The Policy as a Contract

A medical malpractice policy is a form of legal agreement (a contract) between the physician (the insured) and the insurance company (the insurer). The contract (the policy) specifies that the insured will pay the insurer a premium in exchange for the insurer’s agreement, in the event of a claim, to pay (1) the costs of any resulting verdicts or settlements and (2) the costs of investigating the claim and defending the insured. The policy is a special type of contract where there is usually little opportunity for one party (the insured) to bargain with the other (the insurer) over the terms of the contract.² Courts recognize this inequality in bargaining power and the fact that the insurer is totally responsible for the wording of the policy. When disputes arise over terminology that is considered ambiguous, the advantage is usually given to the insured.

Sections of the Policy

Most modern malpractice policies are written in language that is comprehensible to the average physician and always includes a section providing definitions of legal terms. Thus, doctors can and should read their policies, not just when they are notified of a claim, but also soon after they receive the policy. This is the only way to ensure that any misunderstandings are resolved before a claim is made, rather than at the time a claim is filed when the stakes are much higher.

Binder or Certificate of Insurance

Prior to the receipt of the actual policy, the physician will usually receive a “binder” or “certificate of insurance” that functions as a guarantee that the policy has been issued and that coverage is in place. It is not a substitute for a policy and only provides a portion of the information included on the “declarations page.”

Declarations Page

The first or second page of a policy usually contains a Summary of Coverage, or as commonly known, the Declarations Page. This lists the name of the policyholder, the insured individuals and entities, dates of coverage including the retroactive date,³ the limits of coverage, any deductibles, the type of policy, e.g., claims made, the insureds’ medical specialty, and the premiums charged. Also included is a list of “endorsements,” “riders,” or “amendments” that function as modifications or addenda to the main policy. These may include additional benefits of coverage, additional exclusions of coverage, or changes in policy terminology required by law. If the policy includes an additional certificate of insurance, it is best to use that rather than the declarations page when providing proof of insurance to a hospital, managed care organization (MCO), or state medical board. The certificate typically does not contain personal information such as mailing addresses and premium charges.

The Insureds

Coverage is strictly limited to those physicians or entities listed on the declarations page. Most insurers automatically include the physician’s corporate or business entity as a named insured for no additional premium. This is generally “shared” coverage with the physician when considering the maximum amount the policy will pay in the event of a claim. The same holds true for any nursing or administrative employees who are covered automatically along with the physician. Other professionals who are working with or employed by the physician, such as psychologists optometrists, chiropractors, or anesthetists, are not covered unless specifically listed as additional insureds on the declarations page. These individuals commonly carry their own liability insurance. Nurse practitioners and other paramedical personnel generally require specific policy coverage as named insureds. “Slot coverage” is coverage available to additional named insured physicians or paramedicals on an interchangeable basis.

When a solo practitioner purchases malpractice insurance, he or she is not only the physician being insured but is also the policyholder. When a medical group or other entity provides insurance to its employees or partners, the policyholder and insured may not coincide, although the policyholder is generally required to be a named insured.

Restrictions on Specialty

Medical liability policies are issued for a particular medical or surgical specialty. The physician’s specialty determines, in good measure, the risk that the insurer is undertaking and is a principal factor in setting the premium rate. If a physician officially changes his or her specialty or materially alters his or her practice by performing procedures ordinarily considered to be within a different specialty, the company must be notified. Failure to do so may result in cancellation of the policy or noncoverage of the added procedures.

Restrictions on Territory

Another factor determining the insurer’s risk is the physician’s geographic location. There are often significant differences in both the frequency of claims and the size of jury award between various venues (cities, counties) within a state and between states. Premiums are based on a specific practice location and changes must be reported to the insurer.

Limits of Coverage

The declarations page traditionally specifies the policy limits as two numbers separated by a slash, e.g., $100,000/$300,000. The first number refers to the maximum amount the insurer will pay for any one claim and the second to the aggregate limit for all claims during the policy period, typically one year. Some policy summaries specify the policy limits separately as “per claim” and “aggregate,” rather than using the traditional format. In determining the maximum amount the insurer will pay for “indemnification” (verdicts and settlements), the insurer’s cost of defending the insured is usually in addition to the per claim limit. However, some policies will specify that defense costs are included in the yearly aggregate limit of coverage, meaning that they are subtracted from the aggregate limit when calculating the amount available for indemnification.

Turning to the questions posed in sample Situation A: Dr. Thrifty’s first claim for $150,000 is less than her per claim limit of $300,000, so she would have no personal obligation. Unfortunately, her second settlement of $400,000 exceeds her per claim limit by $100,000, leaving her with that amount as a personal obligation. Her last claim of $200,000, although less than the per claim limit, brings her aggregate total to $650,000, which exceeds her policy limit for the year by $50,000. Thus, Dr. Thrifty would be personally liable for another $50,000 and perhaps for an additional sum if her insurer subtracts its defense costs from the aggregate limit it will pay for indemnification.

If there is a fourth claim against Dr. Thrifty, clearly she will be personally obligated for any verdicts or settlements because she has already reached the $600,000 policy period aggregate limit. Furthermore, once that limit is met, most insurers will not cover any new defense costs, leaving her completely on her own. Anticipating the plight of a physician in this situation, some insurers will mercifully provide a specified amount of coverage, for example, $25,000, in excess of the aggregate limit for defense costs associated with disciplinary actions instituted by a state medical board. For this or any other exceptions to apply, they must be stated in the policy.

Occurrence Insurance

There are two broad categories of professional liability insurance, “claims made” and “occurrence.” It is vital to thoroughly understand their differences. Until the first malpractice insurance crisis in the 1970s, virtually all policies were written as occurrence insurance. This means that once the policy is in force (i.e., premiums paid and the policy issued), any “occurrence” or “incident” during the policy period will be covered regardless of when the claim is made against the insured, even if the policy is no longer in force. Looking at Situation B, Dr. Olde would have coverage after retirement even though he is no longer paying any premiums. While on the surface this seems advantageous for the physician, there are some serious shortcomings inherent in occurrence insurance.

First, because the premiums paid in any particular year are paying for the defense and indemnification costs of a claim that might be made ten or twenty years in the future, it is difficult for the insurer to estimate both the future “frequency” and “severity” of the risks. Every physician is aware that as society in general, and patients in particular, become more litigious, the frequency of malpractice claims increases. Quantifying that increasing risk is difficult and so insurers must hedge their bets by charging seemingly disproportionately high premiums.

In addition to increasing claims frequency, with time, the costs of indemnification (size of verdicts and settlements) increase, as do defense costs. This is due to inflation, the tendencies of judges and juries to make larger awards, and the increasing complexity and duration of the litigation process. Again, estimating the severity (size) of future awards and settlements is difficult, leaving insurers with little choice other than to charge sufficiently high premiums. Finally, because occurrence insurance coverage continues even after the policy is no longer in force, any incident in any one year that develops into a claim, regardless of how far in the future, must be paid for by that single year’s premium plus any investment returns the insurer earns on that premium.

When combined, these factors result in the second major problem with occurrence insurance: insurers may be forced out of business if their premiums are inadequate or their investments falter. When this happens, the insured is theoretically left without any coverage for incidents that occurred while the policy was in force but have not yet developed into claims. In reality, because insurance is regulated by the states, when a company fails, every state provides some protection to their insured physicians in the form of State Guaranty Association coverage discussed below. Furthermore, as we shall see, coverage for this period of time may also be available from other insurance, when and if the physician purchases another policy.

Another quirk of occurrence insurance is the possibility of legal arguments arising as to what constitutes the actual occurrence. If, for example, a surgeon insured under an occurrence policy leaves a sponge in the abdomen, is the date of occurrence the date when the surgery was performed, or when the patient developed symptoms and required treatment? If two different insurers provided coverage for each of the two possible occurrence dates, each may attempt to deny coverage by invoking the definition most favorable to its position. The eventual resolution of such disputes may require the physician to seek a “declaratory judgment” by a court. Such judgments only result in a determination of which insurer is responsible for covering the claim, not a resolution of the claim.