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Healthcare Professional Liability Insurance

Tort Reform and Its Impact on Medical Malpractice Insurance

Charles Kolodkin | March 21, 2003

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The medical malpractice insurance industry is definitely in crisis, with many insurers refusing to cover hospitals and physicians. This scarcity along with skyrocketing costs are thought to be the result of numerous professional liability claims and lawsuits. Tort reform proponants list non-economic damage caps as the number one medical liability reform measure. However, non-economic damage limitations have their greatest impact on lowering hospital, and other institutions', rates rather than those rates assessed to physicians.

Very few observers of the medical malpractice insurance industry would disagree that the situation today has reached the "crisis" stage in many jurisdictions, with "crisis" being defined as an unstable or crucial time or state in which decisive change is impending. Indeed, such change is already occurring. This is evidenced by the scarcity of insurance carriers now interested in covering hospitals and physicians. Many companies previously serving this industry no longer do so, including St. Paul, MIIX, The Reciprocal Group, PHICO, and Frontier. Those still actively underwriting this coverage are reducing the volume of their business. The decrease in supply, that is, reduction in the number of carriers offering malpractice coverage, coupled with several years of significant underwriting losses, has produced unprecedented pressure on premium rates. As a result, most healthcare providers are experiencing premium increases to levels never before seen. The cost of professional liability insurance is reaching a point where it is unaffordable to many healthcare providers.

Is there a solution? Where can a citizen (or doctor) turn to for help in times of crisis? You guessed it: the legislature. But will the politicians do anything? Absolutely. One thing that can be counted on is legislators will pass laws designed to correct societal problems, in our case the medical malpractice insurance problem. (Here, the term "legislature" refers to an individual state's lawmakers, but may also be applied to the U.S. Congress.) The degree of legislative action will be directly influenced by the acuity of the particular state's problem, with states such as Pennsylvania, West Virginia, Texas, Florida, Mississippi, and Nevada seeing more activity than the stable venues of California and Indiana.

Of course, the form of this legislative activity will be categorized as "tort reform," but what does tort reform entail and what impact will it have? In the following paragraphs, the most common tort reform provisions are identified and briefly summarized. The article then focuses on perhaps the most talked about, if not the most important reform measure: non-economic damage caps, and offers commentary on the likely effect of these provisions on the medical malpractice insurance industry.

Top 10 Medical Liability Reform Measures

The following initiatives have been frequently enacted by state legislatures to attempt to stem the rising cost of medical malpractice insurance and assure the availability of adequate coverage. Not all measures have been used by each state and in fact, the specific provisions vary widely from jurisdiction to jurisdiction.

Top Ten Tort Reform Measures

  1. Limits of non-economic damages
  2. Evidence of collateral source payments is permitted
  3. Limits on attorney contingency fees
  4. Advance notice of a claim
  5. Statute of limitations
  6. Periodic payments of future damages
  7. Alternative dispute resolutions
  8. Good Samaritan provision
  9. Limitations on joints and several liability
  10. Expert affidavits

Limits on non-economic damages. Under such initiatives, the amount of money a claimant may recover for "non-economic" damages in a claim against a healthcare provider for medical negligence is limited to a specific sum, for example, $250,000. Non-economic damages are sometimes called "general damages" and refer to things such as pain and suffering, disfigurement, and loss of consortium. Economic damages, such as lost earnings, medical care, and rehabilitation costs, are not included and therefore, are not limited by the cap.

Evidence of collateral source payments is permitted. Under this reform measure, a defendant in a medical liability action is able to introduce evidence of collateral source payments (such as from personal health insurance) as they relate to damages sought by the claimant. A jury informed of the existence of collateral source payments then uses its discretion in determining whether or how these sources influence an award of damages. Whenever a defendant introduces such evidence, the claimant is usually allowed to introduce evidence of the cost of the premiums for such personal insurance.

Limits on attorney contingency fees. This reform measure enables a greater portion of a settlement or jury award to go directly to a claimant by placing reasonable limits on contingency fees paid to plaintiff attorney. In California, an attorney's contingency fee is limited to 40 percent of the first $50,000 recovered; 33 percent of the next $50,000; 25 percent of the next $500,000, and 15 percent of any amount exceeding $600,000.

Advance notice of a claim. This is an often seen, but modestly effective reform that is designed to further the public policy of resolving meritorious claims outside of the court system. A claimant is required to give some notice (for example 90 days) of an intention to bring a suit for alleged professional negligence. Presumably the parties will agree to a resolution of their dispute without the need for litigation.

Statute of limitations. The time limit a plaintiff has to initiate his cause of action is proscribed by statute or case law. Debate regarding statutes of limitation is usually not as contentious as other tort reform measures. For example, in California, a claim for alleged medical negligence must be brought within 1 year from the discovery of an injury and its negligent cause, or within 3 years from the injury.

Periodic payments of future damages. This measure enables a defendant-healthcare professional to elect to pay a claimant's future economic damages in periodic amounts. An annuity can be purchased by the defendant to pay the cost of the judgment over time that is less expensive than making a lump sum cash payment to the plaintiff. Importantly, the danger of a claimant's wasting of an award prior to actual need is reduced.

Alternative dispute resolution (ADR). This is a statutory provision that requires the litigants to attempt to resolve their case without a time-consuming and expensive trial. Arbitration, mediation, and judicially conducted settlement conferences are types of alternative dispute resolution processes. Binding arbitration, as opposed to non-binding, is highly controversial since the jury trial is removed from the process and parties are compelled to assent to the decision of the arbitrator. ADR activities are commonly initiated by the parties or at the direction of the trial judge, so the need for a legislative provision is questionable.

Good Samaritan provision. Good Samaritan laws protect licensed healthcare providers who care for patients or provide services gratuitously and without pay by not subjecting them to liability for civil damages arising from the care rendered. The care must be provided in good faith and not recklessly or wantonly. As its name implies, Good Samaritan provisions further public policy by encouraging physicians and other healthcare providers to help people in need without the fear of liability.

Limitations on joint and several liability. In many jurisdictions where a case involves multiple defendants, there are circumstances in which a healthcare provider may become liable for more than his or her proportionate share of a damage award. For example, assume a finding of equal liability between a hospital and physician yielding total damages of $4,000,000; under many joint and several statutes, a plaintiff could force the hospital to pay $3,500,000 and the physician only $500,000. An increasingly popular reform is to limit each defendant's liability to his proportionate share.

Expert affidavits. This provision requires a claimant/plaintiff to furnish the defendant with a written report from an expert giving opinion testimony that the defendant's care or conduct departed from accepted standards of medical treatment. These prerequisites are designed to screen out frivolous or nonmeritorious lawsuits at the onset by forcing a claimant/plaintiff to consult with a knowledgeable person prior to commencing litigation.

Non-Economic Caps

Limitations or caps on the amount of non-economic damages that can be awarded to plaintiffs are perhaps the most popular statutory provision advocated by tort reformers. A principal rationale for caps on non-economic damages is to remove the element of unpredictability from the process of evaluating damages. Attempting to quantify a highly subjective concept such as pain and suffering is inherently complicated, one that produces great disparity from jury to jury. Accordingly, the valuation of the mental anguish resulting from a particular event in the same community might generate a $5,000,000 award from one jury and $50,000 from another.

Certainly an argument can be made that inconsistencies in damage awards are to be expected and that the evaluation of such factual issues are within the purview of a jury. In actuality, the principle for the establishment of limitations on damages in civil cases by a legislature is similar to the one that allows the same regulatory body to develop sentencing guidelines in criminal matters. It is generally accepted that the legislature has the innate authority to establish parameters for the awarding of damages for the overall good of the public. It is an appropriate use of that power to limit non-economic damages. The central question is what impact do damage caps have on medical malpractice insurance?

The purpose of non-economic damage caps is to lend some objectivity and uniformity to the awarding of general damages, while at the same time attempting to remain fair to all litigants. Statutorily imposed non-economic damage caps typically vary from $250,000 to $500,000, so when this component is added to special damages, i.e., past and future lost wages, past and future medical treatment expenses, plaintiffs are still in position to assert and collect a substantial sum of money. One only has to look so far as the proverbial brain damaged baby cases, in which verdicts have traditionally been substantial, to understand multimillion dollar claims remain, irrespective of the existence of caps on non-economic damages.

Consequently when studying non-economic damages and the role of damage caps, it is essential to keep a proper perspective: namely that these pain-and-suffering payments represent just one piece of the tort cost pie. An estimate by Tillinghast attributes 24 percent of overall tort costs to awards for non-economic losses, as shown below. Conceivably, due to the very nature of medical malpractice claims, a higher proportion of their claim costs may go toward non-economic damages than in other personal injury claims, though it is unlikely more than one-third of medical malpractice tort costs pay non-economic losses.

Where Tort Cost Goes Graph

Source: Tillinghast

Will Damage Caps Help?

Notably, the limits of professional liability insurance coverage maintained by most physicians are not that large, usually ranging from $200,000 per claim to $1,000,000 per claim. Only a minority of physicians have policies that pay more than $1,000,000 for each case. For example, in Texas it is common for physicians to carry insurance policies with just $200,000 in coverage, while in Florida many doctors have only $250,000 in protection. In comparison, hospitals in these and other states have much higher coverage limits. Not surprisingly hospitals customarily have more sophisticated insurance programs, containing substantially greater financial protection, than physicians maintain. So, can healthcare providers anticipate non-economic damages caps to favorably impact the affordability of liability insurance? Yes and no.

In this commentator's opinion, the consequences and benefits of damage caps on insurance premiums will be felt by and large by institutions such as hospitals and nursing homes, not physicians. Hospitals, through a combination of self-insurance and commercial insurance, carry more coverage than physicians. For the most part, hospitals maintain insurance programs with coverage limits of at least $5,000,000 to $10,000,000 on up to over $100,000,000. These programs consist of sizeable deductibles and several different excess or umbrella policies. Hospitals are compelled to carry high limits of coverage for several reasons, not the least of which being their substantial financial assets make them the "deep pocket" and target of many cases. The effect of non-economic damage caps will be to help lower the ceiling on court judgments and negotiated settlements. This, in turn, will provide more relief to the hospital purchasing $25,000,000 in coverage than to the physician buying $500,000.

As is the case with physicians, for the past several years hospitals have been experiencing rising premiums in both the primary and excess layers of their liability programs. However in jurisdictions such as California and Indiana with well-ingrained laws capping damages, hospitals have seen very modest premium rate increases and a stable insurance environment exists. The reason for this is damage caps mitigate the likelihood of the "runaway jury" verdict and give more predictability to the litigation process. Medical malpractice awards of $10,000,000 and $20,000,000 are simply rarities in states with damage caps, but more frequent in those without damage caps. Allowing more certainty into the evaluation process, as is provided by damage caps, in turn encourages settlements, as the vagaries of a trial are reduced, and the parties can more objectively negotiate. Removing the wild card nature associated with non-economic damages narrows the differences between the "unreasonable" offer from the defense and the "ridiculous" demand from the plaintiff yielding a result both parties can be satisfied with. Moreover, promoting early resolution of cases has numerous positive ramifications, not the least of which is the reduction in defense costs involved in malpractice litigation. But one must not lose sight that $10,000,000 awards are still possible even with non-economic damage caps, although these will be the result of quantifiable special damages rather than jury sympathy. Notwithstanding, multimillion dollar cases will be infrequent, thereby creating a favorable impact on loss costs and premium rates.

As alluded to above, it is questionable how much influence non-economic damage caps will have on physician claim severity and subsequently, physician insurance premiums. Today's $500,000+ case against a physician will likely be a $500,000+ case, with or without non-economic damage caps. However, assuming arguendo that non-economic damage caps could reduce today's average $500,000 case, by 50 percent, and that such caps will reduce frequency by dissuading frivolous claims, it will likely take several years before malpractice insurance premium rates reflect this favorable claims trend. Regardless of investment income returns or administrative expenses, ultimately, premium rates are a function of loss costs. Until it is demonstrated that loss costs are decreasing or stabilizing, meaningful physician insurance premium rate relief will not occur.

It is useful to point out there is also a time lag between the enactment of tort reforms and associated insurance rate relief. This has been the case numerous times. Clearly the risk bearers want to gauge the degree of effectiveness of the reforms on claims and litigation before they adjust prices. Often it will appear there is meaningful reform, but on closer examination the actual impact on loss costs is minimal. Physicians expecting immediate rate relief will need to be patient or lower their expectations.

Recently (July 2002), Nevada passed a law that caps non-economic damages at $350,000. Although it sounds beneficial, a more thorough reading of the statute states "each plaintiff can be awarded up to $350,000 from each defendant." Thus, for a single claim event non-economic damages alone might total over $5,000,000 for a father, mother, and child suing three doctors, a professional association, and a hospital. In the end, appellate courts must render decisions interpreting and clarifying the law's true meaning. Healthcare providers and other interested citizens will need to wait years to learn how these caps actually work, further shedding light on why tort reforms take so long to make an impact. Politicians are quick to take credit for solving a problem with the passage of a law, regardless of its ultimate impact. In many instances, legislation, particularly tort reform measures, must go through a process of judicial review in order to determine its constitutionality and the statute's true implications.


The need for reducing the spiraling costs of medical malpractice insurance is urgent, particularly in a number of states. The panacea most often touted is enacting tort reforms in those problematic jurisdictions. There is a broad array of legislative changes proponents of tort reform advocate. Some are more meaningful than others. Imposing a cap on non-economic damages is the most popular reform; used in conjunction with other reforms damage caps have proven effective in lowering long term insurance costs. However, non-economic damage limitations have their greatest impact on lowering hospital, and other institutions', rates rather than those rates assessed to physicians.

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