They may sound a little off-the-wall, but the terms used for medical malpractice insurance were designed to help professionals easily remember which types of coverage relates to which period of time. You only need one—nose or tail—and the main difference relates to whether the coverage for prior acts is purchased from your new insurance provider or your old one.
Your nose: Purchased from the new carrier
Nose coverage refers to the period that you were covered under a claims-made malpractice policy that was terminated at the same time a new policy with a different carrier was issued. With this coverage, incidents that occurred during the nose period (your prior policy), but were not reported until the new policy started, are covered by the new carrier.
This coverage is needed since the typical professional liability policy is issued on a claims-made rather than an “occurrence” basis. This means that coverage must be available when the claim is reported instead of when the claim occurred. When it comes to medical malpractice, it is not unusual for an incident to be discovered years after a procedure took place.
If you decide to change insurance carriers, your new carrier is going to require a list of all procedures performed before the requested issue date of the new policy. They will ask for loss runs from the prior carrier to determine if any prior claims are open or have been closed. If you want your new carrier to offer coverage for your nose period, be prepared to provide a lot of information about your practice during that time.
Your tail: Purchased from the old carrier
Tail coverage is important because claims may be reported long after a procedure or service. The tail option in your liability policy allows you to extend coverage from your old carrier for a number of years when you cancel your insurance because you are closing your practice or switching employers.
When applying for coverage, it is critical to determine what tail coverage options are available, especially when it comes to the cost of coverage and the time limit available. Your tail coverage provides protection if there is an incident related to a procedure or service you performed during the policy period, but a claim was not filed until after the policy period. Tail coverage is typically required when you are closing or selling your practice.
Example 1. You have decided to retire and close your practice that has been in business for 30 years and has been insured the entire time. However, you are still liable for all procedures performed during those 30 years (depending on your state’s statute of limitations) and must remain covered for as long as possible after you close your practice. With the appropriate tail coverage, any claim brought for past procedures will be covered under the last carrier that provided your malpractice insurance.
Example 2. You have decided to retire and sell your practice. The buyer has requested that you provide tail coverage for three years so that your patients can be transitioned into the new practice. Even if the buyer doesn’t require the tail coverage, you should ask for tail coverage just in case you are named in a malpractice suit so you will have defense costs coverage available.
Lapse in coverage
A lapse is a period when you continue to provide services without being insured under a professional liability (malpractice) policy. This is not only financially dangerous to your practice, but will also cause problems when you do get a policy in place. Since the insurance carriers have no way of properly underwriting for the period of lapsed coverage, they will typically not offer coverage for that period, or they will apply a significant surcharge.
Know if your defense costs are inside or outside
Your malpractice coverage will pay for defense costs, settlement costs and judgments awarded by a court. It is important to know whether your defense costs are inside or outside the policy limits.
Inside the policy limits: Defense costs inside the policy limits are deducted from your policy limit first and can significantly reduce the amount left over to pay judgments and settlements. These costs include attorney’s fees and general court costs that occur before a judgment or settlement is reached. You should consider that your defense can be the costliest part of a malpractice claim.
Outside the policy limits: With defense costs paid outside the policy limit, the significant cost of defending your case will not impact the limit available for settlement costs and judgments.
Your malpractice insurance can stand between a claim and financial devastation. It’s extremely important to make an informed decision before committing to a purchase rather than at the time of a claim.
Colin Nabity is the founder and CEO of LeverageRx, an online financial help desk for physicians, dentists and other medical professionals looking for personal financial guidance.