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Nearly all medical professionals hope to have a successful career without ever needing to look at their medical malpractice insurance policy. The only interaction most physicians have with their malpractice carrier is making payments on those monthly, quarterly, or yearly premiums. However, medical malpractice insurance policies are too important to ignore as they provide an exit strategy in defending against malpractice lawsuits, whether frivolous or not. Despite the importance of medical malpractice policies, many medical professionals may not fully understand how their policies work when a lawsuit is filed.
Nearly all professional liability insurance policies contain a per claim amount and a separate total aggregate limit. A typical policy may have coverage of $1 Million Dollars per claim and a $3 Million Dollar total aggregate limit. However, what many professionals who are paying for such coverage may not appreciate is that these “limits” are often reduced by hard costs, consisting primarily of attorneys’ fees as well as other costs expended in defending against a lawsuit. Such a policy is typically referred to as a “Claim Expense Inside” policy, or colloquially referred to as “burning limits,” “diminishing limits,” or a “cannibal policy.” Under this type of policy every dollar over the practioner’s deductible that is used to defend the lawsuit is applied to the Per Claim Limit. Such a feature in a professional liability policy is in stark contrast to the typical automobile liability policy which contains a limit of liability amount regardless of any fees or expenses incurred in defending against a claim.
For example, in a typical automobile liability policy, someone who is sued for causing a rear-end collision is afforded the total limit of liability insurance (i.e. $100,000 per person/$300,000 per occurrence). If a lawsuit is brought against that insured, the insurance company will hire an attorney who will generate fees in defending against the lawsuit. However, if the claim is settled for the full amount of the limits of liability, in our example, $100,000 per person, then the injured party will receive the full $100,000 regardless of any fees expended in defending against the claim, as the cost of defense comes from a separate “pot.”
In a professional liability policy with diminishing limits, a physician with $1 million dollars in coverage may quickly find him or herself with a significantly lower limit of liability than initially thought. This is especially true if the matter is tried to a jury and an unfavorable jury verdict is rendered against the physician. In this type of policy, in an instance where a jury verdict is rendered for $1 million dollars, the policy of insurance will not fully cover both the jury verdict and the cost of defense. Stated differently, the total amount of “exposure” for the insurance company in this situation is $1 million dollars, which includes both any verdict plus the cost of defense (i.e., attorneys’ fees, law firm costs, etc.). Thus, if the verdict is returned for $1 million dollars, and the insurance company’s hard costs equal $200,000, then the insurance benefit remaining to pay the verdict is only $800,000, leaving the physician exposed for the balance of the verdict.
Although professional liability policies which contain “burning limits” are commonplace, such policies are not necessarily problematic for the physician. The important aspect of any professional liability policy is fully understanding what type of policy it is, what the policy covers and what the policy excludes. Professional liability insurance is often expensive and any questions regarding a specific professional liability insurance policy should be directed either to your insurance agent or to your legal counsel, who can provide a detailed review of the policy.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.