Understanding Entity Coverage

There are numerous ways a practice can be organized and many options for the creation of a legal entity. It is important that OMIC insureds understand both how to secure professional liability coverage for their various business entities and how that coverage works.

OMIC's policy excludes coverage of individuals for liability arising from their status as members, partners, officers, directors, shareholders, or employees (hereinafter referred to as "members") of any partnership, professional association, or corporation. Because members and entities may be named as defendants in lawsuits, OMIC offers separate coverage to professional entities. Entity coverage insures the entity itself, its members in their capacity as such, and non-physician employees of the entity for their respective acts and omissions. It also covers the entity and its members for their vicarious liability arising from the acts and omissions of others.

If an insured ophthalmologist has a sole shareholder corporation, it is included as an additional insured under his or her policy. No additional premium is charged to insure the solo corporation at shared limits with the sole shareholder. Separate liability limits are available for an additional premium. In order to obtain this coverage, the sole shareholder corporation must be listed on the ophthalmologist's application and the applicant must indicate whether shared or separate limits are desired. Coverage is in place only when the sole shareholder corporation is named on the Declarations.

An insured ophthalmologist may decide to sell or give shares of the sole shareholder corporation to another physician or individual, thus converting the corporation into a multi-shareholder corporation. When this occurs, the corporation must complete an entity application so that OMIC can evaluate the entity's eligibility for continued coverage. If OMIC determines that the change in ownership violates OMIC's eligibility requirements or increases the risk of insuring the entity too dramatically, the entity's coverage may be cancelled mid-term following appropriate advance notice. If new articles of incorporation are filed as a result of the change in ownership, the entity is considered a new entity. Therefore, coverage for the sole shareholder corporation would cease as of the date it is dissolved, and the new entity would not be covered until properly underwritten, paid for, and named on the Declarations. Multi-shareholder corporations, partnerships, and outpatient surgical facilities (OSFs) may obtain entity coverage at separate liability limits. (These limits do not serve to increase an individual insured ophthalmologist's personal limits of liability.) In order to obtain this coverage, the multi-shareholder corporation or partnership must complete an entity application; the OSF, an OSF application. Coverage is in place only when the application has been approved, the required premium has been paid, and the entity or OSF is listed on the Declarations.

Unlike corporations, which can have changes in ownership or name changes without affecting the legal status of the corporation, partnerships can exist only in their original form. If a new partner is added or a partner leaves, the partnership ceases to exist. Instead, a new partnership is created. Therefore, the retroactive date for the new partnership, if insured, would be the date the new entity was formed, and the former partnership would need to purchase tail coverage in order to remain insured for future claims arising from past services.

Insureds must remember that entity coverage is not applied automatically. The ophthalmologist application gives several areas to provide information about the applicant's professional entities. It asks for the name under which the applicant does business, inquires about how the practice is organized, and provides space to give the name of the legal entity(ies). Only those entities approved for coverage that have paid the required premium, if any, and are listed on the Declarations or an endorsement to the policy are covered.

Remember that coverage for a claim against an entity, its members, or its non-physician employees is only available if the entity is already listed on the Declarations or an endorsement to the policy at the time the claim is reported. In addition, the incident upon which the claim is based must have occurred on or after the retroactive date applicable to the entity. To prevent an uninsured risk, insureds should notify OMIC immediately if they form or acquire a new entity during the policy period so the entity can be properly underwritten and added to the policy, if approved.