Questions You Need to Ask Before
Purchasing Medical Professional Liability Insurance

Written by
PRMS

One of the many important decisions you will make in starting your psychiatric practice will involve the purchase of medical professional liability (medical malpractice) insurance. As you review the information below, please bear in mind that insurance is a highly regulated industry that varies from state to state. As such, all coverages referenced may not be available to you; however, general principles will still apply.

1. What type of policy is right for me?



There are two main types of policies available: claimsmade and occurrence. When offered by the same insurance company, these two types of policies will be virtually identical in terms of what is covered. The difference between the two, is how – or more accurately, when ‐ coverage is triggered. In order to fully explain this, some basic definitions are useful (but understand that definitions may vary by policy):

Policy Period: the time between the effective date (the date coverage first took effect) and the expiration date of coverage.

Policy Limits: the sum available with which to pay claims or lawsuits in any given policy year.

Incident: negative act or omission giving rise (or which could potentially give rise) to a claim or lawsuit.

Reporting Date: the date on which the insured physician notifies the company of the incident.  Note, this reporting may be made well in advance of an actual claim or lawsuit. Policy language will typically govern how and when an incident should be reported to the company.

Claim: demand for money, outside of litigation.

Lawsuit: demand for money, via litigation.

With an occurrence policy, coverage is given for an incident giving rise to a claim or lawsuit that occurs while the policy is in place, regardless of when it is reported to the insurance company – even if that reporting occurs after the policy has expired. Each year that an occurrence policy is renewed, you are given a new set of policy limits. Previous years’ limits remain available to defend claims that may arise from incidents occurring in those previous years.

By contrast, a claims-made policy affords coverage to those claims or lawsuits reported while the policy is in effect. Even if a physician had insurance at the time the incident giving rise to the claim occurred, if it is reported after the policy has expired, there will be no coverage for that claim, unless an extended reporting coverage (tail coverage) has been purchased. When a claims‐made policy is renewed, you are given a new set of policy limits but you do not keep the previous years’ limits to draw from.

2. What is “tail coverage” and do I need it?

A claims‐made policy is often very attractive to physicians starting out in practice as premiums (at least in the early years) are typically much less than those for an occurrence policy. After several years, premiums usually even out between the two policy types. This may make it seem like purchasing a claims‐made policy is a no‐brainer from a financial perspective but there is an important consideration – what happens when you retire or leave a practice? As stated previously, with an occurrence policy, you are covered for claims reported even after the policy ends, but this is not the case with a claims‐made policy. Thus, in order to protect yourself from personal exposure if you have a claims‐made policy, it may be necessary to obtain an extended reporting endorsement, aka “tail coverage.”

Tail coverage does not extend the policy period but rather the period of time during which claims may be reported. In other words if, after the policy is cancelled, a claim is filed stemming from an incident that occurred while your policy was active, a tail policy would ensure that you were covered for that claim. If on the other hand, after your policy was cancelled you rendered care which resulted in a claim being filed, you would not be covered.

Tail coverage is sometimes offered free of charge to physicians who are retiring or have been with a company a great many years. Otherwise, tail coverage is typically very expensive to purchase, and payment for tail coverage is typically due in full within a very short time frame. If your employer is providing you with a claims‐made policy, it is a good idea to inquire as to whether that employer will pay for tail coverage should the employment relationship end. An employer’s agreement to pay for the tail coverage should be documented in the employment agreement.

3. What are the limits of liability?

With any malpractice policy there will be two limits of liability per policy period:

Per incident limit: the amount of indemnity coverage you have for each claim that is reported for a single injury; a common limit is $1,000,000.

Aggregate limit: the amount of indemnity coverage you have for all combined claims reported during a policy period; a common aggregate limit is $3,000,000.

4. Should I purchase additional coverage?

Whether additional insurance is purchased (for example limits of $2,000,000/$6,000,000) usually depends upon personal choice. Some physicians in high‐risk specialties such as neurosurgery or OB‐Gyn, simply feel more secure with higher limits. Others opt for the lower limits fearing that higher limits may set them up as the deep pocket in a malpractice case. The decision is a personal one based upon each individual physician’s scope of practice and his or her tolerance for risk.

5. Are policy limits the same with claimsmade and occurrence policies?

When considering whether to select a claims‐made or an occurrence policy, it is important to understand how policy limits may be affected by each. In order to better illustrate this concept, let’s look at the following scenario.

Suppose that you started practice in 2010 and in 2013 were sued 10 times. Four of these lawsuits were from incidents that occurred in 2010, three were from incidents that occurred in 2011, and three were from incidents that occurred in 2012. Your policy has limits of

$1,000,000/$3,000,000. Let’s further assume that each of these suits was settled for $500,000.

Under an occurrence policy, the settlement amount paid for each incident ($500,000) falls well below the per incident limit of $1,000,000. Further, each aggregate amount ‐ $2,000,000 for 2010, $1,500,000 for 2011, and $1,500,000 for 2012 – is well within the yearly aggregate of $3,000,000.

Under a claims‐made policy, however, the protection afforded in this scenario is vastly different. As with the occurrence policy, each settlement of $500,000 is well within the per incident limit. The problem lies with the aggregate limit. Remember, with claims‐made, there is only one set of policy limits ever available, so all that is available in any given year is a maximum of $1,000,000/$3,000,000. So, rather than having a separate pool of money available from 2010, 2011, and 2012, we have just that sum available in 2012. Thus, the total settlement of $5,000,000 exceeds the $3,000,000 aggregate limit by $2,000,000. This is admittedly an extreme example; however, it is an important distinction to keep in mind.

6. Are defense costs taken from of my policy limits?

Professional liability insurance provides coverage for two types of expenses:

Indemnity costs: the amount paid to resolve the claim or lawsuit, whether it is pursuant to a judgment or a settlement

Defense costs: the amount paid related to legal expenses to defend the case, such as attorneys’ fees, expert witness fees, etc.

It is important to ask your prospective insurance carrier whether defense costs are taken from the same set of limits used to pay indemnity. In other words, is the amount of money available to pay indemnity costs reduced by the cost of defending the claim itself? While this is rare, it is not unheard of. Given the significant expense related to defending a malpractice claim, defense costs could severely limit the amounts left for indemnity payments which could make you personally liable for a shortage.

7. Will I be covered for the activities in which I plan to engage?

Medical professional liability insurance covers acts and omissions occurring in the rendering of professional services, i.e., the practice of psychiatry. This would include such things as evaluating, diagnosing and treating patients for psychiatric disorders. It is important to bear in mind that just because an activity (for example telemedicine or forensic activities) is a well established aspect of psychiatric practice, it does not mean that a particular insurer will cover that activity.

Professional services

In order to determine whether the policy being offered by a particular company will actually meet your coverage needs, you must first think carefully about all of the activities you may be engaging in both now and in the near future. Once you have that list completed, take a look at the coverage being offered. One of the first things to look for is the company’s definition of

“professional services” or other comparable term such as “practice of medicine.” You will  likely find that this definition is written quite broadly to incorporate both clinical and administrative functions.

Exclusions

All policies will contain a list of activities the liability for which will be excluded from coverage. Typical exclusions include: acts of fraud or criminal activity, business ventures, sexual misconduct, etc. Exclusions may also include specific procedures or practice at certain locations.

Endorsements

An endorsement is a written amendment, addition, or modification made that takes precedence over the original contract provisions. Endorsements may be used to restrict or to expand coverage.

Other coverage available

Most psychiatrists find that the scope of their practice goes far beyond just treating patients. As your practice matures and your duties expand, it is important to recognize that your potential for liability exposure will likely expand as well and you will want to make sure you have coverage for those exposures. To that end, you may wish to look for additional coverage within any policy you are contemplating. Determine also whether additional coverages include both indemnity and defense costs. Examples of other coverage might be:

  • Vicarious liability (for acts of employees)
  • Medical director coverage
  • Administrative defense (for actions brought by licensing and regulatory boards)
  • Peer review activities
  • Corporation coverage
  • Cyberliability
  • Utilization review/QA activities
  • Geographic area (can carrier provide insurance outside of your current state)

You do not want to be put in the position of having to limit your professional activities or to switch carriers as your practice activities change so try to choose a policy that will grow with you.

8. In the event that a claim is made against me, will I have any say in the settle/defend decision?

While a physician may not have any monetary exposure in the event of a claim or lawsuit, there is still a personal cost that comes whenever a claim is settled. Anytime an insurer makes an indemnity payment on behalf of a physician, in addition to other reporting requirements that may exist (such as to the state), the insurer must report that settlement to the National

Practitioner Data Bank. Data Bank records are available to your state licensing board, hospitals and other health care entities, professional societies and certain Federal agencies. Additionally, this information would be made available to health insurers, professional liability carriers and other entities to which you grant authorization to obtain a claim summary. Because a negative claims history can impact you professionally, it is important that you have a say in the settle/defend decision.

There are basically four types of consent language contained in professional liability insurance policies:

Unlimited consent: the insured alone decides whether a case may be settled. No settlement can be made without his or her express consent.

No consent: the insurer alone decides when a case will be settled. The insured has no say in the matter whatsoever.

Limited with a hammer clause: allows the insured to accept or reject settlement; however, he or she would then be personally responsible for any eventual judgment or settlement in excess of the previously rejected settlement amount.

Limited with arbitration: provides for arbitration in the event that the insured and the insurer do not agree on settling the claim.

9. What are my obligations under the policy?

Insurance policies will also list conditions which must be met by the insured. Failure to meet these conditions will be deemed a breach and can result in termination of the insurance contract by the carrier. These conditions typically include requirements that the insured:

  • Pay the premium
  • Notify the carrier of claims (as defined in the policy)
  • Assist in the defense of the claim/cooperate with the carrier
  • Notify the carrier of practice changes

10. What else should I know about the insurance company?

Aside and apart from reviewing policy language, it’s a good idea to know something about the company itself starting first with financial viability. Take a look at AM Best and other ratings to ensure that the company is stable. You might also want to take a look at your state’s insurance department website to see whether any complaints have been made against the company.

Once you’ve determined that the company is sound, consider what else the company may have to offer beyond insurance coverage. Many companies provide practice resources for their insureds such as newsletters, risk management consultation, and continuing medical education.

Especially if you are in a small practice, the ability to obtain risk management advice and CME free of charge can be a huge bonus.

Consider also asking about the company’s claims philosophy. Does the company try to simply resolve cases as quickly and inexpensively as possible or do they aggressively defend every case? Ideally you will look for a company that takes the middle position ‐ aggressively defending non‐meritorious claims and promptly resolving those that do have merit.

11. Are there things to think about after I’ve purchased my policy?

In addition to keeping in mind and following the conditions discussed above, there are at least the following three additional important things to do:

Maintain copies of each year’s policy indefinitely. Although presumably the carrier will have that information, you cannot be absolutely certain of this. At some point, you may need to be able to establish exactly what coverage was in place many years prior.

Ensure you do not have any gaps in coverage. Particularly if you change carriers, there is the possibility that policies will not run consecutively thus creating a gap of time for which you are not insured.

Notify the carrier with practice changes. As mentioned above, this is your obligation under the policy, and it is an ongoing obligation, and there could be serious consequences for lack of notification. For example, should you fail to notify your carrier of a new practice location, your carrier may deny coverage should a claim arise at that new location.

12. Where can I get more information?

The Physicians Insurers Association of America (a trade association for professional liability insurance companies) has developed an extensive resource, Medical Professional Liability Insurance: A Practitioner’s Primer. To obtain a complimentary copy:

  • Complete and return the form on the next page, or
  • Or, call us at 800‐245‐3333, ext. 389

Contrary to popular belief, not all companies and not all policies are the same. Choosing the one that is right for you can have long‐ranging effects on your medical practice. Take the time to research your options and make sure that you are making an educated choice. Even if you are joining an already established practice and liability insurance will be provided for you, it is important that you understand a bit about types and scope of coverage so that you may better assess the value of the benefit being offered.

PRMS
Manager of The Psychiatrists’ Program
Medical Professional Liability Insurance for Psychiatrists
1-800-245-3333
Email: [email protected]
Visit: www.psychprogram.com
Twitter: @PsychProgram