Introduction to Malpractice Insurance
- A 30-year-old, recently graduated anesthesiologist agrees to work as a 1099 independent contractor at an endoscopy facility. Since he is responsible for his own malpractice insurance, he needs to understand what to look for when purchasing a policy.
As an independent contractor, it's common to need to buy your own malpractice insurance, and it can be confusing to know where to start. Working with an independent broker who has access to several carriers is a great way to compare both price and features.
In this guide, I’ll introduce key features of malpractice insurance so you can make an informed decision.
- Claims-Made vs. Occurrence-Based Policies
The two main types of malpractice insurance policies are claims-made and occurrence-based:
- Claims-Made Policies cover you for incidents that occur and are reported during the policy's active period. If you're sued while your policy is in effect, the policy should cover you.
However, if you leave the policy—whether by retiring, switching jobs, or moving to a new insurer—and are later named in a lawsuit, you won’t be covered unless you have purchased tail coverage. Tail coverage is a separate policy that protects you against claims filed after your original policy ends but for incidents that occurred while it was active.
- Occurrence-Based Policies cover you for incidents that happened during the policy period, no matter when the claim is filed—even after the policy has lapsed. Because they provide ongoing protection after the policy ends, occurrence-based policies do not require tail coverage.
- Since occurrence-based policies offer more comprehensive protection, they tend to be more expensive. However, it’s not always clear whether they’re the most cost-effective option compared to a claims-made policy plus tail coverage. Some insurers offer graduated pricing for claims-made policies, where premiums start lower and gradually increase over five years to match the cost of an occurrence-based policy. If this is the case, the need to purchase tail coverage later might make the total cost of a claims-made policy higher over time.
- Incident Reporting in Claims-Made Policies
For claims-made policies, when a claim is reported is critical. The two key terms to understand here are incident trigger and demand trigger:
- Incident Trigger (Incident Sensitive Trigger): Allows you to report a potential malpractice event as soon as it happens—even if the patient hasn’t formally filed a complaint. This ensures that the incident is covered by your policy, even if the lawsuit comes later. This is generally a more protective feature.
- Demand Trigger (Written Demand Trigger): Requires that the lawsuit or complaint is formally filed before the policy covers it. If the patient delays filing until after your policy expires and you don’t have tail coverage, you’re exposed to risk.
- This distinction matters less in occurrence-based policies, where coverage applies regardless of when the claim is filed.
- Defense Costs: Inside vs. Outside the Limits of Liability
Malpractice insurance policies typically have limits like $1 million per claim and $3 million aggregate per year. This means the insurer will pay up to $1 million for any single claim, but no more than $3 million for all claims in a year.
It’s important to check whether defense costs (legal fees, court costs, etc.) are included in these limits or are outside of them:
- Outside the Limits of Liability: If defense costs are outside the liability limits, legal fees won’t reduce the amount available for settlements or judgments. This is a favorable feature, as legal costs can be significant.
- Inside the Limits of Liability: If defense costs are included in your coverage limits, they reduce the amount available to cover any damages. If legal fees are high, this leaves less money for a potential settlement or verdict, which is less favorable.
- Consent-to-Settle Clause and Hammer Clause
Another important feature is the consent-to-settle clause, which requires the insurance company to get your permission before settling a case. Without this clause, the insurer could settle a claim without your consent, potentially affecting your future career—since settlements may need to be reported during credentialing or license renewals, as well as to the National Practitioner Data Bank (NPDB).
Some policies may also contain a hammer clause designed to put pressure on physicians to settle a case rather than go to trial. It allows you to refuse the insurance company’s recommendation to settle, but if you choose to proceed to court and the judgment ends up being higher than the proposed settlement, you could be responsible for the difference. This clause incentivizes physicians to accept settlements, as it places the financial risk on the physician if the case doesn’t go their way in court. Because of this, the hammer clause is typically considered an undesirable feature in a malpractice policy.
- Final Thoughts
This guide provides an introduction to malpractice insurance policies. When choosing a policy, it’s important to understand your practice's requirements, as well as the regulations in your state. For example, New York State offers a Section 18 Free Excess Coverage Program, which requires minimum coverage of $1.3 million per claim and $3.9 million aggregate in certain circumstances, and may provide additional excess coverage at no cost if you qualify.
At Modoo Strategy LLC, we can help you navigate this process without any bias, since we do not receive commissions for malpractice insurance sales. We work with trusted brokers who prioritize your needs and work in your best interest to find a policy that fits your unique situation.
- American Medical Association (AMA): Guide to Professional Liability Insurance
- Medical Professional Liability (MPL) Association: Types of Medical Malpractice Insurance Policies
- New York State Department of Financial Services: Information on Medical Malpractice Insurance
- National Practitioner Data Bank (NPDB): Reporting and Queries in Medical Malpractice
