Does your employer provide your medical malpractice insurance coverage? Are you looking for new employment? Are you in the market to purchase a professional malpractice insurance policy? Are you planning to retire soon?
If you answered “yes” to any of these questions, you likely will confront the concept of “tail” insurance at some point in your medical career.
Now is the time to dust off your employment agreement and professional liability insurance policy and review what happens in the event a lawsuit is filed against you after you leave your current employer. This means paying special attention to whether your professional liability insurance policy provides for claims-made or occurrence-based coverage, and, if it’s the former, who is responsible for purchasing tail coverage.
When Do I Need Tail Coverage?
Tail insurance issues frequently arise when a physician leaves his or her place of employment, whether due to switching jobs, retirement, or a buyout of a physician’s ownership interest. If the physician is leaving an employer that has claims-made professional liability insurance, the physician’s insurance coverage might not be seamless. Instead, tail or similar coverage is required.
Claims-made coverage protects a physician for professional negligence, as long as a two-part test is met: First, the physician must have the claims-made coverage in place when the negligent act occurs (with employer No. 1); second, the physician must be covered by the same carrier when he or she is notified of the claim while employed by employer No. 2. If either test is not satisfied, the current claims-made insurance policy will not provide coverage to the physician in the event a lawsuit is filed for an act of negligence that took place while employed by employer No. 1. Alternatively, some employers offer “nose” coverage from its insurance carrier, which will cover negligent acts that might have occurred during your current job. The vast majority of professional liability insurance policies written for medical practice groups are for claims-made coverage.
If, however, an employer has occurrence-based professional liability insurance, the departing physician’s insurance coverage is seamless and no tail insurance is required.
Here is a common example of what happens when a physician leaves an employer with claims-made professional liability coverage:
An employer maintains claims-made professional liability insurance coverage for its physicians with ABC Insurance Co. A physician decides to leave his or her current employer and accepts employment by a new employer, which maintains claims-made coverage with XYZ Insurance Co.
Within a few months of the physician’s new employment, a medical malpractice lawsuit is filed by a patient for medical treatment the patient received when the physician was employed by the former employer. By leaving the former employer, the departing physician automatically fails the two-part test for claims-made coverage, as the second prong is not satisfied. Therefore, even though the physician has liability coverage through the new employer, this insurance policy will not cover the lawsuit described above.
Unless the physician has tail insurance (or nose coverage) to cover lawsuits related to the former employment, a gap in liability coverage will exist. If claims-made insurance is the benefit you have received in your employment agreement, it is imperative that you understand that tail coverage is necessary when you leave.
However, if a physician leaves and a) is subsequently employed within the same state and b) stays insured by the same insurance carrier, then the insurance carrier will provide continuous coverage and no tail insurance policy is needed.
Who Pays the Premium?
If the physician will need tail coverage, the next critical question is, Who pays for such coverage? Even though tail coverage comes into effect when a physician leaves an employer, tail coverage should be addressed before the physician informs the employer of their departure; an even better approach would be while the employment agreement is negotiated. Payment of tail coverage should be defined in the physician’s employment agreement.
In terms of payment for the coverage, there are several options. First, the cost of tail coverage can be attributed 100% to either physician or employer. In specialties for which recruitment of new physicians is challenging (i.e. HM), employers are more likely to pay a substantial portion, if not all, of the cost as a benefit or inducement.
Second, the physician can connect the payment of tail coverage to the manner in which employment is terminated. For example, if the physician terminates the agreement for cause or if the employer terminates the physician’s employment without cause, the employer could be required to pay for the tail insurance. Alternatively, if the physician terminates the agreement without cause or if the employer terminates the physician’s employment with cause, the physician could be required to pay for the tail coverage. Frequently, physician employment agreements require physicians to pay for tail coverage if the physician violates a restrictive covenant (e.g. non-competition).
A third option is to split the cost of tail insurance between the former employer and the physician based on a percentage, or to include a vesting schedule, for example, such that the former employer pays one-third of the coverage if employment ends in the second year, two-thirds of the coverage if employment ends in the third year, and 100% of the coverage if employment ends in the fourth year or later.
Whatever arrangement the parties agree upon should be included in the physician’s employment agreement in order to prevent an expensive surprise.
Review Your Policy
Now that you have an understanding of claims-made coverage, occurrence-based coverage and tail insurance, it’s time to review your insurance policy. When reviewing your current policy, look for answers to the following important questions:
- Is your policy claims-made or occurrence-based?
- Does your insurance policy only cover professional negligence claims? Does your policy also cover claims of unprofessional conduct reported to state medical licensing boards? Does your policy also cover medical staff bylaw disputes and state licensing matters?
- How is loss defined? “Pure loss” is coverage for the amount awarded to the plaintiff; “ultimate net loss” covers what pure loss covers, plus attorneys’ fees and costs.
- What procedures do you need to follow in order to properly notify the insurance carrier of a claim? Are you precluded from full coverage if you fail to properly report?
- What does the “duty to defend” provision cover? Will you be reimbursed for lost wages for your time in court? What services will be provided as part of your defense?
- What does the “consent to settle” provision say? If a settlement is negotiated between the plaintiff (patient) and the insurance company and the physician does not consent to the settlement, is the physician responsible for the ongoing defense costs and the amount of any verdict in excess of the recommended settlement amount?
It is important to both understand your insurance policy and what your employment agreement says about the policy. If you will be responsible for purchasing a tail policy at the end of your current employment, you should be well aware—and financially prepared—for this post-employment responsibility. Make sure your tail is not left exposed.
Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC in Chicago. Write to him at email@example.com.