Why Is A Claims-Made Policy Like A Ruler?

There have been inquiries over the past decade about the difference between a “Claims-Made” Professional Liability policy and an “Occurrence” Professional Liability policy. The December 2019 Tip of the Month addressed this topic from the aspect of the ERP (Extended Reporting Period). So here we go.

First, we want to recognize that the social work profession is noble and founded on service, integrity, and clinical expertise. At times it can be a stressful and hazardous occupation. The nation is grateful for what you do. AND SO ARE WE! Thank You!

Think of a Claims-Made Professional Liability policy as a “Ruler.” A ruler has a beginning point and an endpoint. The Claims-Made policy starts at a point and terminates at a point beyond. As a working example, suppose the “Ruler” is 12 inches long, with each one-inch interval equal to a month in an insurance policy term year.

Suppose you buy a Claims-Made Professional Liability policy and only intend to own it for a year. How are you covered?

First, the Claims-Made and Occurrence Professional Liability policy contracts are virtually identical regarding covered perils, sublimity, and all coverage, such as $1MM per occurrence/$ 3MM in the aggregate. The difference between a Claims-Made policy and an Occurrence policy is the aspect of lifetime coverage, the first several years of annual premiums paid, and an optional ERP (Extended Reporting Period) tail premium available for the Claims-Made policy.

Let’s dig into that. What does this mean, and how am I covered for my professional liability if I buy a Claims-Made policy? After all, I want to minimize the premium that I pay, so the Claims-Made policy looks better because it has a much lower premium for the first year and steps up each year during the next several years of coverage until it equals the annual premium of the Occurrence Professional Liability policy.

There is a trade-off between low premiums and coverage duration which we will discuss shortly.

Let’s review an example. Suppose I decide to practice social work for only a single year, and I want to pay the lowest premium possible. So, I buy a Claims-Made Professional Liability insurance policy.

Typically, a Claims-Made policy premium for the first year of professional liability coverage is about $52 at Preferra Risk Retention Group versus an Occurrence Professional Liability policy annual premium of about $225.

Consider the 12-inch-long “Ruler” 12 months long in this example. I intend not to renew my Claims-Made Professional Liability policy and let it terminate after 12 months because I only intend to practice social work for a year. Suppose an incident results in a claim during the first 12 months of my social work practice. The claim is covered exactly like an Occurrence Professional Liability policy that I would have paid $225 for and is the identical coverage.

Now, assume I ceased my social work practice after the twelfth month as initially planned, and I let my Claims-Made professional liability policy terminate. What happens, then?

Suppose in any month or any year after the termination of my Claims-Made policy; a claim is brought against me that is rooted in an incident that occurred during the twelve-month period during which I was practicing social work when my Claims-Made Professional Liability policy was in force for those twelve months.

In that case, the Claims-Made Professional Liability policy does not respond, so I have no coverage. In other words, the Claims-Made Professional Liability policy is not in force for claims brought after the Claims-Made policy terminates. Somebody must report the claim during the actual policy period of the Claims-Made Professional Liability policy while the policy is in force. In other words, within the beginning and ending points of the “Ruler.” The Claims-Made Professional Liability policy only responds to incidents that occurred and became a claim, while the Claims-Made Professional Liability policy was in force and premiums paid.

On the other hand, the Occurrence Professional Liability policy lives forever beyond the 12-month period during which I practiced social work; (but only covering claims from incidents that occurred during the 12-month period during which I paid the premium, and in my case, one year); or for any period or term that the Occurrence Professional Liability policy was in force beyond the 12 months “Ruler” example.

Many insurance carriers advertise the Occurrence Professional Liability policy as a “lifetime” coverage. Because even after I leave the social work profession and terminate my Occurrence Professional Liability policy, if a claim arises decades after an incident occurred during the period in which my Occurrence Professional Liability policy was in force, I am still covered.

The coverage for the “Ruler‘s” 12-month period (and more “Ruler” periods if I continue renewing my Occurrence Professional Liability policy) continues indefinitely, which in the insurance industry, we call “lifetime” coverage for those 12 months and additional annual renewal periods by providing coverage for all claims that arise. These claims are rooted in incidents that occurred while my Occurrence Professional Liability policy was active. I paid a premium for those 12 months and additional periods if I renewed my policy term.

Knowing this, I can still select to buy a Claims-Made Professional Liability policy to save some money because the insurance premium for the first and only year that I intend to practice social work is about $55.

However, I should consider buying an ERP (Extended Reporting Period) endorsement when my Claims-Made policy terminates after my intended one-year of social work practice concludes. That way, I obtain extended liability coverage for future claims filed against me from incidents during my single year of social work practice. However, the risk of pinching pennies by not buying an Occurrence Professional Liability policy initially is that most ERPs and tail coverage are not “lifetime” and expire at 12 years or earlier after the Claims-Made policy termination. ERPs also require a single endorsement premium equal to one to four times the annual premium of the Claims-Made policy.

While the annual premium for an Occurrence Professional Liability policy is more than a Claims-Made Professional Liability policy in only the first few years, it is a better option because you will always have “lifetime” coverage for incidents and claims for the period that the policy was in force.

Currently, the risk of legacy claims is increasing in the nation. Over 30 states have or are changing their statute of limitation laws regarding some issues. They now allow claims and lawsuits to be filed indefinitely after therapy for certain matters. When ERPs’ expire, no coverage for older, even decades older, legacy incidents and claims will be available. It makes sense to buy an Occurrence Professional Liability policy instead of a Claims-Made Professional Liability policy.

In summary, ERP… the acronym for Extended Reporting Period, in connection with a Claims-Made Professional Liability insurance policy, or as insurance speak calls “tail coverage,” is an option offered in a Claims-Made policy. Remember the words: “Reporting Period .”That term drives the difference between a Claims-Made policy and an Occurrence policy. Occurrence policy forms and Claims-Made policy forms are the same. But the significant difference is that the policy language determines how the claim is triggered for defense when reported.

The Occurrence Professional Liability policy offers the peace of mind of lifetime coverage and predictability. In the Occurrence Policy structure, there is no question that coverage continues for any and all claims incidents born during the in-force Occurrence Policy period, regardless of when the policy terminates and regardless of when the claim is reported. In other words, the risk legacy is covered in the Occurrence Policy forever, with no fees and no exceptions, provided that the claim is a defined peril in the policy contract and was born from an incident when the policy was active and in force.

Regardless of when the claim is reported, during the Occurrence policy term, and even after the termination of an Occurrence Professional Liability policy, coverage still applies if the injury or damage occurred during the Occurrence policy period when somebody paid the premiums for insurance coverage. The Occurrence Professional Liability policy shall respond.

Consider this “Ruler” example before you choose between buying a Claims-Made or an Occurrence Professional Liability policy.