Medical Malpractice Tail Premium and Coverage
The Doctors’ Insurance Agency provides Medical Professional Liability Insurance for physicians and facilities. In the past thirty years (we were founded in 1988) we have probably answered the question about the high cost and the importance of providing tail insurance for the work that you’ve done over the past weeks, months or many years. Tail insurance can be purchased immediately following the cancellation of a policy by following the terms of the policy; most ‘admitted’, preferred medical malpractice insurance companies charge between 200 and 250 % of the expiring premium to provide a tail policy protecting you indefinitely into the future.
So, this is the answer to one of our most commonly asked questions:
How much does my tail cost?
Tail calculation for a standard Medical Malpractice Insurance Policy: Answer: Ask your insurance Carrier for the last year’s non discounted annual premium. That is your basis for this calculus: multiply that basis x 2.0 or 2.5 (or somewhere in between); this will produce your tail premium. Which will lead to the next question:
How can you pay for the tail premium?
Or, more commonly, is there any way to lower the tail premium. The answer is: you pay either one full upfront lump sum payment (like an annuity funding future periodic payments)..Or, if there are no special circumstances surrounding the underlying policy (which gave rise to the tail premium and quote) then you can generally have two to three years to pay off your tail. Tail Coverage premiums are two to two and one half times your annual premium and you can make eight (non- interest bearing) payments to the insurance company to settle this charge.
The term of ‘reporting’ (which is the language of tail; how long is the extended time in which you now have to report claims?)
The standard, clinical medical practice liability insurance industry does not put a time limit on the reporting period. So, often this question isn’t asked because the answer is assumed: no time limit, or indefinite reporting periods are extended.
There must be some way to reduce the tail premium. Not many! Tail is often quoted with some urgency (the expiring underwriter can’t really extend the offer to purchase an extension too long); because there has to be uncertainty involved in the insurance transaction. The cancelling policyholder cannot know that there is a pending claim; this purchase (like all insurance contract purchases) must be the ‘step of faith’
Wanting an extension to the medical professional liability contract providing the assurance that all future claims will be covered.
The incumbent, cancelled company does not always have the entire picture of the new practice situation, so, the only offer is: to bill for an extended reporting endorsement committing the carrier indefinitely to respond to all claims. This is, understandably an expensive proposition.
Ideally, it would be nice to hold the offer open giving the cancelling physician the chance to negotiate with the next insurance carrier (assuming there is another carrier associated with a new job offer) to provide a policy that reaches back over past medical service.
This is the best way to reduce the cost of tail : to avoid it entirely (either because you’re retiring from the practice of medicine and you meet the criteria set forth by the insurance company to qualify for free tail)
Or, you can purchase a new policy providing you with “Prior Acts”. That is, to ask the new company to provide a premium rate that is slightly higher than it would be if you were not bringing any prior practice risk to them, this prior practice risk is referred to as prior acts and carries with it a surcharge.
Prior Acts or Retroactive coverage pulls the insurance coverage back in time (with a retroactive date).
Prior Acts coverage is always better than tail coverage:
The ‘surcharge’ premium charged for retroactive insurance is usually less than half the cost of tail and therefore a policy premium which reflects a mature policy with retroactive coverage is much more affordable than a policy without any prior history insurance provided. The risk that the new company takes on sometimes seems hardly worth it. The Medical Malpractice Insurance Underwriter is agreeing to respond with the companies’ resources, claims representatives and defense attorneys for an unlimited period of time. ….limited premium unlimited commitment.
So, what if Prior Acts with the new carrier is not offered?
Purchasing tail coverage. Some insurance actuaries believe that an unlimited period of time is unnecessary and accordingly, they have developed premiums that are less than the factor of 2 or 2.5; thereby allowing you to purchase a single year of extended reporting; Or, you can purchase a three year extension period (which is called a three year tail policy) And sometimes you can purchase a five year tail period.
These ‘stand alone’ tail policies generally don’t offer unlimited terms. The premiums are more manageable, the offering of the policy is not time limited (like the incumbent’s 60 day limited offer) and the terms are finite (which allows the tail medical malpractice insurance company to measure the risk and attach a more manageable premium to it.
The more flexible and affordable options for tail (or Extended Reporting Periods (ERP’s) are as follows:
An ERP option of up to a 60-month reporting period is available for an additional premium to
be determined - 12 - Month Extended Reporting Period-100%, 36 - Month Extended Reporting
Period - 150% & 60 - Month Extended Reporting Period - 200%
OR, you can OWN the TAIL. (Offered by some carriers) You can reduce and amortize (and if you’re a recruiting physician organization you can own the tail!)
In this scenario, you reduce the cost of tail by 30 -50 %
The premium is derived by using a depreciating premium which mimics actuarial loss lag patterns. a descending premium each year the farther out you go from the depart date. Once the departed premium has been calculated it is charged incrementally each year until between year four and five it has been fully paid.
Departed Physician coverage insures the physicians in the event claims are presented against them in the future (based upon the time they were active on the policy.
“Departed” coverage is not the same as “tail” coverage, however. Should the group choose to move the coverage away from TDC, they would have the option of officially tailing out the remaining balance and leaving the exposure with us, or moving the coverage to a new carrier. This is not the same as reporting endorsement coverage, where a former insured doctor receives a tail endorsement . If the entity cancels coverage with TDC, then when they go to their next carrier, the entity must obtain coverage for these former insureds with the next carrier, or request a tail at the time of active coverage moving.
The ‘Departed Physician’ Premium calculus:
The Former Insured premium is affected by the policy’s terms and rates each year when it renews. If the group endures a change in credits, it will flow through to the cost of the departed coverage for the year – it’s not locked in as tail premium would be. The premium is derived by using a depreciating premium which mimics actuarial loss lag patterns. a descending premium each year the farther out you go from the depart date. Once the departed premium has been calculated it is charged incrementally each year until between year four and five it has been fully paid.
Future Cancelled Doctor’s premium is included in this departed physician coverage premium: which is spread out over these four to five year increments, -- reducing the sting of the consistent large tail payments and allows for budgeting the tail (departed) premiums over time.
Should the group move mid year, any unearned premium would not be returned. The departed premium would then become collectable at the beginning of the first renewal thereafter, or it is calculated by the new group purchasing this departed physician endorsement and the projected premiums. The premium for the former insureds is paid for over a period of roughly 4-5 years, as opposed to the shorter period allowed for ERC. Instead of the group getting a lot of separate bills for each ERC, they get the charges included in with the usual group bill.