A Tale of No Tail: The Impact of Not Purchasing Tail Coverage

By David Shaffer

David Shaffer is the vice president of Insurance Office of America's Professional Medical Healthcare Division, which provides the most comprehensive medical spa insurance to members of the American Med Spa Association (AmSpa). He has been working in the medical professional liability insurance field since 1996, where he uses his unique combination of underwriting expertise and broker knowledge to assist medical aesthetic facilities, medical spas, hospitals, healthcare facilities, physicians and physician groups with their insurance needs. In addition to medical professional liability, Shaffer also has the ability to assist clients with other insurance needs, such as employment practice liability, directors and officers, business office packages, workers compensation and various other lines of coverage customary to the healthcare industry. To learn more about AmSpa and Insurance Office of America, call 312-981-0993 or log on to www.americanmedspa.org.

As the owner of a medical spa or aesthetics practice, you probably haven't given a great deal of thought to what you would need to do if the nature of your business suddenly changed—for example, you declare bankruptcy, sell your practice or merge your practice. However, if you do find yourself in such a situation, it is important that you are aware of how your medical professional liability—malpractice—insurance would be impacted. In the majority of instances, an extended reporting period endorsement, commonly referred to as “tail coverage,” must be considered. Simply terminating your coverage without contemplating the purchase of tail coverage could be a costly mistake.

Coverage clarification

First, let's review some basics about how a malpractice policy works. Because the majority of medical spa malpractice insurance policies are written on a claims-made policy form and because tail is applicable to this policy form, we'll focus our discussion here.

Without getting overly complicated, a claims-made policy requires an active policy to be in force when a claim is reported in order to have coverage extended to said claim. Further, a claims-made policy will only provide protection for treatments rendered from your retroactive date through the policy's expiration or termination date. A retroactive date is the earliest date that coverage will apply to services rendered within your practice. In the absence of an active policy, coverage for claims arising against the spa after your policy's expiration or termination would be denied protection.

To continue coverage uninterrupted, you must have your incumbent insurer or replacement insurer continue or assume your retroactive date. The new policy would then allow you to report claims that may arise during the active policy period. The coverage provided by the active policy would extend not only to the services rendered during the policy period, but also to all other services performed back to the retroactive date on your policy.

Simple enough, right? Now let's consider what could happen when you no longer require malpractice coverage. As mentioned previously, in order to report claims under a claims-made policy, you must have an active policy in force. Cancelling your policy because of a sale, merger, acquisition, bankruptcy or for any other reason would bring an end to your need for coverage. Many people believe that because they paid for a policy when the treatment occurred, they should have coverage regardless of when they were notified of the claim. Unfortunately, that isn't the case with a claims-made policy. Coverage is triggered when the claim is actually made, as opposed to when the treatment happened.

So how would you report a claim that arose after the termination date of your policy? Some insurance companies will automatically give you an additional 30 or perhaps 60 days beyond the policy's cancellation date to report claims, but securing additional time requires tail coverage to be purchased.

Taking on tail

It's vital to understand the protection that tail coverage provides in order to help you decide if purchasing it is the right decision for you. When you secure tail coverage, it provides you with an additional amount of time after the expiration of your policy to report claims that arise from treatments occurring from the policy's retroactive date to its expiration date. This means that coverage is not applicable to any new services administered after the policy has expired or has been terminated.

Obviously, this can be extremely useful; however, securing tail coverage can be difficult for some to justify. What most often prevents people from purchasing tail coverage is its cost. It is not uncommon for tail coverage to cost anywhere from 100% to 300% of the expiring policy's premium. Not only do these percentages vary from insurer to insurer, but the length of the tail—the amount of time you have to report a claim after a policy's expiration/termination—can also vary. Fortunately, the terms of purchase tail are often known before coverage is put into force. If you are unfamiliar with the tail terms for your policy, you should be able to inquire with your insurer and/or broker to locate this information.

Additionally, a tail premium is unlike your annual policy premium. The entire payment must be made in full, with the funds being delivered to the insurer within 30 days of the original policy's termination date. Further, a tail is 100 percent earned and cannot be cancelled once issued. These factors can make finding financing for this purchase difficult, since the lender's only recourse upon default would be to come after you personally.

You may think that all this sounds like more trouble than it's worth and, because purchasing tail is optional, you could elect not to buy it. However, if you decline to purchase tail coverage, any claims brought or alleged against you after the policy's termination date would become your responsibility to defend and indemnify.

A real-world example

About a year ago, a long-term medical spa client told me that his practice was realigning its corporate structure by bringing in a new medical director, because their medical group entity was changing ownership. This particular client was a mid-level provider who owned 49 percent of the old medical entity; he also owned 49 percent of the newly formed entity. I provided him with alternatives that included coverage to the new entity that also assumed the retroactive date for the old entity. When comparing costs, this was the most economic way of ensuring that the old entity was given the ability to report potential claims. In this case, because we were planning on including retroactive coverage via the new policy, tail coverage would not be needed. One point of clarification: Extending the old corporation's retroactive date to the new corporation's policy would mean any claims arising from the old corporation's operations would directly impact the new corporation's coverage.

Even with a couple of alternatives in hand, the new medical director (and 51 percent majority owner) had taken it upon himself to purchase a different policy for the new entity without consulting my client. In an effort to save premium dollars and avoid assuming any liability from the prior medical group entity, the new medical director chose to exclude any retroactive coverage from the policy. This left my client needing to decide if they wanted to purchase tail coverage for the prior policy.

After discussing his options, my client conducted a review of his patient charts and concluded that the business had no bad outcomes or unhappy clients from the treatments that occurred from their retroactive date through the policy's termination. Therefore, instead of investing in tail coverage, he chose to self-insure. His thought was that if a minor incident arose, the business should be able to resolve it for less out-of-pocket expense than prospective tail coverage would cost.

Several months later, I received a call from this client. I was told there was a falling out with the spa's latest medical director, and they needed my assistance with locating coverage. After discussions about the proposed new policy, my client paused a moment and asked if they still had the ability to report claims to their prior policy—the one for which no tail coverage was purchased. I reminded them that they had chosen to forgo tail coverage when their prior policy terminated.

When I asked why the question arose, he said that there was a recent development with a former patient that would likely result in a claim against them. As it turns out, this particular incident arose from an invasive procedure performed by the corporation's prior physician/medical director who had been insured via the corporation's policy. When they again inquired about their coverage options, I regretfully informed them that the cost of any defense or indemnification for this situation would be their responsibility.

He then asked, “What could a plaintiff expect get from a now-defunct entity if it were sued?” I explained that, in my experience, it is entirely possible that the corporation owners could hold personal liability in this potential claim and, as a result, their personal assets may be at risk. I elaborated that the only way to find an accurate answer to that question would be to contact an attorney.

Keeping an eye on the future

Hopefully this gives you a better understanding of how and when tail coverage becomes relevant. As long as your business remains open and you maintain an active policy with uninterrupted retroactive coverage, tail coverage shouldn't be a concern. However, negotiating—or at least knowing—the tail terms within your active malpractice policy will help you plan for future unforeseen events.