By Stuart Benas, CIC and Bruce E. Bennett, Ph.D.
Reproduced with permission from The National Psychologist
have decided that you are going to start a private practice and are
ready to take a major step into running a business. One component of
that business will be to make sure you have adequate professional
liability insurance. Very few psychologists, especially those just
getting started, have the financial resources to defend a malpractice
claim. Legal costs alone can run into tens of thousands of dollars.
Damages or settlements can be hundreds of thousands of dollars.
purpose of this article is to acquaint Early Career Psychologists and
those who may be confused about insurance with an important issue to
consider when shopping for professional liability coverage: What type of
insurance should you buy?. There are two basic types of professional
liability insurance policies - "occurrence" and "claims-made" coverage.
Purchasing insurance is a business decision and it is important to know
what type of policy best fits your business needs.
policy provides coverage for alleged incidents (injuries) that happened
during the policy year regardless of when the claim is reported to the
carrier. The occurrence policy provides a separate coverage limit for
each year the policy is in force. It does not matter if the policy is
active when the claim is reported. It only matters that the policy was
active when the alleged incident occurred. If the coverage limits are $1
million/$3 million, the insured would have up to $1 million to cover an
incident that occurred during the policy year. The insured would have a
total of $3 million to cover all claims that result from incidents
during the year.
A claims-made policy covers the insured for an
incident that occurred during the policy period and was reported as a
claim while the policy remained in force. When you start a claims-made
policy, the original inception date, known as the retroactive date,
becomes a permanent part of the claims-made policy. The retroactive date
remains the same each year the policy is renewed. The renewed claims
made policy covers claims that come in during the policy year for
incidents that occurred on or after the retroactive date. This is how
past years are covered under the current policy. As long as you renew a
claims-made policy, you will be continually protected for incidents that
happen between the retroactive date and the policy expiration date. An
incident that occurred prior to the retroactive date would not be
covered. Therefore, it is important for the insured to renew the
claims-made policy to maintain continuous coverage.
insured retires or is no longer practicing but wants to retain
protection for the years insured under the claims-made policy, the
insured can cancel the policy and buy the "extended reporting period"
(commonly known as the tail). Generally you can purchase the tail for a
specified number of years. An unlimited tail, allowing claims to be
reported anytime in the future, normally costs 175% of your last year's
premium. The cost of the tail is a onetime fee. The tail permits the
insured to report claims for incidences that occurred during the time
the policy was active (from the retroactive date to the policy
expiration date). An incident that occurred when the policy was active
but was reported after the policy was terminated, in the absence of the
tail, would not be covered. Importantly, the tail will not cover
incidents that occur after the policy is terminated.
benefits of a claims-made policy is that changes to your current
coverage or changes to the policy limits applies to past years as well.
This is a positive benefit if the carrier expands coverage in the
Another feature of a claims-made policy is that the
insured can move coverage from one carrier to another carrier. If you
have an active claims-made policy you can apply to another insurance
company that offers prior acts coverage for claims-made policies. Under
this scenario, the new company takes the retroactive date from the old
policy and endorses it onto the new policy. The new policy with the
retroactive date from the previous policy now covers the same period of
time as the old policy. It is important to compare policy features prior
to changing insurance companies because the policy issued by the new
company may have specific exclusions that would significantly alter
coverage once the switch is made.
From a pricing viewpoint,
occurrence policies are more expensive than comparable claims-made
policies because they provide coverage for incidents that occurred
during the policy year regardless of when the claim is reported. And the
occurrence policy provides a separate limit for each year protection is
Claims-made policies are initially significantly less
expensive than occurrence policies. The premium for a claims-made
policy is lowest during the first year because the policy only covers
incidents that occurred in the first year and are reported as claims in
that year. The premium increases during the second year because the
policy now covers incidents that occurred during the first and second
year as long as the claim is reported during the second year. The
claims-made premium continues to increase as the policy matures for 5 to
7 years when the premium usually stabilizes. The reason it takes a long
time for the claims-made rates to mature is that several years can
elapse from the time the incident occurred to the time the incident
becomes a claim.
If you have a claims-made policy for several
years and buy the tail when the policy is terminated, the total cost
begins to approach the rate of a comparable occurrence policy.
Fortunately, many claims-made policies offer free tail coverage for
death, disability or permanent retirement, a feature that can result in
considerable cost savings if you qualify.
You might ask "Which
policy is better?" As noted above each policy has its benefits. With a
claims-made policy you can increase your policy limits or add coverages
as the need arises or as new coverages become available. The claims-made
policy is more flexible and provides considerable cost savings during
the early years. This could be important in when you are starting a new
If you are worried that your current insurance company
may go into receivership (the insurance equivalent of bankruptcy) you
can move your coverage to a financially stronger insurance company. If
the carrier for an occurrence policy goes into receivership, switching
to a new financially stronger carrier will not remedy the problem with
the former carrier.
The occurrence policy has the advantage of
permanency. You do not have to renew the policy to maintain coverage for
a year you were insured. You have separate limits each year you were
insured so past claims will not erode the limits of future years of
What is important is that you understand how the
policies work and make an informed business decision. It is also
extremely important that you take the time to read the policy and call
your agent or broker if you have any questions about what is and what is