Published 1/1/2008
Howard B. Yeon, MD, JD; James H. Herndon, MD, MBA

Protecting your assets: Why medical liability insurance isn’t enough

Medical liability is a ubiquitous concern for orthopaedic surgeons. The prospect of a lawsuit brings well-justified fears of a prolonged, unpleasant, and costly judicial process that could result not only in professional stigma but also in financial ruin.1

Laws capping tort damages have been effective in some states, but in many states, political forces make the adoption of such limits unlikely. Because hospitals in some states are protected under the doctrine of charitable immunity, individual physicians may be seen as the ultimate deep pockets in medical liability litigation.

Medical liability insurance is imperfect protection
Most physicians trust that medical liability insurance will protect their personal and business assets, but this reliance may be misplaced. Premiums have risen sharply over the past decade as insurers have adjusted to changes in legal and administrative costs and to the rising fraction of paid closed claims.4-6

Despite its increasing cost, medical liability insurance provides limited protection from the full range of tort liability. For example, medical liability insurance does not cover liability arising from activities inherent in running a medical practice but not directly related to the physician-patient relationship. These potential liabilities include employment lawsuits and tort claims from injuries sustained on the office premises.

Jury awards in medical liability cases are often unpredictable and can exceed coverage limits. When this occurs, physicians’ personal assets and revenue stream are vulnerable to collection by the plaintiff.

More isn’t necessarily better
One way to address this risk is to pay for more insurance coverage. Harvard-affiliated physicians, for example, have medical liability coverage with limits of $5 million per suit and an annual aggregate of $10 million. High-limit policies may be somewhat effective in protecting physicians’ personal assets from loss as a result of medical liability litigation.

In Texas, for example, a jury awarded $269 million to the family of a girl with cerebral palsy who died as a result of an overdose of propofol administered as a medication error. But the family later settled privately for $3 million—just under the total insurance policy limit of the three physicians involved.

A “high-low” agreement between a plaintiff and defendant before trial may guarantee the plaintiff a sizeable minimum payment but limit the maximum payment amount to the insurance policy limit, regardless of the actual damages awarded at trial. Because such agreements are quite common, high medical liability insurance policy limits may also directly increase settlement amounts in high verdict cases.8

High-limit policies may also encourage lawsuits because they ensure a large pool of liquid assets available to tort plaintiffs and their attorneys. Because most plaintiffs’ attorneys are compensated on a contingency fee basis, lawyers have become the de facto gatekeepers of the medical liability tort system.9 An attorney working on a contingent basis may decide whether to accept a case by considering its merits and various economic factors.

Before accepting a medical liability client, an attorney may estimate the probability (P) that the case has merit and the likely monetary recovery (L) should the client settle or win at trial. The a priori value of the case to the attorney is P times L times the contingency percentage (usually around 33 percent). If the value of the case is greater than the attorney’s predicted cost, he or she will proceed, but if the value of the case is lower than the cost, he or she is unlikely to continue and may even try to dissuade the potential client from pursuing the lawsuit.

The potential monetary recovery depends both on the severity of the patient’s injury and on the physician’s ability to pay. To determine a defendant physician’s available assets, a plaintiff attorney’s first inquiry is invariably the policy limits of the physician’s insurance coverage. Insurance companies are ideal deep-pocket payors because they can make large lump-sum payments without the added transactional and legal complications implicit in seizure of personal assets or garnishment of income.

Personal assets at risk
A physician’s personal assets, if substantial and otherwise unprotected, also contribute to the pool of funds available to the plaintiff and the plaintiff’s attorney. A search of state and county records can uncover real estate, corporations, and other assets held in the name of the physician or his or her spouse. Private financial investigators and tactics such as “phishing”—attempting to discover account balances and other sensitive information by posing as the physician—may also be used.

A large pool of medical liability insurance revenue contributes to a public perception and expectation that well-heeled and well-insured physicians have pockets deep enough to compensate patients who have adverse outcomes. Although the physicians’ medical liability coverage limits cannot generally be mentioned at trial, juries typically assume that doctors carry liability insurance adequate to compensate injured patients. In Florida, where some physicians elect to practice without medical liability insurance, state law requires them to post a sign in their offices informing patients that they have assets sufficient to cover at least $250,000 of any medical liability award.

Expanding the boundaries
To obtain monetary damages in an environment in which physicians have substantial insurance coverage and other vulnerable assets, attempts to expand the duties of physicians within the standard of care may be made.

One illustrative case involved a 30-year-old man who underwent two hip surgeries—a left total hip arthroplasty (THA) and a right hip core decompression—in 1990. The two procedures were scheduled 7 days apart during the same hospitalization. Prior to the THA, the patient consented to participate in an experimental protocol and receive RD-Heparin, a low molecular-weight heparin being tested at the defendant’s hospital.

After the patient failed to receive the first dose of the experimental medication at the time prescribed by the clinical trial due to a nursing error, he was excluded from the study and was started on aspirin on the first postoperative day in accordance with the surgeon’s standard anticoagulation prophylaxis protocol. The patient continued to receive aspirin through his hospital stay and after discharge to his home, but he suffered a fatal pulmonary embolism 6 days after discharge. Despite the experimental nature of the alternative medication and testimony that aspirin was an acceptable choice for anticoagulation, the jury awarded a total verdict of $539,275 for the plaintiff.

The cumulative effect of such cases is to expand the boundaries of legally enforceable physician responsibility as perceived by physicians and by patients. As a result of this asymmetric development and dissemination of case law, accepted boundaries of physician responsibility have expanded, creating additional legal theories under which physicians can be found liable and reducing the role of patient self-accountability in medical practice. Reporting bias may also cause plaintiffs to overestimate their chances of prevailing in medical liability litigation and the monetary value of their case.11

What’s the alternative?
If physicians cannot rely on insurance to protect their property from tort liability, what can they do? One alternative is asset protection—the use of statutory protections, business entities, and strategic financial transactions to limit financial risk. Most business enterprises with significant risk exposure take advantage of asset protection techniques to limit tort liability, but most orthopaedic surgeons do not use asset protection effectively. Next month, we will describe simple, functional, and inexpensive asset protection strategies that can be used by orthopaedic surgeons.

Howard B. Yeon, MD, JD, is a graduate of Harvard Medical School, Harvard Law School, and the Harvard Combined Orthopaedic Residency Program. James H. Herndon, MD, MBA, is past president of the AAOS and currently program director of the Harvard Combined Orthopaedic Residency Program. Comments from members on this article are welcome; e-mail them to aaoscomm@aaos.org

Did you know?

  • Fewer than 2 percent of injuries caused by medical negligence resulted in a medical liability claim, and only 17 percent of medical liability lawsuits filed were in fact found to involve medical negligence, according to the Harvard Medical Practice review of 30,000 hospital discharges and 3,500 medical liability claims in New York state.2
  • More than one third of written demands for payment for medical injury did not involve medical error, based on a recent closed claims analysis of 1,452 medical liability claims from five large liability insurers.3
  • Claims not involving error were more than twice as likely to result in trial rather than settlement.3
  • Meritless claims led to compensation through settlement in more than 25 percent of cases.
  • Overhead costs—including litigation costs and attorney fees—typically account for more than half of settlement costs.3
  • The average time between injury and resolution is 5 years.3
  • Professional liability insurance rates in Massachusetts have increased 132 percent since 1992, and professional liability premiums account for more than 11 percent of operating costs in four out of 10 physician practices.7
  • The New York state insurance department approved a 14 percent increase in medical liability premiums in 2007 to prevent a looming insurance industry crisis.


1 See Kennedy v. McKesson Co., 58 N.Y.2d 500 (1983) holding that damage to a dental surgeon’s professional reputation and mental condition rendering him unable to carry on his professional work as a result of a medical malpractice action and associated criminal investigation stated a valid cause of action permitting recovery for monetary damages.

2 Localio AR, Lawthers AG, Brennan TA, et al. Relation between Malpractice Claims and

Adverse Events Due to Negligence: Results of the Harvard Medical Practice Study III. New

England Journal of Medicine 1991;325(4):245-251.

3 Studdert DM, Mello MM, Gawande AA, Gandi TK, Kachalia A, Yoon C, Puopolo AL, Brennan TA. Claims, errors, and compensation payments in medical malpractice litigation. New Eng J Med. 2006: 354(19): 2024-2033.

4 Limiting Tort Liability for Medical Malpractice. Office of the Actuary at the Centers for Medicare and Medicaid Services. Congressional Budget Office. Issue Summary, January, 2004).

5 Studdert DM, Mello MM, Brennan TA. Medical Malpractice. New Eng J Med. 2004; 350(3): 283-29.

6 Medical Malpractice Insurance: Multiple Factors have Contributed to Increased Premium Rates. General Accounting Office -03-702. June, 2003.

7 Massachusetts Medical Society Physician Workforce Study, July 2005.

8 Hallinan, JT. “In Malpractice Trials, Juries Rarely Have the Last Word.” WSJ 11/30/04.

9 Brennan TA, Leape LL, Laird NM, et al. Incidence of adverse events and negligence in hospitalized patients. Results of the Harvard Medical Practice Study I. N Engl J Med. 1991; 324: 370–6.

10 Poplin C. Medical decision making, legal liability, and managed care. Legal Medicine. 98; 23-30.

11 Bailis DS, MacCoun RJ. Estimating Liability Risks With the Media As Your Guide: A Content Analysis of Media Coverage of Tort Litigation. Law and Human Behavior 1996;20:419-429.