For years, physicians and other healthcare professionals cancelling their claims made malpractice insurance policies have been socked with a one-time cancellation charge to assure that there is coverage for lawsuits that are made for services rendered during that policy term that might be made after policy cancellation. The cost of that protection, which is called “tail” insurance or “Extended Reporting Period” coverage, can be as much as two to four times the expiring annual premium.
This comes as a shock to many practitioners. Some did not have this explained to them at the time the coverage was initially purchased and for many who were aware of this coverage, the price tag comes as a shock. Many young physicians find that they are unable to pay the premium since they have not worked long enough to save that much. Others, who have saved enough think hard about whether they would rather take the risk of being uninsured.
Going without coverage is not wise even if a physician or other healthcare professional has only treated a few patients and even if certain that all of the patient outcomes have been satisfactory. It is important to remember that under our system of justice, anyone can file a suit that will subject another to significant defense costs which are rarely recovered even if the party being sued wins. Malpractice coverage ordinarily covers all of these costs.
So what are the alternatives to purchasing a tail from the insurance company at these high premiums? In the recent past, the only source of tail coverage was from the insurance company that provided the claims made coverage. Those carriers preferred policy cancellation without a tail purchase over selling a tail because a healthcare professional can be sued years after services have been provided and insurance companies have to reserve funds against that future possibility. If an insured cancels a claims made policy and doesn’t purchase a tail, the insurance company knows that future claims will not be its responsibility and can book all the premiums it has received as profit at that time. If a tail is purchased, the collected premiums have to be held in reserve until it is reasonably expected that no more claims can be filed.
In the last few years, a number of quality insurance carriers have found that this presents them with opportunities to increase their incomes by marketing lower cost tails to take over the potential claims that could have been filed against the professionals’ initial carriers. These “standalone tails” are usually available at 10% to 30% below the premium charged by the carrier that provided the initial coverage and can be a quality alternative. If tails are needed for an entire large group that is being purchased or merged, the savings can be even greater.
Before one makes any decision on tails, a competent insurance professional should review the initial policy, explore all the alternatives to purchasing tails, and confirm that no gaps are being created in any transition. Many claims made policies provide free tails for death, disability, retirement or other conditions. If the reason a tail is needed is because one is leaving one job to take another, the option of obtaining retroactive coverage from the insurer covering the new employer should be considered. If a free tail is not available and retroactive coverage from a new carrier is either not available or not an economical alternative, going into the standalone tail market can be a great choice for significant savings without giving up quality.