Malpractice guide
Three Tales of Whoa!
Learn from these three vignettes how to
avoid costly mistakes in the purchase of malpractice insurance.
Vignette #1: Trust Your Broker
This first story is about the disastrous
decline of what seemed to have been a very good relationship
between a large physician group and their broker. The broker, a
malpractice specialist with 28 years of experience with all
types of physician groups and insurance products, had been
serving as broker to this group for the last five years. Prior
to that, he had put together a successful program for them
while employed by a large physician insurer.
The relationship, the broker
believed, was founded on trust and a partnership mentality.
There was give and take on both sides, with the risk manager
and broker conversing several times weekly and the
physician-owner meeting with the broker at least quarterly to
discuss relevant issues, growth plans, and goals for the
malpractice program and the practice. The broker encouraged and
organized many meetings between the group and the malpractice
carrier (the only carrier during the five years preceding). The
broker also entertained the client on occasion, sponsored
events put on by the group for its employees, and attended a
funeral 90 miles away in blizzard conditions.
Within a period of nine months, the
relationship deteriorated to the point where the broker lost
the business to another broker and a carrier with whom the
previous broker had maintained a close working relationship.
The group moved the business without so much as a
‘thanks’—no word at all. The broker found out
he had been replaced from the new carrier. Phone calls to the
group were not returned and to this day there has been no
direct contact between the group and the former broker. WHAT
HAPPENED?!
Nine months before, the risk manager
was replaced with the group’s general counsel due to
political and other corporate issues. The malpractice program
had a large deductible, and, while there was no contractual
obligation on the part of the insurer to do so, the risk
manager was allowed to use his own favored attorneys to handle
their cases. The carrier was happy to use the risk
manager’s attorneys, and was reluctant to use the general
counsel’s favored attorney due to perceived conflicts of
interest.
When the general counsel succeeded
the risk manager, the GC took it upon himself to correspond
directly with the carrier, outside of protocol, without
including the broker. To compound the error, the claims person
at the carrier responded directly to the GC, without copying
the broker, also outside of protocol. The claims
department’s response to the GC was less than cordial and
made the GC more than a little upset. The broker did not become
aware of the correspondence until three months later at a
carrier/broker/group meeting at the group’s office. By
that time, the relationship had begun a slide from which it did
not recover.
There was fault on all sides. The
broker’s biggest mistake was trusting that the
physician-owner would be open about the state of the
relationship. The owner needed to tell the broker that there
was a problem and that the carrier was in jeopardy of losing
the business. The owner should have been able to separate the
broker’s role from the carrier’s. The broker should
have done a better job of educating the owner that the broker
represents the owner’s interest and can bring other
carriers to the table if there is a problem with the existing
carrier.
Tell your broker if you have a
problem with the carrier. He can help resolve issues or replace
the carrier if necessary.
Vignette #2: Don’t Take Bad
Bait
In many legal jurisdictions in the United
States, the malpractice crisis of the 2000’s has spawned
a large number of new insurance company alternatives for
physicians to consider. There are several traditional and
non-traditional variations of malpractice insurance carriers.
These variations are classified into one of two broad
categories: admitted (licensed) carriers and non-admitted
carriers (non-licensed). The differences are these:
Admitted carriers are those that
have been approved by one or more state insurance departments
for operation in that state and have received a license to
operate. The state insurance department has approved the
carrier’s rates, policy forms, management,
capitalization, reinsurance, and methods of operation. The
state continues to scrutinize the admitted carrier and can
penalize the carrier through fines and orders to cease and
desist, as well as take over the operation of the carrier and
even declare it insolvent if the carrier does not perform to
the state’s standards.
Admitted carriers also are subject
to the state guaranty funds, which are funds that are available
to help protect the insured individuals of admitted carriers
should the carrier become bankrupt (insolvent).
Non-admitted carriers are ones that,
while licensed in one state (of their choosing), are not
licensed in your state and do not have to submit their rates
and forms to your state. Most importantly, the insureds of a
non-admitted carrier are not protected by that state’s
guaranty fund.
Now enters a fictional insurance
company in a market-stressed state. Let’s call it Take
Your Money and Run Insurance Company—TYMRIC for short.
TYMRIC became admitted in the state
of Naïve and started doing business on a non-admitted
basis in your state. TYMRIC was started by a former broker and
has one other employee, an attorney who claims to be an
actuary. The founder is the underwriter. The main source of
business for TYMRIC is relatives of the founder who also are
brokers. TYMRIC begins quoting business at rates far below the
competition’s rates on the basis of “what do we
need to do to write (actually meaning ‘buy’) the
business?” Its strategy pays off and it begins writing a
lot of business. It is partially compensated by charging a
percentage of the premiums it collects. The company has few
losses in the early months of operation because of the nature
of the liability business it writes.
However, since price was the main
driving force of underwriting the business, the quality and the
losses of the people they insured was not properly scrutinized
and underwritten. Losses started being reported and soon
outpaced the premiums available for claims and legal fees.
TYMRIC had not purchased true risk-transfer reinsurance as it
was available to only the very best carriers, and TYMRIC was
soon insolvent. It could not pay the losses it had
contractually promised to pay and was bankrupt in record time.
Because TYMRIC was not covered by your state’s guaranty
fund, the insureds’ losses were not paid and the premiums
the insureds paid were not refunded.
What lessons are to be learned from
this story? Due diligence is extremely important when
considering the purchase of malpractice insurance. All that you
are purchasing, really, is a promise to pay your future losses.
Given the nature of medical malpractice, it could be two to
twenty years before a claim is made and settled or adjudicated.
This lag, or tail, makes it critical that the carrier with whom
you contract for medical malpractice is solid, stable, and has
passed muster with experts who can speak to the likelihood of
continued solvency.
Partner with a good, reputable
broker to advise you in your selection process. National rating
agencies such as A.M. Best & Company and Standard and
Poor’s rate established carriers. Admitted carriers are
subject to more scrutiny in your state than non-admitted
carriers, even though there are some fine, very substantial
non-admitted carriers that have been writing medical
malpractice for twenty years or more. Your broker should know
the difference and guide you to only the reputable carriers,
whether admitted or not.
Don’t ever buy on price alone.
Like most other products, you get what you pay for!
Vignette #3: A Tale of Tail
No one works harder to achieve her life
goals than a physician, and no physician expects to work until
she dies. I suspect that retirement is a goal that physicians
hold in high esteem and need to plan for relatively early in
their careers. No, I’m not trying to sell retirement
benefits. More than likely, your malpractice policy already
contains a retirement benefit that you may have overlooked or
taken for granted. Please don’t do that—it could
cost you plenty at retirement.
The claims-made policies that the
vast majority of physicians purchase have, as an integral part
of the policy, a provision for the purchase of a tail (extended
reporting period endorsement) if the policy is not renewed or
is cancelled. Simply put, the tail provides an extended period
of time (usually unlimited) that covers claims made after the
termination of the policy for events that occurred while the
policy was in force. Most policies offer, as a benefit, free
tail if the policyholder retires from practice, provided the
policy has been in effect a number of years with that same
carrier. The thresholds and terms vary, but a typical scenario
is free tail for retirement if the physician is 55 years of age
and has been with the carrier for five or more years.
The intent is to provide a
reasonable and very valuable reward for longevity with the
carrier. Since tail coverage can cost up to 250 percent of the
annual premium, its value is significant and loss of the
benefit equally so. How can it be lost?
Switching from one malpractice
carrier with the cited benefit to another with the same benefit
less that five years prior to retirement will force you to
either work longer to vest in the five years of continual
insurance with the second carrier, or fork over up to 250
percent of the annual premium! While it may seem obvious that
one would not be so foolish as to fall into that trap, it has
happened and cost the physician a considerable portion of his
nest egg!
Do yourself and your family a
favor—be VERY careful before switching carriers.
It’s often penny-wise and pound-foolish. g
Richard Vento is the president of Medical
Risk Management Services, Inc., a malpractice insurance
wholesale brokerage and consulting firm in Jamison,
Pennsylvania. He may be reached at rvento@medriskman.biz.
