Brief Guide to Malpractice Tail Coverage
Malpractice tail coverage is one of those things physicians do not want to think about, but it is a must. There are also a lot factors to look at when it comes to tail coverage. Michael Taskila from Diederich Healthcare has put together a great guide on what to look for in your tail coverage and what to look for when purchasing tail coverage.
- Claims-Made vs. Occurrence Coverage: There are substantial differences between the 2 most common forms of medical malpractice insurance. Claims-Made policies are the most common type available to physicians today.
A claims-made policy covers events that occur:
- During the policy period (on or after the “retro-active” date) AND
- Are reported while the policy is still in force. (See “tail” coverage section later for further clarification.)
An occurrence policy covers events that occur during the policy period regardless of when they are reported as claims. Because it is nearly impossible to predict future claims costs in today’s medical malpractice environment—occurrence policies have become nearly extinct for medical malpractice coverage.
- AM Best Ratings: The financial strength of your insurance company is a very important consideration. AM Best is the most widely used company to evaluate the financial health of insurance carriers. If possible an AM Best rating of “A-“ or better is desirable for the carrier you choose for your professional liability coverage.
- Extended Reporting (“Tail”) Endorsements & Prior Acts (“Nose”) Coverage: The “tail” (extended reporting endorsement) provisions are among the most important variables between policies to consider.
Because a claims-made policy will only cover you if the event happened while the policy was in force (after your “retro-active” date) AND was reported to the carrier while the policy was still in force—you cannot just leave your current carrier and start over with a new insurer!
You need to either purchase the extended reporting endorsement (“tail”) from your current carrier OR purchase prior acts (“nose”) coverage from the new insurance carrier. Purchasing tail coverage from your present carrier effectively converts your claims-made policy into an occurrence policy because it allows you to report claims in the future to that carrier even though the policy period has ended. If you purchase tail coverage from your current insurer and start over with a new insurance company you will have a new retro-active date.
Prior acts (or “nose”) coverage allows you to transfer your existing retro-active date to your new insurance carrier—eliminating the need to purchase tail coverage from your last carrier. It is usually less expensive to obtain prior acts coverage from the new company than to buy tail coverage from the old carrier and then purchase a first year claims-made policy from the new company.
I CANNOT OVER-EMPHASIZE THE IMPORTANCE OF YOUR RETRO-ACTIVE DATE. Most physicians I talk to are not sure what I mean by “retro-active” date when I am collecting their information. Your retro-active date is the first day you became insured by a claims-made policy. That date will follow you for the rest of your medical career in most cases.
FREE “Tail” Coverage: Many insurance companies offer free tail coverage if a physician has been continuously insured by that carrier for 5 years and is at least 55 years of age upon permanently retiring from the practice of medicine—or has been continuously insured with the company for 10 or 15 years and is younger than 55 when he/she retires.
- Consent to Settle Clause & “Hammer” Clause: The best interests of the insurance company ARE NOT ALWAYS the same as YOUR best interests. You should try to obtain a policy with a “consent to settle” clause which requires the carrier to obtain your written permission to settle a claim against you. If not, the carrier can settle a claim that you believe is very defensible without your permission.
A “hammer” clause is one in which the insurance company must obtain your written permission to settle a claim against you BUT YOU ARE RESPONSIBLE for all costs exceeding the amount of the settlement proposed by your carrier if you will not agree to that settlement. If you push the case to trial and you win—you avoid having the proposed settlement becoming a permanent part of your claims history. But if you lose—you will have to pay the difference between the amount of money the case could have been settled for and the actual costs of awards and extra defense.
- Defense Costs “Inside” vs. “Outside Policy Limits”: If your policy pays defense costs “outside” the limits of liability then your defense costs do not erode the limits of liability of your policy. As an example—if your policy limits are $1 million per occurrence and $3 million aggregate and your defense costs for a case are $100,000, you would still have $1 million to cover a potential award for that claim. If your policy pays defense costs “inside” the limits of liability then you would have only $900,000 left to cover a potential award in the previous example. Clearly—it is preferable to purchase a policy with defense costs “outside” the limits of liability.
- Incident Reporting vs. Written Demand for Damages: How each insurance company defines a “claim” is another important consideration when comparing policies.
“Incident reporting” allows the physician to report an adverse outcome to the carrier as a potential claim. This is important because remember that for a claim to be covered—a claims-made policy requires that the incident BOTH happen AND be reported as a claim while the policy is in force!
If an insurance company requires that the insured receive a “written demand for damages” in order to consider a claim to be reported—than the physician must wait to be sued before the claim is recognized! This can be a real problem for physicians wishing to change professional liability carriers: Most insurance companies would decline to offer a policy to prospective clients who can expect to be sued in the future for past adverse outcomes. The carriers often consider such a situation to be the same as “buying future claims.”
- “Admitted” Carriers vs. “Excess & Surplus Lines (‘Non-Admitted’)” Carriers: An insurance company that is licensed and regulated by a State Department of Insurance is known as an “admitted” carrier in that State. Because the company is “admitted” its policy holders are protected by the admitting State’s “guarantee fund.” This fund affords policyholders some protection against the insurance company becoming “insolvent.” (Check with your State’s Department of Insurance for details of its guarantee fund and for a list of malpractice insurers which are “admitted.”)
Often, a physician simply cannot obtain coverage from an admitted carrier because of past claims history, licensing issues, or “high-risk” procedures in the doctor’s practice. For example: In some States—Bariatric Surgeons will be declined coverage from every admitted carrier in that State.
Excess & Surplus Lines (“non-admitted”) Carriers usually become the best option for so called “higher-risk” practitioners. An ‘E & S’ carrier is not regulated by the State’s Department of Insurance and therefore, is not subject to the “guarantee” fund. However, your State’s Dept. of Insurance must approve the Excess & Surplus Lines Company for it to be a viable option for you.
- Review Policy “Exclusions”: The “exclusions” of an insurance policy state what the policy WILL NOT cover. For example: Most individual practitioner’s policies specifically exclude coverage for duties as a “medical director.” You should study very carefully the exclusions of your current and any future professional liability insurance policy.
- Shopping the Market—You? An Agent? Or A Broker? Most physicians are too busy to adequately shop the complex medical professional liability insurance market by themselves. And, quite frankly, the ones who do attempt to do so usually do a poor job of it. They don’t ask the right questions, don’t provide complete & accurate underwriting information, and get frustrated & often “give up” before the process is complete. Do yourself a favor—enlist the services of an insurance professional to survey the available options for your professional liability insurance needs.
The terms insurance “agent” and “broker” are often used interchangeably but in their purest forms: AGENTS usually represent insurance companies and BROKERS usually represent their clients. Brokers (and “independent” agents) typically have access to many insurance carriers.
In choosing an insurance professional to assist you—ask the following questions:
- How many physicians does the broker’s firm currently represent? How many physician clients does the individual broker have? How many years have they been involved in insuring physicians?
- What percentage of the broker’s business consists of medical professional liability coverage?
- From how many malpractice insurance companies can the broker obtain premium quotes on your behalf?
- Which specific carriers does the broker recommend submitting your information to for quotes? Why those particular carriers?
- What are the “A.M. Best Ratings” of those carriers?
- Why should I choose you to represent me for my professional liability insurance needs? What makes you better than your competitors?
Finally—choose ONE broker to represent you to each insurance carrier! If you call several brokers to obtain quotes for you—without letting them know which companies your application has already been submitted to—they will invariably get in each others way and dramatically slow down the process. No one likes to do double work. The insurance carriers will not look favorably upon a physician whose application has been submitted by several brokers.