Nationally, the U.S. sees six to eight medical malpractice claims per 100 doctors per year. If a judge rules in favor of the patient, the average settlement or judgment amount is about $400,000 — although that can vary widely based on where the claim is filed and the physician’s specialty.  These figures come from Jason Shah, M.D. Jason is cofounder of Flagship Healthcare, a team of powerful med-mel insurance experts. This week on Money Checkup, he fills us in on the basics as well as the nuances of malpractice insurance. 

How much malpractice insurance coverage do doctors need?

Most malpractice insurance policies include two numbers: $1 million/$3 million and $200,000/$600,000 are common. The first number expresses how much the policy will pay for a given claim, including legal defense costs and resulting indemnity amounts. The second number represents the maximum amount an insurer will pay out for all claims in a policy period, which is usually one year.  Normal coverage amounts vary by state. In Michigan, for instance, $200,000/$600,000 is a common limit. In other states, like Illinois, many doctors carry the higher $1 million/$3 million limit.  Additionally, your specialty can drive some of the decision on how much coverage to obtain. An OB/GYNE may need higher limits than a primary care physician. There is some truth to the idea that the more insurance you carry, the larger a target you are for lawsuits. But being underinsured is much worse. If you carry adequate coverage, reaching the aggregate limit of your policy is unlikely. Ask your insurance broker about appropriate limits for the state where you practice. Make sure your broker has the expertise in med-mal to provide you with the best advice for your situation.

What types of policies exist?

There are two types of malpractice insurance policies: Occurrence policies and claims made policies. The difference is in the timing of the event that triggers coverage under the policy. Occurrence policies offer coverage based on when the medical incident in question occurred. If a patient files a claim in 2020 for an incident from 2017, it’s the 2017 policy that responds. Occurrence policies will provide coverage for incidents that occurred during the policy year regardless of when the claim is reported, which is why these policies tend to be more expensive than comparable claims made policies. Claims made policies are based on when the claim was filed. In that case, if a patient files a claim in 2020 for an incident from 2017, the 2020 policy will respond.  A claims made policy must be in effect when the claim is made, so if you cancel your policy, you will no longer be covered for lawsuits that could be filed in the future. If you choose to cancel your policy or if you leave the practice that provides your policy, you will need to purchase “tail coverage” to cover potential liability from procedures you performed in the past.  Claims made policies are usually less expensive initially compared to occurrence policies. This is because the policy only covers the first year and pays out only for claims reported in the first year. The premium increases in the next year because now it is covering the first and second year, as long as the claim is reported in the second year. The premium continues to increase as the policy matures, but then will stabilize. It takes some time for a claims made policy to mature because a few years typically pass between when an incident occurs and when a malpractice claim is filed. If you have a claims made policy for a few years and buy tail coverage when you leave your employer or retire, the total cost is comparable to an occurrence policy.    Ultimately, the cost of claims made and occurrence policies should be the same over the course of a career. Occurrence policies simply charge the same amount each year, whereas claims made policies start out with lower costs that grow over time.  Generally, claims made policies are more common than occurrence policies. Many carriers offer occurrence policies now, but many still do not, so it’s important to understand both. 

Employer-provided coverage

Employment contracts often include some type of malpractice insurance. However, employees may lose this insurance when they leave that hospital or medical practice. It’s important to know up front what your insurance coverage will look like if you choose to move on from a job: Will your employer pay for tail coverage, or will you need to obtain that separately?  For example, say you’re joining a practice and your contract stipulates that your expenses are attributed to you, then subtracted from your earnings. You’ll want good coverage, but also to keep your expenses as low as possible. If you know that your employer will be responsible for tail coverage, then a claims made policy probably makes most financial sense for you because you’ll have lower initial premiums. Some firms offer a middle ground in which an associate vests into tail coverage — for each year you spend with the practice, the practice will assume a greater percentage of tail coverage.

Choosing a malpractice insurance carrier

Not all carriers are created equal. Insurance is regulated at the state level, and each state’s department of insurance has slightly different requirements that insurers must adhere to in order to have access to state financial backing. Carriers that comply with those rules and receive that financial backing are called “admitted carriers.” Carriers that do not are “excess and surplus lines carriers,” or E&S carriers. E&S carriers are not necessarily worse or riskier than admitted carriers. In fact, they often have better financials than admitted carriers. Physicians may seek out E&S policies when an admitted policy doesn’t fit their needs — for example, physicians who are doing work like telemedicine that may cross state lines.  One provision that may differ by carrier is “consent to settle,” which determines who has the power to agree to settle a claim. If you hold an individual policy, you probably want that power, rather than your insurer. If your employer is the policyholder, they may retain that right.  Additionally, some policies include a “hammer clause.” In these cases, the policyholder has consent to settle. But if the policyholder chooses not to settle and the claim ends up closing for more than the proposed settlement amount, the insurer can charge the policyholder for the difference. Practically, this forces physicians to settle even when they would prefer not to.  Finally, when reviewing a potential insurance policy, find its AMBest rating. AMBest is a well-respected, independent financial analytics and rating company. Generally, if a carrier does not have a rating of B+ or higher, consider other options.  There are some exceptions to this rule, particularly if you are pursuing insurance through a risk retention group. Carriers those brokers work with may not be rated, but may be better suited to your needs than a commercial insurance agency. 

Managing your malpractice insurance needs

To make sure you have the malpractice insurance coverage you need, review your options and negotiate whatever you need to negotiate before you sign a contract. If your employer offers claims made coverage, negotiate your tail before you join the group. Know who your carrier is. Make sure they have experience writing medical malpractice insurance and that they’re highly rated. Review your policy in partnership with an expert to make sure it provides the coverage you need. For medical malpractice insurance in particular, keep detailed records of your insurance provider, the dates of coverage, the coverage limits, and what to do in the event of a claim. Medical malpractice claims can be filed years after the incidents in question. Accessible records will help you respond if claims arise — as will having an insurance broker and a financial planner who you trust.  Jason Shah, M.D. is cofounder of Flagship Healthcare, a medical malpractice insurance firm that was acquired by Alera Group in 2017. His business is now known as the Alera Healthcare Professional Liability Division and insures more than 5,000 physicians nationwide. Learn more about their services here. Contact Jason at jason.shah@aleragroup.com.