General Principles

Certain general principles, however, can be set out for guidance. Certain rules can be developed as guidelines for the majority of states, even though other principles are followed in minority states. The focus here will not be to provide the reader with the rules for a specific case or to follow the laws or cases applicable in any jurisdiction, but to raise awareness of the issues to be considered and thereby to assist in making an informed decision.

Insurance policies are actually contracts between the insurance company and the health care provider. As a contract, there are terms that set out the duties and responsibilities as well as the rights and benefits gained by each party to the contract. Once the insurance contract is in force, each party is presumed to know the contents of the policy; therefore, it is advisable to read the policy and learn the duties and responsibilities that you have assumed on purchase of the policy. The various provisions commonly found within these contracts are briefly discussed below.

(a) Many insurance policies contain a clause that permits settlement when the company deems it expedient to do so. Such a clause generally protects the insurance carrier from bad faith settlements occurring within the policy limits. This concept is based on common law, but some jurisdictions may have statutory provisions supporting this principle. Such settlements within the policy limits are generally protected, even if the claim has little merit, because most courts believe that such a conclusion to the lawsuit is what the parties really expected on entering into the insurance contract.¹ Some states have legislation that the insurance contract must contain an authorization for the insurer to settle for any amount within the policy claims, regardless of the wishes of the insured, but such a statute may also additionally require that the settlement must be made with the best interest of the insured in mind.²

(b) Cooperation with the company, and its representatives, including the claims adjuster and the assigned defense attorney, is universally required. Such cooperation extends to the availability of the insured to participate in discovery, conferences, or trial at any reasonable time.

Generally, the terms of the policy prohibit the insured from admitting any liability, or attempting the settlement of any claims, even with the insured’s own funds. Some physicians feel that such a settlement is a useful option when small amounts can settle “nuisance” claims. When one is considering such an option, consultation with private counsel can be helpful, but generally this benefit is more useful if the insured has reviewed the policy in advance. Some policies permit such settlements, but generally only with the consent of the insurance company.

(c) Coverage is governed by the terms of the policy, but there may be certain required minimums mandated by statute. While there may be state law variations, not every interaction between a health care provider and a patient or client is necessarily covered by the malpractice policy. The terms of the insurance contract, in addition to the required cooperation discussed above, may contain other coverage exclusions.

The most common basis for refusal of coverage for some event is generally based upon the term (duration) of the policy. By skipping from carrier to carrier in an attempt to reduce premium costs, some physicians have eliminated coverage by avoiding buying tail coverage for the old policy or retroactive coverage for the new policy. This is particularly dangerous when dealing with coverage under an “occurrence” policy.³ It is important for the provider to know which type of policy is in force, or which type of policy is being offered.

While state law varies, if the event occurs within the policy period, most insurers are required to defend all suits, even though the suit may be groundless, false, or even fictitious. In most states, the insurer’s duty to defend is greater than its duty to indemnify. Thus, an insurer could defend its insured against a fictitious suit, but refuse to pay a plaintiff the amount awarded in the judgment. The plaintiff or defendant would then be left to sue the insurance company. The carrier may issue a reservation of rights letter in circumstances similar to the above, or when some measure of defense is necessary to protect the insured, but more investigation is necessary to be certain that the alleged event is covered by the terms of the policy. One who receives a reservation of rights letter should consult personal counsel who may wish to discuss the issue with a carrier representative.

Remember that the insurance policy is for medical negligence. Negligence generally means that the caregiver has failed to meet the prevailing appropriate standard of care, and as a result the patient has sustained an injury. Some policies exclude nonnegligent patient injury, that is, injury to the patient that occurs as a result of some intentional act by the physician. Sexual impropriety, intentional acts that damage a patient, and criminal acts frequently are excluded by the terms of the insurance contract.

Except where the occurrence clearly falls beyond the term of the policy, insurers are hesitant to refuse to defend an action against one of its insured, because if the refusal is later found to be unjustified, the insurer is likely to be found to have acted in bad faith. An unjustified refusal to defend may leave the insurance company (1) liable for the judgment or settlement amount suffered by the insured; (2) liable for defense costs; and (3) liable for any additional damages that can be attributed to the unjustified refusal to defend. Such obligations have been found to exist in a number of states, and it is probable that where the issue arises in other states, the same carrier liabilities will be found to exist.⁴