Our last blog post outlined 3 Practical Questions for Providers to Consider Before Signing an Employment Agreement. In this post, we focus on a question that is at the forefront of our physician-client’s mind when evaluating employment opportunities: “Am I responsible for paying for tail insurance coverage?” As a healthcare and business law firm, we routinely assist physicians in negotiating terms of employment agreements. Through our experience, we have developed tactics for negotiating compromises to the structure of tail insurance coverage agreements, and, herein, we share those tactics.
What is Tail Insurance?
During a physician’s employment, the employer generally acquires and pays for malpractice insurance covering the physician. But what happens when a claim is brought against a physician after her or his employment ends but for actions taken during the employment? The answer depends on the type of liability insurance purchased.
If the malpractice insurance purchased by the employer during the employment is an “occurrence” policy, then the physician’s actions are covered by the insurance policy even if the claim is brought after employment ends. If the employer purchased a “claims made” policy, however, then there is coverage only for claims based on conduct that occurred during the employment that are also brought during the employment. There is a clear liability gap with “claims made” policies that is usually solved by requiring the purchase of an extending reporting endorsement (“tail”) policy. Tail policies can be costly; thus, who is responsible for paying for such policies is usually contained within the employment agreement.
Physicians want the employer to pay for tail coverage; Employers want the physician to pay for tail coverage. The result is usually a compromise of those two positions. Below, we outline fair and reasonable compromises for both parties to use in negotiating tail insurance coverage.
Tactic 1: Propose that the Responsibility for Tail Coverage Depends Upon the Circumstances Around the Employment Ending
This tactic requires an understanding of the possible ways the employment could end. Generally speaking, the physician can terminate with or without cause and the employer can terminate with or without cause. As a way to compromise, each party could assume liability if they (1) terminate without cause, or (2) act in a way that allows the other party to terminate for cause. This is a reasonable compromise; it apportions a financial penalty of sorts on the party who is at fault for the termination or who terminates with no reason.
Tactic 2: Propose that the Physician’s Tail Coverage Responsibility Declines Over Time
One reason why employers place the burden of tail insurance coverage on physician-employees is to reduce the risk and costs associated with hiring a new physician. Over time, physicians generally pay for themselves and bring a profit to the practice. Understanding how the employment relationship evolves reveals the next tactic, which varies the parties’ respective cost of tail coverage over time based on the years of employment. In essence, the longer the physician is employed, the less responsible the physician is for paying for tail coverage. This may appear as a complex chart of percentages changing each year or a clear statement that after a certain number of years (e.g., two years), the employer will pay for 100% of the cost of tail coverage. There are numerous ways to construct a tail coverage calendar and deciding on the right approach requires an understanding of the practice’s business model and expectations of the physician.”
Of course, we often propose a mix of these two tactics depending on the type of practice and willingness of the employer to negotiate terms. Each client contract requires a tailored approach. Our attorneys are experienced in advising clients on employment matters, including employment agreements. If you have questions about an employment opportunity or would like to discuss this blog post, you may contact our healthcare and business law firm at (404) 685-1662 (Atlanta) or (706) 722-7886 (Augusta), or by email, firstname.lastname@example.org. You may also learn more about our law firm by visiting www.hamillittle.com.
*Disclaimer: Thoughts shared here do not constitute legal advice.