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The Changing Nature of Insurance Coverage

The traditional malpractice insurance policy was an occurrence policy: it covered all incidents that occurred during the term of the policy. It did not matter if the claim was not presented until after the expiration of the policy. The claims made after the term of the policy are called the tail (from the tail of a normal distribution). These tails could be several years' long, which makes it difficult to do loss projections. Malpractice insurance companies began to abandon occurrence policies several years ago, and most now offer only claims-made insurance.

A claims-made policy covers only claims that are presented during the term of the policy. If a patient is injured while the policy is in force, a resulting claim is covered only if it is presented before the expiration of the policy. If the claim is presented after the expiration of the policy, it is not covered. Claims-made policies do not have the tail associated with occurrence policies because there is no liability beyond the policy year.

On first entering practice, a physician has no history of potentially injured patients who may make a claim against his or her insurance. Over the years, this physician's universe of potential claimants begins to increase until it begins to reach a plateau. The major determinant of the plateau is the statute of limitations for bringing a malpractice lawsuit. Secondary determinants include the probability that a patient will decide that he or she has been injured by the physician and the willingness of an attorney to represent the patient.

The risk plateau is reached within a few years of beginning practice. This is reflected in the pricing structure of claims-made policies. The first-year rate for these policies is usually much lower than the mature rate (that charged after the insured reaches the risk plateau). Physicians who have been in practice for several years before buying a claims-made policy may be asked to pay the mature rate and a substantial surcharge in their first policy year. This surcharge represents the reserves that the insurance company would have put aside during the physician's first years of the practice had the physician been insured with the company during those years.

When a claims-made policy expires, the physician is no longer insured for events that may have happened during the term of the policy but have not yet been presented as a claim. The physician must procure insurance, called tail coverage, for these events. Tail coverage is an occurrence policy for events that occurred during the term of the claims-made policy. This tail coverage may be bought from the same insurer that provided the primary coverage or may be obtained from a new insurer.

The cost and availability of tail coverage is a major determinant of a physician's ability to change malpractice insurance companies. The terms of availability for tail coverage are an important consideration when evaluating the cost of malpractice insurance. The cost of the tail should be predictable and its availability guaranteed.

Some companies do not require that an event be presented as a claim before it is covered by the policy. These policies provide coverage for all untoward events reported by the physician during the policy life. These early reports help the insurance company to estimate its future risks better. Theoretically, it is to the physician's benefit to have potential future claims covered. However, this benefit accrues only if the physician allows the policy to expire without obtaining tail coverage.

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