Why Use a Claims Made Policy?

In the long-term care sector, there will typically be a gap in time between a resident incident and the filing of a claim, oftentimes pushing the statute of limitations.  A claim reporting lag makes it extremely difficult for an insurance company and an insured to have a timely grasp of their liabilities.  Coverage from a Claims Made policy is "triggered" by two events:  The incident must have occurred in the policy period (or subsequent to the Retro Date) and the claim must be reported within the policy period.  In a RRG, the insured is the owner.  As an owner, wouldn't you prefer to have greater certainty of your liabilities? 

Another advantage of the Claims Made policy is that an insured can have greater certainty in the financial position of the carrier that will have to pay the claim. Many insureds have a false sense of security in thinking, because they have an Occurrence policy, the claim will be paid no matter when it comes in. In truth, it’s impossible to know what financial condition the carrier that provided the Occurrence Form coverage will be in when a claim is filed, especially when the insured has switched carriers over time.  In an industry with such lag time issues in claim reporting, Claims Made insureds can have greater certainty knowing the claims from prior years will be the responsibility of the current carrier as opposed to one that provided coverage any numbers of years previous.      

When you renew with a Claims Made carrier, there are several differences: 

  • You know they are in business. 
  • You can review their financials, which means you can rest assured they are financially stable. 
  • You can increase the limits of the policy if you feel you may have "hot incidents" in the pipeline.
  • As carriers compete for business, they often improve or broaden the coverage form; consequently, you are not only assured that the insurance company is in business and that you have adequate limits, you may also enjoy a broader coverage form than you had at the time of the incident. 

From the perspective of the owners of an insurance company – which is what you are in an RRG – the Claims Made policy provides much greater financial certainty. Claims Made policies provide coverage for claims reported prior to the expiration date of the current policy, provided that the incident occurred subsequent to the retroactive date (the effective date of your first Claims Made policy). Because the Claims Made policy covers only claims reported within the policy period, the Claims Made carrier has much greater certainty of its liabilities. The Claims Made carrier will certainly reserve for potential negative development of known claims, but it does not have to reserve for new claims being reported after the policy expiration as an Occurrence carrier does.  As a business owner, greater financial certainty is a tremendous benefit.

Lastly, the assertion that Claims Made policies become more expensive than Occurrence Form policies is patently false. While it is true that, in the first few years, a Claims Made policy will increase in cost (referred to as the Claims Made Step Factor), the increases stop when rates are equivalent to those of an Occurrence Form. This is because a Claims Made policy actually “matures” into an Occurrence policy once the policy period covers equal amounts of risk. The Statue of Limitations requires a nursing home incident to be reported within two to four years, depending on circumstances. 

Think of it this way: An Occurrence Form policy prices from a forward looking perspective – accounting for incidents that occurred during the policy period which may become claims four years later. The Claims Made policy prices from the perspective of looking back, as it only responds to claims reported during the current policy periods for incidents that occurred during and prior to (subsequent to the retro date) the current policy period.  Thus, a First Year Claims Made policy can be significantly less expensive than an Occurrence Policy because both the incident and the actual claim must occur in the twelve month policy period in order to trigger coverage for that policy.