Table of contents
- What is medical malpractice insurance?
- What does medical malpractice insurance cover?
- Who needs medical malpractice insurance?
- Educating physicians on medical malpractice insurance
- Types of medical malpractice insurance policies
- Types of medical malpractice insurance companies
- Checklist for evaluating insurance companies
- Advising: other factors to consider
- Who sells medical malpractice policies
- What's needed to apply for coverage
- What’s in a medical malpractice insurance policy?
- History and development of the medical malpractice system
- The first medical malpractice lawsuit
- The development of medical malpractice insurance
- Medical malpractice insurance crisis and reform
- State laws and tort reform
- Glossary of medical malpractice insurance terms
Medical Malpractice Insurance Complete Guide
Medical malpractice insurance provides coverage to physicians and other medical professionals for liability that results in any patient injury or death. A good portion of doctors will face at least one medical malpractice claim over the course of their career.
Purchasing this type of insurance is necessary for physicians—and is required by law in most states. Most hospitals require doctors to carry this coverage before they are granted admitting privileges.
What Is Medical Malpractice Insurance?
Medical malpractice insurance helps protect healthcare providers in case of a lawsuit or allegations of negligence.
Medical malpractice insurance covers expenses like:
- defense attorney fees
- court costs
- any settlements or judgments
If a healthcare provider doesn’t have malpractice insurance, they might have to pay personally for these expenses, in addition to being held personally liable for any settlements or judgments resulting from a lawsuit.
Many states require physicians (and, often, other healthcare workers) to have medical malpractice insurance. But even healthcare providers who do not live in states with such requirements should have insurance. According to a 2011 study in The New England Journal of Medicine, 7.4% of physicians – that’s 1 out of every 14 doctors! – had a malpractice claim in the previous year.
What Does Medical Malpractice Insurance Cover?
Medical malpractice insurance covers healthcare providers when they face allegations of negligence due to errors or acts of omission. It does not cover them for intentional or criminal acts, or for sexual misconduct.
If a healthcare provider is sued for medical malpractice, insurance companies will pay for a lawyer to defend them. Many malpractice insurers also provide other services such as risk management education.
Who Needs Medical Malpractice Insurance?
Any provider of healthcare services will need medical malpractice insurance, including:
- nurse practitioners
- physician assistants
In most states, physicians are required by law to have malpractice insurance, though the minimal amount of coverage varies. Hospitals also often require physicians and other providers to have malpractice insurance in order to get and keep staff privileges.
Physicians need to have medical malpractice insurance. Not only is it the law in many states, but, as mentioned above, physicians often can’t work in a hospital without it. Becoming a physician requires a large investment of both time and money, and a good malpractice policy protects this investment.
Physician assistants (PAs) are one of the fastest growing professions in the healthcare industry. Because they work in a variety of settings and have different levels of independence depending on the state they practice in, medical malpractice insurance can be highly individualized. As with physicians and nurses, completing risk management coursework can help lower their medical malpractice premiums.
Podiatrists are in high demand, as more Americans turn to them for foot, ankle and lower leg care, and as they grow in prominence in treating diseases such as diabetes. Medical malpractice insurance for podiatrists is generally less expensive than for physicians, but it is equally necessary to protect podiatrists from allegations of medical malpractice.
Group practices most often purchase a group policy for medical malpractice insurance, rather than have each healthcare provider buy their own policy. This lets them find more affordable and more customized insurance plans.
Hospitals require a type of medical malpractice insurance, referred to as Hospital Professional Liability (HPL). In recent years, many hospitals, especially larger ones and those that are part of hospital systems, have begun self-insuring part or all of their professional liability risk. Physicians, along with other healthcare providers employed at the hospital, will often be insured in this way.
Educating Physicians on Medical Malpractice Insurance
Purchasing medical malpractice insurance can be daunting, but it doesn’t need to be with the right information. Physicians should understand the different types of insurance policies that are available, the types of insurers offering these policies, and how to evaluate the financial strength of those insurers. Physicians also need to know how their specialty, practice location and claims history can affect how much they pay in premiums. Finally, physicians should understand the different options for purchasing insurance, including buying directly from a single insurance company versus using an insurance agent or broker who can provide quotes from multiple insurance companies.
Types of Medical Malpractice Insurance Policies
Most medical malpractice insurance policies are known as claims-made insurance. This means that an insurer provides coverage only for claims resulting from services provided while the policy is continuously in effect, and only for claims reported during that period of continuous coverage. If a claim is reported after a claims-made policy is cancelled, the physician would no longer be covered for the claim, even if coverage were in place at the time of the alleged malpractice incident. To protect against such a situation, physicians can purchase tail malpractice coverage or extended reporting coverage (described below).
Claims-made policies typically have a lower initial premium that increases gradually over a period of four to seven years, until the policy is at a mature rate. After that, premiums will only change due to claim experience or if the insurance company makes overall rate adjustments .
An occurrence policy provides coverage for a claim filed while the policy is in effect, regardless of when the claim was reported, including after the policy has lapsed or been canceled. Occurrence policies are initially more expensive than claims-made policies, but it doesn’t require purchasing tail coverage after cancellation. Medical malpractice claims tend to have a “long tail”, as it is difficult for insurance companies to predict settlements and judgements for claims filed years in the future from services provided today. As a result, only a few insurers sell occurrence policies.
Tail malpractice coverage
Tail malpractice coverage, also known as extended reporting coverage, covers physicians who have cancelled a claims-made or a claims-paid policy. Tail malpractice coverage solves the problem of dealing with claims filed after a claims-made policy is cancelled for services provided while the policy was in effect.
|Policy Type||How Coverage Works||Cost||Availability|
|Claims-made||Insurer provides coverage for claims from services provided while the policy is continuously in effect and that are reported during the period of continuous coverage.||Typically begins with a lower initial premium, increasing gradually over 4-7 years until the policy is at a mature rate.||Common type of medical malpractice policy; widely available.|
|Occurrence||Insurer provides coverage for
claims from services provided during the term of the policy, regardless of when the claims are filed, even after the policy has ended.
|Initially more expensive than claims-made policies.||Only available from a few insurers.|
|Tail Coverage||Insurer provides coverage for physicians who have cancelled a claims-made or claims-paid policy.||Typically 200% or more of the last policy premium when purchased from the insurer the physician is leaving.||Common type of medical malpractice policy; widely available.|
Types of Medical Malpractice Insurance Companies
Today, there are many kinds of insurers that offer medical malpractice coverage, including:
Physician-owned insurers: These companies frequently originated in state medical societies. Some are now publicly traded companies. Physician-owned insurers can be one of two types:
- Mutual insurance company: A mutual insurance company is privately owned and managed by its policyholders. Profits are either paid out to policyholders as dividends or used to reduce future premiums.
- Reciprocal insurance company: A reciprocal insurance company, also known as a reciprocal inter-insurance exchange, is an unincorporated association of subscribing members that agree to pool their risks. As with a mutual insurance company, the policyholders are the owners of the company and profits are paid out as dividends or premium reductions. A reciprocal insurance company is managed by an attorney-in-fact who reports to the board of directors.
Commercial carriers: These are insurance companies owned by stockholders. Any profits are paid out to investors as dividends.
Risk retention groups: These groups were formed after the Federal Risk Retention Act (RRA) of 1986 allowed organizations and persons involved in similar businesses and activities to form their own liability insurance company. In a risk retention group, the policyholders are also its members and owners. Risk retention groups are required to follow the insurance laws of the state in which they operate.
Risk purchasing groups: These groups also came into being thanks to the RRA. Unlike risk retention groups, a risk purchasing group allows people involved in similar businesses or activities to band together to purchase insurance coverage from an insurance company.
Joint Underwriting Association (JUA): a JUA is a nonprofit risk-pooling association that acts as an “insurer of last resort” when affordable insurance coverage is not available. Many states have set up JUAs to provide medical malpractice insurance to physicians who cannot get coverage in the commercial marketplace.
Trusts: These are an alternative to traditional insurance. Trusts provide coverage to members, who usually have to pay into the trust in order to join. Depending on the state, trusts may not be regulated by state insurance departments or covered by the state’s guaranty funds if they become insolvent. Trust members are retroactively assessable, meaning if the trust is unable to pay its losses, the members must make up the difference. If a physician joins a trust, they may be obligated to remain assessable, even after leaving the trust.
|Organization Type||Structure||Profits||Requires a Capital Investment?||Covered by State Guaranty Fund?|
|Mutual Insurance Company||Owned by policyholders.||Profits are either paid out to policyholders as dividends or used to reduce future premiums.||No||Yes, if the company is admitted in the state.|
|Reciprocal Insurance Company||Unincorporated association of subscribing members (policyholders) who agree to pool risks.||Profits are either paid out to policyholders as dividends or used to reduce future premiums.||No||Yes, if the company is admitted in the state.|
|Commercial Carriers||Owned by stockholders.||Paid out to investors as dividends.||No||Yes, if the company is admitted in the state.|
|Risk Retention Group||Owned by policyholders.||Retained by policyholders.||Yes||No|
|Risk Purchasing Group||A group of people (not an insurance company) engaged in similar businesses or activities band together to purchase insurance coverage from an insurance company or risk retention group.||Does not have profits.||No||Yes, if the company is admitted in the state.|
|Joint Underwriting Associations||Nonprofit risk-pooling association; acts as an insurer of last resort when affordable coverage is not available.||Nonprofit.||No||Yes|
|Trusts||Members pay into the trust to join.||Retained by policyholders.||Yes||Depends on the laws of the state.|
Checklist for Evaluating Insurance Companies
Understanding an Insurance Company’s Financial Strength and Stability
You'll want to understand the financial strength and stability of potential insurers, since this can matter even more than how much a physician pays in premiums. Strengths of an insurance company include:
Surplus: This is the net worth of the company, or its assets minus its liabilities. A surplus determines a company’s ability to assume risk and pay for unanticipated shortfalls in their loss reserves.
Net Written Premium: The amount maintained by the company after it has paid for reinsurance.
Loss Reserves: The amount set aside for indemnity payments and loss adjustment expenses for open claims.
Ratios: A measure of the financial health of a company. Several ratios can be used to evaluate a company, including:
- The ratio of net written premiums to surplus: This shows the insurance company’s ability to assume risk. The strongest insurance companies will have a ratio as close to 1:1 as possible, though a ratio of up to 3:1 is considered a sign of a company’s strength.
- Ratio of loss reserves to surplus: This indicates the company’s ability to cover unanticipated shortfalls in their reserves. Regulators recommend that this ratio be 4:1.
- Loss ratio: The total amount of incurred losses as a percentage of earned premiums.
- Expense ratio: The total amount of operating expenses as a percentage of earned premiums.
- Combined ratio: If this is more than 100%, it indicates an unprofitable year for an insurance company and is a sign that action will need to be taken to reduce the combined ratio and once again become profitable.
Medical malpractice insurance companies are given ratings by independent analysts, based on the financial and operating strength of the company. These ratings provide a snapshot of how a company is doing and what its long-term prospects may be. You should be familiar with these ratings, especially those by A.M. Best Company, which is considered the leading insurance industry analyst. A.M. Best ratings range from “A++” (Superior) to “C-“ (Weak). Other rating analysts include Duff & Phelps, Moody’s, Standard & Poors’ and Weiss Research. Ratings are an important indicator to look at when advising a physician on a policy.
Advising: Other Factors to Consider
Beyond an insurer’s financial health, physicians looking for medical malpractice insurance should consider factors like how a claim is defended, how much protection is available, types of coverage offered in the policy, and many other things.
Consent to Settle: If an insurance policy has a “consent to settle” clause in favor of the insured, the insurance company must obtain the written permission of the insured physician before making any settlement with a plaintiff. If there is no “consent to settle” clause, then the insurance company can settle a claim as it sees fit, without the consent of the policyholder.
Cyber-liability: With both patient health data and other personal information stored electronically, hospitals, health care facilities and even individual physician practices are all vulnerable to data breaches and attacks. Many, if not most, medical malpractice insurance policies now include some level of supplementary cyber-liability coverage separate from the medical malpractice insurance limit of liability. Pay attention to the level of supplementary cyber-liability coverage offered in the policy, as the supplementary coverage provided may not be adequate for massive data breaches.
Free Tail Coverage Provisions for Death/Disability/Retirement: Medical malpractice insurance policies can vary greatly in how they handle death, disability and retirement for physicians. Many policies will offer benefits like free tail coverage automatically for death and for disability (depending on the nature of the disability). But there may be restrictions for retirement based on age and how long the physicians has had their policy. Especially for physicians who are considering retirement, these provisions can be very important and can influence when a physician is best able to retire with free tail coverage.
Defense Costs: The cost of defending a claim, including legal fees, court costs, attorney fees and expert witness fees. Defense costs can either be “inside” or “outside” the limits of liability for the policy, which is an important difference. If defense costs are inside the limits, then the cost of defending the claim is subtracted from the total amount of liability coverage available. For example, if a policy provides $1,000,000 in liability coverage and the cost of defense is $150,000, then there would only be $850,000 left to pay for any settlement or judgment. If defense costs are “outside” the limits of liability, then the cost of defending the claim will not reduce the amount of coverage; in the example, the full $1,000,000 would still be available to pay any settlement or judgment and the $150,000 in defense costs would be assumed by the insurance carrier. Defense costs outside the limits of liability can be unlimited or capped with their own separate limit. For the insured, it is better to have unlimited defense costs outside the limits of liability.
Exclusions: A statement of specific items that an insurance policy will not cover. Physicians should know what these are so they know which claims or allegations their policy will not cover. For example, it is common for some policies to exclude any duties carried out as a Medical Director, which can be covered under a separate policy. Another common exclusion is payment for settlements or judgments for claims of sexual misconduct.
Incident Reporting: An adverse outcome or event that may become a claim. Some insurance policies will allow an incident to be reported to the insurance company as a potential claim before a suit is actually filed. Early reporting of an incident before it can become a claim may allow for actions to be taken that prevent a lawsuit from being filed.
Some insurance companies will only accept a “written demand for damages” as a claim, meaning a physician will have to wait for a demand for money or to be sued before the insurance company accepts the claim. This has two downsides for physicians. First, it can make it difficult for physicians to change insurers until the claim has been filed, as a new insurance company will not want to insure a physician who is expecting to be sued. Second, it will not be possible to resolve the problem before a suit is filed against the physician.
Liability Limits: Insurance policies impose limits on the amount of coverage offered by claim and by year. For example, many medical malpractice policies will have limits of $1,000,000/$3,000,000, meaning the insurance company will cover up to $1,000,000 per claim and provide up to $3,000,000 in total coverage for all claims in a given policy year. However, if a given claim is settled for more than $1,000,000, there would not be coverage for the amount exceeding $1,000,000. Similarly, if a physician faced several claims which were individually less than $1,000,000, but collectively exceeded $3,000,000, there would be no coverage for the amount exceeding $3,000,000.
Locum Tenens: Provides insurance coverage for a substitute physician so that they can fill in for the regular physician policyholder without having to purchase additional insurance coverage. For example, many physicians take time off their practice for vacation, additional education, research or sabbatical work, or to deal with personal matters, such as pregnancy, family care or personal health issues. Locum tenens coverage allows these physicians to employ a substitute physician during their absence, with the substitute physician being insured under the absent physician’s own insurance policy. Insurers have different rules for Locum Tenens coverage, so make sure you understand the details of the coverage and whether or not coverage is automatically extended to the substitute physician, or if additional requirements need to be fulfilled.
Notice of Non-Renewal: Insurance companies in many states are required by law to provide written notice in advance of when they intend to cancel or not renew coverage. Depending on state rules, this notice must be given a minimum amount of time before the cancellation takes effect. However, some insurance companies will provide notice of non-renewal even before the legally mandated notice date. Policyholders will thus have more time to shop for a new policy and have it go into effect before the old policy is officially cancelled. This is important, because it is more difficult to obtain a new policy once a physician has a cancelled policy on their record.
Portability: The ability to take the policy you have and go to another state without having to buy tail coverage. Many insurance companies do not operate in all states. Physicians considering moving to a different state may want to see if their insurance coverage is portable. If not, the physician might need to purchase tail coverage, which can be expensive, as well as find a new insurer. If, however, the physician’s insurer offers coverage in both the old and the new state, they won’t need to buy tail coverage.
Premium discounts and credits: Many insurers offer various types of premium discounts or credits to physicians for completing risk management coursework; having membership in a particular professional association; or being claims-free, part-time, or new-to-practice.
Who Sells Medical Malpractice Policies
Medical malpractice insurance policies are distributed in three ways:
- Through a Direct Writer
- Through a Captive Agent
- Through an Independent Agent
What’s the difference between them?
Direct Writers sell their products directly using in-house agents and producers. Customer service functions are performed by the insurance company’s staff.
Captive Agents are appointed by a particular insurance company to market and sell only that company’s products. Captive agents are usually barred from representing other insurance companies. Customer service functions are provided by the agents and their employees.
Independent Agents contract with various insurance companies to market and sell their products. Independent agents typically represent more than one company. They will also perform customer service tasks. Unlike Direct Writers and Captive Agents, Independent Agents can often provide many policy options to physicians. Because they can shop for coverage with many insurance companies, independent agents frequently find better rates or more appropriate coverage options for an individual physician. Presidio Insurance is an Indpendent Agency.
There is no additional cost to using an independent agent or captive agent. Agents receive a commission from the insurance company, which is already included in the premium.
What's Needed to Apply for Coverage
Physicians will need to have certain things ready when they begin a search for a medical malpractice insurance policy. These may include:
- A copy of the Declarations page (usually the first page of a policy) from the physician’s most recent insurance policy, as well as for any tail policy.
- Claims loss runs for the past 10 years, or since the date the physician began practicing medicine whichever is less. Loss runs are obtained from the current or any previous insurer.
- A copy of the physician’s letterhead and current Curriculum Vitae (CV).
- Additional materials, if applying for coverage for a corporation or for other individuals, as in a group practice.
- A completed application form, including coverage history; information on physician education, specialty and types of procedures performed; practice details, such as location and number of hours worked; hospital privileges; and previous claims history.
Application questions and requirements will vary by insurance company, but it is important to provide accurate and complete answers in order not to jeopardize future coverage.
What’s in a Medical Malpractice Insurance Policy?
Declarations page: Usually the first page of an insurance policy. It includes the name of the insurance company, the name and address of the insured, the policy number, policy limits, the policy period, the premium amount and any deductibles that apply to the policy. The Declarations page will also list the retroactive date for the policy.
Insuring agreement: A standardized part of an insurance policy that describes the risks assumed by the insurance company and the nature of the coverage.
Endorsements: Additional pages or sections in a policy that modify, expand or clarify the insuring agreement, based on conditions such as state regulations or the inclusion of supplementary coverage. Endorsements may modify a policy unconditionally, or only in certain cases.
History and Development of the Medical Malpractice System
The First Medical Malpractice Lawsuit
Medical malpractice lawsuits go back to the Middle Ages. The first recorded medical malpractice lawsuit was Stratton v. Swanlond, decided in 1374 by Chief Justice John Cavendish of the Court of King’s Bench in England. The plaintiff, Agnes of Stratton, sued the London-based surgeon John Swanlond for breach of contract. Swanlond had promised to treat Stratton’s mangled hand, but, after treatment, she was unsatisfied with the result. Justice Cavendish declared, in an important precedent, that a physician should be held liable only if a patient was harmed as a result of negligence, and not merely if the physician was unable to provide a complete cure.
The Development of Medical Malpractice Insurance
Over the next several centuries, malpractice cases occasionally arose, but they remained uncommon until the middle of the 19th century. Between 1840 and 1860, medical malpractice cases in the United States rose by 950%. The reasons for this sudden increase are unclear, but possible factors include cultural changes, greater ease of transportation and communications, and changes in the practice of medicine itself.
By the early 20th century, many physicians had joined state medical societies. These societies produced medical journals and gave physicians a forum for interacting with their peers. At least one state medical society, the Massachusetts Medical Society, also began offering medical malpractice insurance coverage as an incentive to join. This new type of liability insurance was designed to protect physicians from financial ruin in the event of a lawsuit. Fortunately for physicians,medical malpractice lawsuits remained relatively rare and relatively small (by today’s standards) for the next several decades.
Medical Malpractice Insurance Crisis and Reform
Beginning in the late 1960s and continuing into the 1970s, the United States experienced a medical malpractice insurance crisis. Rising numbers of claims against physicians and hospitals, often resulting in large judgments, led many malpractice insurers to leave the market. By 1975, physicians found it hard in many states to obtain medical malpractice insurance at a reasonable rate, or any coverage at all.
States scrambled to address this new challenge. One of the biggest responses came out of California, which enacted the Medical Injury Compensation Reform Act (MICRA) in 1975. MICRA was the first medical liability tort reform act, which made several changes to malpractice insurance law:
- It imposed a non-economic damage cap of $250,000
- It imposed attorney’s fee caps, which limit the amount an attorney can receive from a settlement
- It shortened the statute of limitations for claims to be filed
- It set up a process for resolving disputes through binding arbitration instead of a lawsuit
- It allowed for periodic payments, meaning physicians and hospitals can pay out an award over time
According to the RAND Corporation, MICRA has decreased medical malpractice defendants’ overall liability by about 30%. Due to caps on both awards and fees, it may also have led attorneys to be more selective about which cases they bring to court. MICRA also served as a model for several other states, but often with limited success. Many state supreme courts have rejected damage caps as unconstitutional, and California and other states have been criticized for not increasing the amount of these caps to keep pace with inflation.
In addition to MICRA, many states have passed reforms to their medical liability systems. Reforms generally fall in the following categories:
Damage Caps: Damage caps set a limit on the amount of money that can be recovered in a suit. For medical malpractice cases, this can include caps on non-economic damages (e.g., pain, suffering, and other non-economic losses) or caps on punitive damages (for inappropriate or egregious conduct). Some states have also capped the overall amount of an award, but this is less common. As mentioned earlier, damage caps in many states have been declared unconstitutional; for example, because it interferes with the right to trial by jury.
Joint and Several Liability: Many states limit the amount of damages that a defendant can be held liable for based on the degree of culpability the defendant is found to have. For example, if a physician is found to be only 25 percent responsible for a plaintiff’s injuries, then they may only be required to pay up to 25 percent of damages (depending on the state). In other states, defendants may be held responsible for all damages; thus, even if the physician was only 25 percent culpable, they could still be on the hook for more than 25 percent of the damages. Many states set percentages of culpability, meaning defendants are considered only partially liable if they are held to be at fault for under a certain threshold of damage; this threshold can vary from state to state.
Apology Laws: These are laws that allow physicians and healthcare workers to make statements of regret or apology to a patient (or to the patient’s family or representatives) harmed as a result of a medical error. These statements are thus inadmissible in court. Apology laws are intended to improve the relationship between physicians and patients, with the hope that patients will be less likely to sue a physician who admits an error and apologizes. Apology laws are also intended to make it easier to come to a settlement in these cases, rather than going through the courts.
Patient Compensation Funds: Seven states have created Patient Compensation Funds (PCFs) that are intended to cover medical malpractice claims above a certain amount. PCFs are set up to provide insurance to physicians, and sometimes other healthcare practitioners, above and beyond their own personal medical malpractice policies. PCFs are financed by surcharges on physicians and healthcare workers.
Collateral Source Reform: This refers to whether or not a plaintiff must disclose sources of payment for their medical bills, such as health insurance. Whether or not collateral sources are considered can have a large effect on the amount of a final judgment; if collateral sources are considered, the award will generally be less, as it will only kick in after other sources have been exhausted. For example, if a plaintiff wins a case, but their health insurance will pay for 80 percent of the plaintiff’s future medical care anyway, then the defendants will only be liable for the remaining 20 percent. Collateral source does not affect the size of non-economic damage awards.
Medical Malpractice State Laws and Tort Reform
|State||Damage Caps||Patient Compensation Fund||Attorney Fee Limits||Collateral Source Reform||Joint Liability Reform||Periodic Payments||Apology Law|
|District of Columbia||No||No||No||No||No||Yes||Yes|
Glossary of Medical Malpractice Insurance Terms
Ratios – there are several types of ratios to look at when assessing the financial health of an insurance company:
- The ratio of net written premiums to surplus – this ratio shows the insurance company’s ability to assume risk. The strongest insurance companies will have a ratio as close to 1:1 as possible, though a ratio of up to 3:1 is considered a sign of company strength.
- Ratio of loss reserves to surplus – this indicates the company’s ability to cover unanticipated reserve deficiencies. Regulators recommend that this ratio be 4:1.
- Loss ratio – the total amount of incurred losses as a percentage of earned premium.
- Expense ratio – the total amount of operating expenses as a percentage of earned premium.
- Combined ratio – A combined ratio of more than 100% indicates and unprofitable year for an insurance company and is a sign that some type of adjustment will be necessary to reduce the combined ratio and once again become profitable.