Ординатура / Офтальмология / Английские материалы / Risk Prevention in Ophthalmology_Kraushar_2008

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In an occurrence-type policy, you are covered against any patient who sues you for medical malpractice as long as the incident occurred when you were insured with the carrier. This is similar to a typical auto insurance policy in which if you rear-end another car in December 2005 and you sell your car in January 2006, you are still covered against the claim even if the person does not file a lawsuit against you until June 2006, because the negligent act occurred when you had a policy in effect.

In contrast, in a claims-made policy, you are covered against a person who sues you for medical malpractice if two conditions are met: if the incident occurred when you were insured with the carrier and if, at the time the lawsuit is filed, you are still insured with the carrier. In the example using auto insurance, if you were to be involved in the same accident described previously, you would not be covered, because at the time the lawsuit was filed against you, you were no longer insured with the insurance carrier. However, in a claims-made policy you can protect yourself against such a lawsuit, even if it was filed after you left the insurer, if you purchase a supplemental “endorsement,” often referred to as a tail. This optional tail endorsement typically costs two to three times the physicians’ prior year’s premium at the time they leave the insurance carrier. Often physicians can avoid this very costly tail if they meet one of three conditions: (1) if the physician dies during the policy (his estate does not need to purchase the tail endorsement);

(2) if the physician becomes permanently disabled; or (3) if the physician is with the insurance carrier for at least the 5 previous years, is over 60 years old, and decides to permanently retire. If one of these conditions is met, often the insurer will provide the tail free of charge.

Although the “free” tail endorsement is often considered a major benefit to the physician in a claims-made policy, it is also the most often misunderstood portion of the policy. First, a physician should realize that a claims-made policy was introduced by the medical malpractice industry to meet their needs, not to address the needs of the physician. Claims-made policies enable the insurer the ability to adjust their rates and premiums more quickly than an occurrence type policy.

The primary benefit to physicians of the claims-made policy is the cost savings. In fact, the cost savings is typically what allures them to purchase the claims-made policy, as generally a claims-made policy will cost 35% of the cost of an occurrencetype policy in the initial year. However, the savings automatically diminish for the physician each year until the fifth year of the claims-made policy, when the cost becomes the same as the occurrence-type policy. In fact, the typical escalating costs in the claims-made policy provide that the claims-made policy will be 35% of the cost of the occurrence-type policy in the first year, 65% in the second year, to 80% in the third year, and will generally be 90% in the fourth year from the occurrencetype policy. Generally, physicians are unaware of the fact that the savings of the claims-made policy is predetermined by the insurance companies as the company has already filed for these escalating factors with their state’s department of insurance prior to issuing the policy.

As stated earlier, the advantages of a claims-made policy to the insurance companies far outweigh those cost advantages to the physicians. One of the most important advantages to the insurance company is that it can raise rates to

its policyholders at a more rapid pace, while ensuring that most physicians will be forced to pay those rate increases. For example, when any insurance company chooses to raise its rates, it typically has the fear that such a rate increase can cause its current policyholders to shop around and consequently leave their insurance company, which would hinder their projections to collect more total premiums. However, physicians faced with a rate increase in a claims-made policy are forced to purchase a very costly tail if they desire to leave the insurer. Historically, the most common problem with a claims-made policy is that most physicians anticipate receiving the “free” tail endorsement and therefore never set aside capital to purchase a tail; then, when faced with a rate increase, they have no choice but to absorb it. Renewing under such a circumstance also increases the physicians’ tail endorsement cost by that rate increase percentage as well.

In fact, in 1982, the “claims-made” form of coverage for physicians was introduced in New York and several insurers began solely offering these policies to their physicians. As a result, a number of physicians were forced to close their businesses because they were faced with unaffordable and unpredictable rising tail costs by insurance companies. In 1991, as an “emergency measure,” the New York Insurance Department stated, “It has become apparent that there are medical malpractice situations where claims-made coverage has proven impractical or unworkable,” promulgating a regulation requiring that every insurer offer to physicians “occurrence-type” policies. The implementation of this regulation ended the “claims-made crisis” in New York.

The main advantage of the traditional occurrence-type policy is rather simple: it provides physicians the freedom to choose different insurance coverage each year, without incurring any additional and unpredictable costs. The largest complaint by most physicians is the unpredictable nature of the costs associated with medical malpractice insurance, and, by purchasing an occurrence-type policy, physicians are capable of ensuring that they can afford to shop for other insurance if their rates increase substantially.

Common Misconceptions About the Free Tail

Without question, the largest misconception for physicians is related to the conditions that provide for the “free” tail endorsement. Most physicians believe that with a claims-made policy the insured is entitled to free tail endorsement coverage after 5 years with the carrier. Typically, they believe they can simply remain with the carrier for 5 years, and, because they are over 60 years of age, a free tail endorsement will be provided. Unfortunately, they do not foresee the scenarios in which they will not qualify because of intervening factors.

First, the physician fails to realize that remaining with the insurance carrier for 5 years is not their unilateral decision. In other words, the insured does not always have the option to remain with the carrier for 5 years. Physicians are often nonrenewed by their insurance company before reaching that 5-year mark. The

language. One of the most common clauses found in medical malpractice policies is the “consent to settle” clause. The purpose of introducing the consent to settle clause in the 1990s was to attract physicians by providing them the illusion that they will possess the peace of mind to know that the insurance company will not be capable of settling a lawsuit without their consent. Although the clause seems simple enough in description, its practical application is far more complex.

First, a physician must dispel the notion that an insurance company’s claims manager or executive officer will settle frivolous claims simply because the defense attorney costs are higher than the settlement offer. The reasons are simple. Generally, most medical malpractice lawsuits are generated and taken by a few large plaintiff attorney law firms within that state, and, if an insurance company or claims manager gains the reputation of settling claims without merit, they will most certainly increase the number of claims filed against them in the future. Second, unless odd circumstances exist, such as an insurance company placed under rehabilitation, an insurance company has the same interest in not paying out for lawsuits that have no merit.

Although there may be physicians who may insist that they have been involved in a past scenario whereby their insurance company settled a lawsuit without merit, one must realize that the viewpoint of a highly trained physician and that of an experienced trial attorney can be vastly different. First, physicians accused of medical malpractice feel their management of the patient was not a deviation from the standard of care, and, although this may be clear in their minds, an experienced defense attorney realizes it is not whether this is a fact but whether he or she can prove this to a sympathetic jury. Many times the only evidence to protect a physician are illegible notes in medical records and disputed testimony. Physicians may believe their defense against the claim is strong, but an experienced defense attorney, and an even more experienced claims manager who has seen the disposition of hundreds of medical malpractice claims, may be of the opinion that indicates the true risk of taking the case to trial.

The primary reason why a consent to settle clause is rendered meaningless to a physician is because it may expose physicians to their greatest risk, as one of the greatest protections for physicians when they go to trial is their ability to sue their insurance carrier for acting in “bad faith” by not settling the claim prior to a jury verdict.

Physicians must understand that insurance companies have a fiduciary duty to their policyholders to prevent their policyholders from exposure of their own personal assets. This responsibility means that if an insurance company has the ability to settle a case below the policy limit of the physician prior to a jury verdict and fails to do so, when it “should have reasonably known” that a jury verdict could expose a physician to its own personal assets, it can be held liable for “bad faith” against its policyholder. Although the standard of what constitutes a “bad faith” claim against an insurance company may vary from state to state due to the state’s case law, this is generally the standard adopted by many courts.

For example, let us say a physician who buys a $1 million liability limit is being sued by a patient plaintiff for medical malpractice. After discovery, the plaintiff’s attorney offers to settle the claim for the policy limits of $1 million. In response,

despite reasonable evidence to support that the physician could be liable for negligence, the insurance company refuses to settle the claim and proceeds to trial. At trial, the jury finds in favor of the plaintiff for a judgment of $3 million. Because plaintiff attorneys would much rather seek the insurance company’s “deep pockets” of capital than the limited personal assets of the physician in order to recover the excess of $2 million not covered by the insurance policy – they will approach the physician and offer to settle the excess $2 million claim in exchange for the “bad faith” rights of the physician against the medical malpractice insurance company.

In summary, when or if a physician refuses to settle a claim that the medical malpractice insurance company wishes to settle, they will tear down their final wall of protection against a plaintiff’s attack on their personal assets.

What Policy Limits to Choose

One of the most common questions asked by physicians is, “How much insurance is enough?” If you take the necessary steps to protect yours assets, the minimum permitted by your licensing board or the state regulation is likely sufficient. In fact, there is more evidence to suggest that when physicians purchase high policy limits, they may be causing more medical malpractice lawsuits against themselves. The reason this occurs is because, during discovery, it is within the plaintiff’s rights to find out what each physician being sued has for medical malpractice insurance and the policy limits of that policy. The plaintiff’s attorneys ask this primarily to determine which insurance company faces the largest exposure associated with the malpractice claim.

An example commonly found is when a “failure to diagnose” claim is made against an obstetrician as well as the radiologist. Typically, obstetricians carry the minimum limits required by most states, which is a $1 million per occurrence policy, while radiologists typically carry the higher limits of at least $3 million per occurrence. If a plaintiff’s attorney can make any allegation of malpractice that would associate the injury to the radiologist, he or she would be exposing the medical malpractice insurer for the radiologist to a possible $3 million loss. The tremendous trial experience of insurance claims managers who see the high policy limits at stake will be more likely to settle the claim at a higher value than if the policy limit were lower. In essence, higher policy limits can actually create a larger “target” for the plaintiff’s attorney to seek.

Those physicians who believe they should purchase higher policy limits because of jury verdicts or settlements discussed in the newspapers should understand that settlements are typically always below the policy limit. When one reads of a settlement in the newspaper of $2 million for a medical malpractice case, it is most likely because the limits of the policies associated with that medical malpractice case were either $2 million or below. More importantly, plaintiff’s attorneys also have their interests to protect. When one considers that 80% of all medical malpractice cases that go to trial are won by the defense, it should not be a surprise that a plaintiff’s attorney would also have an apprehension of going to trial.

The Financial Condition of the Insurance Company

Issuing the Policy

Too often in recent history, insolvent medical malpractice insurers have placed physicians’ personal assets at risk. Physicians commonly are misled to believe an insurance carrier is more stable simply because of its size. However, the reality is that most medical malpractice insurers that have gone insolvent (similar to declaring a bankruptcy) or that have discontinued writing policies have been the nation’s largest carriers. One could argue that there is more data to support the theory that in the field of medical malpractice insurance, larger could actually mean riskier. The following medical malpractice insurance carriers were recently deemed insolvent or ceased operations:

PHICO Insurance Company: The nation’s eighth largest malpractice insurance company was declared insolvent and placed in liquidation in 2001 by the Commonwealth of Pennsylvania.

St. Paul: The nation’s largest malpractice insurance company in 2001 exited the insurance market in 2002.

MIIX Group, Inc.: The nation’s seventh largest malpractice insurance company in 2002 discontinued issuing policies in 2002. At the time, MIIX executives stated publicly it had sufficient assets to pay losses. In 2004, it was placed into rehabilitation by the state of New Jersey and found to be deficient to pay losses by over $300 million surplus.

Medical Liability Mutual Insurance Company: The current largest medical malpractice insurance company was downgraded to a B– rating by A.M. Best in 2004, and is now currently requesting to be not rated and not to participate in the rating process.

Reliance Insurance: This company was deemed insolvent in 2001.

The biggest misconception about larger insurance carriers is that, because they have large stated assets, they are financially secure. However, assets alone should not be used as a strong indication of financial strength in the insurance industry. Unlike typical unregulated businesses, insurance carriers collect premiums well in advance, assuming liabilities into the future. For example, in the medical malpractice insurance field, insurance companies do not pay the majority of the claims until years after the policy is written. Therefore, insurance carriers will accumulate capital at the start of each policy, which is stated as assets. Consequently, insurance carriers reserve a portion of this capital to pay for claims that will be paid in the future, and these potential claims are considered possible liabilities, or “loss reserves.” In summary, if one were to determine financial strength based on assets of an insurance carrier, it would be similar to determining a person’s wealth without looking at the person’s liabilities. How financially secure is an insurance company with $100 million of assets if it has over $110 million in possible liabilities to pay?

Therefore, assets alone should not be relied on as an accurate barometer when trying to assess financial stability because they do not illustrate how much capital

the insurance carrier has available for a possible “cushion” if losses are worse than anticipated. In fact, financial strength ratings by rating bureaus such as A.M. Best and Weiss are chiefly based on the level of “cushion,” termed surplus, each insurance carrier maintains in relation to the amount of premiums it collects. The larger the surplus an insurance carrier maintains in ratio to how much it collects every year is more accurate at measuring an insurance carrier’s financial strength. This “premium to surplus ratio” is the most significant measure of financial strength, as it measures an insurance carrier’s ability to pay for claims, even if its predictions for losses are inaccurate.

In addition, rating bureaus further determine their ratings of financial stability and strength by analyzing an insurer’s historical track record of predicting its losses. Obviously, if an insurer has a track record of setting insufficient capital aside for its claims, the accuracy of how much surplus it truly maintains can be considered questionable. For example, an insurer can systematically and purposefully under-reserve for its existing claims in order to increase its publicly reported surplus in the short term. Therefore, the historical track record of an insurer’s ability to set accurate reserves is typically what determines the credibility of the insurer’s stated surplus.

Regardless of the type of company, prospective policyholders should evaluate the financial and operating strength of the company. One way to do this is to review the company’s A.M. Best rating. A.M. Best is an independent rating agency that evaluates the adequacy of reserves, soundness of investments, control of expenses, and capital and surplus sufficiency of companies. If a medical malpractice insurance carrier has completed 5 years of operation, it is eligible for rating by A.M. Best. A.M. Best has been publishing its opinion on the financial strengths of insurance companies since 1899. You can find the rating of your insurance carrier on their website at www.ambest.com. Another way to evaluate a company is to look at its annual report. The report will give some important financial data that should be considered by a physician before selecting an insurance carrier. First, however, you need to understand the basic terms related to analyzing an insurance company:

Surplus: It is important that an insurance company have sufficient financial resources to meet all current as well as expected future claims. Surplus is the sum of items shown on a company’s balance sheet under the heading “policyholder surplus.” Surplus represents the amount by which assets exceed liabilities and is the net worth of the company.

Loss reserves: Establishing loss reserves is complex. There are two classes of claim reserves: indemnity reserves and expense reserves. Expense reserves are further classified as allocated loss adjustment expense (ALAE) reserves and unallocated loss adjustment expense (ULAE) reserves. The incurred losses is the money set aside to pay present and future claims as well as defense attorney fees or expert witness fees (ALAE) and in-house claims operations (ULAE). You should examine how accurately your insurer has been setting its loss reserves in the past by looking at its “reserve development” in A.M. Best’s full rating report.

Loss reserves to surplus ratio: The ratio of loss reserves (including reserves for loss adjustment expenses) to surplus (R/S) indicates the company’s ability to cover unanticipated reserve deficiencies. Industry regulators recommend that this ratio not exceed 4:1.

Although these terms may seem intimidating, your understanding of them can make the difference between choosing a financially reputable and strong insurer or putting your personal assets at risk.

Conclusion

Physicians have much more to worry about now than in the past regarding medical malpractice insurance. They no longer can afford to rely on their agent or broker, who may have a strong financial interest in their choice of medical malpractice insurer. Physicians spend countless hours keeping abreast of developing medical techniques, drugs, and treatments each year; unfortunately, keeping abreast of their medical malpractice insurance company also needs to be added to this list. Not spending at least a few hours a year analyzing your medical malpractice insurance can cost you your personal assets in the future.