Issue number 4

Between the Spreadsheets Understanding Medical Malpractice Insurance: Identifying Key Differences Between Claims Made and Occurrence Based Policies

To ensure sufficient protection against negligence allegations that may arise, private equity firms, healthcare companies, and medical professionals must consider whether a claims-made or occurrence policy offers the most appropriate medical malpractice insurance coverage. Discerning the difference between medical malpractice insurance policies is challenging, yet necessary to limit the liability that may arise from a patient’s injury or death. This type of professional liability insurance offers healthcare providers protection from allegations of negligence, ultimately mitigating considerable financial and reputational risk. According to a study conducted by the American Medical Association in 2016, over one-third of respondents have been sued at least once during their career. Malpractice coverage is also required in nearly all states and by many medical systems to lawfully practice.

Understanding Medical Malpractice Insurance 1

The importance of medical malpractice insurance is uncontested, yet the question remains as to whether a claims-made or occurrence policy provides optimal coverage for a physician or practice. The two forms of malpractice insurance feature a key distinction in coverage depending on when the incident occurred and when the claim was filed. As the name implies, an occurrence policy provides coverage for incidents that occurred within the insured period, regardless of whether the claim is filed after the policy lapsed. If a patient’s complications manifest and legal action is taken, there is protection against future claims if malpractice took place during the insured window. Conversely, a claims-made policy must be effective when the malpractice occurred and when the related claim is filed. Even if the incident occurred within the policy period, there would be no coverage for the claim if it was filed after the policy has expired. To mitigate risks arising from claims-made coverage gaps, the company and/or its physician can opt to purchase “tail coverage,” which extends the period of coverage beyond the policy’s expiration. This effectively converts a claims-made policy to an occurrence policy for a one- time payment of 1.5-2x the annual malpractice insurance premium. Tail coverage is useful for medical professionals during times of transition, including moving to a new position, practice, or state, changing carriers, or entering retirement. While the responsibility for maintaining coverage falls upon the individual, tail coverage may be covered by the previous employer or new practice depending on negotiations. However, hospital systems are typically self-insured, and the group policy may not offer an incoming practitioner protection against previous incidents. Similarly, a policy issued in a new state may not provide adequate insurance over malpractice committed elsewhere. Tail coverage is essential in these scenarios to offset risk of liability, though nose coverage can provide protection for incidents that occur before a policy’s effective date. For those entering a new plan, it may be worthwhile to consider if prior acts coverage can be purchased from the new carrier.

Understanding Medical Malpractice Insurance 2

While many medical professionals opt for occurrence coverage, there are additional considerations that factor into policy selection, including:

• Differences in annual premium • Potential need for additional payments coverage (e.g., nose and tail coverage) or policies to address • Coverage offered by an employer cyber liability and regulatory • Coverage offered in the state of requirements set forth by HIPAA practice When compared to a claims-made policy, a practitioner may find the additional expense of occurrence policy insurance to be significant and prohibitive. From a budgetary perspective, the premiums for an occurrence policy will be higher, but remain consistent year-over-year. On the other hand, claims-made premiums will be lower initially, but gradually increase over a ~5-year period to account for the time elapsed between the incident’s occurrence and claim filing. Though many providers prefer occurrence policies, they may not be offered in every state or by each employer (as claims-made It is important to note that medical malpractice insurance likely does not cover liability resulting from sexual misconduct or criminal acts. It is imperative that each policy is critically assessed to determine what types of incidents would be covered, as well as the amount of coverage per individual claim. Additional coverage may be warranted depending on other risk factors and regulatory requirements Our experts At , we understand your challenges and have extensive experience helping healthcare organizations maximize the value of their investments, from acquisition to exit. With a strong track record in the healthcare sector, we have the expertise and resources to guide you to success, whether you need assistance identifying potential acquisitions, performing due diligence, tax structuring, post-transaction integration, assessing regulatory and compliance pitfalls, or consulting, audit and tax services. For more information, visit www.mazars.us/fa

Wayne Pryor has over 30 years of experience in the healthcare industry, with a focus on transaction services. He has worked on over 400+ buy-side and sell-side transactions in every sub-sector of the industry, ranging from $1 million to $10 billion deals. Prior to joining Mazars, Wayne was a Managing Director in a large national firm’s Transaction Services Practice, where he focused on the healthcare sector.

Courtney Zozulia is a transaction services associate with Mazars focusing primarily on providing due diligence to private equity groups, investment banks and other financial institutions. Prior to joining the Mazars, she was an experienced Business at EY. Courtney has passed all four sections of the CPA Examination, fulfilled the New York experience and educational requirements, and is currently awaiting licensure from the state.

Understanding Medical Malpractice Insurance 3

Contacts

Wayne Pryor, Partner, Mazars [email protected]

Courtney Zozulia, Staff, Mazars [email protected]

Mazars USA LLP is a high-performing accounting, tax and with significant national presence in strategic U.S. geographies. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. We offer a broad array of industry specialists providing services to growth- oriented enterprises and individuals. As the independent US member firm of Mazars Group, which operates in over 90 countries and territories around the world, we deliver seamless access to the expertise of 26,000+ professionals. At local and global levels, we are proud of our value-added services, building lasting relationships with our clients and communities. For more information, visit us at www.mazars.us.

Understanding Medical Malpractice Insurance 4