Don't Expose Your Tail: Reporting Endorsement

Orthopedists know everything about bones…but do they know anything about tails? Tail coverage, to be exact. The fact is, it pays—literally—to be savvy about this nuanced part of the insurance world.

Steve Harris, an attorney with McDonald Hopkins, LLC in Chicago, explains, “The terms tail coverage and reporting endorsement are interchangeable. No matter what you call it, however, it can greatly impact an orthopedist’s income.

Two Types of Liability Insurance

“There are two kinds of professional liability insurance that are relevant for orthopedists, namely, ‘claims made’ and ‘occurrence.’ With the former there is a two part test for someone to be covered: first, the doctor needs to have this coverage in place when the negligent act occurs; second, when you are notified of a claim, you must be covered by the same carrier. Doctors often don’t know if they will be named in a suit, so the alleged negligent act occurs, and then two years later, the doctor is served with the lawsuit. The second part of the ‘and’ test has to be in existence…many doctors get caught in the switch from one job to another and stand to lose a significant amount of money.”

“Occurrence coverage, ” says Harris, “is much simpler. If you have this and the act occurs, then you are covered, plain and simple. Let’s say you’re in residency or fellowship, make a mistake, and then head off to another city. If you are tagged with a suit that initiated when you were in training, and were under an occurrence based policy, you are covered in perpetuity. The vast majority of hospitals have occurrence based coverage.”

Think the lead doctor in your practice is a stand in for Genghis Khan? Or, perhaps you’re interested in pursuing an academic career? Do some homework before you clean out your office, says Harris. “More than 90% of policies in existence for private groups are claims made. A typical example of what happens is as follows: there is a six person orthopedic practice with a claims made policy and someone decides to leave. This automatically means that this person is not going to meet the two part test. This often happens in cases where orthopedists have ‘jumped ship’ for another practice that carries claims made coverage. This is a major gap in coverage that leaves the doctor quite vulnerable.”

Who Will Buy Your Tail?

While the lingo may sound a bit humorous, the results are serious indeed. Steve Harris: “The major issue is, ‘Who is buying your tail?’ Ensuring that you are covered begins with the contract. Payment of tail coverage converts a claims made policy to an occurrence policy, something that you should do whenever you leave a practice. The contract is going to rule who has the responsibility of purchasing tail, so when signing an employment contract, say to the group, ‘If you let me go without cause, I want you to buy my tail. However, if I walk away for no reason, I will buy the tail.’ There may also be a vesting schedule strategy. As an example, each year you are with a practice 20% of the tail premium is paid, so in five years you are fully vested.”

Sometimes, lady luck kicks in. “If you’re in practice A (which has claims made) and move to practice B, and by pure chance practice B has the same insurance company, you can get seamless coverage. This means that you don’t have to buy tail because the insurance company underwrites this on a per physician basis. This materially affects the next phase of someone’s career. If one practice pays a $200, 000 salary and another pays $250, 000, with everything else being equal, if you have to pay a $75, 000 tail, that’s something you’re going to want to factor in. Remember that when you’re in discussions about a new job, it is fair to ask who the underlying carrier is.”

There are also times when it’s good to chase your tail. Steve Harris: “Let’s say that you’ve negotiated well and the practice is going to be responsible for paying all of your tail coverage. After awhile, things change, so you leave and fortuitously go to another practice with the same underlying carrier. While this means you don’t have to pay tail, the contract with your former practice did say that the group had the responsibility of paying tail for you.

“Those doctors might be thinking, ‘Great. He went to another practice that has the same carrier as ours. We dodged a bullet.’ But in that situation, your attorney can notify the group that they do indeed have to buy tail. They will inevitably respond with, ‘But Dr. X doesn’t need tail, ’ to which the attorney should say, ‘The contract doesn’t say that you will pay it if he needs tail…it says if you let him go without cause you shall buy the tail.’”

“The magic of this is that in most groups you are on an ‘eat what you kill’ formula, meaning, in part, that you are saddled with all your expenses and those get subtracted from your productivity. If you force your old group to buy tail, then you are underwritten as a first year doctor because all of the claims history is wiped out. A first year doctor with no claims is underwritten for a fraction of the cost. When you emerge from fellowship, premiums increase for the first five years or so then level off. So if you come in as a fifth year making $250, 000 and the new practice charges you for the cost of annual professional liability coverage, and you get the prior group to pay the tail, you’re charged only a fraction of the yearly cost of a mature policy, and each year you’re taking home a higher salary.”

A fundamental difference between claims made and occurrence? Cost. “Claims made policies are a lot less expensive per year because when you’re underwriting claims made, you’re not underwriting future claims. Every year is a snapshot because the covered individual has met the second part of the test. So if I’m an underwriter providing an occurrence policy, and someone works for one year, then I am forever covering that risk. Occurrence policies can actually be twice as expensive as claims made policies.”

Remember, says Harris, it all starts with the contract. That is your opportunity to shift the risk to the practice and protect your income and nest eggs.