Tail Insurance: Watch out for the Gotcha!
With the right advice and proper planning, you can avoid the traps
associated with this extended coverage.
Publish date: Feb 15, 2008
By: Wayne J. Guglielmo
When a Midwestern internist thought about leaving his group practice, he faced a dilemma: Resign before his employment term was up—which would mean paying $50,000 for tail
insurance to protect him from malpractice claims that might be filed after his current policy was terminated—or stay in a job he disliked for the remaining two years of his contract.
He chose the first option, though he found it "frustrating and upsetting" to have to buy the extra insurance, formally known as "extended reporting coverage."
It could have been worse. "There are a lot of doctors, especially in some of the more litigious specialties, who just can't afford this coverage," says John W. Miller II, a principal at Sterling Risk Advisors in Marietta, GA. But the danger of rolling the dice and going bare, he says, is "potential bankruptcy down the road." Ironically, that's less likely to be the result of any actual judgment than of the cost of contesting a claim, which can reach $400,000 or more in defense attorney fees.
Physician owners also face a risk if a doctor they've hired can't—or won't—purchase tail coverage when he leaves. In such cases, the group itself could end up being the plaintiff's deep
Tail coverage-also known as extended reporting coverage-can be expensive, especially if you're in a high-risk specialty.
It's in the interest of employed doctors not to be contractually obligated to buy tail insurance when they leave.
Less expensive nose, or "prior acts," coverage may be an alternative for some physicians. Employment agreements should spell out who's responsible for buying tail insurance and under what circumstances.
pockets. "When a physician is hiring other physicians, the employment agreement needs to spell out who has the obligation to purchase the tail and how that mechanism will work," says Philip Reischman, president and CEO of Gallagher Healthcare, in Houston.
In fact, it's in the interest of both parties to spell out as clearly as possible who's responsible for buying what and when. To help you do that, we've looked at the tricky world of tail coverage from each side of the employment desk.
The deal on tail coverage
If you're an employed physician, it's wise not to be contractually obligated to buy tail coverage when you leave. The reason, of course, is the cost. A tail policy can run anywhere from 150 to 300 percent of your existing claims-made premium—a sizeable chunk for any doctor but an especially big bite for ob/gyns, neurosurgeons, and other high-risk specialists.
Many employment agreements won't let you off the hook completely if you leave prematurely, however. In such a case, you may end up paying most or all of the bill, as the Midwestern internist did. "In many contracts, the deal on tail is this: 'If we fire you, we pay. If you fire us, you pay,' " says Sterling Risk Advisors' John Miller.
If you do leave for greener pastures, your least expensive option—assuming your old
employment agreement permits it—is to purchase "nose," or "prior acts," coverage from your new carrier. The insurer provides the coverage in the form of a claims-made policy with a retroactive date that's the same as the start date of your old policy. That way, if a claim comes in after the old policy is terminated, you're still protected. Unlike tail coverage, which has a set multi-year term and coverage limits and is paid in one lump sum, nose insurance is renewed and paid annually, making it much more affordable. There are potential pitfalls, though.
If you move to another state and your new carrier doesn't do business in your old state, it's unlikely to offer you nose coverage, since it won't be able to defend you if a prior action were to result in a claim against you. If your new employer contracts with one of the big national firms— The Doctors Company, Medical Protective, or ProAssurance, which do business in most states— you may be in luck. But even such big firms sometimes balk at extending prior acts coverage. "Let's say you're moving from Cook County, Illinois"—where malpractice insurance rates have historically been among the highest in the country—"to small-town Colorado," says C. John Keane Jr., president of The Keane Insurance Group, in St. Louis. "Even if your new and former groups have the same national carrier, that company is likely to say to you, 'We can't give you insurance for your prior acts because our rates in Colorado, which are one-fifth of what they are in Cook County, won't support such coverage.' " A physician in that situation, adds Keane, would have little choice but to purchase more-expensive tail insurance on his own. If he can't, he risks jeopardizing his new job.
For this reason, doctors changing jobs need to do their homework. If you think you might be saddled with a huge tail bill, talk to your new employer about helping you out—either directly or through some form of financing arrangement—before you sign an agreement and begin loading the moving van. "You're in a weaker negotiating position after the fact," says Miller.
Put it in the contract
Doctors on the other side of the table also need to do their homework. Step One, insurance experts advise, is for practice partners to draft an employment agreement that stipulates who'll buy tail coverage should the new hire leave prior to his full term. Groups that ignore this contractual step, experts caution, may pay the price down the road.
"Where the contract is silent, courts have generally identified the employer as being the provider of the tail, especially when the employee may have signed an agreement without seeking legal counsel," says Paul Frisch, general counsel of the Oregon Medical Association (OMA). To avoid this, Frisch says, groups should always insist that a prospective hire have the employment
contract reviewed by an attorney prior to signing it.
The contract itself should be as specific as possible. If the employee is obligated to buy tail coverage under certain conditions, those should be spelled out. Some groups go even further, says Phil Reischman, requiring prematurely departing employees "to reimburse the practice for the cost of purchasing the tail." That way, he says, the practice itself is in control of the process, although he acknowledges that recruiting may be difficult with this provision in place.
Savvy groups also include another item in their agreements—corporate coverage. Without this, an employer has no guarantee that the departing physician will include the group in his tail policy. That can spell big trouble down the road if a claim names both the former employee and his corporate employer, as is typically the case. And even with this provision in place, a group would still be vulnerable if the departing physician tries to ignore or is unable to meet his contractual obligations.
To protect themselves, practice partners need to take an extra step. "I advise all employers with two or more employed doctors in their practice to have a separate limit for their corporation," says Miller. "That way, if the departing physician's negligence results in a claim, the
corporation's protected."
Keane points to another reason why a separate corporate policy makes sense. "If both the former employee and the corporation are named in a suit, you now have two sets of limits, effectively doubling the amount of your coverage," he says. Corporate coverage, Keane adds, is "relatively cheap," typically no more than 10 percent of the collective premium of the group. Some
malpractice insurers even cap their corporate policy premiums, so you end up paying a set amount, no matter how large your group's collective bill.
Whether you're an employee or an owner, there are some unique aspects of tail coverage that you should be aware of:
Free tail coverage. Physicians become eligible for this in one of three ways: They die, in which
case the insurer assigns the free coverage to their estate; become disabled; or retire. To qualify as a retiree, the doctor must have been with the insurance company for at least five years and have reached the designated retirement age, typically 55. What not all doctors are aware of, however, is that the retirement criteria vary from company to company.
"A physician called me up recently and said he was retiring from obstetrics and wanted his free tail," says Miller. "After I told him I was sorry to hear he was retiring, he replied, 'Oh, I'm not retiring—I'm starting a job as a clinical professor.' I told him I was sorry to have to share this with him, but he was going to have to pay for his own tail coverage."
Some insurers prohibit a retiring physician from doing anything medical, including writing scripts for family members. Others are more lenient, and almost all will permit doctors to volunteer their services without pay. "More and more carriers are adopting underwriting guidelines that take into account the different situations," says Reischman.
But what happens if you retire, obtain free tail coverage, then get bored and want to re-enter medicine?
"We're asked that question a lot," says Keane, who advises doctors to notify their insurer of their decision, even though they risk losing their free coverage. Still, he says "a lot of doctors just do what they want, figuring the company will never know what it doesn't know"—a decision that's likely to be dangerous if a malpractice problem arises down the road.
The free tail issue also surfaces when practices switch carriers. "It's important that the new carrier grandfather active group members who've already qualified for their free coverage," says Miller. Some insurers, he says, won't do this immediately, but "will shorten the time frame for when senior physicians are eligible to receive their free tail after they retire."
Step-down coverage.This is an option for physicians who want to jettison the riskier aspects of
their current practice, taking advantage of the lower malpractice premiums. A case in point is the ob/gyn who's decided to stop delivering babies and just focus on gynecological surgery. She'll pay the lower gyn-only premium going forward but will still need to cover her past obstetrical exposure. A step-down policy will accomplish both things.
Insurers compute step-down premiums in different ways. At one extreme, says Keane, are companies that provide eligible recipients with free step-down coverage, just as they would give free tail insurance to retirees. At the other extreme, he says, are companies that force doctors to get Ob tail coverage as if they were retiring—but to pay for it themselves—and "then start them on a brand new claims-made policy at the Gyn rate." In between, Keane says, are all kinds of
variations, including insurers that use a "blended" rating system, which keys tail charges to the difference between Ob and Gyn rates.
Delay in purchasing.Doctors buying tail insurance have to do so within 30 days of canceling
their current policy. Once that 30-day limit passes, says Miller, the option is gone. Companies impose this limit, he says, to avoid what's known in insurance lingo as "adverse selection"—the idea that the only physicians purchasing tail insurance would be those who suspect they have a legal problem.
There's another big reason not to delay buying coverage. "If your tail insurance doesn't mesh perfectly with your ongoing insurance, some companies will see this as a gap in coverage and refuse to insure you," says the OMA's Paul Frisch. And if you can't obtain malpractice coverage, that, in turn, could put the kibosh on any promising job offer.
Payout arrangements. "If you can't afford to buy tail or step-down coverage, talk to your insurer
about an incremental payout arrangement," says Frisch. In such arrangements, the physician is expected to pay a certain percentage of the total policy up front, and then lesser percentages going forward—40 percent, 30 percent, and 20 percent, for instance. The company might agree to this because its risk isn't at 100 percent the day you switch jobs or step-down your practice. The bottom line? There's more than one way to ensure that you're protected for prior actions, and the coverage that's best for you depends on your circumstances. While tail, or extended
reporting, coverage can be tricky, when you're armed with information, it becomes manageable. "If doctors would only take the time to talk to their legal advisers, brokers, or insurers," says Miller, "tail insurance needn't be the gotcha that it often is."
