23 Professional Liability Insurance © alexskopje/ShutterStock, Inc. It’s Your Gavel… CRIMINAL ACTS AND INSURANCE COVERAGE A physician was convicted for the sexual assault of a minor. He was then sued in federal court for civil damages. An insurer had issued medical malpractice policies to the physician. Under the policies, the insurer agreed to pay on behalf of the insured all sums that the insured became legally obligated to pay as damages because of bodily injury or personal injury resulting from rendering or failing to render, during the policy period, professional services by the insured. The policies contained an express exclusion barring liability of the insurer for any acts of the insured arising out of the performance of a criminal act. Does sexual assault constitute rendering professional services within the coverage provisions of the physician’s insurance policy? Should a malpractice insurer be required to indemnify a physician for liability resulting from the sexual assault of a minor?1 WHAT IS YOUR VERDICT? I never was ruined but twice—once when I gained a lawsuit, and once when I lost one. —Francois Marie de Voltaire (1694–1778) Learning Objectives The reader, upon completion of this chapter, will be able to: • Describe the purpose of an insurance policy, including risk categories, and the importance of professionals to carry professional liability insurance. • Explain the elements and conditions of an insurance policy. • Describe the investigation and settlement of claims. This chapter introduces the reader to some of the basic concepts related to professional liability insurance. The purpose of liability insurance is to spread the risk of economic loss among members of a group who share common risks (for example, an obstetrician would share risk with other obstetricians). As risks increase, premiums increase to cover the associated risks. The premiums are placed in a shared risk fund from which monies are drawn to cover the costs of lawsuits. Because of skyrocketing malpractice premiums, some physicians limit their practice to less costly procedures, restrict their practices by not accepting new patients, decide to close their practice, or accept a position as an employee in a hospital setting. Medical malpractice insurance is subject to the cyclical nature of the insurance market. Problems intrinsic in malpractice insurance include the uncertainty of the U.S. legal system, inflation, damages awarded, emerging technology, and high-risk procedures. 23.1 INSURANCE POLICIES Insurance is a contract that creates legal obligations on the part of both the insured and the insurer. It is a contract in which the insurer agrees to assume certain risks of the insured for consideration or payment of a premium. Under the terms of the contract, also known as the insurance policy, the insurer promises to pay a specific amount of money if a specified event takes place. An insurance policy contains three necessary elements: (1) identification of the risk covered, (2) the specific amount payable, and (3) the specified occurrence. Insurance companies are required by the laws of the different states to issue only policies that contain certain mandated provisions and to maintain certain financial reserves to guarantee to policyholders that their expectations will be met when coverage is needed. The basic underlying concept of insurance is the spreading of risk. By writing coverage for a large enough pool of individuals, the company has determined actuarially that a certain number of claims will arise within that pool, and if the premium structure has been established correctly and the prediction of claims made accurately, the company ought to be able to meet those claims and return a profit to its shareholders. Risk Categories A risk is the possibility that a financial loss will occur. The main function of insurance is to provide security against this loss. Insurance does not prevent or hinder the occurrence of the loss, but it does compensate for the damages. An insured individual may be exposed to three categories of risk: 1. Property loss or damage: the possibility that an insured’s property may be damaged or destroyed by fire, flood, tornado, hurricane, or other catastrophe. 2. Personal injury: the possibility that the insured may be injured in an accident or may become ill; the possibility of death is a personal risk covered in the typical life insurance plan. 3. Legal liability risk: the possibility that the insured may become legally liable to pay money damages to another and includes accident and professional liability insurance. Insurance Policies Insurance policies include occurrence policies, which cover all incidents that arise during a policy year, regardless of when they are reported to the insurer; and claims-made policies, which cover only those claims made or reported during the policy year. Tail coverage policies provide for an uninterrupted extension of an insurance policy period. Umbrella policies cover awards over the amount provided in the basic policy coverage. The dollar amount of coverage is specified in the policy. 23.2 LIABILITY OF THE PROFESSIONAL An individual who provides professional services to another person may be legally responsible for any harm the person suffers as a result of negligence. Many professionals protect themselves from their exposure to a legal loss by acquiring a professional liability insurance policy. $44M Paid in Nurse Practitioner Liability Claims Over Past 5 Years: Report According to the “Nurse Practitioner 2012 Liability Update: A Three-part Approach,” the average malpractice indemnity payment (judgments and settlements) for the five-year study period has increased 19 percent since the 2009 NSO/CNA nurse practitioner claims analysis, rising from $186,282 to $221,852. The average cost to defend a lawsuit also rose to $63,792. —Claims Journal, November 27, 20122 All Professionals Need Insurance All healthcare professionals should carry malpractice insurance. Even though a hospital, for example, as an employer can be held liable for the acts of its employees under the doctrine of respondeat superior, the employee can be financially liable to the employer for his or her own negligent acts. From a cost–benefit standpoint, the answer to the question, “Do I really need insurance?” is yes. Insurance premiums for allied health professionals are relatively reasonable. Malpractice insurance coverage is especially important if a caregiver is working: • As a volunteer at a clinic or health fair not sponsored by his or her employer • As an independent contractor providing a service in a patient’s home
Models Of Managed Health Care
23 Professional Liability Insurance © alexskopje/ShutterStock, Inc. It’s Your Gavel… CRIMINAL ACTS AND INSURANCE COVERAGE A physician was convicted for the sexual assault of a minor. He was then sued in federal court for civil damages. An insurer had issued medical malpractice policies to the physician. Under the policies, the insurer agreed to pay on behalf of the insured all sums that the insured became legally obligated to pay as damages because of bodily injury or personal injury resulting from rendering or failing to render, during the policy period, professional services by the insured. The policies contained an express exclusion barring liability of the insurer for any acts of the insured arising out of the performance of a criminal act. Does sexual assault constitute rendering professional services within the coverage provisions of the physician’s insurance policy? Should a malpractice insurer be required to indemnify a physician for liability resulting from the sexual assault of a minor?1 WHAT IS YOUR VERDICT? I never was ruined but twice—once when I gained a lawsuit, and once when I lost one. —Francois Marie de Voltaire (1694–1778) Learning Objectives The reader, upon completion of this chapter, will be able to: • Describe the purpose of an insurance policy, including risk categories, and the importance of professionals to carry professional liability insurance. • Explain the elements and conditions of an insurance policy. • Describe the investigation and settlement of claims. This chapter introduces the reader to some of the basic concepts related to professional liability insurance. The purpose of liability insurance is to spread the risk of economic loss among members of a group who share common risks (for example, an obstetrician would share risk with other obstetricians). As risks increase, premiums increase to cover the associated risks. The premiums are placed in a shared risk fund from which monies are drawn to cover the costs of lawsuits. Because of skyrocketing malpractice premiums, some physicians limit their practice to less costly procedures, restrict their practices by not accepting new patients, decide to close their practice, or accept a position as an employee in a hospital setting. Medical malpractice insurance is subject to the cyclical nature of the insurance market. Problems intrinsic in malpractice insurance include the uncertainty of the U.S. legal system, inflation, damages awarded, emerging technology, and high-risk procedures. 23.1 INSURANCE POLICIES Insurance is a contract that creates legal obligations on the part of both the insured and the insurer. It is a contract in which the insurer agrees to assume certain risks of the insured for consideration or payment of a premium. Under the terms of the contract, also known as the insurance policy, the insurer promises to pay a specific amount of money if a specified event takes place. An insurance policy contains three necessary elements: (1) identification of the risk covered, (2) the specific amount payable, and (3) the specified occurrence. Insurance companies are required by the laws of the different states to issue only policies that contain certain mandated provisions and to maintain certain financial reserves to guarantee to policyholders that their expectations will be met when coverage is needed. The basic underlying concept of insurance is the spreading of risk. By writing coverage for a large enough pool of individuals, the company has determined actuarially that a certain number of claims will arise within that pool, and if the premium structure has been established correctly and the prediction of claims made accurately, the company ought to be able to meet those claims and return a profit to its shareholders. Risk Categories A risk is the possibility that a financial loss will occur. The main function of insurance is to provide security against this loss. Insurance does not prevent or hinder the occurrence of the loss, but it does compensate for the damages. An insured individual may be exposed to three categories of risk: 1. Property loss or damage: the possibility that an insured’s property may be damaged or destroyed by fire, flood, tornado, hurricane, or other catastrophe. 2. Personal injury: the possibility that the insured may be injured in an accident or may become ill; the possibility of death is a personal risk covered in the typical life insurance plan. 3. Legal liability risk: the possibility that the insured may become legally liable to pay money damages to another and includes accident and professional liability insurance. Insurance Policies Insurance policies include occurrence policies, which cover all incidents that arise during a policy year, regardless of when they are reported to the insurer; and claims-made policies, which cover only those claims made or reported during the policy year. Tail coverage policies provide for an uninterrupted extension of an insurance policy period. Umbrella policies cover awards over the amount provided in the basic policy coverage. The dollar amount of coverage is specified in the policy. 23.2 LIABILITY OF THE PROFESSIONAL An individual who provides professional services to another person may be legally responsible for any harm the person suffers as a result of negligence. Many professionals protect themselves from their exposure to a legal loss by acquiring a professional liability insurance policy. $44M Paid in Nurse Practitioner Liability Claims Over Past 5 Years: Report According to the “Nurse Practitioner 2012 Liability Update: A Three-part Approach,” the average malpractice indemnity payment (judgments and settlements) for the five-year study period has increased 19 percent since the 2009 NSO/CNA nurse practitioner claims analysis, rising from $186,282 to $221,852. The average cost to defend a lawsuit also rose to $63,792. —Claims Journal, November 27, 20122 All Professionals Need Insurance All healthcare professionals should carry malpractice insurance. Even though a hospital, for example, as an employer can be held liable for the acts of its employees under the doctrine of respondeat superior, the employee can be financially liable to the employer for his or her own negligent acts. From a cost–benefit standpoint, the answer to the question, “Do I really need insurance?” is yes. Insurance premiums for allied health professionals are relatively reasonable. Malpractice insurance coverage is especially important if a caregiver is working: • As a volunteer at a clinic or health fair not sponsored by his or her employer • As an independent contractor providing a service in a patient’s home