Professional Liability Insurance: What Does Your Policy Actually Cover?

Providers often learn about the limitations of their professional liability insurance policies in the context of a claim. Know what to look for before you agree to the terms.

Distressed doctor sitting at at desk, looking at her professional liability insurance policy.

While most healthcare professionals know they need to purchase insurance, they may be less attuned to the nuances that differentiate policies. Gaining a better understanding of professional liability insurance can help physicians and other providers best address the needs of their practices. 

Types of Liability Insurance Policies

Professional liability insurance comes in two primary forms: occurrence or claims-made.

Claims-Made Policies

Claims-made policies provide coverage for incidents that both occurred and were reported while that specific insurance policy was in effect.  In other words, both the incident and the claim’s filing must happen during the policy’s term. If you cancel a claims-made policy, you are not covered if someone then makes a claim about an incident that occurred while the policy was active. 

To avoid this kind of exposure, you can purchase nose or tail coverage. Nose coverage applies to claims arising from incidents that took place before the policy was in effect. Meanwhile, tail coverage extends the reporting window for claims arising from incidents that occurred in the past, while a policy was in effect. These add-on coverages are frequently a point of negotiation in providers’ employment contracts and separation agreements.

Tail coverage can be critical when you’re switching jobs. Read more in our article, Leaving for a New Practice? Here’s What Healthcare Professionals Need to Know.

When changing policies or jobs, be sure to compare the rates of tail coverage and nose coverage to determine what is most reasonable for your practice. Often, claim denials are based on a misunderstanding about the coverage period, and this can unexpectedly leave you without coverage. 

Occurrence Policies 

Occurrence policies provide lifetime coverage for incidents that occurred while the policy was in effect, regardless of when a claim is filed. Generally, occurrence policies initially cost more than claims-made policies. However, the premiums for claims-made policies increase over time as the potential for claims accumulates. Therefore, in comparing costs between claims-made and occurrence policies, be sure to ask how much the premium will increase each year.  

Common Clauses in Liability Insurance Policies

Consent-to-Settle Clauses

A consent-to-settle clause grants a healthcare provider the right to be consulted before any settlement offers or counteroffers are made. Without a consent-to-settle clause, an insurer can settle a case against the provider’s wishes, even if the claim is without merit. 

Insurance companies may favor settling meritless cases when the cost of litigating a defense may exceed the settlement cost. However, for the provider, a settlement may adversely affect their insurance status, ability to participate in managed-care groups, and applications for hospital privileges. 

Because consent-to-settle clauses give providers more control, providers should seek to include these in their contracts. On a related note, even if insurance-appointed counsel represents you in litigation, you may find it useful to hire a personal attorney who isn’t beholden to the insurer’s interests. (Learn more about our litigation management services.)

Hammer Clauses 

Some policies may include a “hammer clause” rather than a consent-to-settle clause. A hammer clause takes effect if a provider refuses to settle and, when the case goes to trial, the trial results in an award higher than the insurer’s settlement recommendation. In such a situation, the provider would be required to pay the amount that exceeds the recommendation. Hammer clauses protect the insurance companies but can work against a provider’s interest, making it riskier for the provider to go to trial than to settle.

Defense Costs

It’s also important to understand whether your policy covers the expense of your defense in a lawsuit. Some policies do not pay for defense costs. Other policies put a limit on the amount the insurance company will pay. If you are sued for more than the amount of coverage allowed for by your policy, you may have to pay the costs from your own pocket.

Additionally, determine whether a policy is a “wasting” policy. Under this type of policy, defense costs can reduce the policy’s liability limits. For each additional dollar spent on the defense, there will be one less dollar available to pay the claim. In contrast, a non-wasting policy establishes that the policy limits apply only to damages. Any expenses, such as defense costs, are covered in addition to the stated liability limit.

Understanding Your Policy Coverage

Your healthcare practice may involve a variety of activities beyond direct patient care. For instance, you may oversee residents, conduct research activities or serve as an expert witness. Therefore, it is important to understand which activities your professional liability insurance policy covers, and to what extent.

Generally, your professional liability policy covers damages that you are legally obligated to pay as a result of a “medical incident” for which a claim was made during the policy period. Your insurance agreement will provide definitions for terms such as “medical incident” or “professional incident” in the definitions section. If an incident leading to a complaint falls outside of a “medical incident” or “professional incident,” as defined in the policy, it may not be covered. Before committing to an insurance policy, It’s crucial to study these terms and definitions, as they will determine the policy’s scope of coverage.

Additionally, some policies may offer vicarious liability coverage that offers protection from claims arising from the actions of others. However, when it comes to vicarious liability for healthcare providers, sometimes the policy must list certain types of employees in order for coverage to apply.

Professional Liability Insurance Policy Exclusions

Professional liability insurance policies for healthcare providers contain many exclusions. While some of these are more obvious (such as illegal activity), look for some less obvious exclusions. For example, many policies exclude claims arising from any business you own or manage that is not named on the policy. Additionally, some policies may exclude claims arising from certain medical procedures. Understand and consider such exclusions to prevent any gaps in your coverage.

Get Legal Support

Providers often learn about the limitations of their professional liability insurance policies in the context of a claim. An experienced healthcare attorney can help you understand the fine print in your insurance contract and avoid costly surprises. A healthcare attorney can also help you negotiate the insurance coverage included in your employment contract. If you operate in one of the states where our firm has licensed attorneys, schedule a consultation to learn more.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

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