Cover Story -- April 2004
By Walt Borges
Physicians must ask many questions when it comes to the intricacies of buying medical liability insurance, lest they find themselves in the high-speed lane to litigation hell and financial ruin.
In theory, Texas physicians should find cheaper and more plentiful medical liability insurance opportunities in 2004. That's thanks to last year's successful tort reform efforts in the legislature and the subsequent voter approval of Proposition 12 to amend the Texas Constitution and protect the law from court challenges.
But finding the right insurer to provide the right coverage at the right price is likely to be no easier this year than last.
"The major carriers have responded to tort reform and Proposition 12 in different ways, and there are still physicians who are plagued with the task of obtaining medical liability insurance," said Robert W. Sloane Jr., MD, chair of the Texas Medical Association's Committee on Professional Liability. "The marketplace for finding insurers is still small. There are questions about whether some underwriters have adequate resources to pay claims, there are premium increases of 100 percent for some physicians, and there are questions about the staying power of some of the insurers."
There's no doubt that specialists are being asked to pay higher prices for the same amount of insurance, he adds. "I don't know of physicians who can't get insurance, but sometimes the insurance is almost unaffordable. I know neurosurgeons who pay $120,000 to $160,000 in medical liability premiums a year."
The Texas Medical Liability Trust (TMLT) slashed its rates 12 percent after Proposition 12, but other insurers have yet to follow suit. Some have deferred planned rate increases approved by the Texas Department of Insurance (TDI) before the passage of tort reform legislation and Proposition 12, while others have raised rates, arguing that it will be several years before the tort reforms impact losses paid by insurers.
Also, many physicians are being offered less coverage for the same or greater premiums.
"There are some insurers who are offering physicians lower coverage than in the past," Dr. Sloane said. "Others are offering group policies with caps that are not equal to the sum of the limits on individual members of the group."
Dr. Sloane says cost is only part of the equation for acquiring effective medical liability insurance. It's important to ask the right questions about who's writing the insurance and how the policy works.
"Most physicians have much difficulty in reading and understanding their policy," said TMLT President Tom Cotten. "They often do not understand what is covered and what is excluded."
Texas Medicine asked TMA staff lawyers, TDI regulators, and insurance executives to suggest questions that physicians should ask. They responded with the following list.
Question 1: What is insuring you?
One thing all agree on is that knowing how underwriters are organized and how extensively they are regulated are important factors in evaluating insurance options. A physician who understands the different types of insurers has taken a solid first step toward a wise purchase of insurance.
In Texas, five types of entities can offer medical liability insurance: licensed insurers, legislatively authorized insurers, surplus lines companies, risk purchasing entities, and risk retention arrangements. (See "Types of Medical Liability Insurers Operating in Texas" [PDF]).
Insurers who are licensed in Texas must have TDI's prior approval for forms and policy terms. "Policies are reviewed by TDI for such things as restrictive provisions that are not in accord with public policy, and to ensure that claims-made policies have provisions for 'tail' or run-off coverage," said TDI Director of Communications Jim Hurley. (See Question 5 .)
Tail coverage eliminates the gaps in coverage that occur when a physician terminates a policy by retiring or switching to another insurer. Because claims-made policies indemnify physicians for only those claims brought while the policy is in effect, doctors buy run-off or tail coverage to cover those claims that are filed after the policy has lapsed. Tail coverage can cost up to 200 percent of the premium collected in the last year before the physician retired.
Licensed insurers must file their rates with TDI before putting them into effect. Under this "file and use" system, TDI can challenge rate increases, but not always before insurers begin implementing them. TDI can later order the insurer to reduce its rates.
Insurers also must meet TDI regulations governing policy cancellations, notice for nonrenewal or an increase in premium, and surcharges on claims made against a physician.
They also must submit annual audits from a certified public accountant. Those audits analyze each licensed insurer's investments. TDI considers not just the diversity of investments, but also the adequacy of reserves held by the insurer to pay claims for the doctors it covers.
Mr. Cotten says it is important to remember that being covered by a licensed insurer is no guarantee of solvency. Despite the best efforts of the insurance regulators in many states, most carriers that have gone into bankruptcy in recent years have been licensed in one state or another, he noted.
When a suit is filed against a doctor and the insurer is insolvent, the physician is on the hook for any judgment against him or her. However, if the physician has a policy from a licensed insurer who goes insolvent, the physician can tap the resources of the Texas Property and Casualty Insurance Guaranty Association, which will cover as much as $300,000 for each medical liability claim. The Guaranty Association will not pay to defend the claim.
Legislatively Authorized Insurers
Two insurers have been authorized by the Texas Legislature. One, TMLT, was created in 1978 by TMA after the Texas Legislature authorized the organization of insurance trusts by professional organizations. TMLT is now the largest insurer of Texas physicians. The legislature created the other, the Texas Medical Liability Underwriting Association, commonly known as the Joint Underwriting Association (JUA), in 1975 to provide insurance for physicians who cannot find insurance in the regulated markets.
TMLT can insure only TMA members, and it currently covers 11,000 Texas doctors. The trust does not have to meet the audit requirements of TDI nor submit its forms and contract terms to TDI for approval. Instead, TMLT submits an audit, rates, and its policy terms and forms to TDI for informational purposes.
The JUA, which covers approximately 2,500 doctors who have been turned down by at least two licensed insurers, does submit to TDI regulation of its finances, policy terms, and forms. In 2003, Insurance Commissioner José Montemayor blocked JUA's request to raise rates after Proposition 12 was passed.
Neither the JUA nor TMLT is a member of the Guaranty Association. However, neither is likely to become insolvent as both are authorized to assess surcharges onthe doctors they insure to maintain sufficient reserves and solvency. (See Question 4 .) JUA also can tap the state's other licensed medical liability insurers.
Surplus Lines Insurers
These out-of-state insurers are not licensed in Texas but are allowed to sell policies to physicians who can't find coverage through a licensed Texas insurer. They must be licensed in their home states and sell their products in Texas through an agent who must make sure they can cover claims. They do not have to submit an audit to TDI, nor do they have regulated forms and policy terms. A surplus lines policy is not subject to Texas requirements governing cancellations, and the insurer may keep a substantial portion of a premium if a policyholder cancels the policy in the middle of a policy year, TDI officials warn.
If the physician ends up buying a surplus lines policy, he cannot tap the Guaranty Association if the insurer becomes insolvent.
In a 1986 article in Texas Medicine , TMA Senior General Counsel Helene A. Alt, JD, and insurance lawyer Jay A. Thompson, JD, laid out the dangers of surplus lines insurers. Noting that many legitimate companies write surplus lines, they said that "the prudent insurance buyer should determine through his agents or others the financial ability of the company to respond in the event of a future claim."
Risk Purchasing Groups
Many physicians are attracted to the use of group purchasing power to obtain affordable insurance. Groups of physicians and practices can form risk purchasing groups, which are not regulated by TDI. The group must register with TDI, but it has the option of purchasing its insurance through a licensed insurer or a surplus lines carrier.
If a group buys its insurance from a licensed insurer, the policy must meet all TDI's requirements for policy terms, and the group members can tap the Guaranty Association if the licensed insurer has capital and a surplus totaling $25 million or more.
Risk Retention Groups
While a risk purchasing group is set up by the insured physicians themselves, a risk retention group is usually formed by an out-of-state insurer to sell insurance to a group of physicians with similar practices or specialties. Rates or policy terms are not regulated, but risk retention insurers must register with TDI and be licensed in their home state. Their insured physicians cannot tap the Guaranty Association.
Ken McDaniel, TDI's professional liability contact,warns that the self-insurance aspects of some risk retention and risk purchasing arrangements have consequences that must be considered.
"Doctors may want to self-insure, but they need to remember they still have to get credentialed at hospitals which often require liability coverage limits of $200,000 per claim and $600,000 aggregate per policy year. It's the same thing for HMOs, so physicians should understand that they need to be careful of being self-insured."
Question 2: Is the insurer experienced in Texas?
This is not a parochial question, says Mr. Cotten, as many Texas physicians learned the last time new insurers entered the Texas medical liability insurance market in the 1990s. Most of the new insurers were gone in a matter of years, taking premium dollars with them and leaving many physicians scrambling to find new insurers.
"Out-of-state insurers move in and undercut other insurers' premiums to build market share," he said. "They sign up physicians and practices and collect premiums, but they lack a feel for the Texas experience. When claims start coming in, they find their calculations falling down around their ears. They take a lot of losses and then they leave the state, and their insured physicians have to find new insurance."
Mr. Cotten says doctors should ask if out-of-state insurers maintain any staff in Texas to provide better services and on-site familiarity with the problems facing Texas doctors.
Question 3: Is the company likely to be solvent when you have a claim? How much has it designated for reserves and surplus?
Mr. Cotten suggests physicians obtain a financial statement from their potential insurer and have their accountant or lawyer review it to make sure the insurer is not under-reserved or on the brink of insolvency. TMA lawyers say such an investigation can't hurt and may identify problems before they arise.
"Don't just go with the lowest bidder. They may not have the rating or the reserves," Dr. Sloane said.
Question 4: Can an insured physician be assessed for "contingent liabilities" such as solvency assessments or contributions to surplus and reserves?
Both JUA and TMLT can assess policyholders to ensure they have sufficient reserves to remain solvent. Often the assessment can arrive unexpectedly, presenting the physician with an unbudgeted expense. State law allows the JUA to make assessments for up to two years after a physician terminates the JUA policy.
Back to Question 1
Question 5: Is the policy a "claims-made" or "occurrence" policy? Do you need tail coverage or prior acts coverage?
"Occurrence" policies indemnify a physician for claims during the policy year, even though they may not be filed with the insurer for up to two years after the alleged incident and may not be settled or tried for several years.
Because claims under occurrence policies are hard to predict, medical liability insurers began switching to "claims-made" policies in the 1970s and 1980s. Claims-made policies provide indemnity for any claims initiated during the policy year, even though the claim could have been based on incidents that occurred several years in the past. The coverage for prior acts is usually limited to a fixed number of years through a "prior acts" exclusion. The important distinction here is that a series of annual occurrence policies essentially blankets a physician's career until he or she retires, and he or she can change insurers without creating a gap in coverage.
Because claims-made policies limit coverage of prior acts with an exclusion clause, an insurer creates the need to purchase prior acts coverage -- also called "nose" coverage -- for a physician who has switched carriers or switched from an occurrence to a claims-made policy.
In the same vein, retiring physicians may purchase additional "tail" coverage if they were covered under claims-made policies before retirement. This ensures that any suit filed against them after they retire is covered by insurance.
"Physicians need to ask whether claims-made policies present them with nose [prior acts] coverage, tail coverage, or in the case of TMLT, a surplus surcharge," Dr. Sloane said.
Back to Question 1
Question 6: Will tail coverage be purchased pro rata, or do you get it free as part of a continual stint with the insurer?
Doctors approaching retirement are often promised free tail coverage if they have been with their medical liability insurer for a continuous number of years before retirement. A problem arises if the insurer is no longer operating in Texas when retirement occurs. In many cases, the physician cannot obtain the promised free tail coverage and must make a lump sum purchase of insurance to cover the tail.
Question 7: Are defense costs assessed against a per-occurrence liability limit?
The largest insurers in the state -- TMLT, the Medical Protective Company, American Physicians Insurance Exchange, the JUA, and The Doctors' Company -- do not count defense costs such as lawyers' fees, expert witness fees, and court expenses against the per occurrence cap. For policies with smaller limits, such as $100,000 or $200,000 per incident, excluding defense costs removes pressure to settle a claim simply to save money. If the liability limit is small, physicians must make sure that defense costs that can top hundreds of thousands of dollars are not included in the limits.
Question 8: Does the physician or the insurer determine whether a case is settled?
Most companies, including TMLT, give physicians the right to block settlements. But some insurers retain that right to keep down defense costs and damages, TMA lawyers say.
Mr. Cotten says some insurers tell physicians they control settlements, but will pressure them to settle for less than the policy limits by reminding them they will have to pay damages if a trial judge or jury makes an award greater than the policy limits.
"Some companies will pay a nuisance settlement rather than spend the money and take the risk of going to trial," Mr. Cotten said. "What the physician needs to remember is that the settlement is reported to the National Practitioner Data Bank [on medical liability judgments] and goes on the physician's disciplinary record."
Question 9: How many claims does the insurer receive, how many go to trial, and how many are won by the company?
Insurers should be willing to fight for the insured doctor, Mr. Cotten says. Asking about the number of claims defended, the number that go to trial, and the winning percentage will give physicians an idea of how effective the insurers' defense is likely to be. It also flags insurers that would rather settle than fight.
Question 10: If a group of physicians is being insured, do the policy limits of liability apply to individual doctors or to the whole group?
Being the second physician in a group to get sued during a policy year can be a financial disaster if the group is insured by a carrier that imposes the liability cap on the whole group, says TMA General Counsel Donald P. Wilcox, JD. That means the first doctor to settle or pay damages may use up most of the annual limit, leaving subsequent settlements or judgments partially outside the liability cap. Any damages exceeding the cap are likely to come out of the physician's personal assets.
Question 11: Does the policy defend you against a complaint before the board of medical examiners?
While most physicians think of insurance as protection from lawsuits brought by patients, some insurers such as TMLT offer a rider that defends a physician when a patient files a complaint with the Texas State Board of Medical Examiners (TSBME). Legal representation is necessary to defend against TSBME charges, TMA's lawyers say, and most physicians will benefit from the extra coverage to defend disciplinary charges. TMLT even provides a rider that covers other legal disputes -- over such things as disputes over hospital staff privileges. TMLT does not charge for the extra protection that covers up to $25,000 in defense costs.
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