Physicians may be attracted to a Paid-Claims medical professional liability policy type because of its lower initial price compared to Claims-Made or Occurrence policies. While they all have their differences, the Paid-Claims policy type is one that needs the most understanding before purchasing. Here is why:
First, you need to examine the coverage trigger definitions of each policy type. The coverage trigger is the “event that must occur before a particular liability policy applies to a given loss.” Let us look at the triggers for three coverage types.
Paid-Claims vs. Claims-Made vs. Occurrence:
Comparing Insurance Policy Triggers
Occurrence – The trigger is the occurrence of the injury or damage. Liability will be covered under that policy if the injury or damage occurred during the policy period. With an Occurrence policy, once you pay for the policy, no matter when a claim is filed in the future, the insurance carrier that was in place at the time of the injury or damage will respond to the claim. The buyer needs to feel confident that the carrier will still be around for many years to respond to any future claims.
Claims-Made – The trigger is the date the claim is made, which can be long after the date of the actual injury or damage. Should the insured or carrier cancel the policy, the insured may need to purchase an Extended Reporting Period (known as a Tail) which would allow claims to be reported in the future for professional services rendered during the policy period(s). If the insured is moving to another carrier, the new carrier may be able to pick up “Prior Acts”, meaning the new carrier may be willing to pick up coverage from the first date of the current Claims-Made policy. In this case, the insured does not need to purchase a tail.
Paid-Claims – The trigger is the time a claim is paid. Therefore, if a claim is filed, the insured must remain on the policy until it is closed. This approach can offer significant benefits in terms of pricing accuracy for the insurance carrier offering the coverage, since premiums are based on overall expected costs for the next twelve months rather than estimates of future claim payouts. However, since claims will be paid only while the policy remains active, the insured facing a claim cannot cancel the policy while the claim is pending, often for years, unless he or she is willing to pay the claim out of personal assets, or purchases an Extended Reporting Period (Tail).
Bottom Line Advice: “Avoid Paid-Claims Policies”
In summary, Perron Insurance Services advises professional service providers to avoid the Paid-Claims policy type due the inability of an insured to move coverage while a claim is pending without purchasing a Tail. We believe that carriers will often non-renew coverage or increase rates when they receive notifications of claims they expect to pay out, even if not for several years.
The Risk Retention Reporter, January 2004