How is tail insurance calculated? What is tail insurance? Under what kind of malpractice policy do you need it? And then how much does it cost? There are two common types of malpractice policies for healthcare providers. You have occurrence-based, and claims made. In a claims-made policy, you do need tail insurance, and then if it’s an occurrence policy, you do not.
Two Common Types of Malpractice Insurance Coverage
Let’s talk about the differences between the two malpractice insurance. For an occurrence-based policy, a policy must be in effect when the malpractice incident occurs. In that scenario, there is no need for tail insurance, and I’ll explain why.
In a claims-made policy, a policy must be in effect when the claim is made. And so, for an employee who terminates a relationship with an employer, there’s going to be a period where somebody can sue them. In most states, it’s two years, it’s called the statute of limitations. And in this scenario, let’s say a physician leaves the practice, they’re no longer an employee and they have a claims-made policy, and that policy is done.
Well, they need an additional policy called tail insurance that covers the gap between when they leave the employer and then the last day they can be sued by an individual. Now, there are some exceptions in some states when a minor becomes an adult and a few other scenarios, but let’s just use two years as kind of a common amount here. In the employment contract, it’s going to state that the employer will pay for the underlying policy, assuming you’re not an independent contractor.
Who Will Buy Tail Coverage?
And then, it’s also going to state who is responsible for tail insurance. Now, if you’re in private practice, like a smaller physician-owned group, it’s very likely they’re going to have a claims-made policy. And it’s also very likely they’re going to make the provider pay for tail insurance when the contract ends. If it’s an occurrence-based policy, you’re good; you don’t have to worry about tail when the contract ends.
Why Would Someone Get One Over the Other?
An occurrence-based policy is around one-third more expensive per year than claims made. So, if it is a smaller physician-owned practice, they usually use claims made, so they pay a third less annually for the premium because they’re going to be the ones paying for it. And then two, they’ll usually put the tail cost on the provider. So, they not only pay less per year for the premium, but they also don’t have to pay for tail insurance and it’s just cheaper for them. That’s why 9 out of 10 private practice owners use claims-made coverage. Some use occurrence-based, but it’s rare.
If you do have a claims-made policy, and it is determined in the employment agreement that you are responsible to pay for tail insurance, let’s kind of break that down. What it will state is that prior to your last day of employment with the employer, you must purchase a tail policy. Usually, it’ll also state how long the tail policy must be.
How is Tail Insurance Calculated?
To Calculate Tail Insurance, different factors are considered. There are different lengths of tail insurance. You could have one year, two-year, five-year, or infinite, and then with each one of those, it’s a little bit more expensive. A good rule of thumb in calculating tail insurance costs is about twice what your annual premium is. Let’s just say you’re a family practice physician. On average, your annual premium, so how much it costs to insure you each year, is probably going to be about $6,000. And so, if you had to pay double that, the tail calculation would be $12,000.
Now, that’s a one-time payment, you do not have to pay it annually. You give it all at once and then you’re covered for how long the tail is. If it’s up to you how long the tail lasts, then it makes sense to get an indefinite tail policy. You are rolling the dice if you have a one-year tail, but the statute of limitations is longer than a year because then you’re uncovered for that period. And if you do not have malpractice insurance, they could come after you personally, potentially. And that could be catastrophic for a professional. If it’s only a couple thousand dollars more, it’s just simply worth it to get the longest tail policy that you can. That way, it’s just one last thing you have to worry about.
How Do You Get the Employer to Pay for Tail Insurance?
Well, one, just simply ask them when you’re negotiating, I’d like you to cover the tail expenses. They may say no. If they do, then you could come back at them and we’ve had some success with saying, alright, well, you’re not going to pay for all of it. What if we do it like forgiveness over the initial term? What I mean by that is, let’s say you signed a three-year contract, you would say, alright, for every year that I complete for you, one-third of the cost of tail insurance will be covered by you. So, after three years, when I’ve completed the initial term, if I leave any period of time after that, you’re going to be responsible to pay for tail insurance. You could also have your new employer pay for your tail insurance. That’s called nose coverage. And then the last way of not having to pay for it would be if you stay with the same insurance company with your new position, they’ll generally just roll over your old policy into a new one. In that way, you don’t have to pay for tail insurance. So, that’s a little primer on how tail insurance is calculated.
Additional Resources Regarding Tail Malpractice Liability Insurance
What is Claims-Made Malpractice Insurance?
I’d say one of the most frequent things that come up when I’m reviewing a physician’s contract is malpractice insurance coverage, the differences between the different types, and then tail insurance as well. Today, I’m going to talk about what is claims-made malpractice insurance for physicians. Let’s just do some basics on what malpractice insurance is, and then specifically, what is claims-made coverage. Doctors are required to have medical malpractice insurance policy.
Who Usually Pays for Claims Made Malpractice Insurance Policy?
The employer will be the one that nearly always will pay for the underlying coverage. Every year they must pay what’s called a premium to the insurance company. And then as long as they continue to pay that premium, the doctor is covered for any of their activities for that employer.
Most of the time, the coverage limit will be 1 million, 3 million. That means 1 million per claim. And then no more than 3 million aggregate per year. If you’re having $3 million claims in one year, you have bigger problems than just insurance. You’re going to have some board complaints. You might have a database entry if they settle, or you lose a trial. So, if someone asks or is concerned about the aggregate limit of medical malpractice insurance coverage, it’s a bigger problem than that.
3 Types of Malpractice Insurance
There are usually three types of insurance. You have self-insurance programs. Some of the bigger hospitals and healthcare networks are self-insured, which generally means they have a big pot of money set aside that they pay claims out of. The second would be occurrence-based insurance. And that just means a malpractice policy has to be in effect at the time period that the malpractice event occurred. The benefit of occurrence-based insurance is you do not need tail insurance. The downside is it just costs a little bit more. Generally, occurrence-based insurance costs about a third more per year than a claims-made malpractice policy would. And then lastly, what we’re going to kind of detail today is claims-made insurance.
A claims-made malpractice policy must be in effect when the claim is made. If you are with an employer and then the agreement is terminated and you leave, then there will be a period called the statute of limitations from when a patient can still sue you. In most states, it’s two years. Even though you’re no longer with the employer and it was a claims-made malpractice policy, and it ended when you left, you need gap coverage. Another malpractice insurance policy covers the gap between the last day that you work for the employer, and then generally the last date where the statute limitations run. And that’s commonly known as tail insurance or tail coverage.
You must buy tail coverage if you had a claims-made malpractice policy, let’s talk about that. Everyone wants to know, well, what’s the cost? A good rule of thumb is tail insurance generally costs about twice what your annual premium is. So, if you have a $10,000 annual premium, multiply those times two, and then you would have to pay $20,000 once your employment contract is terminated to cover your tail, that’s a one-time payment. You don’t have to pay it every year. It’s just, that you pay all of it upfront and then you’re covered for whatever it is. Some tail policies last longer than others. Generally, you obviously want more than long enough to go past the statute of limitations. Most malpractice claims, it’s when the patient either knows or should have known of the malpractice event.
There is an infrequent period, but a patient would’ve no way to know about a medical malpractice event until years later. And so that’s kind of when tail coverage kicks in. Who must pay for tail coverage? If you work for a hospital or healthcare network, most of them will be self-insured, but let’s just say they had a claims-made malpractice policy. They will generally pay for your tail. Most of the physicians who have to pay for tail insurance are employed with a private physician-owned group. I’d say it’s probably 75% of physicians who work for a smaller physician-owned medical facility that must pay their own tail. Is this something you can negotiate? Sure. A couple of thoughts on that. You can just ask them to outright pay for your tail. If they say no to that, which many of them most likely will, then you could also say, alright, well, let’s do it this way.
Let’s say for every year that I am employed with you, you’ll agree to pay a quarter of my tail cost. If I finish out a year and then leave, you will pay a quarter of the tail. If I stay for two years, you’d pay half and so on. And in that way, if I complete 40 years, the employer will pay for the entire tail. I find some employers understand that that is a fair way of doing things. And then you can kind of play with the percentages per year or how much each party pays. But there are some creative ways of figuring out how to split the cost of the tail insurance with physicians and employers. Most of the time, physicians will not have the choice of either getting an occurrence-based malpractice policy or a claims-made malpractice policy. Whatever the employer or whatever type of insurance the employer decides to go with, that’s the type of insurance the employee is going to have to use.
Usually, physicians can’t say, hey, I’d like an occurrence coverage if the employer decides to use claims made. The reason why the employer uses claims-made is it’s cheaper. As I said before, an occurrence-based malpractice policy is about a third more expensive per year than a claims-made malpractice policy. So, if you’re the employer and you’re going to make physicians pay for their own tail, you’ll say, not only am I going to save a third per year on annual premium cost, but then I’m not going to pay for tail insurance either. Save them some money. There is a kind of math equation. Let’s say you did have the option of choosing occurrence or claims-made insurance. It’s going to be based on how long you decide to be with the employer.
If you have, say a $6,000 annual premium and occurrence-based would be $8,000. So, $2000 more. The longer you are with the employer, the more that would make sense. Whereas if you’re with the claims-made malpractice policy, you’re paying $6,000 a year or the employer is, but in the end, the longer with your employer, the tail can sometimes be a little bit more expensive. So, you do need to do the math of, alright, if I’m paying a third more per year, at what point does it make sense to just pay if I plan on staying with the employer for 10 years? Well, that might make more sense to a claims-made malpractice policy. Whereas if you’re there for a shorter period of time, maybe an occurrence base malpractice policy makes more sense as well. This certainly is something that you can negotiate in an employment contract. And I do think it’s something that most physicians feel is important. It’s also specialty-dependent. I mean, if you’re primary care and you’re paying $6,000 in your annual premium, then $12,000 for tail insurance isn’t that big a deal. Let’s say surgeons or if you’re an OB-GYN and you’re paying $50,000 a year for your underlying coverage and you must leave and your tail is a hundred thousand dollars, well, that’s certainly something that’s going to get your attention and you may need to discuss the employer.
A couple of ways of getting out of having to pay for tail insurance: one, obviously to negotiate, so the employer agrees to pay for it. Two, if you are with an insurance company and then your new job uses the same insurance company, then generally the insurance company will just roll over your old malpractice policy and tail into your new malpractice policy and you won’t have to pay for tail insurance. Now, obviously, no one’s going to know for certain if they leave a position, the new employer’s going to utilize the same insurance company, but that’s one way of doing it. And then the last way of doing it is nose coverage. What that means is the new employer would pay your old tail called nose coverage. And then that would be a way for you to get out of having to pay for it.
Nose coverage happens, I would say infrequently, but certainly, it’s not completely unique that a new employer would pay someone’s old tail. So, that’s what claims-made coverage is. It’s kind of a lot of, I guess, complicated scenarios but simple once you break it down into three different types of insurance.
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