Basic Issues in Your Hospital Professional Liability Form

Choosing an Insurer

In a firming insurance market, it is important to choose an insurer who is committed to your industry. Few risk management challenges are as stressful as having to place coverage with another insurer after your incumbent insurer decides to pull out of the market. There are numerous insurers that underwrite medical malpractice/professional liability business for hospitals. However, it is difficult to tell which insurers are committed to this line of business and which are not.

How do you evaluate which market is better, and how do you determine those insurers that are not committed to this line of business? There are some basic principles.

• Does the insurer have a dedicated claims staff with experience in the healthcare industry?
• Does the insurer have a dedicated risk management staff with clinical expertise? Someone in the company needs to understand your business from a clinical perspective. When you are being reviewed by Joint Commission of Accreditation for Health Care (JCAHO), it would help if the insurer understood the critical issues.
• Does the insurer have its own medical professional liability policy form?

Choosing the Coverage

All of the 1999 top 20 insurers that write hospital professional liability insurance (some are stock insurers and some are physician owned) have dedicated medical professional liability policy forms. Some of the markets write the coverage on an occurrence basis; others, on a claims-made basis. Some are the new, "easy-to-read forms," others are the old-fashion insurance contracts, "that giveth coverages in big print and taketh away those coverages with the smaller print."

What should you look for in the policy forms of today? What's important to a risk manager or financial person with the responsibility of protecting corporate assets? Pay attention to basic policy form issues and ask the following questions.

Is the policy form a "pay on behalf" or an "indemnify"? The pay on behalf is the preference.

Does the policy form cover defense in addition to or within limits? Primary coverage forms normally cover defense in addition to the limits. This is an important issue if there is an aggregate problem. The basic issue here is that you want your limit of liability to respond or be exhausted by only by the payment of damages, not defense costs.

Who is considered an insured? Policy forms vary. Those normally included are:

• Your employees
• The named insured on the declaration page of policy and any subsidiary of the named insured
• Partnerships may be covered but only with respects to the partner's liability (the same could apply to joint ventures)
• Any director, executive, committee member, hospital administrator, stockholder, or member of the board while acting within the scope of their duties of the named insured (You may wish to be a bit more specific when discussing professionals such as residents, students, fellows, faculty, and employed physicians.)

Is the coverage written on an occurrence or claims-made basis? You must be aware of what is considered a claim or when a claim must be reported. It is important to understand and be aware of the reporting requirements and what constitutes whether an incident or suit will be considered a claim made within the policy period.

If coverage is on a claims-made basis, what is the retroactive date? Claims made for injuries that occurred prior to the retroactive date are not covered by the policy. It is important to cover prior acts as far back in time as possible. Here is a good tip: Most claims-made policies indicate that coverage will take effect after the retroactive date or subsequent to the retro date indicated on the policy. Try to amend the policy to have the coverage incept on or after the retro date. This would provide you coverage beginning on the first the retro date itself rather than the day after.

If the coverage is on claims-made coverage form, is an extended reporting period/tail coverage option included? In some states there are limits on the premium that can be charged. Are there new limits offered and for how long? These are important issues since this class of business is considered "long tail."

What is the duration of the extended reporting period if the option is exercised? Attempt to get unlimited tail coverage and consider 36 months to be the minimum acceptable period.

What other terms govern your ability to purchase tail coverage? Be aware of the time period allowed for you to decide whether or not to exercise the extended reporting period option. You will normally be allowed 30 days after the policy has expired. Most policies also require you to request the coverage extension in writing.

When is the tail coverage premium considered "earned"? Under most policies, the tail premium is earned and will be due upon binding.

Is the policy rated on a flat or auditable basis? Try to negotiate a flat premium. With this arrangement, an increase in exposure will not result in an automatic premium increase; it will be up to the underwriter to request additional premiums. The downside is that you will probably not be entitled to a return premium if your exposures decrease during the policy year.

How do your limits apply? Are there separate aggregates for products as well as professional liability? Are there per-location or total policy limits? It is important to understand how aggregates will be accrued to certain policy years to keep track of aggregate exhaustion. If you have numerous employed physicians under your policy, do they share in the total limit available?

How does the policy define "medical services" or "professional liability"? This definition is the foundation of the policy.

Expanding the Coverage

While this article focuses on the basics, a few suggestions for expanding coverage are in order. A typical definition is provided in the exhibit below.

If you have a dialysis center on your premises, perhaps you should change this wording as follows:

Try to expand this definition to address some of today's new healthcare practices. For example, consider expanding it to include research and experimentation, any managed care operations, and any Internet exposures, including bodily injury as a result of these exposures. Any losses that may result in the loading and unloading of any auto should also be considered.

Lastly, pay attention to the conditions and exclusions. A number of the relatively standard provisions found on most policies present the possibility of coverage problems and can sometimes be amended. Here are some of the common ones.

• Have the nuclear exclusion amended to provide coverage for nuclear medical losses, i.e., radiation.
• Have the notice of occurrence amended to reference the person in your organization that would be aware of losses/claims.
• Have the unintentional acts exclusion deleted or amended.
• Ask for coverage for punitive damages where insurable and include it in the definition of "damages."
• Ask for coverage for administrative investigation (fraud and abuse).
• Ask for coverage for medical records as a result of any privacy issues.
• Ask for coverage for sexual abuse for the entity and defense costs for the accused.
• Have the fellow employee exclusion deleted.
• Ask for coverage for all entities or subsidiaries where the named insured has a controlling (at least 51 percent) interest.
• Know whether your retention applies like a deductible (where you reimburse the insurer) or a self-insured retention (where you pay first).
• Teaching institutions should attempt to add wording to protect them from any bodily injury losses involving education of residents or failure to educate and train them properly. The Educator's Legal Liability policy should provide some coverage, but there may be some gray areas.

Conclusion

Hardening insurance markets present challenges to risk managers, agents, brokers, and underwriters alike. This is a time for risk managers, agents, and brokers to be very careful in choosing insurers and to be diligent about verifying the details of the policy forms they are buying or selling.

Carefully checking medical professional liability policy provisions is doubly important because there is no standard hospital professional liability form and variations in terms abound in the marketplace. While the recommendations in this article are far from all-inclusive, they should provide you with a solid foundation for your next renewal.