Episode 032: The Malpractice Essentials

Speaker 1: You are listening to Your Practice Made Perfect; support, protection, and advice for practicing medical professionals, brought to you by SVMIC.

Brian: Thank you for joining us today on our podcast. My name is Brian Fortenberry, and in this episode we're going to be discussing medical malpractice insurance, medical professional liability coverage, what that looks like, what is involved in it, what the particular parts are, and what is important. To help us with our discussion today, someone who knows quite a bit about this, Mr. Jim Smith. Thanks for joining us, Jim.

Jim: My pleasure.

Brian: Before we get started, why don't you tell our listeners a little bit about yourself and the time you've spent in this industry and all of the many accomplishments that I personally know that you have had?

Jim: Well, I don't know about accomplishments, but I've been with SVMIC coming up on 27 years this January. Started in the MPL insurance business 36 years ago. So that's been my specialty, right out of college, started to work with the Liberty Mutual insurance company in 1975 as a claims adjuster.

Brian: Since you've been at SVMIC, I know for a fact you have served on a number of committees here, obviously, and also the PIAA. Tell us a little bit about the PIAA. That might be a good place to start.

Jim: PIAA is an association of medical professional liability insurance carriers. Started in the United States, branched out to global. So a few years ago, served on the underwriting section, which is just a committee of the PIAA, and that section, that committee plans workshops for continuing education. Also, am a member of an organization called PLUS, Professional Liability Underwriters Society. Served on a couple of committees with PLUS over the years, but that's been a while.

Brian: Well, and you have been a part and seen a number of changes and things that have been cyclical and come around in the industry as well. Let's just jump right into this and let's start with the most basic of questions. Really, what is medical professional liability insurance?

Jim: Well, maybe starting with just the concept of insurance itself?

Brian: Well, sure. Yeah, that's a good place.

Jim: Insurance is a method of transferring risk. So rather than assuming risk of your home burning down or your car crashing, instead of you assuming the financial risk of that, you pay a premium to an insurance company and you transfer that risk to them. And in the case of medical professional liability insurance, physicians and other healthcare professionals pay a premium to an insurance company or someone pays that premium on their behalf, and then that insurance company assumes the risk of medical professional liability or, otherwise known as malpractice.

Brian: Like you said, with anything else, whenever I have homeowners insurance or car insurance, I'm pooling my risk with other fellow auto drivers or homeowners. In this scenario, certainly with a physician-owned insurance company, you're really pooling your risk with other physicians. Right?

Jim: That is correct. Probably most of the medical professional liability insurance in the United States is written by or provided by insurance companies that are stock insurance companies, which means that the insurance company is capitalized and owned by investors, governed by a board of directors. Then, there are companies like SVMIC that are mutual companies, and they're owned by the policyholders. The policyholders pay a premium, but they're also members or owners of the company, and they actually elect the board of directors, and then the board hires the management team.

Brian: What is exactly a medical professional liability insurance contract? Because I am assuming that when you get a policy, you've entered into a legal contract. Correct?

Jim: That is correct. Really, any insurance policy is a contract and, of course, a contract is so-called legal, in that you assume obligations when you enter into a contract. So an MPL insurance policy is a contract between the policyholder and the insurance company. The policyholder agrees to pay a premium and abide by certain terms and conditions in the policy, policy form, that most people don't read. It could be 20 or more pages long. That's probably why they don't read it. But it's important that we all read insurance policies that we pay the premium for. But the insurance company, their contractual obligation is to provide a defense and to indemnify the policyholder, indemnify meaning pay on behalf of the policyholder in the event a claim or a lawsuit is filed or they're facing some legal challenge that would ultimately, or could ultimately, result in financial loss.

Brian: That kind of leads right into the next question I have. If we are going to indemnify or pay on behalf of a policyholder a potential loss like that, what does this contract or what does a typical medical professional liability policy cover? What would be covered under that policy? And I know, I'm sure it's different from policy to policy, and probably even company to company. Correct?

Jim: Sure. Well, in the MPL industry, an insurance policy covers claims or lawsuits arising out of professional services rendered. And, for architects and engineers, that could be professional services that they render. In the MPL market, it's for physicians, surgeons, other healthcare providers as they render professional services. Then, if something goes wrong or a patient believes that they were not treated appropriately, then they'll contact an attorney, usually, and that's how it all gets started.

Brian: When you said something goes wrong or there is a problem, I'm assuming that that's when that phrase that we're familiar with in a lot of different industries, "malpractice", comes into play. I'm certain that probably has a fairly specific definition, or at least it has to meet certain criteria to be in play. So malpractice, how do you define that? How do you know exactly what that criteria is?

Jim: Essentially, the term malpractice is fairly universally defined as a deviation from the standard of care.

Brian: The standard of care then, is that industry-wide or is that specific to a certain area or a specialty? Does it vary a little bit depending on where you are and what you're doing?

Jim: Yeah, generally speaking, the standard of care is referred to that standard by specialty within the community that the physician or healthcare provider practices in. That definition will vary from state to state.

Brian: So, Jim, what are some specifics that medical professional liability policies generally cover?

Jim: Most typically, MPL policies cover the legal expenses or the financial obligations that arise out of claims and lawsuits against medical professionals. Typically, an insurance policy in this industry will define medical malpractice as arising out of the rendering of medical services or professional services, and that includes rendering medical treatment, making medical diagnoses, and rendering medical opinions or medical advice.  And then, most MPL insurance policies also cover healthcare providers as they participate in formal peer review activities, including: reviewing professional services, utilization of professional services, evaluating or improving quality of care and reviewing the qualifications, credentials and competence of other healthcare providers.

Brian: There's a lot of fingers involved in a policy. It's not just tunnel vision of a physician rendering services and a claim being made that they did not live up to, as we said earlier, the standard of care. There's a lot more involved to a policy than just that very limited look then.

Jim: Policies tend to be very broad in nature. They are intended to protect healthcare professionals in their practice, and it's designed for that very purpose.

Brian: Is there different types of professional liability policies? I've heard terms of claims-made and occurrence, and those can be confusing. Could you give us a brief explanation of, really, what is the difference in a claims-made policy and an occurrence policy?

Jim: Well, they're two different forms of insurance policies in the liability insurance arena. The most common is an occurrence policy form. That is typically homeowners, automobile, health insurance, disability insurance, most every type of insurance is written on an occurrence basis. What that generally means is that the policy that is enforced at the time the event occurs, hence the word "occurrence", that policy covers any financial obligations resulting from an incident that occurs during that policy period, regardless of how long it takes for that claim, resulting claim to be filed or adjudicated or settled, however it's resolved.

Brian: So it's like, if you have car insurance and you have an active policy at the time that you have accident, even if that policy was canceled in the future, the fact that you had the policy active at the time that the accident occurred, you still have coverage?

Jim: That is correct. Now, on the other hand, a claims-made policy is a policy that covers claims or lawsuits that are reported to the insurance company during the policy period. So if a healthcare professional has an active MPL policy and they get notice of a lawsuit, the policy that's enforced at the time they get notice of that lawsuit and at the time they report it through their insurance company and the limits of liability that exist under that policy, that's what the policy's going to cover, that particular claim or suit.

Brian: As you said, it's more report-date-driven?

Jim: Yeah. Another way to refer to a claims-made policy might be a "claims-reported policy form".

Brian: Got you. That makes sense. So in that scenario, what happens on a claims-made policy then that you don't have an active policy anymore, you had a policy, but you don't have an active policy anymore, and then you get notification that there is a suit or a possibility of a loss for something that happened in the past when you had an active policy? How is that covered then?

Jim: There are advantages and disadvantages to the occurrence policy form versus the claims-made policy form. The primary disadvantage of a claims-made policy form is the fact that when the policy is canceled or if it's non-renewed by the insurance company or the policyholder, then if a claim or a lawsuit arises after the cancellation date or the termination date of the policy, then that claim or suit would not be covered, unless it had already been reported to the insurance company prior to the cancellation of the policy. Now, there's a remedy for that.

Brian: Okay. Good.

Jim: Yeah. The insurance company, when a claims-made policy is canceled or non-renewed, the insurance company will offer the policy holder the opportunity to purchase additional coverage, it's typically called "tail coverage", but it's also referred to as a "reporting endorsement" and I think you'll see why it's called that in a minute. But that endorsement, the policyholder would pay an additional premium for that endorsement, that endorsement extends the period within which claims or suits that previously occurred would be covered after this claims-made policy is canceled or non-renewed. Or, another way to look at it is the reporting endorsement or the tail coverage converts that claims-made policy back into an occurrence-type policy, in essence.

Brian: I got you. So when you were saying earlier that it has to be reported during, like, an active policy period, the tail becomes the active policy period that it can be reported under?

Jim: That is correct. It typically extends the period within which claims or suits can be reported, and that extension is indefinite, usually. Sometimes it's limited. We would recommend that healthcare professionals confirm that if they are ever in a situation where they would purchase tail coverage.

Brian: We were talking earlier, you referred to, "It's covered at the limits of liability of the policy," and I'm assuming that tail coverage is covered under a certain limit of liability amount as well. Explain to us, what is limits of liability and how you know what is sufficient coverage to have and what that looks like and how do you make that assessment.

Jim: Practically any insurance policy will have limits as to how much the insurance company is willing to pay on behalf of the policyholder. It's true for life insurance, any kind of insurance, and it's certainly true for liability insurance. And MPL insurance policies have limits that are stated in the policy or on the cover page, or typically called the "declarations page" of the policy. The declarations page will show what the limits of liability are, in other words, how much the insurance company is obligated to pay on behalf of the policyholder.

Typically, in the MPL industry there are two limits shown on the declarations page, the first limit being the each occurrence or each medical incident reported. So for every incident, claim or suit, there is a limit, and that is most typically $1 million. Then, there's a second limit called an annual aggregate, meaning that in the event a policyholder has more than one claim reported during the policy period, then the limit of the insurance company's liability will be that aggregate limit. So it would be very rare that this would happen, but if a policyholder had two or three claims that they needed to report to the insurance company during a one-year policy period, then typically the limit for all of those claims or suits combined would be $3 million.

Brian: Okay. That makes sense. So any one claim reported in a year, there's not going to be money that would exceed that $1 million if that happens to be the occurrence amount, and that the $3 million would be the combination of the money spent on all claims as far as a loss payment for that particular report year. Correct?

Jim: Correct. That report year or policy period.

Brian: Got you. Now, when you said it's typical to have $1 million/$3 million limits, is that all that is generally offered with MPL policies, or are there other ways to get additional coverage or less coverage that exist?

Jim: Yeah, that would be the most typical policy limit in the United States. Varies state by state. Some insurance companies, for example, particularly in Florida, insurance companies more typically offer $250,000 limits.

Brian: Less? Okay.

Jim: Yeah, it would be much less than $1 million, and then, there are insurance companies in other states that would offer limits higher than $1 million/$3 million, probably the highest being something like $10 million/$12 million. So $10 million per medical incident, $12 million annual aggregate.

Brian: One of the big questions on everyone's mind, regardless of any insurance policy, whether it's homeowner's, auto, health insurance, you name it, one of the first questions everyone asks is, "How much is this going to cost me?" So what is the typical cost and what are the variables for the cost when it comes to an MPL policy?

Jim: Well, unfortunately, MPL policies are quite expensive and the amount of the premium varies based on the specialty, based on the limits of liability that the policyholder selects, and varies significantly based on what state or what city, if it's a large metropolitan city. So typical MPL premium would range from $3,000, to $5,000, to well over $100,000, particularly depending on the state or the territory, geographic territory.

Brian: You say there's this spectrum of $3,000 all the way up to, potentially, $100,000, and it depends on the state. Why this huge gap? Why is it so different like that state to state?

Jim: It all boils down to the frequency of claims in that area, and then the severity. In other words, how much they ultimately cost. So in an area, for example, south Florida, there is a higher frequency of claims. Then, the claims tend to cost more per claim. So, consequently, the premium in south Florida is one of the highest premiums in the country. So you have south Florida, and then you have major metropolitan areas like Chicago and New York City. In those two states, the premium, particularly for a higher-risk specialty like OBGYN, that premium can be well over $100,000.

Brian: It is then based really on how much more likely you are to be sued, and the severity is not only from the location, but an OBGYN can be over $100,000. Is that because they are at a greater frequency or severity of risk? Is that why theirs is more, say, than just an internal medicine doctor, then?

Jim: I would say OBGYN, maybe not so much frequency, although they would have a higher frequency than, let's say an allergist or a dermatologist. But the primary reason for OBGYN premiums being so high is because of the severity of the claim or the severity of the injury, because, typically, if something goes wrong in the labor and delivery process, it's usually pretty serious.

Brian: That does make sense why that huge variation. As we look at these MPL policies, if a claim is filed, for instance, against a practitioner group or whoever, claiming malpractice, and you start that part, what kind of say does the actual physician, the policyholder get in this whole process when an insurance company's involved and lawyers? What type of say do they get? And does that depend on the policy at all?

Jim: Yes it does. Again, comparing MPL to other types of insurance, most other types of insurance policies don't really give the policyholder the option of determining whether to settle the case or to go to trial, for example. But in the MPL industry and in other lines of professional liability insurance for, let's say attorneys or architects and engineers, many insurance companies, including SVMIC, will give the policyholder the ultimate decision-making authority to make that determination.

If a physician truly believes that he or she did not commit malpractice and that they want to defend themselves, ultimately, before a jury, then that physician has the option to say that they want their case to go to trial, as opposed to it being settled. Many times, a claim can be settled for a lot less cost than if the case goes to trial. But in the MPL industry, insurance companies like SVMIC will defend that physician's professional integrity as opposed to just paying the claim, because there are consequences for physicians and other healthcare providers if a claim is paid.

Brian: So as a potential policyholder, is getting ready to look into getting a policy, some of them are becoming physicians that are employed and under certain employment contracts and they're not getting the opportunity to make some of those buying decisions, they're just joining a group-

Jim: Somebody else makes that decision for them.

Brian: And, so that might be good questions I guess to ask on the front end of, "What is being covered?" Or maybe some wiggle room in negotiating that type of thing in their employment contract. If they do get a chance to have some input or some say, what are some important things that they should really look that their policy would contain?

Jim: Well, I would certainly say that any physician who is considering an employment contract, they find out that their future employer is going to provide the insurance or take care of that for them, would still ask some questions. One, would be getting back to that consent to settle provision in the policy. If they are facing a claim or a lawsuit, will they get to determine whether or not they get their day in court?

Then, the other thing regarding an employment contract, I think it's important for that physician to determine, number one, who actually pays the premium. Will it be the employer? If so, if the employer pays the premium, will the employer then deduct that expense from the physician's salary later on down the road?

Brian: They're paying for it, but just indirectly. Right?

Jim: That is correct. And if, for whatever reason, that policy is canceled, then who gets the premium refund if there is a refund? Who's going to be responsible for purchasing the tail coverage down the road?

Brian: That's a big one.

Jim: That is something that we highly recommend that physicians determine and at least have that discussion during the employment contract discussions.

Brian: On the tail coverage, we had talked about that a bit earlier, is that a pretty consistent price? I mean, when it comes to tail coverage, what would you expect as far as premiums for tail coverage?

Jim: You know, it varies significantly from one insurance company to the other. Most typically, for SVMIC policyholders, the tail premium, I mentioned earlier that it's quite expensive, it can run anywhere from 1.2 times the last premium that that physician paid for an annual policy, or it could be as much as 2 or 2.5 times that premium, just depending on where that physician is and how many years that physician has had a claims-made policy and so on.

Brian: So certainly it's going to be more expensive, we already know that, than the last typical policy. So to your point, that's probably something to really consider talking to the employer in the contract about, because that could be a big expense at the end of that policy period.

Jim: That is correct. A physician or other healthcare professional, you just don't want to be surprised by that sometime in the future. You want to have that discussion upfront and be aware of who's going to be responsible. And sometimes, the employer might say, you know, "You pay the tail premium if you leave our group within the first year of your employment. Or, if you've been an employee of ours for three years, we'll pay half of the tail premium and you pay the other half," something like that. But at least have that discussion with them.

The other caution that we would have is for physicians or other healthcare providers, when they are considering entering into any type of contract, whether it's an employment contract or a contract with a healthcare insurance company or hospital or surgery center, any type of a contract, someone hands them a contract and says, "Here, sign this for us," and they get presented with so many opportunities to sign contracts, but at least take time to look through that contract. And, of course, we would recommend they read the contract and understand it before they sign it.

But there's one provision that's pretty typical in contracts called an indemnification provision. Indemnification means you are agreeing to pay on behalf of that other party under certain circumstances. That's typically called "contractual liability" and, unfortunately, most insurance policies specifically exclude contractual liability from coverage. So one needs to be very careful about agreeing to indemnify other parties. You're basically assuming financial obligations that are not usual and customary in a medical professional liability situation.

Brian: You could end up really using your own limits of liability and your insurance to cover other entities or hospital surgery centers or whatever for losses that you really didn't even intend your policy to cover. Correct?

Jim: That is correct. So we would recommend that if you see the word "indemnification" in a contract, look at that particularly and consult with an attorney or consult with the insurance company. Get some professional help in looking at that, and make sure that the professional is willing to assume that exposure.

Brian: Well, Jim, this has been very informative, a lot of information. It's somewhat like having to drink from a fire hose, because there's so much involved in medical professional liability insurance. And I'm certain, for our listeners, if they want more information or need more information, we can put some information in the show notes that they can contact us if they need additional answers to questions that they have. Thank you so much for joining us today.

Jim: My pleasure.

Speaker 1: Thank you for listening to this episode of Your Practice Made Perfect, with your host, Brian Fortenberry. Listen to more episodes, subscribe to the podcast and find show notes at SVMIC.com/podcast. The contents of this podcast are intended for informational purposes only and do not constitute legal advice. Policyholders are urged to consult with their personal attorney for legal advice, as specific legal requirements may vary from state to state and change over time. All names in the case have been changed to protect privacy.