Medical Malpractice Article of the Month

Medical Malpractice: Law & Strategy
Published by Leader Publication, a division of New York Law Publishing Co.

Check Insurers' Claims-Handling Practices

Malpractice Insurance: Careful Choice Can Prevent Later Problems By Eugene R. Anderson and Joshua Gold

LAWYERS representing health care providers in medical malpractice cases have more that just the immediate concerns of the malpractice case to address. Insurance coverage issues often arise and have serious implications for the client-physician. Accordingly, lawyers representing health care providers should be aware of certain fundamental insurance issues that can arise either during or after litigation of the underlying malpractice case. Unfortunately, professional liability insurance companies routinely dispute coverage and battle their policyholders.1[R1] Now, more than ever, physicians cannot afford to be captives to their insurers. In this age of the National Practitioner Data Bank, a payment to a plaintiff-regardless of the insured's actual liability-is a blemish on the record. In today's managed care environment, health care providers' livelihoods increasingly are tied to their ability to participate in managed care plans. Liability-conscious managed care plans thoroughly review physicians' records and carefully screen their provider-members because a plan's failure to properly screen a participating physician is an undisputed avenue of managed-care liability. Even when an insurer provides coverage, and the policyholder experiences no out-of-pocket costs, a policyholder's practice may suffer as a result of the way in which the claim was handled. For instance, regardless of the insured's actual fault, many malpractice insurance companies settle lawsuits on a purely economic basis, 2 giving little or no thought to the impact this may have on the insured's medical practice. Settlements of meritless malpractice lawsuits-implying substandard care-can tarnish a doctor's reputation, negatively affect the doctor's future practice and impair his or her ability to purchase future malpractice insurance.3 Claims settled against doctors are reported to the National Practitioner Data Bank(NPDB), which went into effect in 1991 primarily as a resource for entities with medical professional credentialing and licensing responsibilities, insurers and prospective employers. Consequently, settlement of a meritless suit may prove to be the margin by which a doctor is denied hospital privileges, a medical staff appointment or a contract with a managed care company. Once a malpractice claim has been filed against them, many doctors quickly learn that their insurance coverage is contingent on the quality of their insurance company's claims-handling practices.4 Thus, physicians and group practices should purchase malpractice insurance only from insurance companies with good claims-handling histories. As two consultants from Johnson & Higgins, one of the world's largest insurance brokers, cautioned, prospective policyholders should use only insurance companies that will "'stay the course' and honor their commitments when the coverage is needed."5 Physicians and medical groups looking to buy or change their malpractice insurance can take steps to reduce or avoid the possibility of insurance coverage litigation. First and foremost, as stated above, they should purchase policies from insurers with comparatively good claims-handling track records.6 An Aetna underwriting executive warned that "[a]ssuming that policies or insurance companies are interchangeable could be a costly mistake for the [policyholder]."7 While this comment was made about directors' and officers' insurance, the warning is relevant for any type of insurance purchaser.

Dual Representation

Insurance policies routinely stipulate that the insurer will appoint defense counsel to represent the policyholder.8 This usually does not present a problem. On occasion, however, the insurance company's authority to select counsel can present a serious conflict of interest issue-one that inevitably works to the policyholder's detriment. In one medical malpractice insurance coverage case, when the doctor-policyholder was sued for malpractice, the insurance company assigned its general counsel to defend the doctor against the patient's lawsuit. While ostensibly representing the doctor-policyholder, the insurance company lawyer learned of facts that it could potentially use to deny insurance coverage. After months of claims handling and representation by the insurance company lawyer, the insurance company disclaimed coverage. The doctor sued the insurance company in order to secure insurance coverage. The trial court ruled in favor of the doctor-policyholder, holding that he was entitled to malpractice coverage. In Medical Mut. Liab. Ins. Soc. of Maryland v. Miller,9 the Maryland Court of Appeals affirmed the trial court's decision. The high court was especially troubled by the conflict of interest that arose because of the insurance company lawyer's prior representation of the policyholder. The conflict of interest raised by dual representation has been scrutinized in other cases as well. In Fidelity & Cas.. Co. v. McConnaughy,10 the Maryland Court of Appeals noted that "[v]arious courts have condemned such dual representation in circumstances analogous to those in the instant case, and several have held that when it occurred, the insurance company had waived its right to disclaim [insurance coverage] or was estopped to do so."11 The Miller case illustrates a problem that policyholders can face when their insurance companies appoint lawyers for them. In Miller, the policyholder was not even informed about his lawyer's affiliation with the malpractice insurance company.

'Deems Expedient' Provision

Some policies contain a "deems expedient" provision, which typically reads: "The [insurance] company may make such investigation and settlement of any claim or suit as it deems expedient." Physicians who have "deems expedient" provisions in their malpractice policies may find themselves vulnerable to quick settlement offers by their insurance companies-even if the insurer's claims-handling department conducted little or no investigation on which to base a settlement decision.12 When an insurer opts to settle claims quickly and cheaply, meritless malpractice claims may nevertheless be rewarded, to the detriment of the policyholder. Sometimes, physicians are not even informed of the decision to settle, much less allowed a voice in the settlement process.13 The insurer is not ignorant of policyholders' concerns for their reputations and understands that insureds would prefer to litigate the merits of the claim as opposed to offering a settlement. Nevertheless, "malpractice insurance companies settle out of court, even when they are convinced that the physician is not at fault,"14 primarily for financial reasons. The danger created by these "expedient" settlements is that they may damage a physician's reputation and limit access to future malpractice insurance.15 Whenever money is paid on behalf of a licensed medical practitioner involved in a malpractice suit, a report must be made to the NPDB-regardless of the suit's merits. As pressure mounts on the medical profession to release information on medical professionals to the public and others, the potential for settlements of meritless malpractice suits to unjustifiably damage a physician's practice is greater than ever. Nevertheless, policyholders have had limited legal success in obtaining redress for harmful and unwarranted settlements. Policyholders have been mostly unsuccessful in persuading courts to find bad faith on the part of insurers that offer settlements without policyholder consent.16 Traditionally, courts have ruled that the "deems expedient" provision affords the insurance company fairly wide discretion to settle claims.17 Recently, however, courts have been subjecting insurers' claims-handling practices to greater scrutiny18.

Reservation-of-Rights Letters

Upon receiving notice of an insurance claim, insurance companies routinely respond with reservation-of rights (ROR) letters. These letters are the first indication that the insurance company may be hard at work looking for reasons to avoid coverage. ROR letters are long, strongly termed statements advancing the insurance company's position as to why insurance coverage may be denied or substantially reduced. They usually recite the very same facts that the policyholder presented when the claim was filed. ROR letters may also list any of the insurance policy exclusions that the insurer argues are potentially applicable to the claim. Additionally, ROR letters usually inform the policyholder that the insurance company will withdraw from the defense of the claim against the policyholder at any time the insurer believes that no insurance coverage exists under the insurance policy. ROR letters frequently prove both frightening and incomprehensible to the policyholder. They come as a shock upon receipt and likely will be just as startling when the policyholder rereads the letter five years later and realizes that tucked away on Page 6 is a clause binding the policyholder to the insurance company's claims-handling methods and arguments. Typically, after laying out the grounds for the potential denial of insurance coverage, the ROR letter provides the following: "Unless the insurance company receives written notice to the contrary within 10 days of this letter, the insurance company shall assume that the policyholder agrees to its handling of this matter with a full reservation of rights, and the insurance company shall proceed accordingly."

Prudent Purchasers And Due Diligence

Before buying malpractice insurance, John Sherlock, a legal malpractice insurance broker, recommends that attorneys first interview insurance companies concerning their claims-handling backgrounds. 19 This is equally good advice for physicians. Coverage purchasers should not hesitate to ask insurance companies for references, such as other policy-holders. It also may be useful to speak with fellow practitioners, insurance brokers and state insurance departments to further evaluate the quality of an insurance company under consideration. 20 Policy holders should also refrain from making premium cost the sole consideration. It is more important that the policyholder purchase malpractice insurance from a company that will stand behind its policy and provide insurance coverage if a claim is filed. Policyholders should also be familiar with the distinction between "claims-made" insurance policies and "occurrence" insurance policies. The coverage afforded under a claims-made policy can differ substantially from that offered under an occurrence policy. Under claims-made policies, insurance coverage exists for claims made against the policyholder during the period in which the insurance policy is effective.21 This is true, unless there is a specific provision to the contrary, even if the events or occurrences that gave rise to the claim took place outside the effective period of the insurance policy. On the other hand, occurrence insurance policies, in the professional liability context, provide insurance coverage for claims against the policyholder, so long as the "wrongful act" that gives rise to those claims takes place during the period in which the insurance policy is effective.22 Thus, there is insurance coverage under the occurrence policy even if the claim is filed well after the policy expires-as long as the "wrongful act" took place within the effective period of the policy, there should be insurance coverage. It should be noted that being an informed and careful malpractice insurance purchaser can present problems, too. When claims arise, insurance companies use due diligence on the part of the policyholder as evidence to support their position that the policyholder purchased the insurance "expecting" to be sued. Hence, the insurance company argues, insurance coverage is void. Insurance company claims handlers have testified that the very purchase of insurance raises a "red flag" in their minds, causing them to investigate and develop facts on which a decision to deny insurance coverage can be based.23

Conclusion

Despite ongoing talk of "medical malpractice reform," malpractice insurance remains and indispensable component of a physician's practice. Equally indispensable is policyholder awareness of key insurance coverage issues and pitfalls. Because claims-handling practices bear so heavily on the quality of the malpractice insurance policy, doctors and group practices alike need to look into an insurance company's handling history. Investigating these issues beforehand can help avoid bitter insurance coverage disputes down the road.

  1. See, e.g., St. Paul Fire and Marine Ins. Co. v. Housed, 533 A.2d 301 (Md. App. 1987).
  2. See Barker, "Combining Insurance and Self Insurance: Issues for Handling Claims," Defense Couns. J. 52 (1994).
  3. See, e.g., Giri v. Rutgers Cas. Ins. Co., 641 A.2d 1112 (N.J. App. Div. 1994), cert. denied, 652 A.2d 174 (N.J. Super. Ct. 1994).
  4. See Trentalance, "Constitutional Rights Versus Malpractice Insurance Settlements," Physician Exec., August 1994, at 7. Mr. Trentalance notes that insurance company claims-handling practices fail to consider "the physician's reputation and capacity to earn a living as a health care provider in today's climate[.]"
  5. See jensen and Victor, "Update on D&O Coverage," The Corp. Board, July/August 1995, at 15,16. Although the authors address D&O insurance, the same principles are applicable to medical malpractice insurance.
  6. See "Forewarned is Forearmed," Kiplinger's Pers. Fin. Mag., June 1995, at 96.
  7. Sills, "Shopping the D&O Market," Risk Management, July 1995, at 65.
  8. Some malpractice insurance policies contain clauses stating, "The Underwriter will have the right and duty to defend any cover Claim through counsel of its choice[.]"
  9. 451 A.2d 930 (Md. App. 1982).
  10. 228 Md. 1 (Md. App. 1962).
  11. Id. At 10.
  12. See, e.g., Gardner v. Aetna Cas. & Sur. Co., 841 F.2d 82, 85 (4th Cir. 1988). The plaintiff physician claimed that his malpractice insurance company inadequately investigated the underlying malpractice suit before offering a settlement.
  13. See, e.g., Feliberty v. Damon, 72 N.Y.2d 112, 531 N.Y.S.2d 778 (1988).
  14. Trentalance, supra n. 4.
  15. See, e.g., Gardner, supra n. 12.
  16. See, e.g., Rogers v. Robson, Masters, Ryan, Brumund and Belom, 392 N.E.2d 1365 (Ill. App. Ct. 3d Dist. 1979); cf. Moss v. Medical Liabil. Mut. Ins. Co., 636 N.Y.S. 948 (A.D. 3d Dept. 1996).
  17. See, e.g., Feliberty v. Damon, 527 N.E. 2d 261 (N.Y. 1988).
  18. See, e.g., Shuster v. South Broward Hosp. Dist. Physicians' Pro. Liab. Ins. Trust, 591 So.2d 174 (Fla.1992).
  19. Sherlock, "Legal Malpractice Insurance Competitive: A Guide to Choosing a Carrier in a Crowded Marketplace," Legal Intelligencer, June 2, 1995, at 3.
  20. See Murray, "Can't Slow Your Spending? Try These Tips," Medical Econ., april 24, 1995, at 119; "Forewarned is Forearmed," supra n. 6.
  21. Bregman and Gibson, 1 Professional Liability Insurance VIII.G.1 (1995).
  22. See trial testimony of claims handler for the insurance company. Jordache Enter. Inc. v. National Union Fire Ins. Co. of Pittsburgh, No. 92-C1952 ( Kanawha Cty., W. Va., Cir. Ct.). See also deposition testimony from Oklahoma City Urban Renewal Authority v. Gulf Ins. Co., No. CIV-94-1760-M (D. Okla. December 1995).

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