COMMENTARY

Your Malpractice Adviser: You Think You're Covered, but You're Not

Brian S. Kern, Esq

Disclosures

July 13, 2011

Introduction

In 2006, a New Jersey obstetrician changed her coverage from a traditional medical malpractice insurance carrier in favor of a risk-retention group (RRG) to save money. Five years later, the company filed a declaratory judgment action against her, claiming it should not have to pay for 2 claims that were filed against her.

Even though the incidents occurred while she was insured with the RRG, and the lawsuits were filed while she was still insured with the RRG, the company is denying coverage by relying on highly technical policy language, claiming that the obstetrician did not follow the reporting requirements. The obstetrician's defense is that the policy language was overly restrictive, and that the restrictions should be void under the doctrine of reasonable expectations.

Because some policies may put you in a bind when you are in need of coverage, it is important to understand them before a claim is filed. There are essentially only 4 types of malpractice insurance policies, and they vary in what they cover. Within these policies are specific rules regarding claims, from how to report them, to whether they will be covered.

Coverage Types

Occurrence Coverage

An occurrence policy affords coverage as long as it is in place when an incident that leads to a lawsuit "occurs," regardless of when a lawsuit is filed. While occurrence coverage is generally the most desired type of coverage, it should only be purchased from companies that have strong financial strength ratings, or are backed by certain government funds, such as "guaranty" funds, which exist in some form in most states. However, occurrence coverage is not always available. Because most RRGs do not have financial strength ratings and do not participate in guaranty funds -- which would provide a financial cushion in the event of an insolvency -- physicians should also understand alternative coverage types.

The problem with RRGs is that they are not backed by anything, and rarely have any advantage besides price. Some RRGs do have excellent financial strength ratings, but they are the exception.

Claims-Made Coverage

Claims-made policies provide coverage if the "claim is made" during the policy period (after the retroactive date, and before the termination date). Claims-made is the most common type of professional liability coverage and has distinct risks.

When a claims-made policy terminates, so does the underlying coverage, unless "extended reporting coverage," (a "tail") is purchased. Tail coverage can be expensive, and even if it is secured, physicians are still at risk if their carrier becomes insolvent. An alternative to purchasing a tail is to change carriers and have the new carrier cover all of the exposure back to the original retroactive date -- known as "picking up prior acts." In this scenario, physicians must appreciate which carrier is responsible for which acts, and report all adverse incidents accordingly.

Claims-Made and Reported Coverage

Claims-made and reported policies operate like normal claims-made policies, but with an additional, and very limiting, feature. These policies only provide coverage for an incident that could potentially lead to a claim if it occurs, and is "reported," in the same policy period. Once the policy expires, even if a physician renews coverage with the same carrier, there is no longer coverage for any adverse incidents that went unreported during the policy year in which it occurred.

Claims-Paid Coverage

In contrast to claims-made policies, claims-paid policies will only cover claims if they are actually "paid" while the policy is still in force. This coverage can handcuff a physician into remaining with a carrier for years while a claim is adjudicated, even if premiums substantially increase.

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