. Suppose you are with an insurance company, and your new job uses the same insurance company. In that case, generally, the insurance company will just roll over your old malpractice policy and tail into your new malpractice policy. You won’t have to pay for tail coverage. Now, no one’s going to know for certain if they leave a position, the new employer will utilize the same insurance company, but that’s one way of doing it. And then the last way of doing it is nose coverage. That means the new employer would pay your old tail called nose coverage. And then that would be a way for you to get out of having to pay for it.

Nose coverage happens, I would say, infrequently, but certainly, it’s not unique that a new employer would pay someone’s old tail. So, that’s what claims-made coverage is. It’s kind of a lot of, I guess, complicated scenarios but simple once you break it down into three different types of insurance.

How is Tail Insurance Calculated?

How is tail insurance calculated? What is tail insurance? Under what kind of malpractice policy do you need it? And then how much does it cost? There are two common types of malpractice policies for healthcare providers. You have occurrence-based and claims-made. In a claims-made policy, you need tail insurance; if it’s an occurrence policy, you do not. 

Two Common Types of Malpractice Insurance Coverage

Let’s talk about the differences between the two malpractice insurance. For an occurrence-based policy, a policy must be in effect when the malpractice incident occurs. There is no need for tail insurance in that scenario, and I’ll explain why.

In a claims-made policy, a policy must be in effect when the claim is made. And so, for an employee who terminates a relationship with an employer, there will be a period where somebody can sue them. In most states, it’s two years. It’s called the statute of limitations. And in this scenario, let’s say a physician leaves the practice, they’re no longer an employee, and they have a claims-made policy, and that policy is done.

Well, they need an additional policy called tail insurance that covers the gap between when they leave the employer and then the last day they can be sued by an individual. There are some exceptions in some states when a minor becomes an adult and a few other scenarios, but let’s just use two years as a common amount here. The employment contract will state that the employer will pay for the underlying policy, assuming you’re not an independent contractor.

Who Will Buy Tail Coverage?

And then, it will also state who is responsible for tail insurance. Now, if you’re in private practice, like a smaller physician-owned group, they will likely have a claims-made policy. And it’s also very likely they will make the provider pay for tail insurance when the contract ends. If it’s an occurrence-based policy, you’re good; you don’t have to worry about tail insurance when the contract ends.

Why Would Someone Get One Over the Other? 

An occurrence-based policy is around one-third more expensive per year than claims-made. So, if it is a smaller physician-owned practice, they usually use claims-made, so they pay a third less annually for the premium because they’re going to be the ones paying for it. And then two, they’ll usually put the tail insurance cost on the provider. So, they not only pay less per year for the premium, but they also don’t have to pay for tail insurance, and it’s just cheaper for them. That’s why 9 out of 10 private practice owners use claims-made coverage. Some use occurrence-based, but it’s rare. 

If you have a claims-made policy, and it is determined in the employment agreement that you are responsible for paying for tail insurance, let’s break that down. It states that you must purchase a tail insurance policy before your last day of employment with the employer. Usually, it’ll also state how long the tail insurance policy must be. 

How is Tail Insurance Calculated?

Different factors are considered to calculate Tail Malpractice Insurance. There are different lengths of tail insurance. You could have one year, two-year, five-year, or infinite, and then with each one of those, it’s a little bit more expensive. A good rule of thumb in calculating tail insurance costs is about twice your annual premium. Let’s just say you’re a family practice physician. On average, your annual premium, so how much it costs to insure you each year, will probably be about $6,000. And so, if you had to pay double that, the tail insurance calculation would be $12,000.

Now, that’s a one-time payment. You do not have to pay it annually. You give it all at once, and then you’re covered for how long the tail insurance is. If it’s up to you how long the tail lasts, it makes sense to get an indefinite tail insurance policy. You are rolling the dice if you have a one-year tail insurance, but the statute of limitations is longer than a year because you’re uncovered for that period. And if you do not have malpractice insurance, they could come after you, potentially. And that could be catastrophic for a professional. If it’s only a couple thousand dollars more, it’s just simply worth it to get the longest tail insurance policy that you can. That way, it’s just one last thing you have to worry about.

How Do You Get the Employer to Pay for Tail Insurance?

Well, one, just simply asks them when you’re negotiating. I’d like you to cover the tail expenses. They may say no. If they do, you could come back at them, and we’ve had some success saying, alright, well, you’re not going to pay for all of it. What if we do it like forgiveness over the initial term?

What I mean by that is, let’s say you signed a three-year contract, you would say, alright, for every year that I complete for you, one-third of the cost of tail malpractice coverage will be covered by you. So, after three years, when I’ve completed the initial term, if I leave any period after that, you will be responsible for paying for tail insurance. You could also have your new employer pay for your tail insurance. That’s called nose coverage. And then the last way of not having to pay for it would be if you stay with the same insurance company with your new position. They’ll generally just roll over your old policy into a new one. In that way, you don’t have to pay for tail coverage. So, that’s a little primer on how tail insurance is calculated.