Vol. No. October 5, 2010
Buying Medical Malpractice Insurance: A Physicians Guide to Selecting a Policy and Evaluating a Carrier By Wendy J. Meyeroff | October 5, 2010
Malpractice insurance is not just a major expense for medical practices, it is a requirement. Selecting malpractice insurance can be a complex endeavor. There's no one-size-fits-all policy, and physicians must be well educated on their malpractice options. What do you need to know to make sure you have the best coverage with the best carrier for your needs? This white paper will provide background and guidance on a topic that is key to maintaining an optimally functioning practice. Understanding Coverage and Carriers Put simply, malpractice insurance protects healthcare professionals from claims brought during litigation and more specifically from financial harm and even bankruptcy from such claims. But when signing on with a malpractice insurer, physicians are seeking more than just financial solvency. Upon choosing a malpractice insurer, a physician should feel confident that her carrier will provide solid
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Vol. No. October 5, 2010 support when it comes to claims investigation, legal representation if it becomes necessary, and, ultimately, responsibility for the majority of any claims payments. Some carriers also provide other services, such as educational seminars, articles, risk management, and patient safety programs. Before carefully evaluating and selecting a malpractice insurer, you should first consider how much coverage is necessary. Among the topics for physicians to discuss with their accountant or malpractice provider is the matter of their personal liabilities. If a large verdict, that is one that is higher than the policy limits, is ever rendered against the physician, that doctor's personal assets may be in jeopardy. It's important for physicians to know they have the appropriate level of coverage. The precise amount of coverage doctors choose will depend on state laws, their assets, the affordability of the coverage, and what level they need to feel comfortable. Malpractice coverage limits typically begin at $1 million, which is the amount an insurer will pay per claim, subject to an overall cap or "aggregate" of $3 million, which represents the total amount the insurer will pay while the policy is active. Limits vary a great deal by state and location. Once you get a sense of how much coverage you need, the next step is to find a carrier to provide that coverage. The three most common companies are: a stock insurance carrier, a mutual insurance company, and a reciprocal insurance company (also known as an inter-insurance exchange). Let's consider all three: A stock insurance carrier is owned by stockholders, and therefore its assets can go up and down with the stock market. It is a publicly owned, for-profit, company. Those concerned about the carrier's financial stability may not be fond of this option. A mutual insurance company is privately owned by policyholders. Every owner of the company is an insurance holder; every insurance holder is an owner of the company's assets. That of course means the owners have a vested interest in keeping the company stable. A reciprocal insurance company is an unincorporated association. Like a mutual insurer, policyholders own a reciprocal's assets. The main difference is that rather than being operated by its owners, the reciprocal must be operated by an attorney-in-fact who functions on behalf of the policyholders. About two-thirds of practicing physicians obtain coverage from physician-owned reciprocal or mutual insurance companies. You may also consider a few alternative markets, which provide other sources of coverage. For example, joint underwriting associations (JUAs) are state-sponsored programs for physicians who have no other way to obtain professional liability coverage, usually because a typical carrier refuses to cover them. In this case, underwriters carefully evaluate the physicians applying for coverage. Two other alternative programs are risk purchasing groups and risk retention groups. Risk purchasing groups (also known as RPGs) are composed of individuals engaged in similar businesses or activities who join together to purchase insurance coverage from a commercial insurer. (Think condo or co-op owners, or in a physician's case, a medical specialty society.) This means the RPG relies on the insurer to assume the risk. Conversely, risk retention groups (RRGs) actually write the policy and assume the group's liability. Such groups actually become their own insurer. The last alternative insurance provider discussed most often is a trust. Trusts frequently require capital contributions in order to join and trust members are retroactively assessable if assets prove insufficient to pay losses. "Assessable" means that all members (even those who have never had a claim) are collectively and personally responsible for paying the claims of all other members. Trusts are somewhat http://www.physicianspractice.com/embezzlement/content/article/1462168/1685979
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Vol. No. October 5, 2010 controversial because they are not always regulated by state insurance departments or protected by state guaranty funds in case the program becomes insolvent. Also, some trusts stop defending and paying open claims for members if the members do not agree to remain assessable, or if they do not purchase tail coverage (which we'll discuss shortly) from the trust. Claims vs. Occurrence You also have options for the types of malpractice policies available. A major shift in malpractice premiums for doctors has been in the trend moving from "occurrence" to "claims" policies. The latter has two sub-categories: a claims-made plan and a claims-paid policy. An occurrence policy covers a physician from the time the incident that led to the lawsuit occurred. Because it can take years for plaintiffs to file a suit, and several more years before the insurer actually resolves that claim, it is harder for insurers to estimate the long-term costs when their subscribers carry occurrence-based policies. For this reason, more and more carriers have shifted away from them. Claims-paid policies are also less common and difficult to estimate. These policies are based only on claims the carrier has already settled during the previous year, or claims that are projected to be settled in the coming year. Claims-paid policies tend to be available through trusts. Most doctors' liability insurance now falls in the category of claims-made policies. These policies cover a physician for events that are reported during the policy period, and they tend to carry lower premiums for the first few years. This can make them especially attractive to new physicians or physicians in solo practice. However you do need to keep in mind that a claims-made policy will increase in cost each year until it reaches a "mature" level, typically in five years. Also, if you later move to another state, or join a practice and assume its insurer, it's likely that you will need another kind of coverage, called "tail" coverage, later. Tail coverage (also called "extended reporting coverage") provides back-end insurance, covering claims that arise after leaving one's previous carrier. When doctors can't get their new employers to supply their tail coverage, and it must be acquired as a separate policy, it can cost more than twice the amount of the annual premium for the claims-made policy alone. It can also get more expensive the further back in time it must provide coverage. Finally, you may have also heard of "nose" coverage. Also known as "retroactive" or "prior acts coverage," nose coverage extends coverage of the claims-made policy to a prior date. Unlike tail coverage, which doctors usually have to pay for themselves, a physician's new employer may provide nose coverage. Nose coverage is another option physicians might want to negotiate when seeking a new position. Evaluating Your Carrier's Strengths Because your malpractice carrier will assume virtually all of the financial liability, you need to be as informed as possible of the carrier's financial strength. Assessing financial stability is critical when evaluating potential insurers. Take a look at the company's annual report, including the balance sheet. Other good resources for checking a particular carrier's financial strength are state and national underwriting associations and insurance departments. A state insurance department, for example, should be able to show how long an insurer has been licensed and how many (if any) complaints have been registered against it in recent years. http://www.physicianspractice.com/embezzlement/content/article/1462168/1685979
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Vol. No. October 5, 2010 Industry analysts such as A. M. Best Company, Moody's, Fitch, and Standard and Poor's rate insurance carriers on their financial viability. Companies are considered secure if their financial ratings range from a B+ to an A++. Anything less and an insurer is considered vulnerable to loss, even insolvency. However, a company can have a good financial rating and still not be credibly solvent. If it is too small, it may be only one high profile verdict away from insolvency. Solvency is another area to evaluate. Is the insurer covered by state guaranty funds? If not, and the company becomes insolvent, you may have no protection in the case of litigation. Be aware that guaranty funds may only offer limited protection. Check on the company's surplus. This is the amount by which assets exceed liabilities. The more surplus a company has the more stable it is likely to be. In addition, consider the company's loss reserves, which are the funds, set aside to pay for reported and unreported claims. It's important to determine the level of an insurer's loss reserves compared with its surplus; it's shown on the balance sheet under "reserves for future claims." Interestingly, it shouldn't be too high (in the case of medical liability insurers, no more than four times the surplus); otherwise the company is considered possibly over-leveraged, meaning it borrowed too much money and can't make debt payments. Another aspect to consider regarding an insurer's financial stability is called net written premium. This is the premium retained by a company after it has paid for reinsurance. Because medical liability carriers typically pay out 100 percent or more of the premium in the form of losses and expenses, net written premium is similar to surplus to make sure the company is not becoming over-leveraged. The net written premium is usually shown on the insurer's annual report.
Questions to Help Evaluate an Insurer There are numerous questions that doctors can and should ask before signing with a malpractice insurer. Besides consulting directly with the carrier, doctors should also ask their professional association(s) for advice. Many of them have either handouts or online resources providing sample questions, such as the ones below. • What kind of carrier is it? • How long has the carrier been in the business of writing medical malpractice insurance? • What is the premium, and how often (e.g., monthly, annually) is it paid? • Does the carrier offer discounts for physicians with favorable claims histories? What about other discounts? • Does the company offer policy deductibles? • What does the policy not cover?
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Vol. No. October 5, 2010 • Can cancellation be made at any time? How much notice must be made prior to cancellation? • Is the carrier endorsed or sponsored by any medical associations? Does it offer discounts for membership? • Does the carrier have a certificate of non-assessability? (“Non-assessable” means the insurer is sound enough economically that policyholders won’t be held responsible for certain company losses.) • What payment plan options does the carrier offer? • Can doctors who take family leave, disability, sabbatical, or other types of leave, be charged while they are not practicing? • How do the carrier’s insurance industry ratings compare with its competitors? • How actively involved is this carrier in national medical legislation reform regarding malpractice? • What, if anything, does this policy cover beyond traditional malpractice insurance? For example, will it cover actions and reviews by Medicare, Medicaid, credentialing agencies, and licensing boards? • What is the claims review process? Who will review a claim and when? • Will the physician be involved in resolving the claim? (The answer should be “yes”) • What happens if the insurer covers multiple physicians who are all being sued under the same claim? Will one attorney defend everyone? What is the record of the carrier’s attorneys? • What is the company’s attitude towards “nuisance” claims? Does it tend to settle quickly despite the doctor’s wishes? Does it use other settlement methods, like mediation—a system called alternative claims resolution? • Are there designated internal claims and risk management departments, instead of a one-team-does-all approach? • What protection does your insurer offer regarding claims developing from computer security or lack thereof?
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Vol. No. October 5, 2010
What's the Carrier's Management Philosophy? Evaluating the carrier — and finding the right match for your needs — doesn't stop at a company's balance sheet. Physicians should also evaluate characteristics that can give them a sense of the company's management philosophy and its empathy toward its subscribers. Remember, a malpractice carrier is providing support as well as financial solvency. Again, the annual report and financial statements can shed light on a company's management philosophy. Also request feedback from your colleagues to help understand a company's philosophy (don't hesitate to seek recommendations from your professional associations). A little outside research will also reveal clues. Here are a few points to consider: • Performance record –– Doctors can get useful information from their state insurance department on a carrier's performance record. To find a state insurance department, contact the National Association of Insurance Commissioners: http://www.naic.org. • Claims management –– How does a particular malpractice provider handle its cases? Doctors need to know how responsive the agent is; how quickly the company responds; how empathetic it is in its guidance; and how concerned the company is with the doctor's interests. Some of this information may be discerned from the agency's promotional materials and from face-to face discussions with an agent, but again, references from colleagues are probably the best source of input. Where allowed by law, a physician should also ensure the inclusion of a consent-to-settle provision, which requires the carrier to obtain written consent to settle any claim. This gives the doctor control over how claims are settled. • Actuarial principles — Actuarial science is a discipline that analyzes statistics, probabilities, economics, and other math- and business-related details to predict and minimize business risks. Companies that tend to remain stable generally have solid actuarial principles, allowing them to minimize financial losses — especially in the constantly changing environment of healthcare. • High-tech options — Is this carrier still coasting on its successes from the 20th century, or are there signs that it's technologically moving forward? Online news items and white paper archives may give indications of whether a company is tech-savvy. Consider whether a company has recognized the need for protection against claims arising from theft, loss, or accidental transmission of electronic patient information. • Patient safety programs — Many insurance companies offer convenient value-added services to help physicians and staff assess and reduce their risk. Consider whether the carrier offers these tools and resources, such as alert notifications, articles, CME courses, webinars, and other documentation. Benefits of Group Practices Over the last two decades, more and more doctors have decided to band together in group practices, and many such groups have reported paying lower malpractice premiums. Among the possible reasons as to why: • Better purchasing power as a team; • The practice is more likely to have instituted mistake reduction plans and procedures, and
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Vol. No. October 5, 2010 • The practice is more likely to have better systems in place for coping if a malpractice suit arises. Finding the right professional liability carrier can be time consuming, but it is one of the most important practice decisions you can make. As changes occur regarding malpractice regulations and reform, the odds are that malpractice insurance will continue to be one of your major expenses. Physicians must learn everything possible about the quality of the carrier and the people who will be entrusted to watch over their interests. By thoroughly investigating their options, doctors can make the right choice in selecting a strong, reputable, and financially stable professional liability carrier who will be there when most needed. Wendy Meyeroff is president of WM Medical Communications, based in Baltimore, Md. She has been a consultant to a wide range of healthcare industries on marketing strategies and copywriting needs since 1988.
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