A significant majority of all professional liability coverage available to physicians these days is provided on a “claims-made” basis, with a claim being covered only if (i) the claim arose out of professional services rendered during the term of the professional liability policy, and (ii) notice of the claim is provided by the insured during the term of the policy. (This is in contrast to “occurrence coverage,” where a claim is covered if it related to professional services rendered during the term of the policy, regardless of when notice of the claim is provided by the insured.) Where termination of the physician’s employment results in termination of the claims-made professional liability insurance policy, there may be a break or gap in coverage, depending upon the new professional liability coverage put in place with the physician’s new employer. Specifically:
- The physician’s prior coverage would no longer protect the physician, since that coverage terminated; any claim subsequently brought against the physician, relating to professional services rendered while an employee, would be asserted outside of the policy period.
- Conversely, the physician’s new coverage, if also a claims-made policy, would only cover professional services rendered while an employee under the new employment arrangement; it would not cover claims arising out of services rendered under the former employment arrangement, even if asserted while the new policy was in place.
In some cases, this gap or break in coverage can be handled without the need for “tail coverage” – - or, in formal terms, an “extended reporting endorsement,” which extends the time during which a claim can be filed under the old malpractice policy for an additional period, ranging from one year through forever, depending upon the additional premium paid. For example, some insurers are willing to provide “nose coverage”, which would involve the new insurer agreeing, for a relative small premium increase, to look backwards and cover the physician for claims arising prior to the start of the new coverage, if the claim is asserted while the new policy is in place. Or, even better, some insurers agree to use the physician’s original “retroactive date” – - the date on which the physician’s prior coverage started – - as the agreed upon start date for coverage under the new policy. (This normally occurs with relatively new physicians who have not yet had time to establish a claims history.) Finally, some insurers provide free “tail coverage” for physicians who retire or who practice for a minimum number of years under the same policy.
In the absence of one of these special cases, however, the physician will need “tail coverage” in order to be fully protected against malpractice liability. (Note that the employer will want this coverage to be in place as well, as the absence of such coverage might expose the employer to additional risk, should the employer be sued as a result of the professional services rendered by its former physician employee.) This may be an expensive proposition, however, as “tail coverage” premiums can be equal to or as much as double the amount of the annual premium on a mature claims made policy.
Under the physician’s employment agreement, who pays for that coverage, following termination of employment? In some cases, the employer will require the physician employee to pay, regardless of the grounds for termination. This is becoming less likely, though, as physician recruitment becomes more competitive and the cost of bringing in a new physician employee increases. Conversely, the employer may agree to pay the cost of the “tail coverage,” regardless of the grounds for termination. This is relatively rare. In between, there are any number of “fault based” or “no fault” provisions which may be included in the physician’s employment agreement, to deal with payment for necessary “tail coverage”:
- If either party terminates without cause, that party is responsible for paying the cost of the “tail coverage”.
- If either party terminates with cause, the other party is responsible for paying the cost of the “tail coverage”.
- The physician employee pays in most cases, but not if he/she is terminated without cause or if he/she retires.
- The parties split the cost 50/50, regardless of the type of termination.
- A phase-in arrangement can be used, where the percentage of the premium cost paid by the employer increases, as the physician employee remains with the practice for a longer period of time.
The Bottom Line: There is a lot of misinformation floating around about “tail coverage.” From this article alone, it should be clear that “tail coverage” is only needed to cover a break or gap in coverage, and only if another option (such as “nose coverage” or use of an earlier “retroactive date”) is not available. When “tail coverage” is needed, however, it should be dealt with specifically in the physician’s employment agreement, with provisions identifying who is responsible for paying the costs associated with that coverage, and what happens if the responsible party fails to do so.