Definition
A Claims-Made Policy is a type of professional liability insurance that provides coverage only if a claim is first made and reported during the active policy period. The timing of the actual medical incident does not matter. If you cancel your policy, your coverage ends completely for any past incidents that have not yet resulted in a claim.
Think of it like a streaming service subscription. You have access to the entire library of content only while you are an active, paying subscriber. The moment you cancel, you lose access to everything, including shows that were released when you were a member. This is the direct opposite of an Occurrence Policy, which would cover any incident that happened during the policy period forever, regardless of when the claim is filed.
Why This Matters to Healthcare Providers
When you sell your practice or retire, your existing Claims-Made Policy will be terminated. This creates a serious coverage gap, leaving you personally exposed to lawsuits filed after the sale for patient care that you delivered before the sale. The buyer’s insurance will not cover these prior acts.
Example in Healthcare M&A
Scenario: An orthopedic group with a Claims-Made malpractice policy decides to sell to a private equity firm. The purchase agreement is signed, and the transaction closes on December 31st, terminating the practice’s old insurance policy.
Application: Six months later, a former patient files a lawsuit related to a surgery performed two years before the sale. Because the claim was filed after the practice’s policy was terminated, the insurance company denies the claim. The physicians are now facing a malpractice suit without coverage.
Outcome: To prevent this, the sellers should have purchased Tail Coverage as part of the sale process. Tail Coverage is a one-time purchase that extends the reporting period for their old policy, ensuring that claims related to their time as owners are covered even after the practice has been sold. The responsibility for paying for Tail Coverage is a standard negotiation point in M&A deals.
Related Terms
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Frequently Asked Questions
What is a Claims-Made Policy?
A Claims-Made Policy is a type of professional liability insurance that provides coverage only if a claim is first made and reported during the active policy period, regardless of when the actual incident occurred.
How does a Claims-Made Policy differ from an Occurrence Policy?
A Claims-Made Policy covers claims reported during the policy period, while an Occurrence Policy covers any incident that happened during the policy period forever, regardless of when the claim is filed.
What happens to Claims-Made Policy coverage when a healthcare provider sells their practice or retires?
The Claims-Made Policy is terminated, creating a coverage gap that leaves the provider personally exposed to lawsuits filed after the sale for care delivered before the sale, as the buyer’s insurance does not cover prior acts.
What is Tail Coverage in relation to a Claims-Made Policy in healthcare M&A?
Tail Coverage is a one-time purchase that extends the reporting period of the old Claims-Made Policy, ensuring that claims related to the seller’s time as practice owners are covered even after the practice has been sold.
Why is Tail Coverage important in practice sale transactions?
Tail Coverage prevents coverage gaps by allowing claims made after the sale but related to the seller’s prior practice period to be covered, protecting sellers from personal liability in malpractice suits post-sale.