COMMENTARY

Your Malpractice Advisor: Tail Coverage Dangers

Why medical groups and employed doctors need to be careful

Brian S. Kern, Esq.

Disclosures

August 03, 2010

Introduction

If you take a job with a medical group or hospital, and the employment contract states that the entity will purchase malpractice coverage for you, it sounds like you're all taken care of, and you don't need to worry about anything, right?

Not necessarily.

In a recent NJ Appellate decision, the court held that a physician-employee was responsible for purchasing her own "tail" coverage on her medical malpractice insurance policy when she terminated her employment -- even though the tail coverage would have covered the time when she was working at the job. The employer medical practice had a contractual obligation to "provide and pay the premium for malpractice insurance coverage covering Employee," but the contract did not specifically address extended reporting period (tail) coverage. Thus, the doctor was not entitled to recover any of the $146,000 she paid for tail coverage.

This lawsuit is a stark reminder that it's essential for all physicians and physician groups to pay close attention to their employment agreements. A better agreement in the above case could have prevented a costly court battle, and saved the physician nearly $150,000.

It's important to thoroughly understand claims-made coverage to draft appropriate language in an employment agreement to address malpractice insurance costs. A claims-made policy only provides coverage for an incident that occurs during the policy period -- after the retroactive date, and before the termination date -- and is still in force when the "claim is made." In contrast, an occurrence policy covers all incidents that "occur" during the policy period, regardless of when the claim is made.

Here's Where It Gets Thorny

For example, assume you start a new job on January 1, 2010, and you (or your company) purchase a claims-made malpractice insurance policy for yourself effective on that date. If employment terminates on December 31, 2010, and the policy also terminates on that date, you will not be covered for any claims filed after that date unless you have specifically obtained tail coverage -- even though you had coverage during the time the incident occurred.

Maintaining coverage after a policy's termination date requires a physician to either replace coverage or secure a tail endorsement. If you die, become disabled, or retire, tail coverage is generally provided at no additional cost, but otherwise costs about 200% of the annual premium.

In the above case, the tail cost $146,000. Had the tail not been obtained, the physician would have had a lapse in coverage, and would have been personally liable for any claims filed after the policy's cancellation date, for services provided during her period of employment.

But the expense of purchasing tail coverage isn't the only problem. Finding a replacement insurance carrier to provide future coverage may also be difficult. Although a new carrier is not responsible for prior exposure, carriers are reluctant to write coverage where a gap exists because some plaintiff attorneys have been successful in bringing the new carrier into the litigation, even where the purported negligence occurred during the gap period. One way they do this is by pleading a "continuation of care." In other words, the plaintiff's attorney claims that the negligence that occurred during the gap period continued through the time when the new coverage took effect. This forces the new carrier to respond to the claim, even though the most logical incident date occurred during the gap period.

A more obvious concern with a coverage gap is that the physician would have to hire, out-of-pocket, her own attorney to respond to an uncovered claim, and would be personally liable for any settlement or award. If unable to pay the claim, the physician could be forced into bankruptcy.

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