Special Report

Use caution when buying medical malpractice coverage

By Layton C. Severson, ARM, AIC, President, L. C. Severson Company, Inc.

Summary: Physicians should not purchase medical malpractice insurance from the surplus lines insurance markets unless there is no coverage available to them from the admitted markets. Physicians should use the surplus market only as a last resort when buying medical malpractice coverage. Moreover, physicians should be concerned regarding two other insurance pitfalls — limits of liability for each physician within a group and whether the expenses of claims are inside or outside of the limits of liability of their policy.

I have encountered several recent situations when reviewing coverages for physicians that have made me wonder if they truly understood how the insurance market works and how policies are constructed. Here are three issues in professional liability insurance that the physician should understand when purchasing professional liability coverage.

Coverage in the Surplus Insurance Markets

Generally speaking, coverage should not be placed with the surplus insurance market unless there are no admitted insurance markets available to quote your coverage.

For the last several years, the healthcare industry has experienced a hard insurance market, meaning that for some physicians, insurance has been difficult to obtain at any price, and for almost all other physicians, the pricing has increased dramatically. In the insurance world, this leads to the entry of surplus lines insurers who can quote conditions, terms, and pricing on almost any basis they feel like offering when they review your application. They know that your agent has (or should have) received declinations from admitted markets before going to them, and they may be your last hope for coverage.

There are indications that some practice managers and physicians have had the misfortune to trust an agent who has placed them with a surplus lines company when an admitted carrier would have issued them an insurance policy. In some cases, physicians and practice managers were not given full information about what it means to be insured by a surplus lines carrier instead of one that is licensed to do business in their state (an admitted carrier). Before you pay a premium to have an unauthorized carrier protect your reputation and your assets, consider the following issues:

  • Each state's law regulating the conduct of insurance agents usually prohibits them from soliciting or placing liability business on behalf of an unauthorized carrier unless there has first been a good faith effort to obtain such coverage from properly authorized carriers in their state. In other words, an agent may not place business with unauthorized insurers unless a number of the companies licensed in the state to provide the coverage have been given the opportunity to evaluate the risk and have refused to offer such coverage. While most insurance agents and brokers are professional in their activities, some of them are closely associated with unauthorized carriers and may not be making the required effort to present their clients to the "standard" market before guiding them to a surplus lines carrier.
  • You should expect your agent to advise you, preferably in writing, of all the markets they have contacted on your behalf and to advise you of the results of those contacts. They should also advise you of their commission or fee arrangements with each market to be certain you are fully informed and can make an intelligent business decision about an issue that is both critical and costly to your practice.
  • Be aware that no agent is licensed with all markets, so there may be other markets that can quote your business from other agents or brokers.
  • Your state Department of Insurance laws usually prohibit an insurance company that is not licensed in your state from transacting insurance business within the state. Agents procuring coverage from surplus lines carriers are involved in out-of-state transactions that are not regulated by your state Department of Insurance (DOI). If you elect to go with one of these insurance carriers, you should ask your agent for a complete briefing on their agency's relationship with each surplus carrier proposal presented and their associated compensation plans. In some instances, agents have the option to adjust the commission or fee with the insurer. Be certain that your agent shares his/her fee or commission structure with you before you buy.
  • Important protections afforded by your state's Department of Insurance will not be available to those insured by unauthorized carriers, including protection against such things as: policy language and coverage that does not meet minimum standards for approval; unreasonable or short notice cancellations; non-renewal without adequate notice; mid-term cancellation by the insurance company; and unreasonable terms for extended reporting endorsement ("tail") coverage.
  • Unauthorized carriers are not permitted to be members of your state's Insurance Guaranty Association. In the recent past, many professional liability writers have become insolvent, including companies that once enjoyed an A rating by A.M. Best. Regardless of a company's current rating, if you purchase from an unauthorized carrier, you will not be protected by your state's guaranty association if that carrier becomes insolvent.
  • Surplus lines carriers have historically been a "court of last resort," charging higher premiums over time, insuring physicians with challenging claims histories, and paying higher-than-average commissions to agents. While there may be a role for these surplus lines carriers in placing physicians who are "high risk" for any number of reasons, surplus lines carriers have not been the insurance companies preferred by doctors with good claims histories and who present an acceptable risk.

While the vast majority of insurance agents have performed admirably and with great integrity through the hard market (see "coverage in the surplus markets" section), there are always a few bad apples that give any profession a bad name.

There may come a time when a high-quality unauthorized or "surplus lines" insurance carrier might be your only option—a time when your claims history or a lack of insurance options forces you to make an informed choice to obtain insurance through such a carrier. We have seen some excellent examples over the past few years in the hard market. However, as the market has stabilized most states now have several admitted carriers available to the vast majority of physicians, and their agents should first look at these admitted carriers for their clients. Any suggestion to the contrary should be scrutinized closely before acceptance.

Lesson Learned. Require that:

1) your agent or broker fully disclose all of the insurance coverage and carrier details;

2) the agent or broker fully disclose their total remuneration for representing your interests;

3) they provide you with a list of the licensed insurers available within your state;

4) they disclose which carriers have been solicited by them (or others they may have contacted with other agents or brokers); and

5) you know what other options you might have regarding your coverage.

Your Policy's Limits of Liability

The limit of liability of an insurance policy indicates the amount of coverage. However, this limit can be modified later within the policy in several ways.

In most professional liability policies, the Limit of Liability (LOL) is stated in a flat amount, such as $1,000,000 per medical incident and $3,000,000 per annual aggregate. The one million per medical incident would seem to be simple to understand, as would the three million annual aggregate. If you are a solo practitioner, there is little doubt for concern regarding these limits.

However, if you practice within a group, such as most ED physicians do, there may be some hidden complications of coverage within the insurance policy. Several policies I have reviewed from surplus lines carriers have indicated that the limit of liability applies, in total, to all physicians within the insured group or corporation.

Let me give you one extreme example. I was recently asked to review one ED group's professional liability policy and determined that for the entire 14-member group, the limit of liability was one million dollars per medical incident, with an annual aggregate of one million dollars. Thus, there was only one million dollars of coverage for the entire policy year for the entire group—and the annual premium approached one million dollars. In this case, there was essentially no insurance, just a trading of dollars for which the agent was receiving 20% of the premium.

Lesson Learned. Make certain that the limits of liability of your policy apply to each physician in the group and not to the group as a whole.

Factors Eroding the Limits of Liability

While there is not enough space here to identify all of the potential approaches insurers might have to affect the LOL of your insurance policy, I want to note that the major concern is whether the allocated loss adjustment expenses (ALAE) of a claim are covered inside or outside of the LOL.

The ALAE in a complex medical malpractice claim can be substantial. Most admitted insurers cover these expenses as an additional or supplemental coverage within their policies. However, many surplus lines carriers may place these expenses within the LOL of the policy, thus reducing the amount of coverage available to settle claims.

Most hospitals requiring specific limits, such as one million per claim and three million per annual aggregate, have not addressed this issue.

However, as time goes on with the continued escalation of claim costs, they will ultimately focus on it. Currently, it is more important that the physician or practice group understand that the limitation of this LOL can pose a significant problem of inadequacy of limits to resolve claims.

When dealing with non-admitted carriers (surplus lines carriers), other conditions and restrictions may apply that admitted carriers routinely provide for.

Lesson Learned. Be careful to get the full limits of liability you applied for. Require that your insurance agent or broker fully explain your coverage and its limitations.

Conclusion

Physicians should understand that most insurance agents and brokers are reliable and trustworthy, but also be aware that, as in any other profession, there are those who will seek to take advantage of your lack of knowledge.