June 2008

Who is sued: you or your insurance company?

by Timothy Feuling

Recently, on an online discussion forum, someone asked what would happen if he were sued but his insurance company was in bankruptcy and could not pay. Specifically, he wanted to know: "Does (my) business need to pay ... or will the judgment be discharged?"

His question isn't uncommon. Many people think that if anything happens to their insurance company, they are in the clear. But the fact is, the lawsuit is against you, not your insurance company. If you are sued and for any reason your insurance company cannot pay, you are liable for any judgment against you, even if it means liquidating all your business and practice assets to do so.

This is a particular problem for chiropractors who have or had an "occurrence" malpractice insurance policy. Under an occurrence policy, the company who insured you at the time the alleged malpractice incident occurred is responsible for coverage. However, since complaints and lawsuits often are filed years after the actual incident, that company may or may not be in business.

Unfortunately, insurance companies fail with shocking frequency. In 1998, 20 insurers went out of business; the next year, 35 became insolvent. According to Standard & Poor's, 10 insurance companies failed in 2005 and another eight in 2006. Eleven were placed under regulatory supervision in that year. That doesn't even include all the companies that have cut back and stopped writing malpractice insurance!

Some doctors may get lucky and be covered by their state's guaranty association or guaranty fund, but only if the insurance company was an admitted insurer (one that was licensed and regulated by the state insurance department). However, most state funds have relatively low limits of liability and, in the case of a large judgment, you may still end up owing hundreds of thousands of dollars from your own pocket. Furthermore, many states have passed laws recently that exclude payments to commercial policyholders and claimants with a high net worth.

Because of these risks, most insurance and risk management experts now urge health care professions to obtain a claims-made policy from a highly rated company backed by a financially strong underwriter.

Many health care associations that provide malpractice insurance have already made the switch. The Texas Medical Liability Insurance Underwriting Association, for instance, switched to claims-made, noting that "rapidly rising claim costs have caused private carriers to increase rates or leave the market. About 6,000 physicians are affected by the departure of eight carriers from the market."

The problem of carriers leaving the market -- or going out of business entirely -- has become a primary incentive to switch to claims-made policies. As Ohio-based Locum Medical Group explained to MDs: "History has shown that occurrence policies have often times had their risk misappropriated and did not include enough funding for current claims and future claims. Therefore, many of the companies that provided occurrence policies have become insolvent. "

Given the looming financial challenges, things will get worse before they get better. A report given at a Brookings Institute conference, referred to the "crisis" of malpractice insurance, noting that: "In several states around the nation, medical malpractice insurance has become either prohibitively expensive or totally unavailable."

Before making the decision, you need to understand the difference between the two types of policies: occurrence and claims-made.

Let's say you cared for a patient back in Sept. 2006. After three adjustments, he didn't "get better" so he stopped coming to you. Instead, in May of this year, he went to an MD who told him he should never have gone to a quack chiropractor and suggested he see a lawyer. Last month, he decided to sue you.

There are two very important dates in this case: the date the patient originally saw you (Sept. 2006) and the date he makes his claim against you (May 2008).

If you have an occurrence policy, the company that insured you back in Sept. 2006 would be responsible -- IF that company is still in business.

If you have a claims-made policy, the company insuring you when the claim is filed is responsible. If you had a different policy back when you saw the patient, the "prior acts coverage" obtained with your claims-made policy would make sure the current policy still covers you.

Because of the uncertainty of so many insurance companies today, most professionals are taking out claims-made policies. With a claims-made policy, they don't have to try to keep track of which company insured them back when they saw the patient. And they don't have to worry about a former carrier's financial situation -- they know they are covered by their current insurer.

Even doctors who have full faith in their malpractice insurance company are finding reasons to switch to claims-made policies. Lower cost is a particularly attractive incentive since a claims-made policy starts out much lower, then increases each year until it reaches "maturity" (usually after four years).

In the cost comparison chart shown (which uses a sample premium for example purposes -- actual premiums would vary), a claims-made policy would cost $1,660 less during the first four years, and $136 each year thereafter. Some companies -- most notably, Chiropractic Benefit Services -- issue prior-acts coverage at no cost. When you retire (at age 52 or older), CBS provides free "tail" coverage as well, to cover you for any lawsuits that might be filed after you retire for incidents that took place while you were still in practice.

Another important consideration is the "limits of liability" factor. In the past, many policies were written with $100,000/$300,000 limits of liability. As time went on, these just weren't high enough to keep up with skyrocketing claim amounts. Most professionals started opting for $1 million/$3 million limits, to make sure they were protected from the million dollar lawsuits that are so common today.

With a claims-made policy, your "limits of liability" are the amounts specified in your current policy -- not the outdated and possibly inadequate limits you had back when you cared for the patient.

The advantages of a claims-made policy are so numerous and strong that many professional organizations recommend them to their members. For instance, the Clinical Social Work Federation tells members, "claims-made coverage is more flexible. You can adjust your coverage limits each year (up or down) to meet the legal, social and economic climates of the year. Claims-made premiums are also more fair and accurate, because they are based on known claims reported to the company during the previous five years. And, because all claims resulting from a professional service are not reported until five or more years have passed, the first four years of the claims-made coverage have proportionately lower premiums."

In an article for the Los Angeles County Bar Association, Paul F. Mahaffey, CPCU, noted that claims-made policies have a number of other, less obvious benefits. "The ability to review claims experience each year gives the insurer the opportunity to preserve its financial integrity by adjusting rates on a timely basis, reflecting actual experience. This benefits not only the insurer but also the insureds who expect and deserve financial responsibility from the insurer in return for the premiums paid," he said.

"Claims-made policies also offer other advantages to insureds. Premiums for today's coverage need not be loaded to provide for future unknown claims (IBNR) or for the inflated costs of handling such claims. Tomorrow's claims are paid with tomorrow's premiums. As a result, premiums charged for claims-made coverage are lower than properly-rated occurrence coverage, since there is no IBNR," Mahaffey added.

Finally, he warned that, "Occurrence policies mislead insureds into believing that they have adequate protection 'forevermore,' when in fact the limits of liability they buy today are likely to be inadequate for five or ten years from now."

Taking all these factors into consideration, it's clear to many professional liability experts that the claims-made policy is the best choice available today.

(Timothy J. Feuling, as president of Chiropractic Benefit Services Malpractice RPG assists doctors in maximizing their practices through the proper choice of insurance and related services. Mr. Feuling is also available for speaking engagements at state conventions and other chiropractic events. Doctors may contact him with questions, comments, and requests for insurance quotes at 2950 N. Dobson Rd. Ste. 1, Chandler, AZ 85224, by phone at 800-883-0412 or by e-mail: tfeuling@cbsmalpractice.com ).