In our practice as an Atlanta and Augusta health care law firm, we see varying options regarding professional liability insurance coverage made to physicians in their employment agreements. All doctors apprehend in general that there are financial risks associated with potential malpractice claims. While the need to obtain liability insurance is obvious, the right coverage for particular circumstances and how coverage works can be less obvious. Understanding the type of professional liability coverage proposed in a physician employment agreement and how the coverage mechanics work is an essential first step for physicians who desire a physician employment agreement that will truly protect their long-term financial interests.
The first type of coverage is “occurrence-based” professional liability insurance. Occurrence-based coverage provides lifetime coverage for incidents that occurred during the insurance policy period. This means that even if the policy lapses or is terminated, if a claim is made concerning an incident that occurred while the policy was in force, the claim is covered under the policy. Generally speaking, professional liability policies will define “occurrence” as the actual act or omission of the physician, not the injury of the patient.
A “claims-made” policy, on the other hand, only covers incidents that occurred and were reported during the policy period. If a claims-made policy is dropped or expires, any claims asserted thereafter are not covered, even if the incident occurred during the policy period. Where a physician’s professional liability policy is a claims-made policy, the physician (or his employer) may purchase an “extended reporting” endorsement, otherwise known as “tail” coverage, to cover claims asserted after the policy period.
Tail coverage can be very expensive, however. Tail coverage typically must be purchased at the time the policy lapsed, and it requires a one-time premium payment that could be as high as 200%, or more, of the annual mature premium. The true advantage of claims-made coverage belongs to whoever pays the premiums, as premiums are lower in the first year and gradually rise to a mature price over the course of three to five years. This reflects the low risk of a claim being brought in the first year and the increased risk of claims as each year passes.
Today, many new physicians are offered claims-made insurance coverage instead of occurrence-based insurance when they sign on with a medical practice. While this presents a cost-savings to the practice, a new physician should be aware of the potential financial risks they will face down the road. If the physician changes insurance providers for any reason – whether due to practice relocation or a change in jobs – they will not be covered by their employer’s insurance if a claim is filed against them after they have left that employment. Therefore, the physician must anticipate the need to pay out of pocket for tail coverage at the end of the employment. Due to the high price of tail coverage, employment negotiations should include who will be responsible for purchasing the tail coverage in the event that a physician leaves the practice: the old employer or the new.
*Disclaimer: Thoughts shared here do not constitute legal advice.