FAQ's & Info

A Claims Made policy responds to a claim if two requirements are simultaneously met. The claim must be reported during the policy period AND the claim must be triggered by an event that occurred on or after the policy Retroactive Date. The retroactive date will continue to appear on each successive Claims Made policy, thus making these types of policies portable. The net result of this portability is coverage for what is known as Prior Acts by the new insurance company. A Claims Made policy with a retroactive date that is earlier than its inception date demonstrates how the transfer of potential prior unknown liabilities from one insurance carrier to another carrier can occur. This is a feature unique to the Claims Made policies. However, it is important to keep in mind that it is up the discretion of the insurance carrier’s underwriter to determine which retroactive date will be utilized for the current policy to be written. One important aspect of a Claims Made policy, providing the two requirements stated above are met, is that regardless of when a claim is made, the Claims Made policy you currently have in force will respond to that claim. Whenever you are deciding between an Occurrence policy and a Claims Made policy, you should consider all of this information and speak with your Broker about your options.

Example:

An Occurrence Policy responds to a claim if the claim is due to an event that occurs during the time the policy is in effect. This means the policy that responds to the claim is the policy that was in effect at the time of the event and not necessarily the policy that is in effect currently. Therefore, the limits of liability of the responding policy can either be different or the same as the current policy in place. Whenever you are deciding between an Occurrence policy and a Claims Made policy, you should consider all of this information and speak with your Broker about your options.

Example:

The insurance carrier that existed in 2010 when the event occurred may no longer be solvent in 2017 when the claim is submitted. In this case, the policy may not provide you protection against the claim in 2017. Each situation is different.

An extended reporting endorsement, commonly called “tail coverage” or a “tail,” is an endorsement modifying the terms of the last renewed Claims Made policy. For a one time additional premium, the endorsement typically provides an open-ended period for the reporting of claims after the expiration of the policy, subject to its terms, conditions and limits of liability.

Claims Made Policy with Extended Reporting

This type of insurance policy has been adopted by many insurance carriers and has been given a few different names, such “Occurrence Plus”. However, it is truly a Claims Made policy. The difference is in the fact that the coverage for a Claims Made Policy with Extended Reporting is based on the Claims Made type of policy and that the Tail Coverage portion, or Extended Reporting period, is charged to you within the premium amount you pay each year. With a pure Claims Made policy the tail is not included. With a pure Claims Made policy the tail is optional and you are reserved the right to purchase it in this type of policy. However, you would need to purchase the tail if you decide to transition from a Claims Made policy to an Occurrence policy.

Both policies respond to losses occurring on or after the “retroactive date”. In addition, both types of coverage respond to losses using the limits of liability and policy terms in effect when the claim is “made”, or reported, to the company.

Occurrence plus policies, or policies with Extended Reporting, have a built-in extended reporting endorsement or “tail” provision that allows for claims to continue to be reported after the last renewed policy expires. Pure Claims Made policies do not automatically include the extended reporting provision. But, pure Claims Made policies do offer the policyholder the right to purchase this extended reporting coverage when the last renewed policy expires.

If you purchase what is called “Prior Acts” coverage with your subsequent new policy, then it may not be necessary to purchase the extended reporting endorsement for your claims made policy with your previous insurance carrier.

Example:

• Situation: Forth Year Claims Made policy and physician elects to switch insurers
• New Company offers “Prior Acts” coverage
• Retroactive Date matches original inception date of the expiring policy
• Resultant Premium: physician pays new insurer the 4th year Claims Made rate
• No ‘tail’ coverage would be needed at this time.

However, Prior Acts coverage is sometimes given limits by the insurance carrier, and physicians should evaluate the specifics of the insurance policy and consult with their insurance broker prior to making any decisions.

Please consult your independent insurance broker or feel free to contact The Professional Liability Insurance Group of South Jersey at (856) 692-7702, Toll Free at (866) 304-9909, or send an email to info@PLIGofSJ.com .

Evaluating the financial strength of any company should be done with the help of a professional or someone with appropriate financial experience.

Below are terminology and definitions used in the insurance industry and are offered as basic standard guidelines when evaluating insurance carriers.*

• Net Written Premium – the premium amount shown in the company’s annual report Statement of Income after paying for reinsurance
• Surplus – the sum of all items represented on the company’s Balance Sheet. This is typically termed “Policyholder Surplus” on the Balance Sheet. It represents the amount by which Assets exceed Liabilities and represents the Net Worth of the company.
• Loss Reserves – money that is held in reserve to pay any present and/or future claims, including defense attorney fees, expert witness fees and in-house claims operations.
• Premium to Surplus Ratio – Net Written Premium divided by Surplus. Industry standards suggest a ratio between 1:1 and 3:1.
• Loss Reserves to Surplus Ratio – Loss Reserves divided by Surplus. This is an indication of the company’s ability to cover unanticipated reserve deficiencies. Industry standards suggest that less than a 4:1 ratio should be maintained.

• Why is the insurance carrier selling malpractice insurance in this state?
• Is the insurance carrier licensed and admitted in this state?
• How long has the insurance carrier been operating in this state?
• Has the insurance carrier ever left this state for any reason?
• Is there a capital contribution (“Buy-in” or “Capitalization”) requirement to become a policyholder?
• How many healthcare providers does the insurance carrier currently insure in this state?
• How many medical malpractice cases has the insurance carrier closed in this state?
• How many of its closed cases did the insurance carrier win?
• Is the insurance carrier insured through reinsurance?
• Is the insurance carrier’s reinsurance through a separate business entity?
• Can the insurance carrier settle my claim without my consent?
• In the event of a claim, will I have input as to my legal representation?
• Does the insurance carrier utilize independent insurance brokers/producers?
• What types of insurance coverage does the insurance carrier provide?
• Does the insurance carrier offer the same type of policy I have currently?
• Does the insurance carrier offer both Occurrence and Claims Made policies?
• What are the requirements when purchasing tail coverage on a Claims Made policy?
• Would I be subject to assessments due to the insurance carrier’s reserve inadequacies?
• Will I have access to the insurance carriers’ decision makers?
• What options are available if I disagree with the insurance carrier’s decision?
• Does the insurance carrier charge additional fees for claims services or risk management services?
• Will the insurance carrier cover my locum tenens?
• What are the restrictions for physicians that practice outside of the state in which coverage is requested?
• Do I have access to the insurance carrier’s financial information any time?
• What is the insurance carrier’s expense ratio?
• What is the premium to surplus ratio for the carrier under consideration?

Extended Reporting Endorsement (Tail Coverage) – this is an endorsement that typically provides an open-ended period for the reporting of claims after the expiration of the policy, subject to its terms, conditions and limits of liability.

• Retroactive Date – the prior date on which coverage is considered to become effective for the current Claims Made policy.
• Prior Acts – those acts covered by a Claims Made policy based on the claim being made on or after the retroactive date.
• Portability – refers to the ability of a Claims Made policy to transfer the Retroactive Date from one insurance company to another insurance company. This allows the new company to provide Prior Acts coverage on the Claims Made policy.

In 1986 the U.S. Congress passed the federal law known as the Liability Risk Retention Act (LRRA). LRRA allows for the creation of Risk Retention Groups and Risk Purchasing Groups. This law was passed during a time considered by many to be a liability crisis. The purpose of the law was to allow the opportunity to purchase insurance coverage from entities other than insurance carriers. These entities do not have to undergo the same degree of regulation as licensed, admitted insurance carriers.

A Risk Retention Group (RRG) is an entity that performs functions of a captive insurance company and is organized for the purpose of assuming and spreading the liability risk exposure of its group members. These types of entities must be chartered and licensed as a liability insurance company in one of the fifty states or the District of Columbia. It can also charter as an industrial or association captive under special state captive laws such as Vermont, Delaware, Colorado, Illinois, etc. A RRG typically bears risk and may purchase reinsurance. It is important to note that except for the chartering state, an RRG is exempt from any state law, rule or regulation that regulates or makes an RRG unlawful.

At the time the “Medical Malpractice crisis” was reaching its peak RRGs appeared to be a good alternative. However, despite their once attractive nature, RRGs are not for everyone and before a decision is made many factors should be strongly considered.

If you were to consider a RRG, then it is recommended to research, among other things, whether or not the RRG is exempt from any state law, rule or regulation that regulates or makes an RRG unlawful.

The difference between a RRG and a Risk Purchasing Group (RPG) is that a RPG is a group of insurance buyers who form a group to purchase liability insurance from an insurance company. This group can be an admitted company, a surplus lines company or a Risk Retention Group. A RPG typically does not bear risk and does not purchase reinsurance. Whereas, a RRG typically does bear risk and may purchase reinsurance. If the RPG decides to reorganize at some point as a Risk Retention Group, then this would be allowed under the LRRA.

It is important to note that a RRG operating in New Jersey would only be subject to New Jersey Department of Banking and Insurance (NJDOBI) oversight if its state of domicile is New Jersey. We are not aware of any RRGs offering medical professional liability insurance that use New Jersey as their state of domicile.

The primary differences between a Risk Retention Group and a licensed, admitted insurance company relate to regulation oversight. A licensed, admitted insurer is an entity that has filed an application and been granted a Certificate of Authority to operate in the state. It must also file all of its rates, rating rules and coverage forms for state approval. Additionally, a licensed, admitted insurer must file quarterly financial statements with the state and is subject to financial examinations by the state every three years, as well as market conduct examinations at any time. This regulatory oversight is intended in part to protect policyholders from the possibility of insurer insolvency. Such oversight and protection is not applicable to RRGs or their members.

The advantages of a Risk Retention Group were originally thought by some to include reduced costs, providing alternative mechanisms for coverage, and promoting greater premium competition among the general liability insurers. The Congressional Committee on Commerce, Science, and Transportation was convinced during the mid 1980’s that an expansion of the Products Liability Risk Retention Act of 1981 was needed to facilitate group insurance programs. The thinking was that this would encourage insurers to set premiums that would compete with the new formations created under the revised law and ultimately result in the advantages mentioned. The result was Congress passing the LRRA, which allowed the formation of new insurance entities that would be exempt from certain state laws. This could impede the information and interstate operation of association captive insurance companies or RRGs. It was also believed the LRRA would allow for preferential premium rates, terms and conditions to groups seeking liability insurance coverage.

The disadvantages of a Risk Retention Group include the fact that RRGs are not subject to the same regulatory oversight as licensed, admitted insurers. They are exempt from state laws and regulations concerning premium rates, coverage language and rating rules. RRGs are also exempt from the regulatory intent of protecting policyholders from potential insurer insolvency. Additionally, RRGs may require capitalization assessments in addition to premium and they may not offer individual legal representation in the event of multiple defendant cases.

Risk Retention Groups for medical professional liability insurance have operated in New Jersey previously. One of the largest medical professional liability RRGs, Physicians National Risk Retention Group, made inroads in New Jersey in the late 1980’s before going out of business several years later. Also, certain specialty-specific RRGs have operated in New Jersey for many years.

Health Care Providers are encouraged to exercise caution when considering insurance proposals from a Risk Retention Group.