Medical Malpractice Insurance: That Pesky "Tail" Problem
by John E. Barton, JD, MBA, CPA, and Robert A. Bitterman, MD, JD, FACEP, Contributing Editor
Emergency physician groups have dealt with the realities of claims-made liability coverage for years now, yet many continue to be unpleasantly "surprised" when it comes to their "tail coverage." Tail coverage: allows the insured an extended period of time for the claim to mature or be reported to the insurance company.
Note From the Authors. This article examines some of the commonly overlooked issues related to the structure of claims-made insurance coverage and its "tails," and the impact that poor planning related to such coverage can have on the group and the individual emergency physicians.
Three real-life scenarios are presented. Please recognize that the language in each malpractice carriers' policy is different and that the specific language of your policy governs your particular tail coverage. Additionally, every situation is highly fact dependent and these scenarios may not arise under your policy. Please discuss your particular situation with an adviser you trust if you have any concerns.
Our goal is to raise your awareness of the potential difficulties related to tail coverage. After reading the explanation of the concepts that follows, and the consequences of the scenarios presented, you should have a greater understanding of how to effectively address your liability "tail."
Scenario One
Group A has six emergency department (ED) contracts. The group has claims-made coverage under a group policy all six of the facilities are insured under one policy. Group A loses one of the contracts and ceases to provide service at the facility on 12/31/07. The group policy stays in force and no "tail" is purchased for the lost contract.
What is the impact to Group A of the lost contract?
Scenario Two
Group B is a 15-physician ED group. Group B has claims-made coverage with per physician policy limits rated on a full-time equivalent (FTE) basis. Group B had struggled to find and pay for insurance coverage, so it purchased a $100,000 per occurrence deductible with an annual aggregate deductible of $300,000 for the policy holder. There is an oral agreement among the physicians that the deductible will be borne by all members of the group. Physician X leaves the group for greener pastures; the group purchases the tail and the tail policy is issued with physician X as the policy holder.
What is the impact on physician X?
Scenario Three
Dr. Newbie joins Group C on 1/1/2003, three years after completing her residency. Dr. Newbie's employment contract with Group C provides that C will provide Newbie with an individual claims-made policy with $1million/$3million limits. Dr. Newbie's policy is unrestricted, but C is not obligated to purchase Newbie's "tail." If the tail is purchased, the tail policy will be issued in Newbie's name.
Dr. Newbie begins moonlighting for Group Y on 07/01/07. Group Y has a "slot rated program" with a retroactive inception date of 07/01/07 the day she began moonlighting for group Y. At 12/31/07 Newbie decides to leave Group C to go work for Group Y.
Will Group Y provide Newbie "prior acts" coverage for the period Newbie was with Group C? What is the impact on Dr. Newbie? What impact does Newbie's policy with Group C have on Group Y?
Some Terminology and Basic Concepts
Basic definitions:
- Deductible the portion of a covered loss that is not paid by the insurance company.
- Group policy a single policy that combines a number of locations or a number of insured physicians (the "insureds") into one policy.
- Slot policy a policy that covers a position or "slot" instead of being issued to a named single individual physician.
- Rating the basis on which rates are applied to determine the amount of premium that will be paid to purchase insurance (hours, visits, full-time equivalents, etc.)
- An "unrestricted" policy is a policy that covers the individual physician, even if the physician works at multiple hospitals or at hospitals outside of the ED group.
- A "restricted policy" for an emergency physician typically just covers the physician's practice at hospitals under contract with the ED group that is providing the insurance for the physician. The physician would have to arrange additional insurance coverage if working in an ED for another group.
Occurrence vs. Claims-Made Coverage and How the 'Tail' Comes Into Play
In a kinder and gentler time, "occurrence" malpractice coverage was prevalent in the marketplace. An occurrence policy covers any incident that occurs while the policy was in force, regardless of when a claim related to the incident is presented to the insurance company. Contrast that with a "claims-made" policy, which covers any incident occurring during the policy period, so long as the claim that results from the incident arises during the "reporting period" (typically while the policy is in place and for 60-90 days after the policy has expired). This is not to be confused with a "claims-made and reported policy" which requires that the claim be made and actually reported to the insurer within the policy period. This type of policy can be problematic if the insured physician becomes aware of the claim very late in the reporting period.
So "claims-made" and "claims-made and reported" policies both have a timing element associated with the claims. If an incident occurs during a claims-made policy period but does not mature into a claim until after the coverage expires, the claim would not be covered. To deal with this liability exposure, the insured must either purchase new coverage with a retroactive date starting with the end of the old claims-made policy (called "prior acts" coverage with a stipulated retroactive date) or purchase a "tail."
A "tail" is really just an "extended reporting period" endorsement. The "tail" allows the insured physician an extended period of time for the claim to mature or to be reported to the insurance company. The "tail" contract can extend the reporting period for different lengths of time: 1, 2, or 5 years or even indefinitely. If the claim is reported during the tail period, it will be covered by the insurance contract. If the claim is reported after the original reporting period or after the extended tail period, whichever period is longer, the claim will not be covered.
"Tail" Mechanics
If a "tail" is not purchased, and the subsequent malpractice insurance coverage does not contain "prior acts" coverage with an inception date back to the date the old claims-made coverage stopped, there is uninsured liability exposure for the physician. If a claim related to an incident that occurred during the policy period arises during this "bare" period, there is no insurance coverage and the physician would be personally liable for the amount of the claim.
Typically, medical malpractice policies provide that when the policy is terminated (for any reason) the insured physician has the right to purchase a tail. The policy language will vary regarding the mechanics of the purchase. In most instances, when the insured physician gives notice of termination to the insurance company, the company will provide the insured physician an offer to purchase the tail. The insured then accepts the tail offer by paying the premium within the timeline laid out in the underlying policy. Nonpayment or late payment of the premium will be deemed a rejection of the insurer's offer for the tail policy, meaning the physician will not have tail coverage.
Whenever the malpractice insurance company (often referred to as a "carrier" by the states) is "admitted" in the state in which the policy was written, the price of the tail is determined in accordance with rates that the company files with the state. If the carrier is not admitted, then the rate will vary depending on how long the claims-made policy has been in force. If the carrier is not "admitted" in your state, then the details regarding the "tail" coverage will be included in the contractual language of your policy.
Discussion of Scenario One
Group A has six ED contracts. The group has claims-made coverage under a group policy all six of the facilities are insured under one policy. Group A loses one of the contracts and ceases to provide service at the facility on 12/31/07. The group policy stays in force and no "tail" is purchased for the lost contract. What is the impact of the lost contract to Group A?
Since the group policy stayed in force, technically no "tail" had to be purchased at the time the group lost one of its ED contracts. However, since this is claims-made coverage, prior acts exposure still exists from patients seen before the insurance coverage there ceased. Depending on the terms of the policy issued by the insurance carrier, the group could be charged an additional premium each year to fund the prior acts exposure. That's right, though no "tail" is issued, under the group policy contract charges may be assessed against Group A that the physicians at the five remaining facilities will have to pay. Total premiums charged on an ED that sees 30,000 visits annually could easily exceed $300,000.
What is the impact to Group A if the exposures were not resolved through the payment of the additional premium? The members of Group A now have a new unfunded contingent liability.
Assume that all physicians are retained and assimilated into the five remaining facilities. Assume further that five months later a claim arises from an incident at the lost facility against Dr. Lucky, a member of Group A. Since the group policy is still in force, Lucky's claim would be covered. In fact, if the group policy remained in force for an extended period, the incurred but not reported claims that existed at 12/31/07 would presumably arise and the exposures would essentially be resolved, eliminating the potential liability.
However, what happens if the group policy is terminated (for whatever reason) within a year? The incurred but not reported exposures related to the lost facility would not all have matured and presented. As a result, the exposures related to the lost facility would be included in the tail premium Group A would have to pay when the group policy is terminated. Obviously, this would be an additional cost that the group may not have been expecting.
Until the incurred but not reported exposures related to the closed facility are mature, the members of Group A would have a contingent liability relating to the tail for the lost facility.
Discussion of Scenario Two
Group B is a 15-physician ED group. Group B has claims-made coverage with per physician policy limits rated on a full-time equivalent (FTE) basis. Group B had struggled to find and pay for insurance coverage, so it purchased a $100,000 per occurrence deductible with an annual aggregate deductible of $300,000 for the policy holder. There is an oral agreement among the physicians that the deductible will be borne by all members of the group. Physician X leaves the group for greener pastures; the group purchases the tail and the tail policy is issued with physician X as the policy holder. What is the impact on physician X?
The focus under this scenario is on the details associated with the issuance of the policy. Given the structure and rating mechanism of the policy, Group B has no real choice. For physician X to be protected, a tail will have to be purchased. Further, the group has already addressed the question of who will bear the cost. Physician X will be the one potentially surprised here the "tail" policy will be issued in Dr. X's name with a $100,000/$300,000 deductible! The tail will be issued with same deductible that exists for Group B. Now Dr. X, having left the group, will have to fund the deductible on his own if a claim arises.
Was the impact of the deductible fully understood by Group B? If understood, was it adequately communicated to the individual physicians? Will the officers of Group B be covered under the group's D&O policy for the lawsuit that will be filed by Dr. X if he gets sued?
Discussion of Scenario Three
Dr. Newbie joins Group C on 1/1/2003, three years after completing her residency. Dr. Newbie's employment contract with Group C provides that C will provide Newbie with an individual claims-made policy with $1million/$3million limits. Newbie's policy is unrestricted, but C is not obligated to purchase Newbie's "tail." If the tail is purchased, the tail policy will be issued in Newbie's name.
Newbie begins moonlighting for Group Y on 07/01/07. Group Y has a "slot rated program" with a retroactive inception date of 07/01/07 the day she began moonlighting for group Y. At 12/31/07 Newbie decides to leave Group C to go work for Group Y.
Will Group Y provide Newbie "prior acts" coverage for the period Newbie was with Group C? Of course the answer is "it depends," but its likely that Group Y will not be inclined to pick up the prior acts coverage for Dr. Newbie. Group Y has designed its program so that the "slot" coverage will continue to stay in place regardless of turnover so no "tail" purchases will be required until the coverage for the "slot" itself changes and necessitates it. Although Dr. Newbie may have the negotiating clout to convince Group Y, it is going to be a difficult sale.
What is the impact on Dr. Newbie? If Newbie leaves, she will be forced to individually purchase the "tail" or go unprotected. The cost of the tail will depend on the details of policy in force and the premium charged, but a $50,000 to $80,000 cost could easily be possible. This unexpected (after tax) expense may cause Dr. Newbie to reconsider her departure.
What impact does Newbie's policy with Group C have on Group Y? The unintended consequence of the unrestricted policy is an overlap of limits. Groups C and Y's policies would both offer coverage for claims that occurred while Newbie was moonlighting for Y.
Conclusions
In the days of occurrence coverage, things were much easier. Though occurrence coverage is once again becoming available, it is not prevalent and the conversion to occurrence comes with its own set of potential financial repercussions. As a result, most groups will be constrained to continue with claims-made coverage. Unfortunately, the complexities of this coverage create significant exposures if not properly understood and planned for.
The starting point for overcoming these potential exposures is to take stock of your current arrangements, with particular focus on how the current structure may impact the group and the individual physician members. If necessary, seek out technical advice from an adviser you trust and then act. The current insurance market is relatively soft and carriers are pricing aggressively. It is best to address your problems now, while solutions are affordable.
Sources
For more information, contact:
- John E. Barton, JD, MBA, CPA, The Hylant Group. Phone: 513-967-1983. E-mail: [email protected]
- Robert A. Bitterman, MD, JD, FACEP, President, Bitterman Health Law Consulting Group, Harbor Springs, MI, Vice President, Emergency Physicians Insurance Company (EPIC), Auburn, CA. Phone: 231-5267979. E-mail: [email protected]
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