Problems with malpractice insurance in physician employment agreements are horror stories that repeat themselves all the time. A new physician takes a position right out of training and signs the contract presented to her. After a few years, she is ready to move on to greener pastures in another town. She’s moving far enough away that her restrictive covenant won’t apply, and this time she’s getting her offer reviewed by a competent physicians contract attorney.
Her attorney gives her a thorough written review of the physician employment contract, and they discuss the review over the phone. One of the lawyer’s comments about malpractice insurance puzzles the physician. Her attorney says that the new contract contains what he describes as a “common provision,” a clause to the effect that the new employer’s malpractice insurance will only cover her for claims arising from her new employment. Does her current employer have a “tail”?
The physician is absolutely convinced that her current boss has horns, but she has never seen evidence of a tail. Her attorney explains that a “tail” is a policy that covers the physician for claims that arise after she leaves her current position. Tail coverage isn’t always required—depending on the type of insurance her current employer carries, the physician may be
covered for those claims automatically. A casual discussion with the office manager at her current position reveals that the practice has claims-made insurance, so the physician will not be covered for any claims that arise after she leaves. Her current contract requires her to purchase tail coverage at her expense when she leaves. The physician is shocked to learn that the premium for the tail coverage is about a third of her yearly salary. She reluctantly decides that she can’t afford to change jobs now or in the foreseeable future. She is stuck in a position that she hates and has to turn down what seems like a dream job in comparison to her current servitude.
There are two types of physician malpractice insurance: occurrence and claims-made policies.
The first type of policy covers you for any claims that “occur” during the period of the policy. If a claim arises based on an alleged action or omission during the period the policy was in force, you are covered - no matter when the claim is presented. In other words, if a case is filed several years after you leave employment, based on alleged malpractice that occurred while you were employed and covered by that policy, you are automatically covered.
The second type of physician malpractice insurance is claims-made coverage. As the name implies, such a policy will only cover a claim that is made during the policy period (i.e., if a lawsuit is filed or threatened). If you leave employment and a claim is filed against you based on alleged malpractice that occurred while you were employed, this type of policy will not cover you.
There are several reasons an employer may purchase claims-made coverage. First, of course, it is cheaper than occurrence coverage. In addition, sometimes occurrence coverage is simply not an option - once the legal environment reaches a critical mass of craziness (as it did in Pennsylvania a few years ago), insurers stop selling occurrence malpractice insurance. As in much of healthcare, these crises tend to be cyclical, so the availability of occurrence insurance varies over time in any given state.
To protect the physician after leaving a position with claims-made malpractice insurance, a separate policy to cover any later claims that are based on alleged malpractice at the old position must be purchased. This is called “tail coverage.”
Tail coverage isn’t cheap. Premiums for a tail can cost as much as a third of a year’s salary. That’s why it is so important to make sure your employment agreement addresses payment for a tail when you leave.
The employer should agree to provide malpractice insurance in reasonable amounts. For example, the coverage provided should be no less than the greater of state-mandated minimums or that required for the hospital staffs the physician is required to join. The type of coverage provided (occurrence or claims-made) is almost never subject to negotiation.
To protect yourself when you leave employment, you have to negotiate responsibility for payment of tail coverage premiums. That must be done regardless of what kind of insurance the employer is currently carrying. Even if the employer has occurrence insurance now, you must protect yourself if the employer subsequently switches coverage (either voluntarily, to reduce costs, or because occurrence coverage simply isn’t available anymore).
I remember the good old days when virtually every employer was willing to pay for a tail. Those days are long gone. Most hospitals are willing to pay for a tail, although that concession is not uniformly contained in the first offer. Private practices, however, are becoming less likely to offer to pay for tails, especially in the first offer.
I have found that many employers are willing to pay for all or a portion of the tail under certain circumstances, especially if the physician can convince them that it isn’t fair not to pay a tail. For example, I am frequently able to persuade employers to pay for the tail if they terminate the physician’s employment without cause or if employment terminates because of the physician’s death or disability.
As a fallback position, if I can’t get the employer to agree to pay for all of the tail coverage, sometimes I am able to obtain partial payment based on the length of employment. For example, the employer might pay a fifth of the tail’s cost for every year of service. That way, if the physician sticks around for five years, the employer pays all the tail’s costs.
However, many employers are not willing to pay for any portion of the tail if the physician terminates employment without cause or if the employer terminates the physician’s employment for cause. It’s a little hard to get the employer to pay for a tail under circumstances in which the physician embarrassed the employer, especially if that embarrassment involved legal exposure.
For those looking at a physician’s employment agreement with a private practice, the good news is that most practices do pay for a tail for the practice owners.
Problems with malpractice insurance in physician employment agreements are a big deal - physicians must ensure that they are protected, or they could be trapped in a job by financial restraints.