Professional liability insurance is important to physicians for various reasons. Its primary purpose is to fund the costs to defend claims alleging professional negligence and to fund the payment of any loss determined by settlement or judgment. Physicians practicing in Michigan are not mandated by state law to maintain professional liability insurance. However, as a practical matter, physicians generally must maintain professional liability insurance as a condition of medical staff privileges at hospitals and other facilities and to contract with health plans.
To understand and limit potential risk exposure, physicians should familiarize themselves with the terms of their professional liability policy, particularly if such insurance is maintained on their behalf by a hospital or other organization. This article summarizes some of the key components of a professional liability policy which physicians should understand.
Type of Professional Liability Insurance Policy
There are two types of professional liability insurance policies—an “occurrence-based” policy and a “claims-made” policy. An occurrence policy typically covers an alleged act or omission of professional negligence which is alleged to “occur” during the policy period, even if the claim is asserted against the physician and/or reported to the insurer after the policy period ends. Under a claims-made policy, the alleged act or omission must occur within a time frame defined in the policy, and the claim must be asserted and reported during the policy period or within any defined time following the end of the policy period in order to obtain coverage under the policy.
Limits of Liability Coverage
Insurance policies generally impose limits of liability coverage for each claim asserted against a physician during the policy period (usually 1 year), as well as the total limit of liability coverage for the policy period (also known as the “annual aggregate”). Each policy period generally has its own limits of liability per claim and in the annual aggregate. It is important for a physician to understand a policy’s limits of liability per claim and in the annual aggregate to assess the physician’s potential risk exposure in the event one or more claims result in losses exceeding available limits of liability. Importantly, attorney’s fees and other defense costs normally do not erode (i.e., reduce) the per claim and annual limits of liability provided by physician professional liability policies.
Applicable Dates of Coverage
Physicians should be aware of the applicable policy period and the start and end dates for such policy period. In addition, physicians should understand whether the policy furnishes coverage for dates of service which extend prior to or after the policy period. For example, sometimes a claims-made policy will define a “retroactive date,” which is usually a date occurring before the inception of the policy period, sometimes referred to as “nose coverage.” When a retroactive date is provided in a policy, the policy will cover claims alleging acts or omissions which occur on or after the retroactive date and through the end of the policy period, assuming the claim is timely reported. Similarly, policies written on a claims-made basis typically permit physicians to purchase, for payment of additional premium, an extended reporting endorsement—commonly called “tail coverage”—to insure claims which are asserted after the policy period ends but which allege claims based on acts or omissions occurring during the policy period (including from any pre-policy period retroactive date, if applicable, through the end of the policy period). Some insurers offer modified claims-made policies which may furnish tail coverage at no additional premium payment upon specified events, such as a physician’s retirement from the practice of medicine.
Scope of Coverage and Exclusions
When a professional liability claim is asserted against the physician, the claim must fall within the scope of coverage afforded under the policy for the claim to be insured. To fall within the scope of coverage, a claim must typically allege professional negligence related to the furnishing of professional services. Some professional liability policies may also provide legal defense coverage for licensing investigations and enforcement actions by state or federal agencies. Physicians should review their professional liability policies to determine the types of claims which may be covered. In addition, physicians should understand any exclusions that may prevent coverage of a claim, such as failure to comply with the terms and conditions of the policy (e.g., timely reporting the claim or paying applicable premiums), if the claim occurred or was asserted before or after the dates covered under the policy, or if the claim alleges matters that are specifically excluded from coverage (e.g., sexual abuse during the furnishing of professional services).
Physicians should periodically review their professional liability insurance policies with their insurance agents to ensure that they understand the adequacy of their available limits of coverage, the scope of coverage, the exclusions, the need for and potential cost of tail insurance, and whether the physician has or lacks the right to consent to a settlement by the insurer and the related consequences. A physician’s professional liability insurance needs may vary depending on the physician’s specialty and practice structure. Likewise, physicians who rely upon a hospital or other organization to furnish professional liability insurance should request a copy of the policy to ensure they understand the available coverage afforded to the physician and any limits of coverage.
*This article originally appeared in the First Quarter 2022 edition of the Detroit Medical News.