Understanding Claims-made “Step-up” Rates and Your Coverage Alternatives

There’s a lot to think about when choosing the right type of medical malpractice insurance for your practice – depth of coverage, your specialty, your risk of being sued, and history of prior claims to name a few. Add to that list the annual premium cost and how it will affect your operating budget. Understanding how “step-up” premiums of Claims-made policies work – and knowing your alternatives – can help you make the best business decision.

Claims-made medical malpractice insurance is typically more appealing to surgeons in private practice because of its relatively low introductory premium rate and wide availability for all types of surgical specialties. Keep in mind, however, that Claims-made policies are designed to increase or “step up” your premium in planned increments each year over a 5-year period. In general, Claims-made step-up rates are based on the expanding length of coverage time, the potentially higher risk of malpractice claims and the insurance company’s increased exposure to losses over that time period.

Here’s an example of a step-up renewal plan with estimated premiums and the time periods covered:

• Year 1 – $5,000 coverage for potential lawsuits in the first 12 months of the new policy.
• Year 2 – $10,000 retroactive coverage for past 12 months, plus the year ahead.
• Year 3 – $14,000 retroactive plus the year ahead.
• Year 4 – $17,000 retroactive plus the year ahead.
• Year 5 – $19,000 retroactive plus the year ahead.
• Mature Policy – Annual premium renewal rates and increases are based on overall market conditions and other factors.

Besides being more affordable at the start, Claims-made step-up premium pricing is considered to more accurately reflect the current risk for the carrier as the policy matures. Also, any changes to the existing coverage or policy limits are retroactive to previous years. However, depending on the needs of your practice, Occurrence malpractice insurance or even a different Claims-made policy may be a better alternative.

Before you cancel a Claims-made policy and switch carriers, be aware that any alleged malpractice incident and the claim must occur during the Claims-made policy period starting from the date the coverage went into effect. As a policyholder, you are covered as long as you have paid the initial premium and continue to make the step-up renewal payments. All current and retroactive coverage ends when you stop paying premiums. Any claims submitted to the insurance company after cancellation will not be covered, even if the incident occurred while your policy was in force.

So, if you decide to switch from Claims-made insurance to a new Occurrence policy for example, you will need to purchase extended reporting endorsement or “tail” coverage for any claims that are filed after your cancellation date. Tail insurance is a one-time fee typically costing 200-250% of the current amount of your Claims-made premium at cancellation.

Whether you’re establishing a new practice or changing policies, Occurrence malpractice insurance offers an option to the step-up premium plan and a more flexible claims structure. Note, however, that not all surgical specialties or practice types qualify for Occurrence coverage. Claims-made insurance may be your only option. Be sure to consult with an independent malpractice insurance broker before cancelling your existing policy.

Occurrence policies usually cost more at the beginning, but the premium is designed to be a fixed, flat rate throughout the length of the policy. Like any malpractice insurance, the cost depends on factors such as the practice location, surgical specialty, type of coverage, and claim limits. For example, according to the 2020 Annual Rate Survey by the American Medical Association, malpractice annual premiums for general surgeons ranged from $41,775 in California (Los Angeles, Orange) to $205,380 in Florida (Miami-Dade).

Other key advantages of Occurrence policies include:

• Premium prices are subject to less volatility
• More total coverage with policy limits
• No need to purchase tail insurance when switching policies

Occurrence insurance covers alleged malpractice incidents that occur during the year that the policy is in force, even if the claim is made to the insurance company at a later time. Unlike Claims-made policies, Occurrence plans will cover claims that are made even after you cancel and go with a different insurance carrier, as long as the incident occurred during the life of the policy. For example, a surgeon with Occurrence insurance in Illinois moves the practice to another state and secures coverage with a new carrier. A patient treated at the former Illinois practice makes a malpractice claim two years later. The surgeon’s previous Occurrence policy carrier will cover that claim.

As your surgical practice evolves and changes, so do your malpractice insurance needs. An independent malpractice insurance broker can help you select the right coverage and premium structure for your practice. At MEDPLI, we partner with physicians and surgeons in multiple specialties across the U.S. as a single expert source for finding the best plans and rates with top-rated carriers.

Need new coverage or ready to switch carriers? Call us at 1-800-969-1339 to protect your practice or contact us via email.