Insurance for senior living

Claims-made to occurrence: Make the move now

By Art Seifert

Insuring the senior living spectrum— skilled care, assisted living, independent living and home health—is challenging. Over the last 10 years, we have seen the market for senior living move from very soft to very hard to very soft. During that period we have seen most carriers move from occurrence to claims-made to occurrence. This historical flip-flopping begs the question…what's next?

Most profess to know the difference between occurrence and claims-made, but just to be sure, here is a short primer:

• Claims-made Incident Sensitive—Coverage will respond to incidents arising on or after the policy retroactive date and which are reported during the term of the policy.

• Occurrence—Coverage will respond to incidents arising from the coverage period, regardless of when the claims are reported.

During the 2001-2003 period, the majority of the carriers writing senior living went to claims-made. Previously, carriers had written senior living on an occurrence basis. In the late 1990s and early 2000s, the valuation of a senior living claim shifted from the economic value of the damaged life to a more punitive approach aimed at the owners of senior living facilities. Where the plaintiff's bar could show that the corporation was more focused on the bottom line than care, large awards were made.

The crafty plaintiff's bar waited until shortly before the statute of limitations expired and then trotted out cases backed by disgruntled former employees. In many cases settlements reached seven figures. As the general insurance market showed signs of hardening, senior living led the way: increasing rates, moving to the non-admitted market and writing on a claims-made basis.

During the last hard market, rate increases of 300% were not unheard of and many insured senior living facilities witnessed a doubling and trebling of their premiums. One positive and lasting benefit of the hard market is the serious adoption of risk management and loss control within the senior living industry. Better risk management combined with effective tort reform in many states to improve the sector's experience.

In 2005, the senior living sector started to soften. Today we are seeing bed rates down from $1,250 a skilled care bed to $250 a bed. In addition to rates dropping, coverage has been expanded and in a last-ditch effort to retain and attract business, some carriers are now offering occurrence coverage. How long will that last?

It is fair to say the majority of senior living business is still written claims-made. As we move toward a hard market in 2012, many carriers will be looking at senior living accounts that have been written on a claims-made basis for eight to nine years, with retro dates back to 2002. In other words, they are writing on an occurrence basis disguised as claim- made. And when they can, many of these carriers will decide to write claims-made with retro dates of three years or less, leaving a serious gap in coverage and an E&O exposure.

In addition, the senior living industry is a busy merger and acquisition market. When an acquiring company purchases a facility written on a claims-made basis, one of the parties will be on the hook for expensive "tail" coverage. Instead of buying the tail, advise the acquiring company to consider making the move to an occurrence form and purchasing "nose" coverage. In today's market it may be cheaper and it will make it easier in the future for the facility to be acquired.

It may be in the best interest of the client to start looking for carriers that are writing on an occurrence basis and have consistently done so. Due diligence will provide a short list of carriers that have been writing on an occurrence basis through three market cycles. But there are a few.

The agent looking to protect his or her client needs to negotiate with one of the long occurrence writing carriers to get a premium for an occurrence-based policy with nose coverage for approximately the same premium as a claims-made renewal with retro date back to the early 2000s.

There is a window to negotiate a favorable move from claims-made to occurrence. That window is open. At the bottom of the soft market trough, that's when pricing is competitive enough to accommodate a cost effective move from claims-made to occurrence.

The hard market will return and nobody knows when. It is fair to say the market is very soft and it's historically very soft before the transition to a hard market begins. Trying to time your senior living client's move to occurrence is risky. A hurricane blowing a million barrels of oil inland could shift the market. A declining stock market and a terrorist attack could cause the market to harden over night. The safe strategy is to test the market…now.

Do your homework and identify the markets that are committed to writing on an occurrence basis. Bring your best accounts to the table and make the move. Once your best accounts are securely written on an occurrence basis, you will have enormous renewal leverage when the market finally cycles into a hard market.

The author  

Art Seifert is chief executive officer of Bunker Hill Underwriters.