Why Should I Choose a Claims Made Policy?
First, claims made and reported policies are generally less expensive than occurrence policies because claims made carriers can more accurately predict the frequency and severity of claims that will be reported during the policy period. Occurrence carriers, on the other hand, must predict not only how many claims will arise from services rendered this year and how severe they’ll be, but also when they’ll be reported and whether inflation will increase the cost of such claims. Second, claims made and reported policies are step-rated so there is an additional cost savings during the first few years of claims made and reported coverage. Third, occurrence policies are not always readily available; many carriers that once offered them are now insolvent and many others have discontinued offering occurrence policies. Finally, there is essentially no difference between the kinds of injuries and damages that are covered by occurrence and claims made and reported policies; both offer the same type of protection.
As long as you remain continuously insured under your claims made and reported policy, you will be covered for new claims arising from services rendered since your retroactive date. And, because of the availability of “tail” coverage, you may continue to be insured for them long after you cancel your policy — just like you would under an occurrence policy.
More questions about insurance? Check out OMIC’s Insurance 101 library here.
Admitted v. Authorized Carrier Status
By Betsy Kelley
OMIC Underwriting Manager
[Digest, Winter 2001]
There are many factors to consider when selecting an insurance carrier. Price, coverage features, loss experience, and claims-handling philosophy are critical issues. So are a company’s integrity and financial stability. But what about its admitted status? Does it matter whether a carrier is admitted or authorized?
The Federal Risk Retention Act of 1986 created a new class of insurance company – the risk retention group (RRG) – and removed the regulatory impediments to obtaining licensure in each state of business that previously made it cost-prohibitive for carriers to offer coverage in a wide range of territories. Under the Act, a risk retention group is required to meet the financial and filing requirements in its selected state of domicile and to register with and file a business plan and other financial information in any other state in which it operates.
A major change created by the Act is the distinction between whether a carrier is registered or licensed to legally engage in the business of insurance in a particular state. A risk retention group need be licensed and admitted only in its state of domicile, where it is subject to the regulatory requirements and financial status reviews of that state’s insurance department. At the same time, the RRG can be registered in other states by annually filing in each of those states the necessary financial statements and other required information. Each state has control over registered companies and has the right under the Act to investigate the company’s financial status in the same manner it can investigate the financial status of any licensed insurance carrier operating within the state. Individual states retain authority over consumer protection issues and may investigate complaints against an authorized RRG just as they would against a licensed and admitted carrier. As an added protection, consumers may file complaints with the RRG’s state of domicile.
Unlike licensed and admitted carriers, risk retention groups do not participate in state guarantee funds and are, in fact, prevented from doing so by the Risk Retention Act. This does not mean that they are any more risky, however, and while a few RRGs did become insolvent during their first few years of formation, the vast majority of insurance company failures involve licensed and admitted carriers.
Furthermore, participation in a state fund does not guarantee that aggrieved policyholders will be made “financially whole.” Most funds do not adhere to the rigid actuarial standards that strong carriers such as OMIC follow in establishing reserves. When claims are covered through a guarantee fund, it is possible that payments will run only pennies on the dollar, and in some cases, may not be covered at all.
Instead of relying on a guarantee fund to provide security in the event of insolvency, a carrier should prevent insolvency by maintaining strong financial reserves, collecting actuarially sound premiums, purchasing reinsurance from a reputable source with a reasonable retention, properly underwriting applicants, and handling claims efficiently and effectively. If a carrier is following sound financial principles and operating legally, it should not matter whether it is admitted or authorized.
About OMIC
When OMIC was formed nearly 15 years ago, the founders believed a risk retention group would be the most cost-effective and beneficial form of organization in which to operate a nationwide insurance program for ophthalmologists. It would have been expensive and administratively cumbersome to become licensed and admitted in each of the 50 states in which OMIC does business. A risk retention group remains the most effective form of organization in which to operate and allows OMIC to keep premiums affordable.
OMIC is domiciled and licensed in the state of Vermont, a strong regulatory jurisdiction known for its excellent reputation and record and accredited by the National Association of Insurance Commissioners. OMIC’s independent financial ratings are superior to many licensed and admitted carriers. OMIC maintains an A- (Excellent) rating with A.M. Best. OMIC’s solid financial condition and strong ratings are due in part to loss experience that is 30% better than the expected industry standard for ophthalmology nationwide as well as to its comprehensive underwriting guidelines, particularly with respect to refractive surgery.
OMIC has three sources of funding for the payment of claims. First, OMIC collects premiums that are actuarially developed to cover anticipated losses. Then, OMIC purchases reinsurance from respected companies to help support large losses. Finally, OMIC maintains adequate surplus in the unlikely event that premium and reinsurance are insufficient to cover actual losses.
OMIC enjoys the support and exclusive sponsorship of the American Academy of Ophthalmology and is recognized as an approved carrier by 11 ophthalmic subspecialty and state societies. OMIC is a member of the Physician Insurers Association of America.
If you have questions about OMIC’s carrier status, please contact Betsy Kelley at (800) 562-6642, ext. 630 or bkelley@omic.com.
Limits of Liability
By Kimberly Wittchow, JD, OMIC Staff Attorney
Digest, Spring 2004
Press coverage of the industrywide rise in medical malpractice claims frequency and severity is abundant. This has many insureds questioning whether their current limits of liability are adequate for the increasingly litigious environment in which they practice. To help insureds assess their coverage limits and needs, this article will address what is meant by limits of liability, how to select limits, and how changing limits affects coverage if a claim arises.
Your limits of liability are the maximum dollar amounts of indemnity OMIC will pay on your behalf as a result of covered claims. Indemnity is the amount of damages awarded in a lawsuit or agreed to in a settlement between the parties. OMIC will pay your reasonable defense costs in addition to your liability limits.
All OMIC insureds have two separate limits: the per claim, or “medical incident,” limit and the aggregate limit. The per claim limit is the maximum amount of indemnity OMIC will pay per insured for all damages caused by any one medical incident, or by any series of related medical incidents involving any one patient, regardless of the number of injuries, claimants or litigants, or the number of claims (notices, demands, lawsuits) that result. The aggregate limit, on the other hand, is the maximum amount OMIC will pay per insured for all claims made and reported during the policy period.
How to Select Limits
There are several factors to consider when selecting limits of liability. The limits you require may vary with changes in your state’s malpractice liability climate, the procedures you perform, and the makeup of your practice. Therefore, you should continually assess your current needs and corresponding coverage.
First, review the claims statistics for ophthalmologists. For example, as of February 2004, OMIC’s average indemnity payment was $130,166 and its largest indemnity payment was $1.8 million.
Second, consider your state’s risk relativity. When OMIC looks at risk relativity, it compares the number of insureds, the number of total claims, and the average indemnity paid per claim in each state. Under this analysis, due to the fact that OMIC has a large number of insureds in these states, OMIC’s highest claims activity is currently in California, Texas, and Illinois. For selecting limits, however, a better way to look at risk relativity might be to compare the average rate of claims per insured per state. OMIC insureds in Louisiana and Michigan currently experience the highest claims frequency.
Third, find out what liability limits your peers are carrying. The majority of OMIC insureds (65%) carry $1 million per claim/$3 million aggregate limits. Higher limits of $2 million per claim/and either $4 million or $6 million aggregate limits are selected by 21% of insureds. OMIC’s lowest offered limits of $500,000/$1.5 million are carried by 6% of insureds, while 4% select the highest limits OMIC offers, $5 million/$10 million. The remaining 4% of insureds carry other combinations of limits, including lower limits available exclusively to physicians who participate in their state’s patient compensation fund.
Fourth, consider the risks related specifically to your practice. Is your subspecialty one in which there is high claims frequency (e.g., cataract surgery) or large damage awards (e.g., neonatal care)? Do you share your coverage and limits with any ancillary employees or your sole shareholder corporation? On the other hand, have you ceased performing most surgical procedures or limited your practice to part time?
Fifth, assess your level of risk aversion. Would higher limits make you feel more secure because of the large indemnity cushion or less secure because of the “deep pockets” potentially discoverable by the plaintiff?
Finally, check with your hospital and state licensing board because they may specify the minimum amount of coverage you must carry. Also note that OMIC generally requires all OMIC-insured physiciansin practice together to carry the same liability limits. The practice’s legal entity cannot be insured at higher limits than those of the physicians.
Which Limits Apply to a Claim?
You should consider how changing your limits will affect the amount of indemnity available to you if a claim should arise. The limits of liability that apply to a claim are those limits that are in effect as of the date the claim is first made against you and first reported in writing to OMIC. In other words, if you increase or decrease your coverage after you’ve reported a claim made against you to OMIC, the limits that you carried when you reported the claim, not the new limits, will be applied to the claim.
Subject to underwriting review and approval, you may increase or decrease your limits of liability at any time during the policy period (although OMIC typically does not consider requests to change policy limits while a claim is pending). If you are in group practice, discuss this desired change with your practice administrator and partners. Your OMIC underwriter can provide you with the most recent OMIC data to help you determine which limits are appropriate for you. However, OMIC representatives are not in a position to offer you advice. If you need further assistance, please consult your personal attorney.
Do You Know Your Nose From Your Tail?
Robert Widi, VP Sales & Marketing
Reposted from Digest, Summer 2000
Revised 7/2018
The advent of claims-made coverage in the 1970s introduced a new insurance lexicon to the medical community. It’s now common for ophthalmologists applying for professional liability coverage to be asked details about everything from their “noses” to their “tails” as well as any gaps in between, proving that if you look hard enough, you can find humor in just about anything – even liability insurance.
How Long Is Your Tail?
In insurance jargon, a tail extends professional liability coverage for incidents that occurred while a claims-made policy was in effect, but that were not filed as a claim until after the policy was canceled. As a rule, tail coverage should be a guaranteed option upon termination of a claims-made policy. OMIC guarantees the availability of tail coverage upon policy termination and provides free tails to physicians at any age who retire after being continuously insured with OMIC for at least 5 years. Tails also are provided at no cost to insureds who suffer permanent and total disability and to the estates of deceased insureds. Some carriers limit the length, or duration, of their tail coverage, which can leave you with an uninsured risk in the future. Always inquire about the tail provisions of a policy before switching carriers to avoid unpleasant surprises down the road. OMIC’s tail provisions allow for lifetime reporting of covered claims. Coverage for fixed periods of one or two years also is available.
How Far Back Does Your Nose Go?
For insurance purposes, a nose provides coverage for claims that arise from medical procedures performed while covered under a previous terminated policy but first reported under your current policy. A nose and a tail are essentially the same thing. It is a nose if you purchase the coverage through the carrier (or policy) you are joining, and a tail if you purchase it from the carrier (or policy) you are leaving. Therefore, if you purchase nose coverage, you do not need tail coverage, and vice versa. As a professional courtesy, many carriers will extend an offer to departing policyholders to purchase tail coverage regardless of whether they obtain nose coverage through their new carrier. Nose coverage also is referred to as retroactive or prior acts coverage and usually will be indicated as the retroactive date on your policy declarations page.
Have You Gone Bare?
Going bare refers to a physician who practices, whether knowingly or not, without the benefit of malpractice insurance. When a physician practices without insurance, he or she is 100% liable for any losses that may result from services rendered. Because there is no way to accurately underwrite this type of risk, a malpractice carrier often will be unable to retroactively cover any uninsured period during which services were rendered. Maintaining continuous coverage is very important under a claims-made policy to ensure that there are no uninsured periods and gaps in coverage, especially if prior acts coverage is requested. Always make sure the retroactive date is accurately recorded on your new policy if you purchase nose coverage, and obtain a copy of the policy endorsement when purchasing tail coverage.
Do You Have Any Free Riders?
Sometimes you can get a free ride, at least when it comes to insurance. Policy endorsements, referred to as riders, are amendments to a policy declarations page that spell out specific coverage issues, such as adding coverage for higher exposure refractive or oculoplastic procedures. Riders sometimes require special underwriting review and may or may not be surcharged. OMIC generally prefers to manage higher risk exposure through underwriting and risk management review rather than through premium surcharges.
How Mature Are You?
When it comes to insurance underwriting, there’s no getting around this question. You’ll be asked about your maturity level throughout your career whenever you inquire about claims-made rates. Premiums for claims-made policies are written in steps to compensate for lower risk exposure during a physician’s first five years of coverage. Because a claim resulting from services rendered during the first year of coverage is not likely to be reported in that same year, the premium is less expensive for the first year of coverage. This is referred to as claims-made year 1. The longer a physician is insured under a claims-made policy, the greater the potential for claims; hence, premiums continue to mature, or increase, through claims-made years 2, 3 and 4. Since most claims are filed within four or five years after an incident, the fifth and all subsequent years of claims-made coverage are referred to as themature rate.
If you have any questions about your OMIC professional liability policy, please contact Robert Widi at (800) 562-OMIC (6642), ext. 654 or rwidi@omic.com.
