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. Whereas it is impossible to predict the future for an individual, using statistical principals, it is relatively easy to predict the outcomes for a large group of individuals. Insurance companies collect premiums, based on those predicted outcomes, in exchange for providing financial compensation in the event that their risk is the one of thousands that actually occurs. In this way, by paying a small amount up front, the individual can be saved from financial disaster in the long run. Medical professional liability (MPL) insurance is simply 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 alleged by a patient or his/her family.

Medical Malpractice Defined

The concept of insuring risk is something all Americans are familiar with. We all insure something, be that a car, a home, or maybe a business. While insurance is a common term, medical malpractice is not as widely understood, and it is often used as a catch-all for anything that goes wrong in a medical setting. For a lawsuit to proceed as a medical malpractice case, it 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 in duty
  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 be warranted. If even one of these criteria is not met, there is no established case for medical malpractice. Medical malpractice lawsuits are incredibly complex and very expensive. 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, many of these claims are “frivolous” because they do not meet 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 the 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.

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 to peculiar risks. Often, this type of carrier insures hospitals due to their need for large limits of liability.

Risk Retention Groups

Risk Retention Groups (RRG’s) are similar to mutual companies because they are owned by the policy holders which they also insure. These groups are not admitted carriers so they can avoid many state regulations and red tape. Because an RRG is owned by the physicians 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 share holders 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, who have enough capital to be able to self-insure.

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 which state they are in.

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 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, even 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. Deciding which type of policy is best for a physician’s situation is often one of the most confusing aspects of MPL insurance. For more information on claims-made and occurrence policies please refer to our claims-made vs. occurrence discussion.

Policy Components

Each policy will be slightly different, so it is 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; others 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 the insured, this type of clause is an important consideration in selecting a policy. None - Insurer is allowed to settle a claim without the consent of the insured Yes - 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 because determining the exact time when a claim is made is not always simple. Policies often contain a definition of claim and the definition can vary significantly from one contract to another. With one policy, a verbal allegation 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 client.

Defense Costs

Policies can have two different types of defense cost coverage: Inside or Outside.

Inside

Such policies are called "defense within limits," "wasting," "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.

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

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, 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 as determined by the state.

Malpractice 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 a pediatrician 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 Manhattan, New York.

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. Obviously, 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.

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: predicting future losses. Looking into the past, it is easy to say what the rates should have been, but looking into the future makes it a little more complex. 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.

What Role Does Gallagher Play?

Gallagher Healthcare is a large national broker of medical malpractice insurance. Unlike an insurance agent, who represents a specific insurance company, a broker acts solely on behalf of the physician. Gallagher brokers can advise physicians on the ins and outs of the market, explain confusing policy language, and negotiate the best policy coverage and rates on behalf of their clients. By using Gallagher to find insurance, physicians can stop worrying about the headaches of MPL insurance, and can concentrate on their patients. The following are just some of the many reasons to partner with Gallagher Healthcare in finding MPL insurance:

  • We have active relationships with all types of insurance companies, and can advise which type of insurance carrier best fits the physician’s situation;
  • There is absolutely no cost to you for utilizing our services – We are paid via a commission from the insurer that is built into their rates regardless if you choose to utilize a broker;
  • Without broker assistance, a physician is limited in negotiating favorable terms and conditions – Our experts can quickly outline all available options, and ensure the practice is getting the best terms possible;
  • We are the largest provider of insurance products to physicians nationally, bringing unmatched leverage to market relationships;
  • We are part of the Gallagher family, recently named the top Ethical Insurance Broker in the U.S.;
  • We can be your “one stop shop” for all your insurance needs, ranging from employee benefits to general business insurance, as part of the Gallagher team;
  • We are the best in the business within our specialty – Physicians Malpractice Insurance.

References

  1. The American Medical Association. http://www.ama-assn.org/ama
  2. Texas Department of Insurance. http://www.tdi.texas.gov.