By Michael R. Burke, Esq.
One of the most important provisions contained in a physician employment arrangement today concerns the payment of a reporting endorsement (commonly known as “tail” coverage) for a physician-employee whose employment with his or her employer ends.
Prior to the malpractice crisis, most employers provided their physician-employees with occurrence-based malpractice coverage. Under occurrence-based coverage, if a physician maintains malpractice insurance on an occurrence basis in 2004 and is sued in 2004 or any year thereafter, he or she is covered by such policy because he or she had maintained the policy in the year that the service which is the basis for the claim occurred. This type of insurance is generally preferable over claims-made coverage, which only covers the physician for claims made during the period of time in which the insurance is maintained.
Claims-made policies must be continually maintained in order to avoid the purchase of tail coverage. However, when a physician is switching jobs from one employer to another, it is more costly to obtain claims-made coverage with a new employer that contains coverage for prior acts with the old employer. Most new employers do not wish to pay for coverage related to claims made against a physician when he or she was working on behalf of a prior employer. As such, tail coverage would need to be purchased to cover any claims that may be made against the employee for services rendered on behalf of his or her old employer during the time that he or she is employed by the new employer.
Hospitals and health systems often insure their physician-employees under a self insurance plan or program. In these plans, there is generally no product similar to a tail policy. Rather, the hospital or health system continues to maintain claims-made coverage for the departing physician under the self-insured plan for the duration of the statute of limitations covering such claims. However, it would be wise for any physician-employee to include a provision in his or her employment agreement to insure that he or she will be covered by the employer under its self insurance plan after his or her employment ends.
Physician groups are torn over the issue as to how to handle the payment of tail coverage. Prior to the malpractice crisis, when occurrence insurance coverage was readily available, it was easier for a physician-employee to push for the employer to pay for tail coverage on a claims-made policy, since the employer generally benefited with lower premiums by obtaining a claims-made policy as opposed to an occurrence policy. However, in today’s environment, occurrence coverage is often not available, and claims-made policies are generally the only game in town. As such, the determination of who should pay for the tail policy is not as easy as it once was.
In addition, as the cost of malpractice insurance in Pennsylvania and elsewhere has skyrocketed, provisions as to the payment of tail coverage have changed. There are various options available to deal with the payment of tail coverage. The first (obvious) option available is that the cost of such tail coverage can be placed onto one party or the other. In specialties where physicians and physician groups are having trouble recruiting and attracting new physicians, these employers are more likely than others to pay all or a substantial portion of the cost of a tail policy. However, where the cost of a tail may be substantial or where a physician-employee has prior claims against him or her, the employer may seek to place the cost of tail coverage onto the employee.
Some physicians and physician groups are simply splitting the cost of tail evenly (or by some other percentage) with the physician-employee. Obviously, a 50/50 split would result in equal risk sharing on the part of the employer and employee for the payment of the tail.
Other employers link the payment of tail coverage to the manner in which employment was terminated. As an example, if an employee’s employment is terminated by the employee without cause or by the employer for cause, the employee would be required to pay the tail; if the employer terminates the agreement without cause or the employee terminates the agreement for cause, the employer would be required to pay the tail.
Other variations on the foregoing methods include a phase-in of the payment of the tail by the employer (e.g., the employer pays one-third of the tail if employment ends in the first year, two-thirds of the tail if employment ends in the second year and all of the tail if it ends in the third year or later). In addition, many employers will require that the employee pay for tail coverage if he or she violates his or her restrictive covenant; in such instances where the tail has already been paid by the employer, the employee would be required to immediately repay the cost of the tail to the employer upon a violation of the restrictive covenant.
The issue of dealing with the payment of tail coverage also can affect the buy-out of a physician-shareholder from a group. Many physicians and physician groups are now subtracting the cost of tail coverage from the separation pay, deferred compensation and/or ownership interest purchase price to which a shareholder would be entitled when departing a physician group. As the cost of tails skyrocket, many groups feel that the payment of separation pay and tail coverage is a “double dip” that cannot be afforded by the group.
Even when the employee is required to obtain tail coverage, it is important for the employer to make sure that that policy has been obtained. If an employee fails to maintain such a tail policy and the physician and the employer are sued for malpractice, the lack of insurance coverage on behalf of the employee will leave the employer with exposure for any possible liabilities that may occur (under the legal theory of respondeat superior, in which an employer may be held liable for the actions of its employee).
As you can see, there is no one “right” way to handle the payment of tail coverage after the termination of a physician’s employment. Hopefully, the foregoing article has given you ideas as to different options there are available to you.
Michael R. Burke, Esq., is a shareholder with the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd., located in Wayne, PA.