Unsettling Practices: Pretrial Settlements Can Be Fraught With Peril

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Law Feature -- May 2003  

By Walt Borges
Associate Editor  

Physicians often think of litigation as a lottery, but it's not only the jury verdicts that can produce large damage awards for injured patients. Before medical liability suits ever get to trial, there's a game of pretrial settlement discussions that can make an accused physician the big financial loser even if the lottery never takes place.

One such example is the $8.4 million pretrial settlement that two surgeons, a clinic, a previous clinic owner, and a medical group reached with a 35-year-old Houston woman allegedly injured by a botched episiotomy and a subsequent repair operation.

The settlement, won by plaintiff's lawyers Richard Tate, JD, and John O'Quinn, JD, just as the trial was to begin, is believed to be among the largest personal injury suit settlements ever in Fort Bend County.

Arlisa Cooper sought $20 million in damages after the episiotomy and the surgical repair operation left her in pain and unable to have more children or sexual intercourse. Mr. O'Quinn told the Houston Chronicle the case was settled because even if the jury awarded the requested $20 million, appeals would have taken years and could have been reduced or reversed.

While few physicians will ever face medical liability claims of that magnitude, the increasing chances that a physician will be the subject of a claim at some point in his or her career makes it important for doctors to understand the mechanics and pitfalls of pretrial settlements, according to lawyers who defend physicians.

In many cases, medical liability insurers will decline to settle claims against a physician because the allegations are unsupported or because injured patients and their lawyers are seeking damages out of proportion to the sustained injuries.

But however distasteful, settling a case before trial may be an appropriate way to rectify a mistake and limit financial damages. 

Three-Cornered Game  

Defending medical liability lawsuits is at its simplest a complex, three-cornered game of injured patient, medical liability insurer, and physician. If the incident that led to the suit occurred at a clinic or hospital, the players multiply as the larger insurance policies of the hospitals and clinics are targeted.

In this game, physicians might wonder who's on their side. Stories circulate among physicians about insurers who settled cases despite objections from their policyholders or who went to trial and exposed physicians' personal assets to judgments that exceeded the policy limits.

While the ethics of some medical insurers are questionable, lawyers say, and the insurer's financial interest may dilute its interest in defending a physician at all costs, most physicians have the right to keep insurers from settling cases without their consent. At the same time, the contracts generally grant the insurer the right to proceed to trial, even when the physician has approved a settlement.

"The first thing a physician should do after being notified of a suit being filed is check his contract with his medical liability insurer," said David Davis, JD, an Austin medical liability defense attorney. He says most doctors have a clause in their contract that requires their consent to settle a case.

But here the law gets tricky, and physicians need to be aware of what can happen if they choose to settle and what will happen if they choose to deny the insurer the authority to settle.

Deciphering Stowers  

The rub is the Stowers doctrine, established by Texas courts to make sure insurers serve the interests of their policyholders rather than the financial interest of the company. Under that doctrine, "there is a duty for the insurance company to perform reasonably and not negligentlyto settle within policy limits, to obtain an unconditional release of all claims against the physician in exchange, and to do so with the doctor's consent," Mr. Davis said.

When a doctor refuses to settle and goes to trial, the insurer is responsible for paying damages up to the limit of the policy. If a doctor with a $600,000 policy limit chooses not to settle, a $1 million court judgment requires him to find assets to pay the $400,000 not covered by the insurance policy.

On the other hand, if the doctor authorizes a settlement, but the insurance company chooses not to, the insurer assumes the risk that the doctor will sue the company for breaching its duty to make up the difference between the judgment and policy limits.

Most of the time, the plaintiff and his or her lawyer ask the physician to assign that claim to them in exchange for a release from further liability.

Rick Evans, JD, a San Antonio medical liability defense lawyer and general counsel to the Bexar County Medical Society, says physicians who are sued should determine early on whether the Stowers doctrine relates to their policy and understand that their decision to settle or not impacts their ability to invoke Stowers .

"It's a gross simplification to assume that refusing to settle makes a physician responsible for the judgment outside of policy limits, and that authorizing the settlement allows physicians to make the insurer pay all judgments above and beyond the limits," Mr. Evans said. "If you are a physician and you authorize a settlement and the insurer does not make one, to recover under Stowers , you still have to prove negligence on the part of the insurer. That's hard for a physician to prove if he or she didn't authorize a settlement."

The Texas Medical Liability Trust (TMLT), a physician-owned self-insurance claim trust created by the Texas Medical Association, is one of three major medical liability insurers operating in Texas.

Bob Fields, TMLT executive vice president of claims operations, says TMLT has had no Stowers lawsuits filed against itwhen a physician has given consent to settle, "but we sometimes have been asked to pay [judgments] in excess of policy limits."

Still, Mr. Fields says the doctrine is a major contributor to rising medical liability premiums in Texas, and he would like to see the doctrine amended.

" Stowers pressure costs doctors millions of dollars in indemnity payments during claims negotiations," Mr. Fields said. "It gives plaintiff's lawyers leverage to pay more claims, and that leads to more payout and, ultimately, more premiums. The final purchaser of the insurance, the physician, pays for it."

First Priority: Defend, Not Settle  

When a TMLT physician is notified that a suit will be filed, "Our first question is, 'Can we defend this case for the doctor?' We have the obligation to defend and indemnify. At this point, TMLT is not interested in asking the doctor for consent to settle," Mr. Fields said.

He says that's because 86 percent of all claims are successfully closed without payments. When a lawsuit is filed, 72 percent are closed without payment. But nearly 90 percent of those that go to trial are closed without payment.

The first step in defending the case is to hire a lawyer for the defendant physician. Mr. Fields says TMLT chooses its defense lawyers from a group of experienced defense lawyers.

 "The defense attorney's primary role is to prepare the defense and prepare the case for trial," Mr. Fields said. "We prefer the claim supervisors handle negotiations directly with the plaintiff's attorneys and allow the defense attorneys to focus on the preparation of the defense of the case. We want him or her to be prepared to try the case."

At the same time, insurers talk to defense attorneys to update the chances of winning and to estimate the value of the case.

Mr. Evans and Mr. Davis reiterate that doctors must understand that even though the insurer is paying the attorney, the lawyer's duty is to the client, the physician.

"There's a line of cases that says our duty is to the physician, our client," Mr. Evans said. "If the company wants the case settled and the doctor doesn't, I won't settle. The better companies know that I'm doing my job the way it should be done, and they don't hold it against me."

While TMLT positions itself to defend a suit, in some cases there is clearly a need to investigate a settlement, given the facts of the case, Mr. Fields explains. But evaluating liability is not the only factor in deciding whether to settle.

"Even in a case of obvious liability, there is still the question of what the damages are going to be and what the damages are worth," he said. "That's where negotiation gets serious."

Answering that question is often difficult, with the plaintiff's lawyer seeking as much in damages in possible, instead of seeking reasonable damages, he says.

Mr. Fields says TMLT makes it very clear to its insured physicians what their role should be in settling the case. "A doctor is not expected to know the value of the case," Mr. Fields said. "Along with assisting in the defense of the case, the doctor's main participation is in providing consent [to settle]."

Mr. Davis suggests that defendant physicians not sit back and let insurers do all the work.

"Physicians should insist on their lawyer fully communicating on the settlement negotiation, as with all other important aspects of your lawsuit," he said. "That means asking your lawyer and insurer to report all settlement communications and knowing how insurance companies evaluate the case."

"Doctors should consider putting their questions to their lawyer in writing and asking for answers in writing to avoid confusion and misunderstandings. They should ask how much the case is worth in a settlement and how much it is worth in a judgment. If gutsy enough, they could ask their insurer how it was reserved, although most carriers probably would not provide that information," Mr. Davis said.

When a claim comes in, funds are reserved to cover the estimated loss if the claim is valid. Mr. Fields says that reserves are internal information that will not be provided by TMLT to any outside sources.

"Reserving a claim is like shooting at a moving target -- we never know the exact value of a claim until it finally resolves," Mr. Fields said. "If that information was leaked to the plaintiff's lawyers, it could affect negotiations."

Mr. Evans' Tips  

Mr. Evans has several tips for doctors who must decide whether to settle cases before trial:

  • There are times when a case should be settled. It's best to admit you made a mistake, acknowledge it, and settle.
  • Be patient. Don't make a decision to settle at the beginning of litigation. A case can't be properly evaluated until the plaintiff's expert witness is deposed, and that's usually 60 to 90 days before trial.
  • Don't make the decision emotionally. The decision shouldn't be visceral, it should be intellectual. Draw up a list of pros and cons and evaluate them.
  • Don't talk with other physicians about their decisions. Their cases were different. And don't open it to debate among your colleagues. If you have doubts, seek a second legal opinion.
  • Make sure you are with a good insurance company. Call the local medical society and get a recommendation for a couple of medical liability defense attorneys with experience and talk with them. Physicians need a good insurance carrier, because the good ones will help them with any number of legal problems and will stop them from making mistakes.


"There is often another factor to consider," Mr. Davis said. "A lack of cooperation with the insurer can cost you your policy at renewal time -- not in terms of premium, in terms of having a renewal at all. The leverage that the insurer has over a doctor who does not cooperate in settlement issues is that the policy may not be renewed."

Because the settlement is an admission that a mistake was made, it becomes the basis for denying renewal. Mr. Davis suggests that physicians check with the underwriting department of the insurer to see what the impact of a settlement may be.

Mr. Evans agrees in part.

"Most carriers stand by doctors who are willing to try cases rather than settle. But not all carriers are the same," he said.

Mr. Evans also sees a downside to settling multiple cases. "If you've settled two or three times over seven years, that's problematic from an underwriting standpoint," he says.

Mr. Fields acknowledges that a claim can cause the insurer to drop the physician and make it difficult for the doctor to find another insurer. The state Joint Underwriting Association is an option, but its premiums are higher.

"There are vast numbers of doctors concerned with insurability, now that there are only three insurers left in the state," Mr. Fields explained. "Previously, getting a blemish on a record was not devastating -- you could go to another carrier."

Walt Borges can be reached at (800) 880-1300, ext. 1385, or (512) 370-1385.  


The Fear Factor

Rick Evans, JD, defense attorney and general counsel to the Bexar County Medical Society, has represented medical liability defendants for 25 years. He says inappropriate reasons for settling a lawsuit include:

  • Fear of being registered in the national malpractice databank. "Physicians think, 'Oh no, I'm going to be reported to the databank.'" Mr. Evans said. "Believe me, this is going to be a meaningless episode in a physician's career. Everybody who's anybody in medicine is in that database because they take risks. Doctors should also remember that since the 1970s, the names of doctors who are sued have been reported to the Texas State Board of Medical Examiners. Nationalizing the database hasn't changed anything."
  • Fear of publicity. Physicians fear that publicity about the suit will cause patients and referring physicians to desert them. "In truth, referral patterns don't change and patients don't disappear for doctors with medical liability problems," Mr. Evans said. "Within days, the fact that a physician is being sued is yesterday's news." While doctors may be inclined to clear their name in court, they must also consider that going to court may increase the risk of publicity, especially in smaller communities where lawsuits are the grist of local news, the defense lawyer says.
  • Fear of the courtroom. "Many doctors are frightened of the courthouse," Mr. Evans said. "They believe the lottery image and that all juries are runaway juries. But they need to understand that a lot of cases are defensible and can be won. In fact, the win rate in trials is phenomenally high. If your attorney tells you he can win 8 of 10 times, you should stick with the case."

Finally, Mr. Evans advises against going to court just to achieve a sense of victory. "When you win, the thrill of victory is short lived. It may be the most important thing in the life of a physician and his of her family, but the rest of the world couldn't care less."

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