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Claims Made Insurance PolicyWhen I asked why malpractice insurance policy premium went up, the agent stated that it was because of “step rating”.  What is step rating and why did my premium go up?

Most malpractice insurance policies are Claims Made Policies.  And most Claims Made Policies are Step Rated.  If your 1st policy written has no prior acts coverage you can expect that by approximately the 5th year that your policy premium could double.  The premium increases for your malpractice insurance in years 2 through 5 will see most of the rate increase.  Somewhere between the 5th to 7th years your policy will become “fully rated”   Once the policy becomes fully rated, then the only premium changes that should occur are because of claims history; the insurer changing rates; changes in practice areas; and/or changes in the general insurance environment. 

What if I switch Malpractice Insurers, will step rating start all over again with the new Insurer?

The short answer is “No.”  One reason that most insurance agents ask to see the Malpractice Insurance declarations page and any prior acts endorsements is to make sure that the agent is quoting and writing you a new policy that matches your current prior acts date.  The reason this is important is the new insurer is picking up the exposure for past acts and looks to the prior acts date for any claims reported, even if the current insurer was not on the risk at the time the error was alleged to have occurred.   When the claim is made determines what insurer will cover the claim.  Your old insurer, once coverage expires normally is not liable for claims being reported after the policy coverage has expired. That is why they call the coverage ‘claims-made’. 

Now that you understand what “step rating” is, why is this done?

 At the beginning of the 1st policy for Malpractice Insurance, it is difficult to commit malpractice and report a claim during the 1st year that the policy was in existence.  Errors and claims have been reported in the 1st policy year but it is hard to do.  Only acts committed after the prior acts date (the inception date of your first claims made policy that has been continuously renewed) are covered.   Even though an error may have occurred, it generally takes a period of time for those errors to be discovered.  Depending on the services performed the allegations of an error made can range from just a few days after the services are performed to many years later.  As the body of work performed under the Malpractice Insurance Policy grows, so does the exposure.  Remember the past acts date.

I understand this, but I do not like paying so much, why can’t I just shorten up my prior acts date?

Shortening up the prior acts date creates exposures that may not be covered.  In many states the statute of limitations starts from when it would be reasonably expected for an error to occur to be discovered.   And if you are dealing with minors, it could start when the minor turns 18.  Given these long time periods, reputable insurers and agents will refuse to knowingly shorten up prior acts coverage.  Even if the insured is willing to accept the risk, the insurance agent/insurer does not want to open up their errors and omissions coverage to this exposure. 

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