Short answer: Terminal liability is an option that extends specific and/or aggregate stop-loss for a run-out period after the policy ends, commonly 3 or 6 months, so claims incurred before the end and paid shortly after are still insured. It usually must be elected before the contract ends.
An employer that leaves self-funding still owes claims for care received before the switch, and a 12/12 contract stops covering them on its last day. Terminal liability fills that gap for claims incurred during the policy term and paid in the extension period.
Example terms from one national carrier: the rider can extend specific and/or aggregate coverage for 3 or 6 months, can be bought at issue or renewal, is available with 12/12 or run-in contracts, requires written notice of intent to activate 15 days before the contract ends, and does not apply if coverage terminates before the end of the contract period. Other carriers’ terms differ.
Terminal liability buys insurance, not administration. The employer still needs a TPA to process run-out claims and cash to fund them, and a new fully insured carrier will not pay for services received under the old self-funded plan.