Terminal Liability Option (TLO)

When a self-funded employer:

• Switches to fully insured coverage from self-funding
• Changes stop loss carriers
• Ceases operations
• Merges or restructures

There may still be claims that were:

• Incurred during the policy year
• Not yet paid at the time coverage ends

Without protection, the employer may remain fully responsible for those unpaid claims — even very large ones.

The Terminal Liability Option addresses this exposure.

A TLO endorsement allows the employer, upon termination of the stop loss policy, to purchase extended protection for claims that:

• Were incurred during the active policy period
• Are paid after the policy ends

It essentially provides run-out coverage beyond the normal contract paid period.

Assume:

• Stop loss contract: 12/12
• Policy year ends December 31
• Employer moves to fully insured January 1

A transplant occurs in December, but billing and payment extend into February and March.

Without TLO:

• Claims paid after December 31 may not qualify under the stop loss policy.

With TLO:

• The employer elects the terminal liability option.
• The employer pays an agreed upon fee for the additional months of run-out coverage.
• The carrier continues to honor eligible claims incurred during the policy period, even though paid after termination.
   

This prevents a timing-based financial gap.

The Terminal Liability Option typically:

• Must be elected at termination
• Requires payment of an additional premium
• Is only available if certain conditions are met (e.g., no default, timely notice)

It is not automatic unless built into the contract.

Medical claims frequently have:

• Billing delays
• Appeals
• Coordination of benefits adjustments
• Complex transplant or oncology payment schedules

Large claims can take months to finalize. Without terminal liability protection, those unpaid balances could become the employer’s responsibility. TLO creates financial closure.