Under the skin of Medical Malpractice Insurance

Claims made or occurrence based

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Introduction Peace of mind 2

Medical indemnity The importance of medical indemnity2

Forms of medical indemnity 3

Protection Protection after termination4

What is a ‘tail’ 5

Pricing What is the difference? 6

Questions & answers Questions and answers8

Conclusion 10

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Peace of mind

Professional practice is ever more demanding. You need protection against complaints and litigation and access to knowledgeable, sympathetic advice from specialist colleagues who ‘speak your language’. As a client of PALM, you’ll find we’re here to give you peace of mind, whether you need to consult us or not.

The PALM offers a wide range of Insurance services and support, including professional indemnity for adverse awards of costs and damages in medical negligence cases.

The importance of medical indemnity

Health Professionals know that in order to protect themselves against potentially ruinous litigation they need indemnity of one form of another.

It is of vital importance to understand that claims are rarely made soon after an adverse incident occurs. The following model shows a typical pattern for the percentage of claims reported each year in respect of medical accidents occurring in 2001. You can see the long delays between incident and claim.

Year

inci

den

t occ

urr

ed

Year claim reported

2001 2002

2003

2004

2005 2006 2007

2008

2009 2010

2011

% reported (per yr)

8 18 15 12 12 10 8 6 4 2

%reported cumulative

8 26 41 53 65 75 83 89 93 95

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The period within which a patient may make a negligence claim usually dates from the time the patient becomes aware that he or she has suffered harm. Moreover, in the case of minors the limit is usually extended to three years after the age of legal majority and, where permanent disability has been caused, or in cases of mental incompetence, the period may be indefinite.

For example: Twenty-three years and 364 days after delivering a child, a GP was served with a writ claiming his negligence had caused the child’s cerebral palsy. The GP had retired several years before the writ was served. Indemnity is required not only whilst you are practising, but also for future years when claims arising from historical incidents may still be made.

Forms of medical indemnity

The established mutual protection bodies, such as the Medical Protection Society, have long protected the interests of medical practitioners by offering indemnity, normally unlimited, against adverse awards of costs and damages on what is known as an ‘occurrence’ basis.

In recent years commercial insurers have entered the market with what appear to be attractive premiums when compared with the subscription rates of mutual doctors’ organisations. They provide indemnity, often limited, on what is known as a ’claims-made’ basis.

There are major differences between the two forms which it is imperative to understand in order to ensure that you are not left vulnerable.

Occurrence-based protection versus claims-made indemnity

The principal differences between the two are found in:

The protection they provide after their termination. Their pricing structure

Protection after termination

Occurrence-based protection

With indemnity provided by a Medical Defence Organisation (Medical Protection Society or similar) on an occurrence basis, you are protected against claims arising from incidents that occurred while you were a member, no matter when they are reported – even if it’s years later. Claims-made indemnity

With claims-made indemnity, you are normally only protected for incidents that both occur and are reported whilst coverage is in continuous force. This means

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that you must be paying for a premium both at the time of the adverse incident and when it is reported without their being a break in cover. Unlike occurrence-based protection, it will not protect you for claims that are initiated after policy cancellation or non-renewal.

If you want the additional protection you will have to pay extra for it.

Example: you had a claims-made indemnity in continuous force from July 2006 to July 2009, at which time you did not renew it. In 2011, a claim is made against you for treatment that you provided in 2008. You would not be covered by your claims-made indemnity for this claim unless you bought “Tail Cover” to extend cover beyond the date the claims-made Policy ceased.

Had the claim in the example been made against someone protected by occurrence-based indemnity, it would be a different story. As long as the “occurrence” based indemnity was in place when the incident took place, that policy would react and they would have access to indemnity, no matter when it was reported.

Occurrence based protection

Policystarts

Policyends

2006 2007 2008 2009 2010 2011

Claims made indemnity

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COVERED

Incident occurs Negligence claim is made

What is a ‘tail’?

In simple terms a ‘tail’ is the period of time between an adverse incident occurring and it being reported.

If you do not renew your claims-made indemnity, an additional payment will be required to protect you for future claims arising from the period for which you wish to be indemnified. This payment is referred to as ‘tail’ cover or ‘run-off’ cover. This extra payment extends the time during which claims can be reported. This can be very expensive, often multiples of the final year’s premium you paid.

Should you wish to cease practising/trading or change to an alternative indemnity provider, you will still have to cover your “tail”.

With occurrence-based protection, there is no need to pay extra for ‘tail’ cover. One year’s premium will protect you in perpetuity from claims arising from that year’s activities.

Pricing structure

As highlighted earlier, the other main difference between occurrence and claims-made protection is the pricing structure.

Occurrence-based rates are calculated on the basis of specialty and claims experience and are generally reviewed annually. Your payment affords protection against all future claims arising from incidents occurring in the year.

Claims-made premiums are generally determined using the same variables but structured differently. Most claims-made premiums are, at first; lower than Occurrence-based rates. This is followed by a steady rise in price until they often exceed the prevailing Occurrence rates. The reason for this is the changing nature of the protection you are purchasing.

For example, during year 1 you are paying for cover against claims that both arise and are reported in the first year. During year 2 you are paying for cover for claims reported during that year from services rendered in the first and second years.

By year 5 the premium will have to provide cover for claims reported during that year, resulting from practice in years 1, 2, 3, 4 and 5. The likelihood of a claim has grown considerably from the first year. By year 8, the majority of claims arising from practice in earlier years will have been reported and the risk is considered to be ‘mature’. From this point the differential in claims-made costs over occurrence costs usually remains constant.

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Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Cover afforded by claims-made indemnity

Cost

Note: the increase in costs is due to the fact that the longer the indemnity is in force the further back it must reach to protect you. Also remember that claims-made indemnity ceases when the policy ceases unles you buy additional “tail” cover.

Despite this pattern of rising premiums, should you cancel or not renew you claims-made indemnity (or be refused cover), it will not protect you for future claims – you will still have to pay for ‘tail’ cover or ‘run-off’.

It is important to realise that the ‘tail’ premium is not a fixed amount. It will increase each year that you have claims-made indemnity. Its rising cost is based on the same principle that applies to the claims-made indemnity itself, i.e. the further back in time the cover must reach to protect you, the greater the risk for the indemnity provider and therefore the more expensive to purchase.

Typical occurrence vs claims-made rates index

Occurrence-based protection rates

Claims-made indemnity rates

(as a percentage of the occurrence-

based rate)

‘Tail’ cover payment (as a

percentage of the occurence-based

rate)

Year 1 100 30 75

Year 2 100 64 122

Year 3 100 85 146

Year 4 100 94 162

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Year 5 100 99 173

Year 6 100 102 181

Year 7 100 104 186

Year 8(and thereafter)

100 105 190

In deciding between occurence-based or claims-made arrangements for medical indemnity, it is essential to establish the total costs of each form to make a true comparison of prices for the respective levels of protection offered. It is also vital that appropriate reserves are allocated against potential future claims for a business that has claims-made indemnity protection and is imperative that detailed Due Dilligence is undertaken if ever considering acquiring a buisness that has historically arranged claims-made indemnity insurance.

Questions & answers

We have explained the nature of claims-made indemnity as it compares with the occurrence-based form of protection. There follows a selection of common questions and answers which we trust will aid your understanding of these concepts and assist you in making the appropriate chioce in this vital component of your professional insurance protection.

Q. why do claims-made rates reach the level of occurrence rates?

A. As a claims-made coverage period reaches maturity, the risks undertaken grow so that they are essentially comparable to those under an occurrence arrangement.

Q. Why does claims-made indemnity appear to cost less than occurrence-based indemnity?

A. A good way to understand this it to think in the following terms. Each year a number of malpractice events will occur that could give rise to a subsequent claim. These events can be divided into two categories.

1. Recognised events

Events that you recognise as being clearly likely to give rise to a claim in the future and which you report to your indemnifier, for example misdiagnosis or something else that is instantly noticeable.

2. Unrecognised events

Events you do not recognise as being likely to lead to a claim and, because of this, you do not report the incident to your indemnifier, for

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example a mis-filed abnormal report that results (some years later) in a claim in negligence being made alleging a missed diagnosis.

With claims-made indemnity your indemnifier only has to collect funds to protect you from the consequences of the first type of event. By increasing future payments this will progressively protect you against the second type of event.

In contrast, with occurrence-based indemnity you pay ‘up-front’ for protection against both types of event.

Q. So is there a drawback in claims-made indemnity?

A. The drawback, in respect of claims-made indemnity, occurs when you decide for any reason to cease arrangements with your Insurer – including their refusal to continue. Clearly there will be many unrecognised events about which neither you nor your Insurer know and for which no payment has been collected. To protect you against claims that arise in the future from this type of event it would be very prudent to purchase ‘run-off’ or ‘tail’ protection. The total cost of your claims-made indemnity plus run-off generally exceeds the total cost for occurrence-based indemnity.

Q. Why do claims-made rates ultimately exceed occurrence-based rates? Surely they should eventually be the same?

A. The effect of Malpractice Claim cost inflation means that the Insurer providing claims-made cover is always nearer to current awards and able to ammend premoiums accordingly to reflect this, occurrence based providers premium are based on the facts know at that time and provide protection for future claims without any extra charge.

Q. Why do you stress ‘continuous coverage’ when referring to protection on a claims-made basis?

A. If there is a gap or interruption in claims-made coverage, you could be left unprotected because the requisites of a claim both occurring and being reported while your protection was in continuous force may not be met. These circumstances create the need ofr run-off or ‘tail’ coverage every time there is an interruption.

Q. Does this mean that if I do not renew my claims-made protection for a brief period, any new claims-made cover or occurrence-based protection I purchase won’t cover my prior activities?

A. Yes. Your professional activities prior to the effective date of the new arrangement could only be protected by purchase of run-off or ‘tail’ cover.

Q. If I become dissatisfied with the service from my claims-made indemnifier and wish to change, I believe I will have to pay a considerable sum for run-off. Isn’t this rather like an exit fee?

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A. Yes, although in truth you are only going to pay to cover future liabilities. Many in this situation find the amount they have to pay is beyond their means and this get ‘locked in’ to a particular indemnifier. Leaving occurrence-based plans carries no such apparent penalty.

Q. I am considering a claims-made arrangement but find that it has a limit on the indemnity for any one claim. Is it wise to have such a limit?

A. The limitmay be appropriate for today. However, claims can and do arise years, even decades later. In these times of claims inflation fixed levels of indemnity may prove to be insufficient to meet the costs of your liability, particularly if the limit of cover includes both the defendant’s and the plaintiff’s legal costs. You would be required to meet any balance from personal funds. Due consideration MUST be given when selecting the limit of indemnity purchased, this applies to both types of protection.

Q. Which is best for me, claims-made or occurrence-based protection?

A. Only you can decide. Claims-made products do give a short-term financial advantage which may suit your particular circumstances. However, you are likely to eventually pay more than for occurrence-based protection. If you are prepared to accept this payment structure and keep you claims-made arrangement in place for many years, the protection you get will be essentially the same as with an occurrence-based plan. If there is a liklihood of changes in your working arrangements or you fail to renew a Contract for Services k, manoeuvering through claims-made complexities may leave you vulnerable. Occurrence-based protection remains the simplest option for peace of mind but is not always available

Conclusion

Although the cost of claims-made indemnity is lower in the short term, it has to rise eventually to finance your” tail”. Also, unlike occurrence-based protection, claims-made indemnity tends to lock you into one indemnity provider – should you cancel to move to another, your tail will not be covered unless you pay extra for it. And, unless you cover your tail, you will be vulnerable to claims arising during this gap in your professional indemnity. There is also another important aspect should you change claims-made provider that you ensure that the “Retro” date matches the same as your previous policy. Failure to do so can mean you have failed to ensure the claims-made policy reaches back to when you first purchased claims-made cover leaving you exposed today for activities carried in the past.

We recommend you should always take advice from a specialist Insurance advisor who is fully conversant with the pitfalls & nuances of arranging indemnity correctly for your protection

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