Back to Basics: Understanding Medical Liability Insurance Policies

Posted by | December 05, 2014 | No Comments

Most physicians are aware of the importance of obtaining high-quality, comprehensive medical liability insurance.  Although most states have basic minimum liability coverage requirements, some doctors do not understand the reasons that proper, individualized coverage is essential and how inadequate or sub-par policies can actually harm the physician, his or her practice, and tarnish professional reputations within the community.  In this article, we will examine differences between professional liability policy forms to better help physicians formulate questions for their agents when considering placing coverage.

The most basic of all policy types are occurrence and claims-made.  Although the largest majority of policies issued fall under the claims-made type, there are certain situations where an occurrence policy may be better suited.  To help make sense of the differences between the two policies, let’s examine each of them.  An occurrence policy form covers a physician for a specific policy period over a specified amount of time, typically a period of one year from the effective date of a policy.  Barring any claim activity, occurrence policy premiums will be consistent from one policy period to another and there is no tail responsibility.  Another benefit of an occurrence policy is that the physician is covered for that policy period, regardless of when a claim is filed.  This type of policy may be beneficial to physicians who change employers frequently or who wish to pay a more stable premium over time while avoiding sometimes substantial tail premiums.  Due to the unstable nature of economic damages over time and long statute of limitations time frames, many insurance carriers no longer offer occurrence policies, as a critical judgment could jeopardize the insurance company’s financial standing.

A physician who is in the market for a policy with premiums which begin small and increase over time, presumably along with the patient load and income of the physician, should consider a claims-made policy form.  Claims-made coverage is associated with a retroactive date or, in other words, the date that coverage begins.  The retroactive date is set at the inception date of the policy and can carry over from one policy to another and even from one insurance carrier to another.   Any claims filed from the retroactive date to the current policy effective dates will be covered by the insurance carrier at the time of the claim.  Claims-made policies also stipulate that tail policy must be provided either free by an insurance carrier (dependant on certain criteria being met) or must be purchased from an insurance carrier.  If tail is not provided or purchased, all claim activity from the retroactive date through the effective dates of the policy may not be covered.  Therefore, when considering a claims-made policy, it is always important to also consider tail options.  Some insurance companies recognize the high premiums associated with tail and many of them have began offering stand-alone tail policies, which can provide savings to a physician wishing to tail out a claims-made policy.

In choosing a professional liability carrier, it is also critical to know what type of carrier will control the policy.  Most carriers in the standard market will either be physician-owned or commercial carriers.  The primary difference between these two types is that, as stated, physician-owned carriers are wholly owned and controlled by the physician-insured’s while commercial carriers are owned and controlled by stockholders.  Outside of the standard insurance market are the risk retention groups (RRG), risk purchasing groups (RPG), and Joint Underwriting Associations (JUA).  Each of these carrier types, while occasionally perceived as “risky,” can actually offer many advantages and options for physicians who are willing to venture outside of the traditional market for their liability coverage.   For more information on all the types of carriers in the professional liability market, please refer to the article “—“ in this issue.

When choosing a policy for your practice, the following factors are often overlooked but should always be carefully considered prior to purchasing the policy:  Consent to settle clause, deductible, claim trigger, defense costs, and extended reporting period endorsement provisions.

Consent to settle clause is standard in many policies and requires that the insurance company obtain the written consent of the physician prior to offering a settlement in any claim.  In the event of a lawsuit and in the absence of said clause, the insurance company could settle with the plaintiff, without requiring consent, and could subsequently tarnish the reputation of the physician in question.  Before purchasing a policy, the physician should always check with their agent to find out whether or not this clause in included in their specific policy language.

Although many malpractice policies do not require a deductible, it is typically an option to include one in order to obtain a premium discount.  There are typically two types of deductibles in a professional liability policy:  Indemnity deductible or indemnity and defense deductible.  Understanding the difference between these is very important.  An indemnity deductible requires a sum of money to be paid to the insurance carrier only in the event of an indemnity judgment.  Conversely, in an indemnity and defense deductible, the physician would be responsible for paying the deductible as soon as expenses are incurred defending the medical malpractice claim, regardless of whether there is an indemnity payment or not. If a physician is interested in including a deductible on their policy, they should inquire directly to their agent to see what options are available.

When a physician has an adverse outcome, it is required that they report this incident to their current insurance provider in a reasonable amount of time.   How the insurance company handles the incident once it becomes a claim can depend on a clause in the insurance policy, referred to as the claim trigger.  There are two types of triggers:  incident driven and written demand.  Due to the long-tail nature of claims-made coverage, some insurance companies will only accept liability for those claims in which a written demand for money is made or a lawsuit is filed.  This type of written demand clause absolves the insurance company of responsibility, even when an insured has reported an incident, if the insured switches insurance companies between the time that the incident was reported and the lawsuit was filed.   On the other hand, an incident driven trigger ensures that the current insurance company has agreed to defend any claim that is reported as an incident to the carrier within a set period of time from the date of the incident, regardless of who the holds the current insurance policy.  Due to the nature of these trigger clauses, those physicians who have written demand triggers in their policy should exercise care when choosing to switch insurance companies.

With defense costs in the US soaring to all-time highs, physicians shopping their professional liability policy should pay close attention to the defense cost responsibility within a professional liability policy.  Defense costs are either inside or outside of the primary limits stated on the declarations page.  When defense costs are outside the limits of liability, the full amount of the limits is available to any payment made on the insured’s behalf by the insurance company.  If the defense costs are inside the limits of liability, this can greatly reduce the amount of monies available to indemnity payments.  In some cases, defense costs can even exhaust the primary limits, leaving the indemnity to be paid out-of-pocket by the physician.

Extended Reporting Period (ERP) endorsements, or tail endorsements, are required for any claims-made policy.  Tail endorsements can either be limited or unlimited.  Limited endorsements can be for a specific number of years after the policy has expired.   Those physicians who practice area has a short  window for statute of limitations may consider purchasing a limited tail endorsement while physicians whose statute of limitations may be very long, such as OB and Pediatrics, would need to ensure an unlimited tail endorsement was in place.  Many insurance carriers offer free tail endorsements, provided a number of criteria are met at the time the endorsement is to be issued.  Typically, these criteria include, length of time with the carrier issuing the policy, physician age, death or permanent disability of the physician, and physician retirement from the practice of medicine.  Many insured’s are faced with tail responsibility when changing employers or moving to a new practice location.  In these cases, a tail endorsement is required or requested.  If the ERP is purchased from the current carrier, the physician can expect the cost to equal approximately 200% of the expiring premium.  Many carriers are now offering stand-alone policies which present a substantial savings to physicians and many can mirror the coverage of the current carrier.  A physician who has questions regarding tail endorsements should speak with a professional liability agent who can help explain the options that are available.

A professional liability insurance policy is a contract between the insurance company and the physician.  As with any legal document, the physician should carefully read the policy and ensure understanding of the contents.  If you have questions about your current policy, the knowledgeable staff at Diederich Healthcare would be happy to assist you in better understanding your coverage or helping you to obtain a policy that meets your needs.

To contact the author, call 800-457-7790 and ask for Matt Thompson.

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