Today, most U.S. physicians are employed by a physician group or hospital. As employed physicians change jobs, insurance brokers, and advisors continue to have discussions about who is financially responsible for payment of the tail premium of the physician’s professional liability or medical malpractice policy.
As a refresher, ‘claims-made policies’ respond to claims made during a policy year, while insurance coverage is in effect. If a physician terminates coverage with one insurance company because they decide to switch carriers, retire, or change employment, the financial responsibility for payment of the tail policy, which covers any claims made after the policy expiration, must be determined.
There are a few options for managing the risk of future claims.
First, a tail policy may be purchased on the policy that was in place for services previously provided within 30 days of the policy termination. Depending on the employment agreement, the physician or the employer may purchase this policy. Tail policies can cost approximately 200 percent of the previous year’s insurance premium, often bringing employment negotiations to a screeching halt. If the physician shares an insurance policy with their employer and/or other physicians they may not need to purchase a tail policy.
Alternatively, the insurance company for a physician’s new employer may offer “prior acts” coverage, which extends the retroactive date and may be less expensive. Often, this coverage is not offered as it may be cost prohibitive or it may require covering a claim in a state outside the carrier’s operating region.
While physician groups and “mega-groups” merge and employ more physicians, the decision on how to handle insurance coverage is increasingly critical. Some are consolidating coverage of their employed physicians into one centralized, master insurance policy while others are allowing physicians to maintain the policy they had at the time of employment. If the group is large enough, it may be successful in negotiating some involvement in settlement authority or other policy enhancements.
Tail policies and corresponding premiums are not always an issue for recent graduates, as they are typically insured by the hospital where they completed their residency. According the conducted by Merritt Hawkins, ninety percent of physicians completing their residency are moving to an employer-based model in which insurance is covered by their new employer. Groups that find it more difficult to recruit physicians because they may be geographically challenged are often obliged to pay for the tail premium or prior acts coverage to attract and recruit talent. Conversely, if the employer is in a geographically desirable location, the new employer has more liberty to require the physician purchase tail coverage prior to becoming an employee.
The employment contract should always address which party is financially responsible for the tail from the physician’s prior carrier as well as which party is responsible for the tail should the physician’s employment be terminated by either the physician or the group. Some commercial carriers offer free tails upon retirement or total disability, but the physician may need to be fully retired. If the new employer group agrees to pay for the tail policy, the group’s risk manager or legal counsel should consider the length of time the physician has been in practice and the potential cost of this expense.
We’ve seen employment negotiations fall apart over financial responsibility for the tail policy premium. Therefore, it is imperative that the responsibility for this payment be discussed early in the negotiation process.
There are many factors that physician groups should consider. They should work with their insurance brokers and advisor to ensure all risks are considered.