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Medical liability insurance plays a critical role in the landscape of medical malpractice claims. For medical professionals, it is an almost obligatory, precautionary device if they wish to practice medicine. Unlike auto insurance, which protects from the very probable risk of an accident, medical liability is not mandatory – but the vast majority of professionals insure themselves against liability risk, regardless.
The duty of liability insurers varies depending on the jurisdiction in which they insure but includes the following.
- the duty to defend,
- the duty to indemnify, and
- the duty to settle a reasonably clear claim
The Duty to Defend a Medical Malpractice Claim
The duty to defend entails the liability insurance company’s duty to provide the insured with competent legal counsel who will act in their best interest in the event of a claim. A majority of policies explicitly contain the promise to defend against false, meritless or fraudulent claims. In its language, the duty to defend is the broadest responsibility of the insurance. Despite seeming straightforward, this duty is very nuanced and subject to a great deal of scrutiny depending on the situation the provider finds himself in. The insurance company will thoroughly evaluate the circumstance to determine whether or not the duty to defend is invoked.
They must first confirm that the nature of the claim made falls within the limits of coverage contained in the policy. If a claim is vague in this respect and it becomes uncertain whether this type of claim would be covered, it is usually construed in favor of coverage – a benefit to the policyholder/healthcare provider. Although the difference is significant to the defendant provider, it is relevant to the insurance company whether the plaintiff prevails in the claim or does not. Their primary concern is whether or not that claim is covered. If a provider is speculating that a patient may bring a claim against him, this is not sufficient grounds to invoke the duty to defend or prompt the insurance company to undertake the first stages of defense. In other words, they will not provide ‘preliminary’ defense in cases of speculated claims.
If the duty to defend is established, the insurance company generally has one of four options – although one option is the most oft-used approach as the others carry many risks and are saddled with drawbacks. They may:
- defend the insured unconditionally;
- defend the insured under a reservation of rights;
- seek a declaratory judgment that it has no duty to defend the claim; or
- decline to defend or to seek a declaratory judgment.
If they choose to defend unconditionally, they effectively waive the right to deny coverage because a claim exceeds the limit of the policy. This option is hardly seemly to insurers and is not the most oft-chosen avenue. The majority of insurers defend the insured under a reservation of rights, meaning they retain the right to deny coverage for that aforementioned reason. If the insurer seeks a declaratory judgment that there is no duty to defend the claim, they more or less shield themselves from the accusation of acting in bad faith or unfairly denying coverage, because they swiftly and proactively brought the matter to the attention of the court. This puts the defendant in the unfortunate situation of defending themselves in two lawsuits, and in neither case do they benefit from insurance-provided defense counsel. The court will issue a decision as to whether or not the insurance company was just in their determination that there was no duty to defend.
In certain jurisdictions, if the insurer declines to defend, they must seek out a declaratory judgment for the denial to stand. If they outright decline to defend or seek a declaratory judgment – out of complete certainty that no duty exists under the circumstances, they will send a letter to the insured explaining their reasoning for the denial of coverage. This is a risky move for insurance companies; if a court later decides that there was, in fact, a duty to defend, the company may be held liable for tort in bad faith. For this reason, insurers most often defend the insured under a reservation of rights.
Duty to Indemnify a Medical Malpractice Claim
The duty to indemnify and duty to settle a claim are more precise and straightforward in meaning. The insurer must pay all sums that the defendant is liable for, and these may be hefty damage payouts ordered for the plaintiff. This duty is triggered when a judgment is entered against the defendant, in which case the insurance carrier is responsible for the covered amounts that the plaintiff has obtained with the judgment. In some cases, the insurer may also need to cover the plaintiff’s expenses and lawyer fees accrued during the case. This duty is universal in liability insurance policies, while the other duties are not.
If the opportunity to settle the claim reasonably arises, the insurer’s duty to settle a clear claim is invoked. This may happen in the context of a settlement offer from the plaintiff, or the understanding that a plaintiff would take an offer if given. This duty is especially critical in cases where the insured defendant is explicitly implicated in the plaintiff’s injuries (such that their role cannot be defended or refuted), the potential damages stand to exceed the coverage limits,
The healthcare provider may elect for different types of coverage. A policy limit is a fixed amount, and the insurance contract stipulates that the provider will be responsible for any cost that exceeds this amount. The costs of defense and the costs of indemnification (damage payouts) are treated separately for insurance purposes. As defense costs accrue, they erode the total policy amount and whatever is left of that figure will be used to make the indemnification payment, if the plaintiff is awarded one. This kind of policy is known as ‘defense within the limit,’ which makes the grand total of defense and indemnification subject to the coverage limit. In contrast, they have the option to choose ‘defense outside the limit,’ meaning defense and indemnification have two separate limits, and the cost of one does not erode the amount available to pay the other.
Liability insurance inherently provides healthcare professionals with a sense of security and peace of mind about malpractice threats, but the fact remains: liability insurance is above all, big business. With premiums written and earned in the billions, and defense costs incurred in the billions as well, the chief concern of these companies is meticulously managing and minimizing the cost of the various provisions of liability insurance. An insurance company employs a law firm, or perhaps a network of them, to whom they delegate malpractice cases and then supervise the costs. This supervision is thorough, if not a bit micro-managed. It is in the interest of the insurance company to spend as little as possible while still providing an effective defense. When the numbers are crunched, if a given legal measure is too expensive, the insurance company will not allow the defense firm to proceed with it in the interest of protecting assets. This cold, by-the-numbers game dictates what path the defense will take in a malpractice claim.