How does tail insurance work? If you are a high-level healthcare professional like physicians, NPs, PAs, and dentists, you will need medical malpractice insurance while you’re practicing. And then depending upon what type of coverage you have; you may need tail insurance. I’m just going to break down the common types of malpractice insurance, and then when tail insurance is necessary and the details of when it needs to be paid, how long it needs to be paid, how much it costs, that type of thing. The two most common malpractice insurance types in private practice are either an occurrence-based policy or a claims-made policy.
When Do You Need Tail Insurance?
An occurrence-based policy simply means a policy must be in effect when the malpractice incident occurs. And in that scenario, tail insurance is not necessary.
Under a claims-made policy, a policy must be in effect when the claim is made. It’s possible if a provider leaves an employer, there’s going to be a gap between their last day at work and then the last day somebody can sue them, and it’s called the statute of limitations. For most states, it’s two years. There are some exceptions, but in general, two years is a good rule of thumb in this situation. Let’s just say for this case, it’s two years. So, if you leave the employer, then there’s going to be a two-year gap where someone can still sue you for the things you did for that employer. And so, in that scenario, you need a policy that covers that gap, and that’s known as tail insurance in the industry.
If you have a claims-made policy, you need tail insurance, if you have an occurrence-based policy you don’t.
Who Should Purchase Tail Coverage?
If you do have a claims-made policy, the employment contract is going to dictate, one, who pays the underlying premium. Ninety-nine out of a hundred times, that’s going to be the employer, if you’re an actual employee and not an independent contractor. And then the employment agreement is also going to cover who pays for tail insurance. Now, this can vary greatly from contract to contract. If you are working for a private physician-owned practice, I would say, more likely than not that the provider is going to be responsible to pay for tail insurance. It’s rare that a physician-owned practice would pay for tail insurance. I’d say maybe 75% versus 25%. So, 75% must pay for their own tail. In the contract, it’s going to state, alright, the physician is responsible to pay tail insurance. Let’s kind of break down the details of that.
The tail policy will need to be in place prior to the end of the employment relationship. So, let’s just say the physician gave notice, and there’s a 60-day without cause termination. They’re going to have to get that policy secured before the end of that 60-day period when they leave.
Average Tail Coverage Cost
Tail insurance generally costs about twice what your annual premium is. This varies based upon specialty. So, if maybe your primary care, it could be around 5,000 to 6,000. Whereas if you’re an OB-GYN, it could be 40,000 or 50,000 a year. A good rule of thumb is twice what the annual premium is, is what you’re going to have to pay for tail insurance. It’s a one-time cost.
You’re not going to have to pay it every year, but you will have to pay all the money upfront to purchase the tail prior to the end of the employment relationship.
How Long is the Duration of a Tail Insurance?
Now, how long does tail insurance last? Well, it depends on what type of policy you bought. You can buy a one-year tail, a two-year tail, a five-year tail, and an unlimited tail.
In my opinion, it seems shortsighted to purchase a short tail. Why would people do that? Well, it’s just a cost. Now, I said two times is kind of the average, but it can usually range anywhere from 1.5 times all the way up to 3 times what the annual premium is based upon how long the tail is. And then also, how long you’ve been with the employer and that type of thing.
Determining how long you should get should be easy. It should be an unlimited tail; it should go on forever. You don’t want to have a scenario where you are not covered at the time that a claim is made. And that could be financially crippling for a physician or any kind of healthcare provider if they’re ultimately found guilty or they must reach a settlement.
Add Tail Coverage to Negotiations With Your New Employer
Now, you can negotiate who pays for tail insurance coverage in the employment agreement. If you go to the employer and say, hey, I’d like you to purchase my tail, they may say, no.
One strategy we’ve been successful with is asking the employer to then forgive a portion of the tail cost based upon how long the provider has been with the employer. For instance, let’s say the physician has a three-year initial term, and they complete the three years negotiating with the employer is one way of getting out of having to pay for tail insurance.
Another would be if your new employer pays for your old tail, that’s called nose insurance. Or this isn’t going to work if you’re employed in the hospital network, but if you are with a private-owned practice, and then you leave for another private-owned practice within that state, and then they use the same insurance carrier, generally, the insurance carrier will just roll over your old policy into your new one, and then you won’t have to purchase tail insurance.
Now, there’s no way you’re going to know, okay, in my next job when I leave this one, whether they have the same insurance or not, but that’s another way of getting out of having to pay for tail insurance coverage.
So, that’s how tail insurance works. It just covers the gap between when you leave an employer, and then the last day somebody can sue you, it’s around twice what the annual premium is, and then you can negotiate who ultimately is responsible for covering the expenses associated with it.
What are the Types of Medical Malpractice Insurance?
What are the different types of medical malpractice insurance coverage? This is a frequent topic that comes up when I’m reviewing a contract. I would say, during med school or training, most physicians are not given a breakdown of the different types of malpractice insurance coverage. So, it’s always a good idea when I’m talking to a physician who is relatively new and doesn’t understand the different professional liability insurance. Just to kind of give a brief breakdown of each one and maybe the pros and cons of each insurance policy. There are three main types of professional liability insurance policies for physicians. You have self-insurance programs from big hospital networks, and then most private practices will utilize one of two, either occurrence-based coverage or claims-made insurance coverage.
Let’s just kind of talk about three of them. First is self-insurance. Large hospital networks will usually have their own policy in the simplest way: they’ll set aside a pot of money, and pay claims out of that. In that circumstance, generally, the physician doesn’t have to worry about purchasing tail insurance coverage. That’ll be covered by the employer’s self-insurance program. This is great. I mean, it’s great insurance when a physician never has to worry about tail coverage and doesn’t have to worry about paying for the underlying premium, that is kind of a nice, secure feeling. That’s what most large hospital networks utilize. The next type is occurrence-based coverage. And what that means is an insurance policy has to be in effect when the event actually occurs.
Any kind of malpractice event is going to occur while you’re employed with the employer. So, you are covered in perpetuity if an occurrence-based policy is in place and then something happens. The benefit of occurrence-based insurance is that you don’t need to purchase tail insurance. The downside is it costs more than a claims-made policy. A good rule of thumb is that occurrence is about a third more expensive than claims-made policies annual your premium. So just to give an example, let’s say you have a claims-made policy and it’s 6,000, then your occurrence-based coverage would be around 8,000 per year.
There is a math equation that needs to be considered to determine what is the best policy for a physician. And I’ll get into that at the end. But honestly, most of the time, physicians don’t have a choice between an occurrence-based policy or a claims-made policy. It’s whatever the employer of a small business chooses to provide. That’s what the physician must go for.
The last one is the claims-made insurance policy. What that means is a policy must be in effect when the claim is made. When someone terminates a contract and they no longer work for the employer, there is still a gap in between their last day of practice with that employer and the last day somebody can sue. That’s called the statute of limitations for malpractice claims. In most states, it’s two years. If there is no insurance policy in effect if a claim is made, then the physician is at risk of trouble. Nearly every employer will require one of the parties to purchase tail insurance coverage. The need for tail insurance coverage is to simply cover that gap between the last day that a physician works for the employer and then the last day somebody can sue them.
Now, it’s two years from when the patient either knows or should have known of a malpractice incident. It’s possible that it can go past the two years period if there was no way for the patient to know until a few years down the line. I’d say most of the time if a physician is working for private practice, a small physician-owned business, group, or something like that, they’re going to have to be the one that purchases the tail policy. There are employers that will pay for tail coverage, but I’d say more times than not, the physician is responsible for their own tail coverage. Tail coverage costs about two times what the annual for claims made coverage. So, if a physician has a $10,000 annual premium for claims made coverage, you just multiply that times two, and then that’s about how much they’ll have to pay for tail insurance coverage.
It’s a one-time cost, so you don’t have to pay it every single year until the statute of limitations runs. It’s just a one-time cost. As soon as you finish the employer and then you’re covered for that amount. Now, there can be different lengths as far as the tail coverage policy goes, but most of the time the tail coverage policy will simply cover a reasonable amount of time until the statute of limitations is over. Somewhere between two to five years period. As I mentioned before, as far as the math equation, if a physician does have their choice of insurance products, either occurrence or claims made, then you need to think about the time period you’re willing to be with the employer to lessen the risk of paying more for the professional liability coverage.
If you’re paying a third more for occurrence coverage per year, but you don’t have to pay tail, then it might make sense to utilize that if you’re going to be there on maybe a short-term basis. Let’s say you’re there for a period of two years, you’re going to pay a third more for that two years period, but then you don’t have this big one-time cost at the end. If you’re in a claims-made policy and you’re going to be somewhere long-term, then it might make sense to use claims made. Therefore, your annual premium with the insurance company is cheaper, but then you’ll still have that hit on the end with the tail coverage. Which one is better? It honestly just depends upon the situation. And then certainly, it depends upon specialty.
The annual premium can vary wildly. Like primary care, peds, or something that could be 6,000 a year whereas OB-GYN, one of the higher-level surgeons, cardiac surgeon, or something like that, could be between 20,000 to 50,000 a year, and then just do the math on that tail cost. It could be forty to a hundred thousand for their tail coverage. It’s specialty-dependent as well. This certainly is something that we negotiate as it can take great resources of a physician. When we’re looking at a physician contract, you always must consider, okay, what’s most important to the physician. And then what are the areas that we can work on more comp, more time off period, better bonuses, whatever. But who pays for the tail insurance product certainly is an important piece for most physicians, especially the ones in those higher-end specialties.
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