Malpractice insurance comes in two types, claims made and occurrence.  The majority of policies sold today are claims-made, which are policies that cover a doctor for a specified period of time during which malpractice claims can be made against the doctor.  An occurrence policy covers  a doctor for a specific case, or occurrence, for the statute of limitations for that particular state. 

Occurence Policies

 These policies cover the physician for each case, or "occurence" they perform and each "occurence" is covered for the duration of the statute of limitations.  Due to this fact, with occurrence policies, it is not necessary to purchase tail coverage.

 Claims-Made Policies

Theses policies have a defined time period within which the physician has coverage for any claims that are made against them, hence the term, "Claims-Made."  If a physician has a policy from 1/1/2007 through 12/31/2007, if they do their last case on 12/30/2007 and then retire, that policy expires on 12/31/2007.  If the case on 12/30/2007 went poorly, it usually takes months for a case to be brought against the physician.  The tail coverage is usually a two year policy that covers the physician for any claims (such as from the case on 12/30/2007) that come against the physicians.  

         An occurrence policy makes the most sense for physicians, as it covers each case you do for as long as you can be sued for the case.  There is no tail to worry about.  A claims-made policy only covers you for a year at a time, and if you get sued during that time period, the case is covered.  The issue with these policies, is that the typical statute of limitiations for malpractice is two years, so a doctor who wishes to cancel a policy should generally buy a “tail” policy to cover any cases that come up during those two years after they cancel their policy.  

    One way of simplifying it is to look at an example.  Let us say Dr. Smith buys a claims-made policy for a general surgery practice she is starting in January 2008.  The policy would cover her from January 1, 2008 to December 31st, 2008.   The premium, as she has just finished residency and lives in a low malpractice risk state, is $14,000. 

     At the end of 2008, Dr. Smith finds that she really doesn't like the area and wants to move to another state.  She contacts her insurance company and they do not offer policies in the state to which she is moving.  They state that her tail will be $28,000, unless her new company wishes to offer her nose coverage. 

     She contacts her new insurance company to see what their “nose coverage” policy is, as she is unfamiliar with this.  They state that insurance companies may offer nose coverage (also known as prior acts coverage) to a new policyholder if they are coming from a lower or equal risk malpractice area, which would cover any suits that could come up for the two year statute of limitations from her old job.  As she is coming from a low-risk malpractice state, they do offer her nose coverage.   She then does not have to pay her old company for tail coverage. 

     From my reading, nose coverage does not seem to add any additional cost.  Be sure to read the fine print, but if you leave the new company, you will still have to pay a tail, unless your new coverage offers you nose coverage.

     Claims-made policies are cheaper than occurrence policies, as the purchaser of the claims-made policy will still have to pay a tail when they leave.  Locum tenens companies even have claims-made policies, as occurrence policies are so hard to find.  Occurrence policies are generally found in very low malpractice risk states.

Here is a  link for current malpractice rates.  Click on the tables in the article to pull them up.  Data is from 2006-2007:

Medical Economics Regional Malpratice Rates 

     One other confusing issue with malpractice policies are step increases.  A step increase is the method by which malpractice companies increase you rates the longer you are with them.  Your first year with a company, assuming that you have no malpractice history with that company (you just finished residency or paid your tail with your previous company,) will be about one third to one half of your “mature rate.” 

    A physician's policy is considered mature when they have been with the company for five years.    Here is an example:

General Surgery Policy: (Medium to low risk area)

Year 1:  $16,000

Year 2:   $20,000

Year 3:  $35,000

Year 4:  $38,000

Year 5:  $41,000

Year 6:  $41,000 

     Having a lower first year rate makes sense, as the physician has not done that many cases and there are no prior acts to cover.  The rate goes up a little for the second year, then there is generally a bigger jump from years two to three, as the physician has a full two years of cases behind them for which they can be sued. 

     In the malpractice companies' view, at two years of practice, they now have three years of liability exposure for that physician for each year that they continue to cover them --  the current year, and the two years of past cases that are within the typical two year statute of limitations.  The rates continue to step up for year 4, and then they typically plateau at year five. 

     Rates may continue to go up, but that is generally due to market forces.  So, these “steps” can have a big impact on a doctor.  Do not assume that the rate you are quoted over the phone will be your rate four or five years from now.  It will most definitely change, probably by 200 or 300 percent. 

    Keep in mind, that your tail is calculated on your current premium.  If you are thinking about leaving a job, it would be wiser to do it during your first year of practice.  If you wait until your third year, your tail will probably be twice what it was during your first year. 

    If you have any questions, call a couple malpractice companies in your area and ask that what the rates are, both for new physicians, as well as mature physicians.  Also, ask them how much rates have changed for a mature physician over the last three or four years.  This will give you an idea of the malpractice situation for that geographic region.

    Tail coverage does not necessarily have to be purchased.  If you are a member of a large group, your contract may state that you are required to purchase a tail, as it would expose cross-covering members of your group to more liability if you did not purchase a tail.  I know a number of doctors who either retired or moved to another state who did not purchase tail coverage due to its cost. 

    Tail coverage is typically twice the annual premium cost.  One important factor to consider  is the malpractice risk of the geographic regions you are considering.   Because if you decide to  move to another region, you may have to purchase tail coverage. 

     Southern Nevada is considered a very high risk malpractice area.  It is virtually impossible to get nose coverage from a company in another state, as they do not wish to assume the liability.  If you are in a similar state, such as Pennsylvania or Mississippi, you are in the same boat.  You will most likely be stuck paying a tail if you want to move to California, Colorado, or another lower risk malpractice state. 

     Interestingly, the malpractice risk varies considerably within each state.  Northern Nevada has much lower malpractice rates than Southern Nevada.  Similarly, the rates in Philadelphia are much higher than the rest of Pennsylvania.  One other thing to keep in mind, is that if you are with the same malpractice company for 20 years, many companies will give you a free tail when you retire.  If they offer this, make sure it is in writing.  I am not sure if companies are still doing this, but many older physicians I know have this arrangement.