Malpractice Insurance: Minimizing Exposure
March 1, 1997
Malpractice Insurance: Minimizing Exposure
By: Daniel J. Sullivan, MD, JD, and Eileen Oswald
Editor’s Note: You are a competent, professional emergency physician (EP) committed to providing the best possible medical care to your patients. You attend seminars, keep up with the literature, and document each case thoroughly. Although you consistently practice within the standard of care, you have malpractice insurance, as required, "just in case." In other words, you’re safe. Or are you?
In today’s litigious environment, the risk of being involved in a malpractice lawsuit over the course of one’s career looms over even the best of physicians. However, the bottom line is, malpractice insurance simply does not cover the broad range of risk associated with the practice of emergency medicine. In addition, small or new emergency practice groups may not be adequately prepared to fund a tail policy, leaving the independent practitioner with a huge liability exposure and debt. Unscrupulous contract holders may have no intention of providing the promised coverage. Malpractice carriers can go bankrupt. Even fairly common activities, like taking a job in a new state, have the potential to leave you exposed if you’re not careful. The EP must enter the marketplace with some savvy regarding malpractice insurance, including the different types of insurance, recommended limits of coverage, the method of coverage at the termination of practice, consent to settle, and other important issues.
With appropriate research and caution in selecting a policy, you can save yourself from enormous risks in the future. Getting "gray areas" settled clearly and in writing on existing policies is essential. This article presents the basic principles every EP must be familiar with to ensure the best possible coverage. As with other areas of medicine, a preventive approach today can spare you from many hasslesnot to mention an enormous financial burdenin the future.
Options for Coverage
Physicians have several possible sources for obtaining professional liability insurance. The majority of physicians, whether they are independent contractors working alone or as a member of a contract group, have individual policies issued by physician-owned carriers or commercial insurers (owned by stockholders). In some states, there are state-sponsored insurance programs for physicians who do not have access to other sources of professional liability insurance, commonly referred to as a Joint Underwriting Associations (JUAs). They offer the same provisions as a physician-owned or commercial carrier.
Risk retention groups (RRGs) came into existence as a result of the federal Risk Retention Act of 1986. RRGs traditionally are created to bring similar risks together to spread over numerous individuals or groups of individual insureds. RRGs form as insurance companies and must follow the insurance laws of at least one state. When first joining an RRG, a physician is typically required to pay a capital contribution in addition to the annual insurance premium.
Risk purchasing groups (RPGs) also provide professional liability coverage. RPGs are not insurance companies but associations of insurance buyers with a common identity (e.g., a medical specialty society) that form an organization to purchase liability insurance on a group basis. Since an RPG purchases coverage from an insurance carrier, no capital contributions are required in order to join.
Trusts are another vehicle providing coverage to physicians in the United States. In some states, trusts are neither regulated by state insurance departments nor are they protected by state guarantee funds in the event of insolvency. Trusts frequently require capital contributions in order to join, and trust members are retroactively assessed if assets prove insufficient to pay losses.
If considering coverage through a trust, RRG, or RPG, a physician should carefully investigate all aspects of the policy, rules regarding accessibility, tail coverage requirements, and the financial solvency of the organization.
Employed physicians are generally covered under the professional liability program of the employer hospital/healthcare provider. Often, these programs are self-insured for a certain dollar amount and excess coverage is secured above the self-insured amount. Employed physicians are advised to discuss the coverage specifics with the risk manager, administrator, or insurance specialist of the organization for which they work. The procedure for the employed physician reporting potential claims and lawsuits to ensure their protection under their employer’s policy may vary from employer to employer. It is of vital importance to determine when events are to be reported to assure that coverage is triggered.
Types of Coverage
Claims-Made Coverage: Almost all professional liability insurance coverage is provided by claims-made policies. Under a claims-made policy, policyholders are covered for any incident that takes placeand that is reportedto the carrier on or after the earliest date to which a specific insurance policy applies, as long as the policy is still in force. That date may be the effective (inception) date of the policy, or it may be an earlier (retroactive) date, which results from the purchase of retroactive (prior acts) coverage for doctors transferring from one claims-made carrier to another.
Claims-made premiums "mature," or increase, during an initial periodtypically 4-6 yearsto reflect expanding liability. Once the potential for liability reaches a steady level, premiums will increase or decrease only if the insurer’s entire premium scale is adjusted due to changes in the overall claims experience of a particular state or specialty.
Because claims-made policies are designed to cover only those incidents and claims that occur and are reported while a specific policy is in effect, policyholders must take special care when switching from one carrier to another. Upon termination of a claims-made policy with one carrier, physicians should obtain either "tail" coverage (extended reporting coverage) from the carrier they are leaving or retroactive (prior acts) coverage from their new carrier.
Before purchasing a claims-made policy, physicians should be certain that their future right to purchase tail coverage from the new carrier is guaranteed. They also should inquire about the length of time tail coverage is applicable.
Occurrence Coverage: An occurrence-type policy insures physicians for any incident that occurs while the policy is in effectregardless of when in the future the incident is reported or becomes a claim. Physicians insured under occurrence policies pay premiums that take into account not only claims that arise during the policy year but also those that are reported after the year of insurance or after the policy is terminated. Such claims are called "incurred but not reported" (IBNR).
Neither retroactive (prior acts) nor tail coverage is needed when switching to another occurrence carrier or to a claims-made carrier. Coverage continues for any claims that are reported in the future as a result of incidents that took place while the occurrence policy was in effect.
Tail Coverage: A "tail" policy, sometimes referred to as an "extended reporting endorsement," provides protection after a claims-made policy lapses and there would be no further coverage. The Contractor should be aware that tail policies vary. The tail policy may cover losses at any time in the future (i.e., indefinite reporting period), or may only cover losses for claims made within a fixed number of years.
A plaintiff must file a malpractice suit within a statutory time frame known as the statute of limitations (usually one, two, or three years). In many states, the statutory time period does not begin to run until the individual knows or should know of the injury resulting from the alleged malpractice. For example, in the case of a patient with a "missed foreign body" in a wound, discovery of the injury could occur many years later. There are also special rules applicable to minors, such as one delaying the start of the running of the statute of limitations until the child reaches the age of majority. As a result, malpractice claims may be filed many years after the alleged negligent conduct. Therefore, whenever possible, the contractor should purchase, or request, indefinite tail coverage. If the group is responsible for purchase of the tail, the contractor should make sure the group is obligated to purchase a tail policy with an indefinite reporting period.
Case #1: Attorney Gives Physician Bad Advice on Obtaining Tail Coverage
In October 1986, a physician was advised by his attorney that tail coverage demanded by his medical malpractice carrier was an unconstitutional and an unenforceable form of age discrimination. He was advised not to pay the premium. Subsequently, the physician was sued for medical malpractice. The physician and his attorney attempted to reinstate the old coverage, which would have protected him from further loss.
They were unsuccessful, and in August 1987, the physician was obliged to obtain counsel for defense of the medical malpractice action. In January 1990, the physician’s second lawyer advised a settlement payment of $230,000 terminating the malpractice litigation. Shortly thereafter, the physician sued his first attorney for giving substandard legal advice. The legal malpractice action was dismissed because the one-year statute of limitations had expired. The physician appealed.
The Court of Appeals said that the physician sustained appreciable harm in 1987 when he was denied reinstatement of tail coverage. The court said the one-year statute of limitations began to run at that time, not in 1990, when the physician was obliged to pay an amount in excess of the premium to settle the underlying malpractice action. The court ignored the physician’s contention, that he did not suffer actual damages until being forced to pay the $230,000 settlement. Had he been given proper advice by his first attorneys, the settlement would have been covered by insurance, the physician argued. He argued further that his loss occurred in January 1990, not in 1987, when he was refused tail coverage. The Appellate Court affirmed the Trial Court’s decision that the statute of limitations barred the legal malpractice claim.
One dissenting judge said the physician sustained an irrefutable loss only on the day he was forced to pay an amount greater than the premium for tail coverage which should have protected him.1
This case ultimately turned on a statute of limitations issue. However, the case is included because of the physician’s original decision not to purchase tail coverage. He clearly got some bad advice. Tail coverage problems are very common. Physicians are often unaware of the type of malpractice insurance that protects them, when and how to purchase a tail, and who is responsible for paying for tail coverage. EPs often work on a handshake, much to the benefit of a contract group that does not intend to pay for tail coverage. Employed and independent EPs should be very clear on the hospital’s or group’s provision of malpractice coverage and coverage on termination. This is an issue that must be covered up front, in writing. There is a tremendous downside here for the unwary.
Case #2: Emergency Physician Contract Holder Refuses To Pay for Tail Coverage
A single-owner hospital EP contract group owned the contract for provision of emergency services at Hospital A. The EP owner purchased a claims-made insurance policy in 1990. That policy was mature in 1995. The owner had verbally or contractually promised each of five EPs that on termination of the hospital-group contract, his corporation was responsible for the purchase of tail coverage. In addition, the contract between the physician-owner and the hospital contained a provision mandating that the emergency corporation provide tail coverage for the EPs. The hospital terminated the contract in December 1995.
The cost of tail coverage was 2.5 times the mature claims-made rate. The total cost of tail coverage for the five physicians was approximately $150,000. Broken down by individual physician, the cost for one of the physicians was as high as $60,000. The physician owner claimed that he did not have the financial wherewithal to purchase the tail coverage and dissolved the corporation. He called each of the five physicians to tell them that he would not provide the promised tail coverage.
The EPs and the hospital were up in arms. The insurance contract between the physician-owner and the insurance company stated that tail coverage must be purchased within 60 days of the termination of the claims-made policy. The insurer also claimed that the tail policy would have to be purchased by the corporation; it was not available to the individual physicians.
The individual physicians turned to the marketplace and found a broker who could provide them with the necessary tail coverage. Each individual was responsible for working out a payment mechanism for his or her own policy. The hospital and the individual physicians are pursuing legal remedies at this time.
This conduct is unethical and arguably illegal, although at the time of this writing, the injured EPs have not filed a lawsuit. The EPs involved were either working under an oral agreement or written contracts that could not be found. Not one of the five EPs could find a contract containing written evidence of the agreement to provide tail coverage. Any challenge to the contract holder’s conduct takes the injured EPs well outside the purchase period for obtaining tail coverage.
This fact pattern raises another critical issue. If a contract holder says he or she will provide tail insurance coverage, even if there is contractual language to that effect, what assurance is there of compliance? How can an EP avoid this fact pattern?
In general, EPs can rely upon the track record of well-established contract groups. Similarly, a hospital-based physician can usually depend upon assertions by the hospital. However, if the EP is considering contracting with a small or newly formed contract group, he or she should ask for assurances that tail coverage is provided and that there is a plan for funding.
The Cost of Malpractice Coverage
One type of malpractice insurance coverage (i.e., claims-made vs occurrence) is not "better" than the other. Occurrence coverage costs more than claims-made, but after paying the tail on a claims-made policy, the two are relatively close in cost. Most professional liability coverage is now provided on a claims-made basis, although tails may be "built in." Generally, in claims-made coverage, there is a yearly increase in premiums through the fourth, fifth, or sixth year, at which time the policy is mature. The increase reflects the insurance carrier’s increased risk. For example, more claims are likely to be filed in the fourth year than in the first. The fourth year’s policy is insuring events occurring in years one through four; the first year’s policy is only insuring events occurring the first year. The exposure levels out because potential plaintiffs have a limited time in which to file malpractice suits.
The cost of a tail is often based on some multiple of the mature claims-made premium, and it is often around 2.0-2.5 times the annual mature rate. The occurrence policy does not increase yearly to a mature rate. Its rate is set when the policy is purchased, although it may vary if market conditions change.
Malpractice Reductions Related to Practice Guidelines
The American Society of Anesthesiologists (ASA) in 1986 promulgated guidelines for intraoperative monitoring. Physicians agreeing to incorporate these guidelines into practice benefited from a reduction in their medical malpractice liability insurance premiums of up to 34%.9 It is noteworthy that the ASA guidelines focused on quality of care rather than reduction of its costs. One consequence was, in fact, initial increased expenditures mandated by purchase and maintenance of requisite monitoring equipment.10 The authors are unaware of any similar national guideline based programs for EPs.
Malpractice Reductions Related to Risk Management Activities
Some insurance companies provide malpractice insurance premium discounts for EPs or EP groups that participate in dedicated risk management and related programs. For example, the Norcal Mutual Insurance Company, a California insurer, provides incentives to physicians who participate in on-site assessments, educational programs, and quality-based care rounds.2 Physicians find this to be effective in reducing their premiums in the arena of 5% for an individual policyholder and upwards for large groups with 10 or more physicians.
The Copic Insurance Company of Colorado uses a rating system to gauge physicians’ practice exposure. Participation in an adverse drug reaction risk management program can result in premium savings for individual physicians upwards of 10%. It was believed by this physician insurer that the control of medication errors was a significant risk reduction opportunity for individual physicians and, therefore, the insurance company. According to the company, adverse drug reactions are caused by inappropriate dosages, administration routes, etc., and have been found to be responsible for up to 28% of all hospitalizations and 200,000 fatalities a year. A Reuter insurance briefing states that "the program rewards Copic-insured physicians who adhere to risk management guidelines and continue to expand their risk management knowledge."3
Increased Malpractice Costs Related to Specialized Programs
Some insurance companies target physician clients with a poor malpractice experience. Physicians with a poor malpractice experience may have difficulty obtaining malpractice insurance in the marketplace. Certain companies exist that work with these physician clients for a higher premium. For example, the Frontier Insurance Company created the Frontier’s Alternative Risk Physicians program. The program is designed to help "nonstandard accounts" reduce their liability risks and return to the standard market within 3-5 years. Frontier makes risk management education mandatory for "nonstandard doctors."
Limits of Coverage
Most EPs carry malpractice insurance limits of $1 million per claim (or occurrence) and $3 million in the aggregate in any one policy year in states without statutory dollar limits on malpractice claims. Some states have an insurance fund that provides compensation to injured patients or have statutory limits on malpractice liability, which allow EPs to maintain lower coverage limits.
As hospital-based physicians, emergency practitioners are rarely isolated defendants in malpractice actions. When an EP is sued, the hospital and/or contract group are typically also included in the litigation. Although the EP may be labeled an "independent contractor," the plaintiff’s attorney may attempt to include the hospital and group through allegations of agency. These issues must be litigated on a case-by-case basis, and the applicable law varies among the states. To the extent that agency can be proven, the group and/or hospital may have to contribute to the judgment or settlement. In addition to the agency theory, the plaintiff’s attorney will often attempt to keep the group and hospital in the case by alleging a theory of primary liability against the group (e.g., negligent hiring or retention) or the hospital (e.g., negligent credentialing, nursing staff negligence).
Malpractice judgments against EPs exceeding $1 million are unusual, but definitely do occur. The group and hospital typically contribute to the settlement agreement or jury verdict based upon one of the theories of liability outlined above. The result is that the $1 million per occurrence is widely recommended as adequate coverage. However, the contractor must closely monitor this issue over time. Statistics demonstrate that the size of judgments continue to rise, although this has been offset to some degree by state tort reform.
The $3 million aggregate is also widely recommended and, based on general experience among EPs, seems reasonable. The EP moving into a new state would be prudent to ask his or her attorney for advice on malpractice conditions and recommended limits in that jurisdiction.
If the EP’s malpractice coverage is obtained by a contract group, the insurance company may quote a third number, which is the annual group aggregate (e.g., $1 million/$3 million/$10 million). The third number represents the total amount the insurance company will pay in malpractice costs for one policy year. Therefore, if the group has used the full $10 million in a policy year, there may be no remaining coverage for a subsequent judgment or settlement. The EP should be aware of how many physicians are covered under the group’s aggregate. If the group is a modestly sized single hospital entity, the $10 million might suffice. However, if the group is a growing multi-hospital entity, the $10 million cap might be inadequate.
Scope of Insurance Coverage
Good risk management dictates that the EP should evaluate his or her particular practice situation and list all activities that could result in exposure to financial liability. It is important to consider the fact that the term "financial liability" applies to the payment of dollars related to a wide range of activities. It may be a malpractice settlement or judgment, the preparation of a legal defense in a civil rights action based upon taking custody in a case of alleged child abuse, an EMTALA transfer violation, or an antitrust lawsuit related to participation on a hospital credentials committee.
Consider the following typical malpractice insurance contract language: "We will pay all amounts up to our limit of liability which you become legally obligated to pay as a result of patient injury or damage. The injury or damage must be caused by a medical incident arising out of the supplying of or failure to supply professional services by you . . ." Review the emphasized words and consider those aspects of emergency practice that may not be covered.
Case #1: Reading Inpatient ECGs and X-Rays
An EP was asked to read a chest x-ray on an elderly post-operative patient for nasogastric (NG) tube placement. The patient had pulled out his NG tube, and the floor nurses had replaced it. The EP observed that the end of the tube was in the lung and put a note to that effect in the patient’s chart, but took no further action.
The EP missed a pneumothorax that was visible on the film. The patient died as a result of the pneumothorax. The estate sued the floor nurse, hospital, and the EP. The suit was dismissed because the judge felt that reading the x-ray did not create a physician-patient relationship.4
EPs often read inpatient ECGs and x-rays. Since the activity is usual and customary in many emergency practices, and since it does relate to the provision of professional services, most insurance companies will cover the cost of related lawsuits. However, it is a good idea to ask about coverage and request a letter specifically outlining coverage for this aspect of care.
Case #2: Responding to In-House Codes
A 68-year-old woman was an inpatient, and status post removal of a thyroid nodule. Twelve hours post-operatively, she began bleeding and developed respiratory distress. The in-house physician was called to assist at 2:35 a.m. Soon afterward, she had a respiratory arrest and a code was called. The respiratory therapist unsuccessfully attempted intubation. The nursing supervisor called the ED physician.
The ENT surgeon gave a phone order for the EP to do a tracheotomy. The EP attempted a needle cricothyrotomy, but was unsuccessful. The ENT arrived and did a tracheotomy. The patient was pronounced dead at 4:00 a.m.
The estate sued the EP for attempting a cricothyrotomy, since the obstruction was obviously below that site, and for failure to perform a tracheotomy.
The parties settled for $800,000.
Once again, since covering inpatient resuscitation is usual and customary in many emergency practices, and since it does relate to the provision of professional services, most insurance companies will cover the cost of related lawsuits. In some hospitals, the EP is expected to respond to all in-house problems, including newborn deliveries, elective intubations, and even emergencies in a nearby professional office building. This may be stretching insurance coverage a bit far. The EP and/or group should be absolutely sure that coverage extends to all related in-house activities. If the insurance coverage does not extend to all in-house activities, the EP should look to the hospital for coverage of any related liability that may result.5
Case #3: Duty to Third Parties
A male patient was treated for a corneal abrasion with an eye patch. Following discharge, while driving home, he hit a driver on a motorcycle. The motorcycle driver (i.e., the third party) sued the EP, not for medical malpractice, but for ordinary negligence, for failure to warn his patient not to drive with an eye patch.6
This is a case involving the EP’s duty to a third party. It is not a medical malpractice action. The EP’s insurance contract is not likely to mention this kind of legal action, and it is not clear whether a malpractice insurance policy would cover this liability. It is related to professional services, but it isn’t a malpractice action, and isn’t even related to the physician’s patient. The insurance company would probably have to send this out for a legal opinion to determine whether the malpractice policy were applicable. "Duty to third party" cases have become more common in recent years, and it is important to determine coverage with the insurer before a lawsuit occurs.
Case #4: Malpractice Does Not Cover Liability Resulting from Wrongful Termination
An employee of a radiology group sued the group, claiming that her hospital staff privileges were wrongfully terminated and that she was falsely accused of numerous acts, including dancing nude and being a drug addict. A California appellate court ruled that the medical liability insurer had no duty to defend the radiology group against the suit for wrongful termination and slander.
The group settled with the radiologist for $150,000 without admitting liability. The group also spent over $90,000 in legal fees. Its liability insurer refused to defend the matter or to pay the settle ment. The insurer alleged that the insurance policy did not cover claims for wrongful termination and that the claim did not arise from rendering professional services.
The group sued the insurer for breach of contract. The insurer moved for summary judgment on the ground that it had no contractual obliga tion to defend the suit because a decision to fire an employee did not constitute rendering professional services. The court entered judg ment for the insurer.
Finding no potential for coverage, the court said the insurer had no duty to defend and affirmed the lower court’s judgment.7
Physicians should be very clear on the nature of the language in insurance contracts. In this case, the insurance policy did not indemnify the physicians for any activities outside the rendering of professional services. There are a large number of lawsuits that may occur outside the realm of "rendering professional services." These would include all of the intentional torts, civil rights actions, wrongful termination, etc. Antitrust actions may also be excluded from insurance policies.
Physicians should be forewarned to carefully scrutinize policies and be aware of the specifics of coverage.
Case #5: Insurer Does Not Have To Defend Physician’s Personal Injury Suit
A Florida appellate court ruled that an insurance company had no obligation to defend an action against a surgeon who allegedly assaulted an anesthesiologist.
The surgeon instructed a staff anesthesiologist to examine an intensive care patient in preparation for surgery. He cautioned the anesthesiologist not to inform the patient of surgical risks because of her highly emotional state. Unknown to the surgeon, another anes thesiologist substituted and proceeded to discuss the operation with the patient.
The surgeon arrived on the scene and found his patient emotionally distressed over the recently learned risks involved in the imminent surgical procedure. The surgeon confronted the anesthesiologist, allegedly grabbed the ends of a stethoscope draped around her neck, pulled and twisted them, and caused her to suffer a herniated cervical disc.
She filed a personal injury suit against the surgeon, who filed a third party action against the hospital’s insurance company for a declaration that it was obligated to provide a defense. A trial court held that the surgeon’s acts were not excluded from coverage.
Reversing and remanding the decision, the appellate court said that the surgeon’s acts were intentional and excluded under the policy’s general liability insurance policy. Even if the injuries inflicted were unforeseeable, for purposes of determining insurance coverage, the surgeon’s original conduct was not an accident.
Thus, the court reversed the declaratory judgment, finding the insurance company had no duty to defend or provide coverage.8
The hospital’s insurance policy excluded coverage for intentional torts. The personal injury action was based on a battery, which is an intentional tort. The language of many insurance policies specifically excludes indemnification for intentional torts.
EPs should review other activities related to emergency practicefor example, activities related to the emergency medical system (e.g. Project Medical Director), chairmanship or membership on a hospital credentials, peer review or disaster committee, employee health services, and others. In each case, consider whether there is a significant risk of exposure to liability, and then determine whether that liability
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