Almost all professional liability insurance coverage is provided by claims-made policies.

Claims-Made Coverage - Under a claims-made policy, policyholders are covered for any incident that takes place and that is reported to the carrier on or after the earliest date to which a specific insurance policy applies, as long as the policy is still in force. That date may be the effective (inception) date of the policy, or it may be an earlier (retroactive) date, which results from the purchase of retroactive (prior acts) coverage for doctors transferring from one claims-made carrier to another.

Claims-made premiums “mature”, or increase, during an initial period typically four to seven years to reflect expanding liability. Once the potential for liability reaches a steady level, premiums will increase or decrease only if the insurer’s entire premium scale is adjusted due to changes in the overall claims experience of a particular state or specialty.

Because claims-made policies are designed to cover only those incidents and claims that occur and are reported while a specific policy is in effect, policyholders must take special care when switching from one carrier to another. Upon termination of a claims-made policy with one carrier, physicians should obtain either “tail” coverage (extended reporting coverage) from the carrier they are leaving or retroactive (prior acts) coverage from their new carrier.

Before purchasing a claims-made policy, doctors or administrators should be certain that their future right to purchase tail coverage from the new carrier is guaranteed. They also should inquire about the length of time tail coverage is applicable.

Occurrence Coverage - An occurrence-type policy insures physicians for any incident that occurs while the policy is in effect regardless of when in the future the incident is reported or becomes a claim. Physicians insured under occurrence policies pay premiums that take into account not only claims that arise during the policy year but also those that are reported after the year of insurance or after the policy is terminated. Such claims are called “incurred but not reported” (IBNR).

Neither retroactive (prior acts) nor tail coverage is needed when switching to another occurrence carrier or to a claims-made carrier. Coverage continues for any claims that are reported in the future as a result of incidents that took place while the occurrence policy was in effect.

Tail Coverage - A "tail" policy, sometimes referred to as an ‘extended reporting endorsement,’ provides protection after a claims-made policy lapses and there would be no further coverage. The Contractor should be aware that tail policies vary. The tail policy may cover losses at any time in the future, (i.e. indefinite reporting period) or may only cover losses for claims made within a fixed number of years.

A plaintiff must file a malpractice suit within a statutory time frame known as the statue of limitations (usually one, two or three years). In many states, the statutory time period does not begin to run until the individual knows or should know of the injury resulting from the alleged malpractice. For example, in the case of a patient with a 'missed foreign body' in a wound, discovery of the injury could occur many years later. There are also special rules applicable to minors, such as one delaying the start of the running of the statute of limitations until the child reaches the age of majority. As a result, malpractice claims may be filed many years after the alleged negligent conduct. Therefore, whenever possible, the Contractor should purchase, or request, indefinite tail coverage. If the Group is responsible for purchase of the tail, the Contractor should make sure the Group is obligated to purchase a tail policy with an indefinite reporting period.

Case # 1 Attorney gives physician bad advice on obtaining tail coverage.

In October, 1986 a physician was advised by his attorney that tail coverage demanded by his medical malpractice carrier was an unconstitutional and an unenforceable form of age discrimination. He was advised not to pay the premium. Subsequently, the physician was sued for medical malpractice. The physician and his attorney attempted unsuccessfully to reinstate the old coverage, which would have protected him from further loss.

They were unsuccessful, and in August of 1987 the physician was obliged to obtain counsel for defense of the medical malpractice action. In January, 1990 the physician's second lawyer advised a settlement payment of $230,000 terminating the malpractice litigation. Shortly thereafter, the physician sued his first attorney for giving substandard legal advice. The legal malpractice action was dismissed because the one-year statute of limitations had expired. The physician appealed.

The Court of Appeals said that the physician sustained appreciable harm in 1987 when he was denied reinstatement of tail coverage. The court said the one year statute of limitations began to run at that time, not in 1990 when the physician was obliged to pay an amount in excess of the premium to settle the underlying malpractice action. The court ignored the physician's contention, that he did not suffer actual damages until being forced to pay the $230,000 settlement. Had he been given proper advice by his first attorneys, the settlement would have been covered by insurance, the physician argued. He argued further that his loss occurred in January, 1990, not in 1987 when he was refused tail coverage. The Appellate Court affirmed the Trial Court's decision that the statute of limitations barred the legal malpractice claim.

One dissenting judge said the physician sustained an irrefutable loss only on the day he was forced to pay an amount greater than the premium for tail coverage that should have protected him.

Case Commentary

This case ultimately turned on a statue of limitations issue. However, I include the case because of the physician’s original decision not to purchase tail coverage. He clearly got some bad advice. Tail coverage problems are very common. Physicians are often unaware of the type of malpractice insurance that protects them, when and how to purchase a tail, and who is responsible for paying for tail coverage. Emergency physicians often work on a handshake, much to the benefit of a contract group that does not intend to pay for tail coverage. Employed and independent emergency physicians should be very clear on the hospital’s or group’s provision of malpractice coverage, and coverage on termination. This is an issue that must be covered up front, in writing. There is a tremendous downside here for the unwary.

Case # 2 Emergency physician contract holder refuses to pay for tail coverage.

A single-owner hospital emergency physician contract group owned the contract for provision of emergency services at Hospital A. The emergency physician owner purchased a claims-made insurance policy in 1990. That policy was mature in 1995. The owner had verbally or contractually promised each of 5 emergency physicians that on termination of the Hospital - Group contract, that his Corporation was responsible for the purchase of tail coverage. In addition, the contract between the physician-owner and the hospital contained a provision mandating that the emergency Corporation provides tail coverage for the emergency physicians. The Hospital terminated the contract in December of 1995.

The cost of tail coverage was 2.5 times the mature claims made rate. The total cost of tail coverage for the five physicians was approximately $150,000. Broken down by individual physician, the cost for one of the physicians was as high as $60,000. The physician owner claimed that he did not have the financial wherewithal to purchase the tail coverage, and dissolved the corporation. He called each of the five physicians to tell them that he would not provide the promised tail coverage.

The emergency physicians and the hospital were up in arms. The insurance contract between the physician-owner and the insurance company stated that tail coverage must be purchased within 60 days of the termination of the claims-made policy. The insurer also claimed that the tail policy would have to be purchased by the corporation, it was not available to the individual physicians.

The individual physicians turned to the marketplace, and found a broker who could provide them with the necessary tail coverage. Each individual was responsible for working out a payment mechanism for his or her own policy. The hospital and the individual physicians are pursuing legal remedies at this time.

Case Commentary

This conduct is unethical and arguably illegal, although at the time of this writing, the injured emergency physicians have not filed a lawsuit. The emergency physicians involved were either working under an oral agreement, or written contracts that could not be found. Not one of the five emergency physicians could find a contract containing written evidence of the agreement to provide tail coverage. Any challenge to the contract holder’s conduct takes the injured emergency physicians well outside the purchase period for obtaining tail coverage.

This fact pattern raises another critical issue. If a contract holder says he or she will provide tail insurance coverage, even if there is contractual language to that effect, what assurance is there of compliance? How can an emergency physician avoid this fact pattern?

In general, emergency physicians can rely upon the track record of well-established contract groups. Similarly, a hospital-based physician can usually depend upon assertions by the hospital. However, if the emergency physician is considering contracting with a small or newly formed contract group, he or she should ask for assurances that tail coverage is provided, and that there is a plan for funding.