Physician Employment Contracts and Medical Malpractice Tail Insurance

In today’s litigious society, physician employment contracts are a necessity. Generally, physician separations from group practices are amicable; however, more often than not there are other non-amicable reasons why physicians leave.

One area deserving attention is medical malpractice tail insurance. Having tail issues clearly spelled out in an employment contract can protect both parties from headaches and potential coverage gaps at the time of separation.

Ideally, whenever a physician signs an employment contract, they should closely examine the insurance section to determine how the termination provisions are spelled out. Tail coverage and prior acts coverage can be complex, therefore, coverage gaps may be discovered. Unfortunately, termination clauses are usually only examined upon contract termination, if they are examined at all.

Regarding tail coverage, there are four basic methods to crafting physician employment contract language:

1. The employer assumes the risk and purchases a tail policy.
2. The employee assumes the risk and must purchase a tail policy.
3. The employee assumes the risk and can either purchase a tail, secure prior acts coverage, or choose to go bare.
4. The contract is silent.

If the employer or employee purchases tail coverage, they are assuming all liabilities associated with the employment contract. The tail policy will provide coverage for all acts that occurred during the term of employment, even after the physician is no longer an employee. This is generally accepted as the best practice for everyone involved. It is a clean contract and if a claim situation arises, there will only be one carrier responding on behalf of the physician and the employer. The employed physician can then enter the marketplace and purchase a new policy with a new retroactive date and enjoy the first-year in-practice deep discount.

If the employed physician is required to assume the risk and is given the option of purchasing prior acts coverage or tail coverage, risk management philosophies may not always be in sync:

• From an individual’s risk management standpoint, purchasing a tail policy or purchasing a new policy with prior acts coverage accomplishes the same objective; however, there are cash flow considerations. Tail policies are expensive, typically priced at 200% of expiring premium. The policy can be paid during a three-year period in annual installments, or may be required to be paid upfront. On the other hand, a new policy with prior acts coverage would allow a physician to pay in quarterly installments. Over time, the comparative total cash outlay will be similar, but given the high lump-sum cost of a tail policy, the initial cash outlay will be much higher. A seven-year timeline illustrating discounted cash flows is an effective tool for comparing these two options.
• From the practice’s risk management standpoint, the corporate policy would respond to any claims arising from the former employee. However, there may now be different carriers involved – and hence, different interests. This could cause a claim to cost more than it would have, had only one carrier been involved.

The fireworks start when the employment contract is either silent, or no employment contract exists. In a mutually-agreed, amicable separation, this may not be an issue, however, the high cost involved with tail could turn a seemingly friendly separation into a contested, litigated mess.

In conclusion, medical malpractice tail policies are complex insurance contracts. When you are entering into any agreement, ensure there is a clause outlining the exit strategy. Avoid the land mines, find an insurance professional you can trust, ask questions and always read the fine print.