William Gallagher Associates Introduction to Medical Malpractice Insurance What is Medical Malpractice Insurance? Insurance, in general, is the practice of sharing your risk with a large number of individuals or groups who have a similar risk. While it is nearly impossible to predict the future for an individual, the use of statistical data and actuarial projections allows an insurance company to better predict the outcomes for a large group. These companies collect premiums, based on those predicted outcomes, in exchange for providing financial compensation in the event that a loss occurs. In this way, by paying a small amount up front, the purchasers of insurance can be saved from financial disaster in the long run. Medical Professional Liability (MPL) insurance, or medical malpractice as it is commonly known, is the application of this principle to the medical practitioners and institutions in an effort to protect them financially in the event of a malpractice lawsuit or other claims of medical negligence. Medical Professional Liability (MPL) insurance is the application of this principle to physicians, surgeons, and other medical practitioners in an effort to protect them financially in the event of a medical malpractice lawsuit or other claims of medical negligence. What is Medical Malpractice? While insurance is a common term, medical malpractice coverage is often misunderstood. In order for a lawsuit to proceed as a Medical Malpractice case, it generally must fulfill four different criteria: 1. The medical provider must have a duty to the patient. 2. The medical provider breached that duty as a result of action or inaction. 3. An injury resulted from the breach. 4. There must be an established link between the injury and the medical provider. All four of these elements must be present for a medical malpractice lawsuit to proceed. Otherwise, there is no established case for medical malpractice in most jurisdictions Medical malpractice lawsuits are complex and can be very expensive, and because these cases have large payments at stake, both the defense and the plaintiff will aggressively pursue a judgment in their favor. Fortunately for doctors, most of these claims fail because they do not meet all the four above criteria, and are dismissed or won at trial. Who Provides Medical Malpractice Insurance? There are many different types of companies which provide MPL insurance, all with different advantages and disadvantages. No one type of carrier is best for every physician-depending upon the physician s situation, using one type of company over another may be a choice or it may be necessary in certain states. Admitted Carriers The most common type of MPL insurers are admitted carriers. These companies are structured according to state guidelines and are regulated by the state Department of Insurance. All rates and policies must be approved by the Department of Insurance before an admitted carrier can use them. These carriers are also backed by a state guarantee fund, which provides an extra layer of coverage in the event that the insurance company becomes insolvent.
Excess and Surplus Lines Many insurance companies write medical malpractice insurance in the Excess and Surplus Lines market. These carriers are not admitted, which allows their policies and rates to be customized more specialized risks. Often, this type of carrier insures hospitals due to their need for large limits of liability and coverage term flexibility. Risk Retention Groups Risk Retention Groups (RRG s) are similar to mutual insurance companies because they are owned by the policy holders which they insure. These groups are not admitted carriers so they can avoid many state regulations and red tape. Because an RRG is owned by the insureds it provides insurance for, the goal of most RRG s is to lower the premium as much as possible. Many risk retention groups even offer dividends back to the shareholders if they feel there is a surplus. Captives A captive insurance company is created when an insured s risk is large enough, and is diversified to the point where they can become self-insured. This usually occurs with large entities, like hospitals, which have enough capital to be able to selfinsure. Like an RRG, captives are a type of alternative risk transfer that requires very careful consideration before being utilized. Trusts In some states, physicians can create a trust which insures its members. These trusts are subject to different regulations than admitted carriers, but are reviewed to varying degrees by the Department of Insurance according to which state they operate. Joint Underwriting Associations This type of company is utilized when there is difficulty finding coverage in the normal market. As an insurance company which is run by the state, it is often the market of last resort for physicians who are not able to obtain coverage elsewhere. Trying to understand the complexities of the different types of companies that provide MPL insurance can be very difficult, confusing and frustrating. Each type of carrier has qualities which could be beneficial or detrimental to a physician s situation. It is prudent to consult with a medical malpractice professional who can assess what type of carrier would best fit the physician s needs. Claims-Made and Occurrence Policies Within the medical professional liability world, there are two main types of policies: claims-made policies and occurrence policies. An occurrence policy is the same type of policy carried for a car or a home. These policies assign payment of a claim to when it occurred. (If you had a car accident in 2009, the 2009 insurance policy would cover the claim). Claims-made policies are based upon when the claim is filed, not when the incident occurred. Using the car accident as an example, if the claim was filed in 2009, the 2009 policy would cover it. However, if the claim was not made until 2011, the 2011 policy would handle the claim, subject to certain policy terms and conditions. Deciding which type of policy is best for a physician s situation is often one of the most confusing aspects of MPL insurance. Policy Components Each policy will be slightly different, so it is very important to read the language carefully to ensure the physician has the proper coverage. Some of the primary features of a policy are as follows:
Consent to Settle Provision Some professional liability policies provide that the insurer is allowed to settle a claim without the consent of the insured. Other policies, however, provide that the insured has the right to veto a proposed settlement by the insurer. Since a settlement can affect the reputation and earning ability of a provider, this type of clause is an important consideration in selecting a policy. Consent to settle clauses prevent an insurers from settling a claim without the consent of the insured, and the Insured has the right to veto a proposed settlement by the insurer. Hammer Clause This is a provision included by insurers in some consent-to-settlement clauses to encourage the insured to accept a recommended settlement offer. It provides that if the insured refuses a settlement offer recommend by the insurer, the insurer's liability is limited to the amount of the recommended settlement offer. Example: The insurer recommends a settlement offer of $50,000. The physician refuses the offer, and the claim results in a judgment of $100,000 against the doctor. The insurer will only pay $50,000, less any deductible. The physician is responsible for $50,000, plus any deductible amount. Coverage Trigger - The Claims-Made Requirement For coverage to be activated, the claim must be made to the insured during the policy period or the Extended Reporting Period. While there are some variances, with most claims-made policies, a claim is made when it is first presented to the insured. This requirement to activate coverage may create a significant challenge since determining the exact time that a claim was made may not always be clear. Policies often contain a definition of claim and that definition can vary significantly from one contract to another. The verbal allegation within one policy may be enough to meet the definition of a claim, while another contract will require a written demand for money or services. Two common examples of claim definitions are written demand and incident trigger. Written Demand This type of claim is constituted by any written demand from a person or organization that it is the intention of the person or organization to hold the insured responsible for the results of a specified wrongful act. Incident Trigger Incident trigger allows you to report not only written demands for damages (claims) but also incidents which might reasonably be expected to give rise to a claim at a later date even though you have not had a written demand from a claimant. Defense Costs Policies can have two different types of defense cost coverage: Inside or Outside. Inside Such policies are called "defense within limits,"" "self-consuming" or "self-liquidating" policies, because every dollar spent on defense is one less dollar available to settle the case or pay a judgment. For example, if a policy provides coverage of $1 million, that sum will be reduced by every dollar spent on defense costs. If $1 million is spent on defense, then nothing will be left of the policy. The policy will be completely liquidated, even if the litigation is in progress. In some states, however, these policies are not allowed by the Department of Insurance. Outside Other companies will pay all costs of defending a lawsuit, including the costs of your defense counsel selected by the Company. The payment of defense costs does not reduce your limits of coverage. Locum Tenens
This is a substitute physician who temporarily takes the place of a named insured policyholder or physician member of a medical group. This coverage may be contingent upon the policyholder or member physician not practicing during the period in which the Locum Tenens coverage is in effect. Punitive damages (exemplary damages) Punitive damages are separate and in excess of the compensatory damages awarded to a plaintiff in a legal suit that arises from the malicious or wanton misconduct of the defendant. Punitive damages are imposed to serve as a punishment for the defendant. Guarantee Funds In the case of admitted carriers as discussed above, the policy will be backed by a state guarantee fund. In the event that the insurance company becomes insolvent, the guarantee fund will cover claims for a period of time and at a limit of liability as determined by the state. Insurance Rates Insurance rates are determined by the risk factors associated with the doctor s specialty, the location in which the physician practices, and the physician s claims history. Some specialties traditionally have a higher severity and frequency of indemnity payments than others. For example, a neurosurgeon has a greater risk for a high paying malpractice claim than an internal medicine physician does. The greater the risk associated with each specialty indicates a higher insurance rate for that type of physician. Location is also a large factor in determining insurance rates. Insurance companies collect claims information to determine trends within states and counties. Holding all other factors constant, an OBGYN practicing in Omaha, Nebraska will have a much lower rate than if he was an OBGYN practicing in Philadelphia or Chicago. The third variable which influences insurance rates is loss history. This is the record of lawsuits in which a physician has been named as a defendant, regardless of whether the claim was dismissed, settled, or paid out as result of a judgment. For example, a doctor who has had five claims in the past two years will receive a higher rate than a physician who has never had a claim. However, it is imperative that a provider work with their MPL broker to explain the loss history because the number of claims is not necessarily indicative of the quality or the provider or the care he or she provides. While these three variables (specialty, location, and loss history) are relatively straight forward, the process of determining rates is complicated by the very nature of insurance, which focuses on predicting future losses. It s far simpler to look to the past to determine what rates should be than trying to guess what will happen in the future. The insurance companies must rely on predictive models as well as past claims trends in an attempt to set appropriate rates. Often carriers will contract with actuarial companies, or employ actuaries within their company to develop and use these complex models. Important Role of the Broker William Gallagher Associates is one of the leading insurance brokerage and risk management consulting firms serving the healthcare industry. WGA s healthcare experts advise providers and physicians about current conditions and trends of the market, and help explain confusing policy language to negotiate the best policy coverage and rates on behalf of our clients. Choosing the right broker to find insurance relieves medical professionals of the complexities of MPL insurance, so that they can concentrate fully on their patients.
WGA Healthcare: Maintains active relationships with many types of insurance companies, and can advise which type of insurance carrier best fits the physician s situation; Operates on a commission-based pay structure -commission is earned from the insurer that is built into their rates regardless if WGA serves as the broker. Reviews all available coverage options and negotiate on behalf of physicians for the best possible policy terms and conditions Brings unmatched leverage to market relationships and are among the largest providers of insurance products to physicians in the nation. Specializes in both Property and Casualty and Employee Benefits consulting services. WGA s experts understand the complex risks and needs facing the healthcare industry today and are dedicated to providing superior client service. Pete Reilly is a Senior Vice President and the Healthcare Practice Leader at WGA with extensive knowledge in healthcare systems, including hospitals, long-term care facilities, and medical practice groups of all sizes. He can be reached at preilly@wgains.com or (617) 692-0256. William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.