Published 8/1/2008
J. Michael Maxwell, MD; Mark A. Tisdel

Read your medical liability insurance contract

By J. Michael Maxwell, MD, and Mark A. Tisdel

You may end up with more questions than you had at the start

I’ve often asked myself, “What can I do about my medical liability insurance?” I seem to have the same conversation with my office manager, my certified public accountant (CPA), and my attorney every year. At year-end, my medical liability insurance premium stands out like a basketball player at a women’s gymnastics meet.

Each year I vow to find a cost-effective yet secure alternative to the commercial medical liability insurance I’ve been purchasing since I completed my residency. I get out my files, organize them neatly, and start seeing patients. The next thing you know, I’m talking to my office manager, CPA, and attorney about the year-end numbers and that pesky premium. Well, this year is different.

Getting started
I started by finding and reading the actual policy. To find an alternative to my current policy, I figured I should understand what I actually have. Medical liability insurance is nothing more than a promise. The question I posed is: Do I really need all of the “promises” that I’m paying for?

My policy “promises” to pay all sums that I “shall become legally obligated to pay” if, in my efforts to heal my patients, they claim I’ve injured them. This does not sound like something I want at all, but my hospitals—and many third-party payors—require it. This promise is referred to as “Coverage A.”

“Coverage B” promises to “pay all sums” that my “Association, Corporation or Partnership” may be obligated to pay as damages “arising out of an incident (defined as the rendering or failure to render professional services) to which this policy applies.” But my “Association, Corporation or Partnership” doesn’t render—or fail to render—any professional services and is not licensed to practice medicine. Do I really need to pay for this promise?

Professional associations, corporations, and partnerships are named in medical liability lawsuits all the time. This “vicarious liability”—liability because the legal entity simply exists—is likely to be applied by every plaintiff’s attorney. But do I really need to pay to protect a “legal entity” that doesn’t render services? How much more is involved in having the attorney hired by my insurance company answer on behalf of my not-real-person professional corporation (PC)? Why should I advise the plaintiff that my PC is covered by insurance, thereby increasing the known collectible value on the table?

The next two pages are “Exclusions,” identifying all the stuff that’s not promised—like coverage for criminal behavior, practicing while intoxicated, or purposely injuring a patient. None seem to apply to me.

That’s followed by “Your Declarations.” This part of the policy shows the named insured, the entity-named insured (the insured that doesn’t actually treat patients), the policy number, effective and retroactive dates, policy limits, medical specialty, and more. The policy Declarations really define the amount of protection you’ve purchased for services rendered within the policy period.

My medical liability policy is the only insurance contract I purchase that doesn’t have a deductible. Why does it provide “first-dollar” coverage? Other policies charge substantially higher premiums for first-dollar coverage; how much could I save on my medical liability policy if I had a deductible?

Claims, tails, and prior acts
I have a “claims-made” policy, which only provides protection if it is in effect when the claim is filed. A claims-made policy has “effective dates,” when the policy starts and ends, and “retroactive dates,” how far back into the past the policy looks. If a claim is made during the period the policy is in effect, and professional services were rendered (or should have been rendered) on or after the “retroactive” date, the policy promises to “pay all sums” that may be assessed.

The retroactive period can also be referred to as “prior acts” coverage, which simplifies switching from one claims-made policy to another. The new company simply needs to cover “prior acts” by using the same retroactive date as the policy being replaced. Now, all claims made during the effective period of the new policy for services rendered on or after the retroactive date are the responsibility of the new company.

About “tail” coverage
This would be a good time to skip to the “Tail Coverage” or “Extended Reporting Period” provisions. Under claims-made protection, the policy that is “in effect” when a claim is made provides protection. If you no longer wanted to carry medical liability insurance but still wanted protection for your prior acts exposure, you would need to extend the reporting period for which claims would be covered. This addition is called an “Extended Reporting Period” endorsement; because it extends beyond the “end” of the last claims-made policy you had, it is commonly referred to as tail coverage.

My current policy allows me to purchase or earn tail protection for an “unlimited duration.” Tail coverage is “free” if I die, retire due to disability, or retire at age 55 or older after 5 consecutive policy years. The retirement portion of this clause is confusing: To earn a free tail at age 55 or older after 5 or more consecutive policy years, you must retire from the practice of medicine. Retire—not quit your private practice and work part-time at a clinic, not move to another state for an office-only practice.

Now, do I really need this? What is the probability that I’ll die or become disabled and faced with a tail expense? Based upon my personal experience, the exposure is pretty low. I’m assuming I will plan my retirement from medicine—reducing my hours, reducing the scope of my practice, eventually move from doing to assisting to eliminating surgery. With that planned retirement strategy, my prior acts exposure is certainly much smaller than if I were to move from one insurance company to another during the peak of my practice.

And what about the “unlimited duration” feature of the tail policy? Where I practice, the statute of limitations is 2 years from the date of services rendered except for wrongful death (up to 5 years) or paralysis/loss of cognitive or reproductive abilities (up to 6 years). With those limits, do I really need a tail policy of unlimited duration?

The cost of “winning”
My policy informs me that the Company has a “right and duty to defend any suit” filed against me and “shall not settle any suit” without my consent. So, until I consent, the Company keeps defending me, without limit, presumably until we “win” or until all appeals or other efforts have been exhausted. But “winning” can be very expensive. How much of the annual premium goes to defending those who insist on battling an unbeatable foe?

A study conducted by the Harvard School of Public Health on the cost of resolving malpractice claims (New England Journal of Medicine, May 11, 2006) concluded that “for every dollar spent on compensation, 54 cents went to administrative expenses (including those involving lawyers, experts, and courts).” That seems like a lot. Does that mean that 54 percent of my annual premium goes to pay for legal expenses?

The Physicians Insurers Association of America (PIAA), the organization representing the physician-owned liability insurers, looked at 10,000 closed claims in 2005. Only 24 percent had an indemnity payment to the plaintiff. Still, the total “loss adjustment” expenses for those claims was $172 million, with an average expense of $21,000 for the “meritless” claims. The state of Ohio released a report in 2006 stating that 80 percent of the medical liability cases closed in 2005 resulted in no indemnity payment but cost an average $24,000 to defend.

The PIAA Data Sharing Project, started in 1985, studied 230,000 closed cases as of Dec. 31, 2005, and found that loss adjustment expenses for claims closed without an indemnity payment totaled $2,112,632,512. For the cases that closed with an indemnity payment, the total expense was $1,836,577,204 or nearly 90 percent of the amount to fight a claim to a zero! How much could I save if my policy didn’t offer unlimited defense or require my consent prior to settlement?

What’s next?
My cursory reading of the policy generated more questions than answers. Next month, I’ll share my search for a quality, alternative risk-financing option.

J. Michael Maxwell, MD, is a board-certified orthopaedic surgeon practicing in Adrian, Mich. Mark A. Tisdel is a principal with Backus Payne & Associates LLC, medical-liability specialists, in Lake Orion, Mich.

Editor’s note: This is the first in a two-part series on steps you can take to reduce your medical liability insurance premiums. This article examines the provisions of a standard medical liability insurance policy; the next article will examine alternatives to that coverage.