Where Malpractice Insurers May Fall Short

Brian S. Kern, JD


March 27, 2013

How a "Bad-Faith" Claim Works

These facts could lend themselves to a "bad-faith" claim against the carrier, and such action might be initiated soon.

In a typical bad-faith action, the plaintiff attorney in the underlying case files the lawsuit against the insurance company on the physician's behalf. To do so, he or she must first obtain the rights from the physician-defendant. In exchange, the plaintiff attorney will relieve that physician from personal liability.

But if the plaintiff attorney has questions about the insurance company's ability to pay, he or she may prefer to go after the physician personally, forcing the physician to decide whether to personally sue the insurance company.

This can be risky for the plaintiff attorney. If the physician refuses to file the bad-faith action or mishandles it, the plaintiff attorney may lose the ability to collect the balance of the judgment from the insurance company. This could set up an out-of-pocket settlement for considerably less than the jury award -- or possibly even a bankruptcy proceeding for the physician.

Make Sure Your Carrier Is Financially Stable

Had these physicians bought insurance from stronger companies, their problems might have been avoided. Most reputable carriers will honor a physician's request to settle a case. More important, claim representatives would not have to factor a company's ability to pay into that decision-making process. Financially strong companies can focus solely on the merits of each case and do what's in each physician's best interest.

Another way the physicians could have avoided their issues is through a somewhat overlooked clause called "demand-to-settle." This provision gives a physician the ability to demand that a carrier attempt to settle a lawsuit on his or her behalf. Historically, there has been little use for this clause, because a carrier would rarely continue a legal proceeding without the support of its insured. This is clearly no longer the case.

An obvious message is to avoid insuring with poorly financed companies. But in the age of risk-taking in healthcare, many doctors have equated increased risk (even in medical malpractice) with an increased bottom line. Such physicians might be wise to decrease their professional liability risk positions and tighten up coverage before the market turns.

Now that financial instability in the insurance marketplace has created litigation instability, physicians who want to take on significant risk should at least understand ways to hedge it.