We continue to stress that not knowing the right questions to ask when making financial and legal decisions can lead to unintended consequences. This is especially true in the area of malpractice insurance. Not understanding the various options and intricacies of malpractice insurance can cost you time and money–and cause major problems with your medical credentials.
This is how it often works: One doctor asks another, “Which company do you use?” and he purchases that plan without any further investigation into the important issues surrounding the type of coverage provided. This is great for the insurance company, but not always great for the doctor or dentist. The following sections provide the essential knowledge base for choosing medical and dental malpractice insurance.
Competition Benefits the Physician
When everyone uses the same company, this greatly reduces competition–allowing the company to set rates to their advantage. In fact, in some states, there is very little malpractice insurance competition, so pricing varies greatly from state to state. Understanding competing options by researching them, either on your own or through your financial advisor, can have a significant impact on your medical malpractice insurance cost.
Different Types of Coverage
Doctors and dentists need to understand the difference between “claims-made” and “occurrence-based” coverage. The best way to explain the difference is through a timeline.
In the timeline above, note that the physician was working with a different practice in 2010, before switching practices at the beginning of 2011. The occurrence happened in September of 2010 while the physician was still at Practice A, but the claim was not made/filed until April of 2011, when the physician had moved to Practice B.
If the physician had occurrence-based coverage while at Practice A, he would still be covered for the event that happened in September 2010, even though he was no longer with that practice. However, if instead the physician only maintained claims-made coverage while at Practice A, he would not be covered for the September 2010 incident. Instead, he would need tail coverage to pick up where his claims-made policy left off in January of 2011. Understanding this difference, and the type of coverage that you hold, is especially important anytime you consider joining a new practice.
Risk/Retention Groups and Captive Insurance Companies
In response to the non-stop increase in malpractice insurance premiums over the past decade, many physicians are now creating risk/retention groups and captive insurance companies in order to better control costs. Through these structures, the member physician “owns” a portion of the entity. Provided that claims are minimal, the profits of the entity are distributed back to the doctors.
Premiums for risk/retention groups or captive insurance companies are usually substantially lower due to the doctor members’ ownership. This also gives the potential for a tax break to the physicians, provided that the risk/retention group or captive insurance company is well structured.
Practices with more than ten doctors often pay between $200,000 and $250,000 in annual malpractice premiums for the group. Right now OB/GYN doctors are hit especially hard, often paying $50,000-$100,000 in premium each year per physician. In the above example, if ten OB/GYN physicians came together to form a risk/retention group or captive insurance company, they could likely reduce their premiums by half or more. (12)
Questions to Ask
These are questions you ought to know the answers for regarding your medical and dental malpractice insurance:
- How much coverage do you have, and are the limits commensurate with your state laws?
- When was the last time you shopped for competitive rates?
- Do you know what your coverage actually is–and what its limits are?
- Does your coverage have a “hammer clause”–a statement inside the policy that details the insurance company’s right to settle a claim? In other words, if you get sued, do you have the right to determine if the case is settled, or does the insurance company maintain this right?
Physicians fail to realize until it is too late that many insurance companies prefer to settle claims out of court instead of fighting them. The problem is that a settled claim shows up on your professional record. It is important to make sure that it is your choice whether the case gets settled–and not the insurance company’s, especially if you have no fault in the case.
(12) Risk retention groups and captive insurance companies have several risks associated with them. Consult with qualified legal and insurance professionals prior to implementing either of these strategies.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal advice or services. Please consult the appropriate professional regarding your legal needs.