For Physicians & Healthcare Professionals"
Choosing A Carrier
A GUIDE...
Choosing a professional liability carrier is one of the most important practice decisions a physician will make, and it is not a decision to be taken lightly. Explore the topics below to learn how you can make an informed choice.
• Choosing A Medical Liability Carrier
• Types Of Insurance Companies
• Alternative Markets
• Trusts
• JUA's (State Pools)
• Risk Retention Groups
• Types Of Policies
• Evaluating A Carrier
• Management Philosophy
• How Much Insurance Should You Carry?
• Making The Right Choice
CHOOSING A MEDICAL LIABILITY CARRIER...
Choosing a professional liability carrier is one of the most important practice decisions that a physician will make, and it is not a decision to be taken lightly. Please explore the topics below to learn how you can make an informed choice.
Today—more than ever—physicians cannot afford to be wrong in selecting a professional liability carrier to protect them against allegations of medical malpractice. A number of medical malpractice insurers have gone bankrupt or have withdrawn from the field. Defense costs have skyrocketed, and medical malpractice settlements and judgments have reached an all-time high. Without the protection of a dedicated professional liability insurer, a devastating financial blow can be incurred.
The premium must be weighed against the protection, service, financial strength and long-term stability provided by the carrier. Doctors should also review a carrier’s claims defense performance, risk management services, underwriting standards, actuarial discipline, and whether its rules of assessability adequately protect its policyholders from unlimited personal liability.
Whether you’re a physician in a solo practice or a group in search of coverage, it’s important to research your options and select medical malpractice liability insurance that meets your needs.
It is your right—and your responsibility—to ask frank questions and to carefully consider the answers you receive before making a decision. I hope that the information I’ve provided here will help you make the right choice.
TYPES OF INSURANCE COMPANIES...
Physicians have several possible sources for obtaining professional liability insurance. In the United States, physician-owned carriers cover the majority of office-based and practicing non-governmental physicians. Commercial carriers, owned by stockholders, provide coverage for many of the remaining physicians.
Insurance companies are generally organized as a stock company, a mutual company, or a reciprocal company:
A stock insurance company is formed as a public, for-profit corporation with stockholders who have invested capital. As with any such company, its primary goal must be the enhancement of stockholder wealth.
A mutual insurance company has no stockholders. It holds the company’s assets, and the company is owned by its policyholders.
A reciprocal insurance company, or interinsurance exchange, is an unincorporated association. Like a mutual company, its assets are owned by its policyholders, who are members of (or subscribers to) the exchange. The fundamental difference between mutual and reciprocal companies is that insurance laws and regulations require that reciprocals be operated by an attorney-in-fact that functions on behalf of the policyholders.
In addition to those three types of companies, insurance syndicates also exist, such as those supporting insurance at Lloyd’s of London. A syndicate is not an insurance company but a group of individuals or companies that agree to share liability and profits in making contracts of insurance.
Most physician-owned companies in the United States are organized as mutuals or reciprocals. If a carrier is not sufficiently sound, a policyholder might be assessed an initial capital contribution (a deposit for security against future claims). The same company might also issue assessable policies. This means that the policyholder could be required to pay additional money for past claim losses if reserves prove inadequate. (Reserves are funds set aside to cover claims that have been reported but have not yet been resolved or paid.)
A carrier that is sufficiently sound and well financed can apply for regulatory approval in its home state to remove its policyholders’ contingent liability for the debts and liabilities of the carrier. Once the carrier receives regulatory approval, it can issue non-assessable policies. This approval frees its policyholders from any obligation to pay additional money for past losses if reserves are inadequate.
Another advantage of mutual and reciprocal companies is that the insureds are the owners, and they do not have the divided loyalties of stockholders versus policyholders. Any profits that a mutual or reciprocal company makes are either used to strengthen the company’s financial position or are paid back to policyholders in the form of dividends.
ALTERNATIVE MARKETS...
Alternative markets provide other sources of coverage. Some state laws provide for special-purpose vehicles or trusts that may operate on an assessable basis. These laws generally provide for ease of start-up for such organizations by exempting them from certain insurance laws such as minimum capital requirements. Other alternative market mechanisms might include joint underwriting associations, risk retention groups, and risk purchasing groups.
If you are considering coverage through the alternative market, you should carefully investigate all aspects of the policy, especially provisions regarding extended reporting (tail) coverage requirements, the organization’s financial solvency, its regulatory requirements, and rules regarding a policyholder’s assessability. Assessability is the policyholder’s obligation to cover past company losses for which reserves have proven to be inadequate. This means that if the organization cannot meet its financial obligations, it can require its insured physicians to make up the deficit.
TRUSTS...
Trusts have become an increasingly common—although controversial—alternative to insurance companies. In some states, trusts are not regulated by state insurance departments nor are they protected by state guarantee funds in the event of insolvency. Trusts frequently require capital contributions in order to join, and trust members are retroactively assessable if assets prove insufficient to pay losses. Coverage through trusts may also be provided on a claims-paid basis, which means that premiums are based only on claims settled during the previous year or those projected to be settled in the coming year. Many claims-paid policies are assessable for a number of years, or even indefinitely, after a physician’s policy has terminated.
Some trusts stop defending and paying open claims for members who go elsewhere for coverage if the members do not agree to remain assessable or if they do not purchase tail coverage from the trust.
JUA's (State Pools)...
Joint Underwriting Associations (JUA's) are state-sponsored programs for physicians who have no access to other sources of professional liability insurance, typically as a result of some problem that causes the standard medical malpractice insurers to refuse to insure them. Some JUA insureds bear infinite assessability for losses incurred by the organization during prior years of insurance activity. In some states in which JUAs operate, all casualty insurers in the state are assessable. In others, only the insured doctors are assessable. In those instances in which only the insureds of the JUA are assessable, ultimate financial obligations are unpredictable and can be significant.
RISK RETENTION GROUPS...
Risk Retention Groups (RRG's) came into existence as a result of the federal Risk Retention Act of 1986, which allows a group to form as an insurance company and requires that it follow the insurance laws of at least one state. When first joining an RRG, a physician is typically required to pay a capital contribution in addition to the annual insurance premium.
An RRG is governed by the regulations of the state in which it is domiciled. If an RRG is appropriately capitalized and operated, it can be a viable insurance alternative. Due to less regulatory scrutiny in some states, however, an RRG can be inadequately capitalized by charging inadequate premiums. As a result, insolvencies imperiling the financial assets of the insureds have occurred among RRGs.
A Risk Retention Group must file an annual financial statement in its chartering state and in all states in which it operates. Doctors considering purchasing insurance from an RRG should review the group’s financial statements. They should also carefully evaluate the degree to which the state in which the RRG is domiciled requires that RRGs meet the high standards of solvency and effective management necessary to ensure that the company is able to fulfill its insurance obligations.
Risk Purchasing Groups (RPGs) also came into existence as a result of the Risk Retention Act of 1986. Unlike an RRG, an RPG is not an insurance company but an association of insurance buyers with a common identity, such as a medical specialty society, who form an organization to purchase liability insurance as a group. Since an RPG purchases coverage from an insurance carrier, no capital contributions are required in order to join.
The company from which the RPG purchases insurance need not be licensed in every state. The purchasing group’s insurer must indicate how much premium was generated by the purchasing group in each state in its National Association of Insurance Commissioners’ Annual Statement. Physicians considering purchasing insurance through an RPG should inquire about the strength of the insurance company that provides coverage to the purchasing group.
TYPES OF POLICIES...
Today, almost all professional liability insurance carriers offer claims-made policies. Two less common types of coverage are claims-paid and occurrence. Since these three types of insurance provide fundamentally different protection, you should clearly understand their differences.
A claims-made policy is a form of insurance in which coverage is limited to liability for claims arising from incidents or events that occur and that are reported to the insurance company while the policy is in force. Thus, once reported to the insurer, the insurer remains liable for the ultimate resolution of the claim or suit.
A claims-paid coverage policy’s premiums are based only on those claims settled during the previous year or those projected to be settled in the coming year. Many claims-paid policies are assessable for a number of years, or even indefinitely, after a physician terminates the policy. When leaving a claims-paid carrier, physicians often have difficulty obtaining retroactive, or prior acts, coverage from their new carriers, and they may be forced to purchase tail coverage from the claims-paid carrier. Of course, the price for such tail coverage may consider all open claims as well as future claims from that coverage period.
An occurrence policy covers the insured for any incident that occurs (or that did occur) while the policy is (or was) in force, regardless of when the incident is reported or when it becomes a claim. Occurrence insurance for medical liability coverage is rarely offered today because of the difficulty of projecting long-term claims costs under this type of policy.
EVALUATING A CARRIER...
A comprehensive evaluation of a medical malpractice carrier should include a review of its corporate ownership and structure, financial strength and performance, management philosophy, and coverage options.
It is vitally important that an insurance carrier have sufficient financial resources to meet all current and future claims against policyholders. A carrier’s annual report and other financial statements should help you evaluate a company’s surplus, net written premium, and loss reserves, as explained below:
Surplus is an important financial element because it is the amount by which a company’s assets exceed its liabilities. Surplus is determined by adding the balance sheet items: capital paid in, surplus, surplus paid, and earned surplus. Surplus is actually the working capital of the company. It is required by regulators before companies are allowed to accept premium and must meet minimum legal standards. However, prospective policyholders will want their company’s surplus to exceed minimum standards. Surplus is necessary to allow a company to grow (i.e., to accept more premium) and to cover unanticipated loss costs. Thus, a secure company accumulates substantial surplus to assume risk and to pay for unanticipated deficiencies in loss reserves, thereby assuring its ability to maintain its strength and fiscal integrity.
Net written premium is the premium retained by a company after it has paid for reinsurance. This item is usually shown on the annual report’s statement of income. Since medical liability carriers typically pay out 100 percent or more of premium in the form of losses and expenses, net written premium can be compared to surplus to make sure the company is not becoming over-leveraged by writing too much business for its capital base (surplus) to support.
Loss reserves are shown on the balance sheet under reserves for future claims, loss reserves, and claims reserves. The three categories of claims reserves are indemnity reserves, allocated loss adjustment expense (ALAE) reserves, and unallocated loss adjustment expense (ULAE). Indemnity reserves are set aside for the portion of claims costs paid directly to claimants. ALAE reserves are set aside to pay present and future costs attributable to specific claims, such as defense attorney fees or expert witness fees. ULAE reserves are set aside for the future management of open claims by the insurer. The level of aggregate loss reserves is important when compared to the insurer’s surplus. Loss reserves are generally a multiple of surplus. If this multiple is too high (generally above 3.5 to four times surplus for medical liability insurers), then concern is again raised about over-leveraging. In other words, the margin for error is diminished.
The financial and operating strength of a company is also indicated by the rating it receives from insurance industry analysts such as A.M. Best Company or Fitch. A company’s rating is an assessment of its ability to pay future claims, but it is also based on the profitability and margins achieved. Thus, higher-rated companies are financially sound and profitable. From the policyholder’s point of view, the financial security of an insurance company is critical.
On the other hand, individual policyholders may be less concerned with the size of a company’s profits. Company size is a critical component of financial security that is not directly reflected in these ratings. For example, a small company (say, with $50 million in surplus) could end up with a higher rating than a company with hundreds of millions of dollars of surplus because of higher profit margins. Yet, the smaller company may be only one runaway verdict from insolvency. It is important that your company have a secure rating. Beyond that, context is extremely important in interpreting individual ratings.
MANAGEMENT PHILOSOPHY...
You should carefully evaluate a carrier’s management philosophy, which is reflected in its underwriting standards, claims management, risk management, and actuarial policies. A carrier’s approach in these areas influences its pricing policies and the level of service it provides to its policyholders.
Underwriting standards—Well managed carriers are staffed by experienced underwriters who have thorough knowledge of the medical procedures necessary to properly evaluate doctors’ applications for coverage. A financially stable carrier exercises a firm hand in refusing coverage for doctors who are unqualified or whose practices might result in indefensible claims. Such claims would imperil the assets of the company and, in the case of a doctor-owned company, the security of the insureds.
Claims management—Claims should be reviewed promptly by skilled claims investigators. Policyholders should be vigorously defended against nonmeritorious claims. In those instances where there is negligence, the company should attempt to settle quickly and fairly with the physician’s consent. Where permitted, a guaranteed consent-to-settle provision should be included in the policy. Such a provision requires that the carrier must obtain the physician’s written consent in order to settle any claim. This gives the physician control over how claims are settled. An insurance company should also provide its policyholders with a written explanation of how to proceed in the event of a claim and provide support and guidance to a doctor who experiences a claim.
Risk management—A company’s risk management and claims-prevention programs should be an integral part of the service provided by a medical liability insurer. The company should conduct regular claims reviews and provide its policyholders with ongoing risk management information such as newsletters, bulletins about issues of vital concern, and symposia that focus on specific topics or specialties.
Actuarial principles—Sound actuarial principles acknowledge probability and statistics, contingencies, loss distribution, risk theory, and forecasting, among other factors. To ensure that premiums are neither insufficient nor excessive, they should be reviewed on an ongoing basis, taking into account the constantly changing nature of the liability environment.
HOW MUCH INSURANCE SHOULD YOU CARRY...
The dollar amount of liability coverage a physician should carry depends on many factors, including the physician’s specialty, the procedures performed, the type and location of the practice, group, or entity.
Each state follows its own department of insurance regulations and restrictions; there is a great deal of variation in state insurance laws.
Standard policy coverage options may include limits of $1 million per claim and $3 million annual aggregate, and some states have commonly prevailing limits. Coverage limits vary in states with patient compensation funds; higher-limit options may be available subject to underwriting approval.
The precise amount of coverage you choose will depend on your state’s laws, your hospital's coverage requirements for staffing privileges, your assets, your comfort level, and the affordability of the coverage.
MAKING THE RIGHT CHOICE...
Finding the right professional liability carrier can be time consuming, but it is one of the most important practice decisions you’ll make. Take the opportunity to learn all you can about the quality of the carrier and the people you’ll entrust to watch over your interests.
Ask around: What kind of reputation does the carrier have? Does it treat its policyholders fairly and with respect, and does it vigorously defend claims?
By thoroughly investigating your options, you can make the right choice in selecting a strong, reputable and financially stable professional liability carrier who will stand behind you when you need it the most.
(Article Courtesy The Doctors Company)
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