Tail insurance: Watch out for the gotcha!

Key Points

When a Midwestern internist thought about leaving his group practice, he faced a dilemma: Resign before his employment term was up-which would mean paying $50,000 for tail insurance to protect him from malpractice claims that might be filed after his current policy was terminated-or stay in a job he disliked for the remaining two years of his contract.

He chose the first option, though he found it "frustrating and upsetting" to have to buy the extra insurance, formally known as "extended reporting coverage."

It could have been worse. "There are a lot of doctors, especially in some of the more litigious specialties, who just can't afford this coverage," says John W. Miller II, a principal at Sterling Risk Advisors in Marietta, GA. But the danger of rolling the dice and going bare, he says, is "potential bankruptcy down the road." Ironically, that's less likely to be the result of any actual judgment than of the cost of contesting a claim, which can reach $400,000 or more in defense attorney fees.

In fact, it's in the interest of both parties to spell out as clearly as possible who's responsible for buying what and when. To help you do that, we've looked at the tricky world of tail coverage from each side of the employment desk.

The deal on tail coverage

If you're an employed physician, it's wise not to be contractually obligated to buy tail coverage when you leave. The reason, of course, is the cost. A tail policy can run anywhere from 150 to 300 percent of your existing claims-made premium-a sizeable chunk for any doctor but an especially big bite for ob/gyns, neurosurgeons, and other high-risk specialists.

Many employment agreements won't let you off the hook completely if you leave prematurely, however. In such a case, you may end up paying most or all of the bill, as the Midwestern internist did. "In many contracts, the deal on tail is this: 'If we fire you, we pay. If you fire us, you pay,' " says Sterling Risk Advisors' John Miller.

If you do leave for greener pastures, your least expensive option-assuming your old employment agreement permits it-is to purchase "nose," or "prior acts," coverage from your new carrier. The insurer provides the coverage in the form of a claims-made policy with a retroactive date that's the same as the start date of your old policy. That way, if a claim comes in after the old policy is terminated, you're still protected. Unlike tail coverage, which has a set multi-year term and coverage limits and is paid in one lump sum, nose insurance is renewed and paid annually, making it much more affordable. There are potential pitfalls, though.

If you move to another state and your new carrier doesn't do business in your old state, it's unlikely to offer you nose coverage, since it won't be able to defend you if a prior action were to result in a claim against you. If your new employer contracts with one of the big national firms-The Doctors Company, Medical Protective, or ProAssurance, which do business in most states-you may be in luck. But even such big firms sometimes balk at extending prior acts coverage.