Choosing a professional liability insurance carrier is one of the most important practice decisions that you’ll make, and it’s not a decision to be taken lightly. Whether you’re a doctor in a solo practice or a group in search of coverage, it’s important to research your options and select the professional liability insurance that meets your needs.
The premium must be weighed against the protection, service, financial strength, and the long-term stability provided by the insurer. Doctors should also review an insurer’s claims defense performance, patient safety/risk management services, underwriting standards, actuarial discipline, and whether the company adequately protects its policyholders from unlimited personal liability.
Today—more than ever—you can’t afford to be wrong in your choice of an insurer. Because your reputation and livelihood are on the line, you need a dedicated insurer that can protect you against allegations of medical malpractice.
We hope this guide helps you become familiar with your medical liability insurance options. To assist with your research, we’ve also included a list of questions that every medical liability insurer should answer. It is your right—and your responsibility—to ask frank questions and to consider the answers you receive before making a decision.
- Questions You Should Ask
- Types of Insurance Companies
- The Alternative Market
- Types of Insurance Policies
- General Principles of Insurance
Our glossary provides a quick reference for understanding insurance terms.
We also invite you to learn more about The Doctors Company and the products and services we offer.
Questions You Should Ask When Selecting a Professional Liability Insurance Carrier
What kind of carrier is it? (Is it a stock company, a mutual or reciprocal carrier, or is it an alternative market carrier?)
How long has the carrier been in the business of writing medical malpractice insurance?
How sound are the carrier’s asset base and surplus? How do its insurance industry ratings compare with its competitors?
If it is a mutual or reciprocal carrier, does it have a dividend policy or loyalty program in place?
Does the carrier offer policy deductibles? Does it offer discounts for physicians with favorable claims histories?
Is the carrier endorsed or sponsored by any medical associations, and does it offer discounts for membership?
Does the carrier have a certificate of nonassessability? (A certificate of nonassessability protects policyholders from unlimited personal liability for losses incurred by the carrier’s past claims.)
What payment plan options does the carrier offer?
If I take family leave, disability leave, leave for military service, or a sabbatical, will the carrier charge me while I’m not practicing?
Will I have easy access to the carrier’s medical director and to its policyholder services?
Does the carrier have its own patient safety department? What types of patient safety/risk management services does it offer?
Does the carrier have designated claims and patient safety/risk management departments to handle these services internally? If not, who handles these services for them?
Can the carrier settle a claim without my consent?
Will the carrier cover my locum tenens?
What does the policy cover beyond traditional malpractice insurance? Will it cover HIPAA-based claims arising from breach of confidential information or actions and reviews by Medicare, Medicaid, medical licensing boards, credentialing agencies, and professional review organizations?
Will I be reimbursed for lost income if I have to go to court? What kinds of services are provided as part of my defense?
Does the company cover punitive awards?
Does the carrier actively support national medical-legal reform?
If I move my practice to another state, can I carry my coverage with me?
What are my extended reporting (tail) coverage options if I retire or decide to move to a practice covered by another carrier?
Physicians have choices when selecting a professional liability insurance company:
Mutual and reciprocal insurance companies are owned by their policyholders and have no stockholders. Two-thirds of practicing physicians are insured by physician-owned mutual or reciprocal insurance companies. These companies were formed to provide their policyholder-owners with a dependable source of insurance. Profits are used to strengthen the company’s ability to pay claims or are returned to policyholders in the form of dividends.
Stock insurance companies are public, for-profit corporations owned by their stockholders. These commercial carriers are publicly traded and provide coverage for about one-third of American physicians. Stock companies offer multiple lines of insurance, and they often move in and out of the malpractice market as the business climate dictates.
If a carrier is not sufficiently capitalized, it may issue an assessable policy. This means that if the carrier cannot meet its financial obligations, it can require its insured physicians to make up the deficit; e.g., if the company’s claims reserves are inadequate, the current policyholders could be required to pay additional money to cover the company’s past claim losses. A well capitalized carrier can issue a nonassessable policy. This frees policyholders from any obligation to pay additional money for past losses if reserves are inadequate.
The alternative market provides sources of coverage that are typically exempted from certain insurance laws, such as minimum capital requirements. If you ever consider nontraditional coverage through the alternative market, investigate all aspects of the policy carefully—especially the organization’s provisions regarding tail coverage, its financial solvency, its regulatory requirements, and its rules regarding assessability.
Trusts are a somewhat controversial alternative to insurance. In some states, trusts are not regulated by the state insurance department and are not protected by the state’s guaranty fund in the event of their insolvency. (A guaranty fund is a state-operated fund that pays the claims of insolvent insurance companies and is supported by contributions from insurance companies doing business in that state.) Capital contributions are frequently required in order to join a trust. In some trusts, only the claims actually paid during the policy period are covered (claims-paid policy). Since most trusts do not maintain reserves, trust members are retroactively assessable if the trust’s assets prove insufficient to pay losses. This means that a former trust member could be assessed years later. Furthermore, some trusts stop defending and paying open claims for members who leave and go elsewhere for coverage if the members do not agree to remain assessable or do not purchase tail coverage.
A risk retention group (RRG) is a group of doctors who form an insurance company that is required to follow the insurance regulations of the state in which it is domiciled. When first joining an RRG, a physician is typically required to pay a capital contribution in addition to the annual insurance premium. If an RRG is appropriately capitalized and operated, it can be a viable insurance alternative. However, due to less regulatory scrutiny, insolvencies imperiling the financial assets of the insured have occurred. Doctors considering an RRG should carefully evaluate the extent to which the state requires the high standards of solvency and management necessary to ensure that the company is able to fulfill its insurance obligations.
The most common types of coverage are claims made and occurrence, although today most professional liability insurance carriers offer only claims-made policies. Since these types of insurance provide fundamentally different protection, you should clearly understand their differences.
In a claims-made policy, a covered event must occur and the claim made during the policy period. Coverage is usually triggered when an incident is reported (report trigger); however, in some policies coverage is triggered only when a demand for payment is made (demand trigger). Since few claims will be reported during the early years of a claims-made policy, the insurance company has less risk exposure than it will have in subsequent years. For this reason the premium is initially lower and gradually increases step-wise until the full risk exposure is reached. This generally occurs after four years, at which time the premium is said to be mature.
Claims-made coverage can be extended back by adding nose coverage for prior events. With nose coverage, the insurer agrees to cover claims made during the policy period based on events that occurred prior to the inception date of the policy. When a physician retires or moves to a different insurance carrier, he or she may obtain tail coverage. This provides insurance for a covered event that occurred during the policy period even if the claim is not reported until later. If a physician moves from one carrier to another, the individual can choose between a tail policy with the expiring carrier and nose coverage with the new carrier.
In an occurrence policy, any claim arising from an event occurring in the policy period is covered, regardless of when the claim is reported or when in the future it needs to be paid. The long time between the occurrence of an adverse medical event and the time when a claim is paid (typically three to five years) makes it difficult for malpractice insurance companies to predict the ultimate costs of losses. Since today’s premiums must cover future losses regardless of when they are reported, malpractice occurrence policies are seldom offered. Furthermore, the limits of liability in an occurrence policy issued today may be inadequate for a claim that is made years from now.
General Principles of Insurance
Most physicians are unfamiliar with the underwriting, actuarial, and reserving principles of professional liability insurance. The policy is usually filed away unread until a claim is made. Yet without this important document, it is virtually impossible to practice medicine in today’s litigious environment. Your policy is a legal contract, and it is important to read it and understand what claims are covered, the exclusions to coverage, and the endorsements or riders that modify coverage.
An insurance company is in the business of managing risk. Like other businesses, income (premiums) must cover expenses (losses), or the company will not be “in business” when future claims need to be paid. However, an insurance company differs from other businesses in an important way, because it must collect an appropriate amount of premiums today to cover losses and legal defense expenses that are paid three to five years into the future. By definition, these future costs are unknown at the time the insurer must price and sell the policies and are difficult to predict due to the length of time involved in resolving malpractice claims. If an insurer underestimates future costs and fails to place adequate funds in claims reserves, physicians may be left without the liability protection they have paid for.
Thus, an insurance company’s survival depends on its ability to determine physician risk and predict future losses, appropriately price today’s premiums to cover these losses, and place adequate funds in reserves to pay losses when they are incurred. The true value of a policy (as opposed to its premium cost) may not be apparent until years after its purchase when a claim must be defended and possibly paid.
Consider the following factors when evaluating an insurance carrier:
Claims management requires both the prompt review of claims by experienced claims specialists and the vigorous defense of policyholders against nonmeritorious claims. In instances where there is negligence, the company should attempt to settle claims quickly and fairly with the physician’s consent.
Where permitted, a guaranteed consent-to-settle provision should be included in the policy. This requires the carrier to obtain the physician’s written consent in order to settle any claim and gives the physician control over whether claims are settled. Absent this provision, a policy may contain a “hammer” clause that pressures the physician into consenting to settle; i.e., if a jury award exceeds a settlement offered by the carrier and accepted by the plaintiff but rejected by the physician, the proposed settlement amount becomes the policy limit and the company is not obligated to pay the amount that exceeds the offered settlement nor the legal fees incurred after the refusal to consent.
Underwriting is the risk assessment of physicians applying for insurance coverage and their placement into subgroups sharing similar risk profiles thought to be predictive of similar future claims losses. A financially sound carrier exercises underwriting discipline by not insuring doctors whose practice profiles or claims histories indicate a high risk for future indefensible claims. Such claims could imperil the assets of the company and, in the case of a doctor-owned company, the security of its insured physicians.
Factors that affect risk include specialty, level of training, nature of practice, clinical setting, practice profile, and the state and county where medicine is practiced (venue). Venue assessment considers the medical-legal climate, presence or absence of tort reform, and the attitudes of both patients and juries toward doctors. Thus, high-risk specialties (neurosurgery, OB, orthopedics) pay higher premiums than low-risk specialties (dermatology, pathology, psychiatry), and it is the reason that a neurosurgeon in New York pays a higher premium than a neurosurgeon in California. An individual physician’s premium may be further adjusted by applying patient safety credits and claims-free discounts when the practice profile indicates a lower-than-average risk.
Actuaries calculate premium price by making specialty-specific estimates of the cost of future losses and associated expenses (legal defense and expert witness fees). Their estimates are based on the company’s past experience and on predictions of future trends in claims frequency (the number of claims per 100 insured physicians) and severity (average indemnity paid + defense expense incurred per closed paid claim). The larger the physician risk pool, the more accurately losses can be predicted. The calculation for an individual physician is further refined by the loss history for the doctor’s specialty in the geographic territory (venue) where he or she practices.
Actuarial models must also reflect the value of investment income. Part of the fiduciary responsibility of any insurance company is to responsibly invest premiums until the money is needed to pay losses and expenses. The investment income collected is used to subsidize the actual cost of premiums. For this reason, insurance rates are sensitive to the state of the investment markets, especially to interest rates, since claims reserves are held in fixed income investments.
Surplus is the amount by which a company’s assets exceed its liabilities. It is accumulated profit that, in a mutual or reciprocal company, belongs to the policyholders. It serves as the company’s capital, and it supports operations during years when unpredicted high losses have occurred. A company’s surplus (capital) allows it to take on risk (write new business) and also serves as a cushion in the event that losses from that risk exceed the reserves intended to cover them. This is because surplus can make up for deficiencies in the loss reserves. Thus, surplus serves to provide strength and to maintain fiscal integrity in the face of adverse loss experience that was not anticipated. It is the most obvious mark of a company’s strength and stability—and it is closely monitored by state departments of insurance and rating agencies in order to assure policyholders that a company has sufficient assets to pay for future claims.
Reserves are the funds set aside to pay for future losses. The reserves are invested, and the interest earned becomes an additional source of income to pay losses. Over time some claims settle, and the reserve estimates on open claims are modified as additional information becomes available. This necessitates a continuous re-evaluation of the adequacy of reserves. If reserves fall below a level considered adequate to pay future claims, the company is under-reserved. Money is then transferred from surplus into reserves, and premiums may have to be raised in order to rebuild surplus. On the other hand, if a mutual or reciprocal company becomes over-reserved, the “excess” dollars are transferred to surplus and taxed. If the surplus is more than adequate for the capital needs of the company, funds may be returned to policyholders in the form of a dividend.
The reserves-to-surplus ratio is an important measure of a company’s reserve adequacy. It measures a company’s financial ability to pay claims if reserves prove to be inadequate, since the additional reserves would have to come from the insurer’s surplus. The target range of reserves-to-surplus is 2–3:1. Thus, it is important to grow surplus, since it is both the company’s capital and the source of funds to bolster reserves if needed.
The loss ratio is the percentage of premiums used to pay incurred losses. Losses include indemnity payments made to plaintiffs as a result of jury awards or settlements and the legal defense expenses associated with dismissal, defense in court, or settlement of claims (primarily defense attorney and expert witness fees).
The expense ratio is the percentage of premiums used to run the company. These operating expenses include underwriting, claims administration, finance, marketing, and agent commissions.
The combined ratio is the sum of the loss and expense ratios and is the percentage of premiums used to operate all aspects of an insurance company (losses and expenses). A combined ratio (CR) of 100 percent is the breakeven point; i.e., losses and expenses equal the premium collected, and profit equals investment income. If the CR exceeds 100 percent, there is an underwriting loss, and if the CR is less than 100 percent, there is a profit.
Historically, for most insurance companies, the CR exceeds 100 percent. How then do malpractice insurance companies stay in business? The answer is that they conservatively invest the premiums collected (primarily in treasury notes and investment-grade bonds), and the investment income generated is usually sufficient to offset the company’s operating losses. If investment income is insufficient to compensate for losses, funds must be transferred from the company’s surplus into its reserves.
Financial stability, not premium price, should be the first consideration when selecting a malpractice carrier because it is essential that the company have sufficient financial resources to pay all current and future claims against policyholders. Financial strength is reflected in the rating a carrier receives from an insurance industry analyst such as A.M. Best Company or Fitch Ratings. This rating is an assessment of the company’s ability to pay future claims.
Patient safety and risk management programs should be an integral part of the services provided by a medical liability insurer. The company should conduct expert claims reviews in each specialty to uncover recurrent problems of medical error, system failure, and patient injury. It should also provide its policyholders with ongoing proactive patient safety programs and information that enhance the safety of their medical practices, reduce the risk of patient injury, and reduce exposure to claims resulting from adverse events and outcomes.