Buyer Beware: What You Don’t Know About Your Professional Liability Insurance Can Hurt You
(This article appeared in the July/August 2003, March 2007, and March 2013 issues of the NewsBulletin and provided information about the differences between admitted and non-admitted insurance companies. As the article explains, the offering of non-admitted insurance by insurance agents is restricted to very specific and limited situations. These situations are determined by state departments of insurance.
It has come to our attention that there are some insurance agents who are improperly offering non-admitted coverage to our members. In addition, these agents are failing to disclose to our members the true meaning of non-admitted insurance and the significant coverage restrictions and limitations it entails. Given these developments, we felt this would be an appropriate time to update and reprint this article.)
Having information about the professional liability insurance you are buying is now more critical than ever. What you assume you are buying may be dramatically different from what you are actually getting. What you don’t know about the insurance policy you are buying could have dire financial consequences.
Generally speaking, there are two kinds of insurance companies: admitted and non-admitted. To be considered admitted, an insurance company must have its rates (the premiums that it charges) and its policy form (the coverages it provides) approved by the department of insurance in the states where it plans to do business. Once approved, that company is considered admitted and can sell only the policy form it was approved to sell. Once approved, the admitted company cannot charge a higher premium than was approved, nor can it restrict or reduce the coverage of the policy it was approved to sell. To some degree, this can limit some of the applicants an admitted insurance company may be willing to insure.
For example, an admitted property insurance company may be more than happy to provide coverage for a building located in the Midwest. If that same building was located in a hurricane-prone area of the country however, that company may be reluctant to provide coverage because it feels that its policy’s coverage is too broad, or its premiums are too low for the risk they would have to assume. In this case, the property insurer could decline to provide coverage for the building located in the hurricane-prone area.
To provide coverage for applicants who are declined by admitted insurance companies, state departments of insurance allow insurance companies to provide coverage on a non-admitted basis.
Because they are willing to accept applicants who do not meet normal underwriting guidelines, non-admitted companies are able to charge whatever premium they want and can limit or restrict their policy form however they want. The policy forms and rates used by non-admitted insurers are neither reviewed nor approved by any state department of insurance. A non-admitted company is not held to the same stringent insurance laws and regulations as an admitted insurer. Clearly, the non-admitted insurance product will not be as consumer-oriented as the admitted insurance product.
For applicants who can’t secure coverage in the admitted company marketplace, non-admitted insurance companies fill a very important void. For CRNAs who have had claims, substance abuse issues, licensure issues or other unusual risk characteristics, coverage from a non-admitted insurance company is the appropriate and, many times, the only coverage option.0
According to most state department of insurance regulations, an insurance agent is prohibited from offering coverage from a non-admitted insurer unless the applicant has been declined by an admitted insurance company (and the declination must come from an admitted insurance company that regularly insures the type of applicant in question, not just any admitted insurance company). Again, in most states, the agent is even required to complete an affidavit that the applicant has been declined by an admitted insurance company before insuring that applicant with a non-admitted insurer.
As an example of how state departments of insurance regulate the offering of non-admitted insurance, consider Texas. According to the Texas Insurance Code (Chapter 981), an eligible non-admitted insurer may provide non-admitted insurance only if the insurance cannot be obtained, after a diligent effort, from an insurer admitted to provide and actually providing that kind and class of coverage in Texas. Simply put, for CRNAs in Texas who have not been declined by an admitted insurance company that insures CRNAs, any coverage offered them from a non-admitted insurance company is done so improperly. The same is true in virtually every other state.
For various reasons (including financial ones), CRNAs who have not been declined by admitted insurance companies are being offered coverage through non-admitted insurance companies in Texas, Florida and other states. Unfortunately, this coverage is being offered improperly and without appropriate disclosure to the CRNA. Agents who improperly insure individuals with non-admitted insurance companies would seem to put their interests ahead of their CRNA clients.
In addition, CRNAs are being offered coverage from non-admitted insurance companies from non-insurance professionals such as staffing/placement agencies. As you might expect, you must be licensed to solicit (offer) and sell insurance. Sending mailings, newsletters, email or running ads constitutes solicitation. Accepting premium payments also constitutes selling insurance.
If you don’t purchase your own annual policy but do purchase daily coverage from one of the staffing/placement agencies, you also need to understand non-admitted insurance companies. In nearly every instance, the daily coverage sold through the staffing/placement agencies is being provided by non-admitted insurance companies.
You should also be aware that any daily coverage being sold by a staffing/placement agency (which is different than coverage provided to you as part of the assignment/placement you have accepted on behalf of a staffing/placement agency) is probably being done so improperly. As noted above, the solicitation and sale of insurance can only be done by a licensed insurance agent. Since it’s very unlikely that any of the staffing/placement agencies employ any insurance agents, the insurance is probably being offered and sold improperly. Obviously, the best way for you to protect your financial future is to purchase your insurance only from a licensed insurance agent.
AANA Insurance Services represents Medical Protective. Medical Protective provides coverage on both an admitted and non-admitted basis. Medical Protective’s non-admitted coverage is only offered to those applicants who are declined by admitted insurance companies.
If you have your own policy, but it was not purchased through AANA Insurance Services, the first thing you need to do is ask your agent if your policy is being provided by a non-admitted (also referred to as “excess and surplus” or “surplus lines”) insurance company. If the answer to that question is “YES,” you then need to seek answers to the following questions as well:
1. Were you properly notified that you were being insured by a non-admitted insurance company?
Anyone whose insurance is provided by a non-admitted insurer is supposed to be notified of this fact. In most cases, your state department of insurance will require that you be advised that your policy is placed with a non-admitted insurer. Your state department of insurance will also require that you be advised that the non-admitted policy is not protected by the state guaranty fund (more on this later) and that the policy may not conform to state insurance department regulations designed to protect policyholders who purchase their insurance from admitted insurance companies.
2. What type of coverage are you being provided?
In virtually every instance, the coverage you’ll be provided will be on a claims-made basis. Claims-made coverage is a bit more complicated than occurrence coverage, so it’s very important that you have a basic understanding of how claims-made coverage works.
For a claim to be covered under a claims-made policy, it must meet two criteria. First, the claim in question must occur (or happen) while the claims-made policy is in force. As an example, consider a claims-made policy that runs from June 26, 2018, to June 26, 2019. If the claim in question occurred on July 1, 2018, it would meet the first criterion. If the claim occurs on July 1, 2019, it would not.
Next, the claim in question must be reported or “made” (hence the name “claims-made”) to the insurance company while the policy is still in force. If the claim is reported after the policy period, there is no coverage. Using the claim described above that occurred on July 1, 2018, that claim would be covered as long as it’s reported to the insurance company before June 26, 2019. If it is reported after June 26, 2019, it would not be covered.
The timeliness of claim reporting is one of the significant differences between occurrence and claims-made coverage. With occurrence coverage, the only thing needed to trigger coverage is that the claim in question occur (hence the name “occurrence”) while the policy is in force. Unlike the claims-made policy, there is no reporting time requirement. For occurrence coverage, if the claim occurs during the policy period, the policy provides an unlimited time in which to report claims. This is the distinct advantage of occurrence coverage over claims-made coverage.
But what if you have a claims-made policy? How do you protect yourself from claims after you have ended or discontinued your claims-made policy?
When you (or your insurance company) end your claims-made policy, your insurance company is required (unless your policy is cancelled for nonpayment of premium) to offer you an extended reporting period endorsement. This endorsement, commonly referred to as a “tail,” allows for additional time in which to report claims that happened during your claims-made policy period.
The insurance company does make a premium charge for the tail. The cost varies by company. The length of the reporting period provided by the tail coverage also varies by company. It is the length of this reporting period that represents the most significant difference between admitted and non-admitted insurance companies.
3. How long will your tail protect you?
Medical Protective’s admitted insurance company provides tail coverage that gives the policyholder an unlimited period of time in which to report a claim. This was also true of St. Paul, TIG, and CNA, three companies AANA Insurance formally represented. The policyholder never has to worry about reporting a claim with this unlimited reporting period.
An unlimited tail even has value when a claim is reported after the statute of limitations. If a suit is made after the statute of limitations, somebody still must go to court to point out the fact that the statute is up. An attorney must be hired. Paperwork must be drawn-up. Costs are incurred. If a claim like this is reported to a company that provides an unlimited reporting period (like St. Paul, TIG, CNA or Medical Protective), that company will pay all the costs and expenses.
If you have patients who are minors, an unlimited reporting period can also be very important. In many states, the statute of limitations doesn’t begin to run until a minor reaches the age of majority. You could be involved in a claim 20 years after the original event. An unlimited reporting period is priceless in this circumstance.
Non-admitted insurance companies generally offer tails that provide only a one-year reporting period. After that one-year is up, no coverage is provided by the non-admitted insurance company. The policyholder must bear all the costs in defending any claim that occurs after the one-year reporting period ends. Since the vast majority of claims aren’t even reported in a year’s time, a one-year reporting period may end up being virtually worthless.
Understanding how the limited tail works is especially critical for CRNAs who are switching from an admitted insurance company to a non-admitted insurance company.
When switching between claims-made insurance companies, you generally have two options to protect yourself for claims that might come up. You can either purchase a tail from your expiring insurance company, or you can purchase Prior Acts coverage from your new insurance company.
If you are switching from one admitted company to another, either option is equally beneficial. If you are switching from an admitted company to a non-admitted company, however, there is a significant difference. If you choose to secure Prior Acts coverage from the non-admitted company rather than a tail from the admitted company, you are giving up the opportunity to have an unlimited period to report claims that might have occurred under your admitted policy period. Eventually, you will only have a year to report all your claims. You will also be faced with all the other issues and restrictions of a non-admitted policy that you didn’t have on an admitted policy (additional information on this below).
The cost may make it seem more attractive to purchase Prior Acts coverage from your new non-admitted insurer, but with the significant reduction in coverage that it brings, you are much better off purchasing your tail from your expiring admitted insurance company.
4. How much will your tail cost?
For admitted insurance companies like Medical Protective (and St. Paul, TIG, and CNA previously), the charge for tail coverage is 100 percent of the expiring premium. As an example, if the expiring premium is $3,500, the charge for the tail would also be $3,500. As indicated in the previous question, this charge is for a tail that provides an unlimited reporting period.
On the other hand, most non-admitted insurance companies will charge at least 125 percent for a tail. In most cases, this charge is for a tail that only provides a one-year reporting period. Many claims aren’t even reported in a year’s time. If a non-admitted insurance company does offer a tail with a longer reporting period, it will be at a substantially higher price than 125 percent of the expiring premium. It is also very unlikely that a non-admitted insurance company would ever offer a tail with an unlimited reporting period.
There is another benefit of the tail coverage provided by admitted insurance companies that is often overlooked. If you are insured by an admitted insurance company and you retire, your tail will be provided to you free or at a discount. Admitted insurance companies also provide free tails to policyholders that die or become totally and permanently disabled. Non-admitted insurance companies never give free or discounted tails. For CRNAs nearing retirement, this is an important consideration not to be overlooked if they are thinking about changing insurance companies.
As with any claims-made policy, non-admitted or not, the cost of the tail should be considered when calculating the true total cost of the policy.
Important Note: In its ongoing effort to provide members with the best insurance products available, AANA Insurance Services now offers CRNAs the opportunity to immediately convert their claims-made policies to occurrence policies and receive free Prior Acts coverage. That means there is no tail to buy now or in the future. This option is available not only to admitted claims-made policy- holders, but to non-admitted policyholders as well. As you can see from the information above, the savings from not having to buy a tail can be substantial.
5. How does your insurance company define a claim?
Most admitted insurance companies have a very liberal definition of a claim. Virtually any communication from the policyholder about a claim or an incident (such as the policyholder making the insurance company aware of a bad outcome that might lead to a claim) to either the agent or the insurance company constitutes a report of a claim and triggers coverage. Unfortunately, that’s usually not the case for non-admitted insurance companies.
Most non-admitted insurance companies usually define a claim as actually being sued and served with suit papers; there must be a demand for money. Why is this definition a problem? Because it severely limits your ability to report a claim and reduces the time you must report a claim if you’ve purchased less than an unlimited tail.
Suppose you are completing a renewal application for your current insurance company. Every application asks the question, “Are you aware of any circumstances that may lead to a claim?” Suppose you are aware of a situation and answer, “Yes.” Whether admitted or non-admitted, the insurance company may decide not to renew your coverage. There’s a big difference to be considered between the two types of companies, however. Under an admitted insurance company’s policy, you’ll have coverage for this situation. Whether you reported the situation earlier or just now on the application, coverage has been triggered. That won’t necessarily be the case if you’re insured by a non-admitted company. If you haven’t been sued and served with suit papers (and there’s no demand for money), you may end up having no coverage for this situation under a non-admitted policy.
Assume that given the circumstances you’ve described on your application, the non-admitted insurance company decides not to renew your policy. At that point, you will be offered a one-year tail for 125 percent of your expiring premium. You haven’t been sued or served with suit papers yet. But what happens if you are sued after the one-year tail runs out? You’ll be on your own to pay for the defense of the claim and any settlement or judgment as well.
For an admitted policy, the claim definition is irrelevant since you have the option of purchasing a tail which provides an unlimited period in which to report claims. For a non-admitted policy, the combination of the restrictive claim definition and a limited reporting period can spell disaster.
6. Does your policy provide a “consent to settle” provision?
Non-admitted insurance companies (as well as many admitted insurance companies other than Medical Protective) don’t normally provide consent to settle coverage as part of their policies. This means that if you are involved in a claim, the insurance company doesn’t need your consent to settle the claim. Even though you may have done nothing wrong and there was no negligence on your part, the insurance company can make the business decision that it would be less expensive to pay a claimant’s demand rather than defend you and your professional reputation.
The ability of the insurance company to settle a claim on your behalf without your consent could have a significant impact on your professional future. If a claim is paid out against you, by law it must be reported to the National Practitioner Data Bank. This information could affect not only your reputation, but your ability to practice in the future. As referenced above, Medical Protective’s admitted insurance company does provide a consent to settle provision in their policy (just as St. Paul, TIG, and CNA formally did). Medical Protective must have your consent before they settle any claim on your behalf.
7. How much will your policy premium be?
This is an especially important question if you are purchasing a claims-made policy. Generally speaking, claims-made premiums stair-step up over a five-year period. This is true of both admitted and non-admitted policies.
Claims-made coverage is considered continuous. When you first buy a claims-made policy, the insurance company is only providing one year’s worth of coverage. If you renew the policy, the insurance company will now be providing two years’ worth of coverage since they will accept claims going back to the inception date of your first policy. As the length of time you are covered increases, so does the premium. Claims-made premiums usually level off after the fifth year. Why is this? The vast majority (but certainly not all) of claims are reported within five years.
The importance of knowing what premium you’ll have to pay (both now and in the future) will help you determine what the cost of your tail will be. As indicated previously, the price of the tail is based on a percentage of the policy premium. This is true of both admitted and non-admitted insurance companies. If you plan to have coverage in force for more than a year, you should have some idea of how much your tail is going to cost in the future.
Since admitted insurance companies must have their rates approved, they can give you a fairly accurate idea of what your premiums will be over a five-year period. With information like this, you’ll have a good idea of what your tail will cost in the future and you’ll be able to determine the true cost of your coverage over time, not just what it will be this year.
As previously explained, non-admitted insurance companies don’t have to have their rates approved. They can charge anything they want. Knowing that their applicants have few if any other options available, many non-admitted insurance companies charge less-than-competitive premiums.
Few non-admitted insurance companies are willing to estimate future years’ premiums. This is unfortunate. Whether the non-admitted premium is high or low the first year, how much will it go up the second year? With a non-admitted insurance company, the premium could double or even triple.
In some cases, the first-year non-admitted premium may be artificially low. Why is this? Even if a bad outcome occurs in the first policy year, the likelihood of a claim actually being submitted in the first year is very remote. The insurance company knows this. (Also, with a restrictive claim definition and a tail which provides only a limited reporting period, the likelihood that a non-admitted insurance company will have to respond to a claim is much less than that of an admitted insurance company.) A non-admitted insurance company knows it doesn’t need to charge an adequate premium the first year because it can make it up in future years. This is especially true since non-admitted insurance companies can change anything they want. Without estimates of future years’ premiums, it is impossible to gauge the true cost of your insurance over time.
Most non-admitted insurance companies charge a minimum amount to provide the policy. This minimum is generally 25 percent of the total policy premium. As an example, if the total policy premium is $6,000, the minimum premium charge you will have to pay is $1,500. In this case, if you were to cancel your non-admitted policy after a month (or even a week or a day for that matter), you would have to pay $1,500. Admitted insurance companies don’t usually charge a minimum premium. If you were to cancel a $6,000 policy purchased from an admitted insurance company after a month of coverage, you would pay approximately $500 ($6,000 /12).
The tail on a non-admitted policy usually has a minimum premium as well. The charge for the tail will most likely be determined as a percentage (normally 125 percent for a one-year reporting period) of the annual premium even if you cancel your policy early.
If you cancel a $6,000 policy after six months, both the admitted and non-admitted insurance companies would charge $3,000. The admitted insurance company would charge $3,000 for the tail ($3,000 x 100 percent) but the non-admitted insurance company would charge $7,500 ($6,000 x 125 percent) for the tail. Total cost for the admitted policy for six months would be $6,000 ($3,000 + 3,000). Total cost for the non-admitted policy would be $10,500 ($3,000 + $7,500).
Unlike policies from admitted insurance companies, policies provided by non-admitted insurance companies usually have a deductible. That means if you ever have a claim, you are going to have some out-of-pocket expenses. Even if there is no payment made to a third party (the claimant/plaintiff) in the end, there will be legal expenses and you will have to share in those expenses if you have a policy with a deductible. This deductible will be charged each and every time there is a claim.
The minimum deductible on a non-admitted policy is $1,000, and many times it is as much as $5,000. The potential costs related to the deductible should be considered when calculating the true cost of a non-admitted insurance policy.
8. How are defense costs handled under my policy?
With admitted insurance companies, defense costs (such as investigation costs, attorney’s fees and expert witness fees) are provided in addition to your policy limits. Costs and expenses provided to defend you are virtually unlimited under an admitted policy since there is no defined cap.
With non-admitted insurance companies, defense costs generally reduce your limits of liability. This means that if your non-admitted insurer incurs any defense costs on your behalf, your limits are reduced by that amount. Essentially, your defense costs under a non-admitted policy are limited to your policy limits. CRNAs working in states where $1,000,000 per occurrence limits aren’t the norm (such as Florida, Michigan and Texas) should be especially wary. Given the right circumstances, your policy could be exhausted by defense costs before any claim is actually paid on your behalf. And considering that your insurance company is responsible for handling the claim, it is up to that company to decide what to spend on your defense. If the non-admitted insurance company’s maximum financial obligation is limited to the policy limit (unlike an admitted company which provides defense costs in addition to the policy limit), the non-admitted insurance company doesn’t really care if it exhausts the policy limit on defense costs or not; there is nothing to motivate it to save money to pay the claim. Once the policy limit is exhausted, the insurance company’s responsibility ends even if there’s a settlement or a judgment against you. Unfortunately, you will have no say in the matter.
9. What are the fees and taxes?
Most states require that certain fees and taxes be paid as part of the transaction on a policy purchased from a non-admitted insurance company. These fees and taxes are paid by the policyholder and are in addition to the premium that is paid to the non-admitted insurer. Generally speaking, there are never any additional charges on policies purchased from an admitted insurance company.
The fees and taxes can increase the total cost you pay for the policy by 2 percent to 8 percent. If you cancel a non-admitted policy before the end of its term, the unearned portion of these fees and taxes may not be refundable. The amounts of the fees and taxes should be itemized and clearly explained. You should know exactly what you are paying for; this will help avoid paying for any hidden charges. All fees and taxes should be considered when calculating the true cost of a non-admitted insurance policy.
10. Will you have access to your state’s guaranty fund if your insurance company goes bankrupt?
No protection is afforded to non-admitted insurance companies by your state’s guaranty fund. If an admitted insurer is financially unable to pay claims, financial assistance would be available to policyholders through their state’s guaranty fund. However, when a non-admitted insurance company is financially unable to pay claims, that company’s policyholders are be left to fend for themselves.
As some of you may recall, a company called PHICO that insured CRNAs went bankrupt some years ago. Fortunately for PHICO policyholders, PHICO was an admitted insurance company. Should they ever have a claim, PHICO policyholders will be able to rely on their state’s guaranty fund for financial assistance. If PHICO had been non-admitted, no financial assistance would have been available.
Since you are relying on an insurance agent to give you the best possible advice about your professional liability insurance and what policy to buy, the most important decision you’ll be making in your insurance purchase is actually the selection of your agent. Don’t pick the wrong one.
Select an agent who specializes in handling professional liability for healthcare providers. If possible, select an agent that specializes in professional liability for CRNAs. Just like in healthcare, there are times when you want a specialist rather than a generalist.
Your professional liability coverage is not the sort of insurance you want to leave up to your automobile or homeowners’ insurance agent. Professional liability coverage can be very complicated. You want somebody who understands this coverage and deals with it on a daily basis. You also want an agent who has the widest variety of coverage options available and has a policy (preferably from an admitted insurance company) that fits your needs.
An agent who specializes in professional liability will handle more of these of policies than an agent who doesn’t specialize. That means the specialized agent will certainly have more clout with the insurance company than the agent who handles only a few policies. That clout may be useful to you if you’re ever involved in a claim or have a coverage need that’s out of the ordinary.
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