As a physician approaches retirement, one of the most important items on the to-do list is to ensure adequate insurance coverage for any future malpractice claims that may arise after the practice doors are closed. Due to the “long tail” nature of malpractice claims, patients may bring a claim against their physician (or other healthcare provider) long after the date actual care took place. This is why you consider the risk of being sued months and even years after their practice is closed.
There are two ubiquitous types of medical malpractice insurance policies (1) Occurrence and (2) Claims-Made. If yours is an occurrence policy, the process for wrapping up your insurance program when approaching retirement is fairly straightforward. On the other hand, if you have a claims-made policy, financially secure retirement requires proper planning.
Occurrence policies, along with the coverage period provided by them, are simple to understand – like your car insurance. One purchases the policy for a set period of time (usually one year) and coverage is provided on a permanent basis by that policy for all incidents which occurred during the policy period – cancel the policy at any time and any future claims (no matter when they are filed) will be insured. You can essentially “walk away” from your occurrence insurance policy upon retirement and not have to worry about securing a tail policy or paying an additional premium.
Due to the nature of a claims-made policy, the end of your medical career is not the end of navigating the insurance world. Instead of insuring each year separately (like the occurrence policy does) a claims-made policy insures multiple practice years on the same policy dating back to a certain point in time (which is called the retroactive date). Claims-made policy forms will only respond to claims made while the policy is in force for any incident which occurred during the retroactive period. When you cancel a claims-made policy, coverage ceases for the past as well as the present and future unless tail coverage is secured. For this reason, medical malpractice insurance companies will automatically offer doctors an option to obtain an extended reporting period, or “tail coverage.” It is this extension that will allow you to report any future claims that arise from the prior practice period in question.
No sugar-coating here: tail coverage is expensive – the cost is usually two to three times your annual premium. On almost all policies the tail will indefinitely extend coverage for the prior acts period. Due to the relatively high cost of a tail and the fact that most insurers will require the tail premium in full within 30 days of cancellation of your claims-made policy, it is important that doctors have a long-term plan in place for retirement.
Many physician insurers will waive the additional tail premium in a few scenarios: (1) Death, (2) Disability, or (3) Retirement. Today, we’re going to discuss the third situation, the retirement tail premium waiver:
Every insurer has specific criteria one must meet to earn the free retirement tail, so there is some variation in the market from the following. But in general:
- You must meet a minimum age – usually 55 years old.
You must be insured by the company offering the free tail for a minimum number of years leading up to retirement – usually 5 years.
You must be completely retiring from the practice of medicine or risk voiding the free tail or being assessed the applicable additional premium.
- Some carriers have no minimum age, some set the minimum at 50 years, and others at 60 years
- Most insurers, though, will allow one to continue to practice on a volunteer basis.
When you begin to make a retirement plan, the first course of action should be to ask your current agent or insurer about the free tail options on your existing insurance policy. You should determine if you’ve met the free tail requirements already, or if the premium waiver will be earned by the time you plan to retire.
If the tail premium waiver criteria have been or soon will be met, then you should remain insured by the current insurer through your retirement. Even if there is another insurance company that could provide you with a lower annual premium (short-term savings), you may end up having to purchase an expensive tail upon retirement from that lower-cost insurer if you don’t meet their free tail criteria (and that would negate your savings in the long term). The “equity” you build with one insurer does not transfer over to another insurer, so you would have to start the “five-year clock” over again to earn the free retirement tail. Now you can see why the focus on timing a retirement tail should be on the long-term cost, not short-term annual premiums.
Also consider the carrier’s financial stability. Once a tail is purchased (or earned as explained above), your coverage is locked down with that chosen insurance company for your entire retirement: these tail policies can’t be cancelled once bound. If the insurance company becomes insolvent sometime in the future, the physician will be personally responsible for any claims that arise. This should go without saying, but it is important to consider the financial security and stability of the insurance carrier before agreeing to purchase their tail coverage.