Your Money: Making Sure You're Covered

With medical malpractice carriers leaving the business in many areas of the country, tens of thousands of physicians are finding themselves faced with skyrocketing premiums, an apparent lack of options, and, in some cases, no coverage at all.

In this article, we will provide you some “tips from the trade” that may help as you try to secure new coverage or renew existing policies.

The state of the market

Today, physicians are facing a market heavily biased toward insurance providers. When insurance companies find it hard to earn a profit, they tighten up underwriting and cancel high-risk physicians. As a result, they are “cherry-picking” the most profitable physicians - and leaving good doctors without coverage. This is referred to as a “hard market” in the insurance industry (as opposed to a “soft market,” when insurance companies typically make a lot of concessions and lower rates to try to “buy” business). Nothing illustrates the point better than the fact that the number of carriers writing med-mal coverage has been cut in half in the past 10 years.

In many hard markets, physicians who have had no legitimate claims against them often are the unfortunate losers. As a result of the insurance companies’ ultra-selective process, new applicants are often given onerous rates. Physicians in certain high-risk specialties such as obstetrics and neurosurgery may face difficulty acquiring adequate coverage at any price. Existing policies may not be guaranteed due to certain inconsistencies in information provided by the insured and/or changes in the insured’s scope of practice. Basically, when the insurance companies are losing money, they look for any opportunity to remove unprofitable business from their books.

Submitting a ‘perfect’ application

Because companies are looking for any reason to deny or nonrenew a policy to any questionable risk, it is imperative that you not give them any reason to refuse coverage. For this reason, we make sure our physician clients submit clear, concise, consistent, and accurate applications. Too often, overworked physicians and sloppy agents cut corners on these submissions - putting the doctor at greater risk of higher rates or outright rejection.

Here are some key elements of a “clean” application for you to include when applying for insurance:

• Type it. We all joke about physician penmanship. But it’s not so funny when there are underwriters who have been known to decline an application simply because it is illegible.

• Leave nothing blank. Be careful to answer every question as thoroughly as possible, especially in the insurance history section. Provide an additional sheet for details when necessary. Carriers would like to know if you have ever gone “bare” - meaning practicing without coverage, increasing the potential liability to the future carrier.

• Be sure to provide all backup documentation. A submission is not complete unless the following documents are included:

• Supplemental claim forms (one for each claim, including the physician’s narrative and supporting documents)

• Current curriculum vitae

• CMEs and licenses

• Medical board accusations with stipulations

• Currently valued company-generated loss runs (information on these loss runs has to be consistent with the claims information provided, and a seven-year loss history is a customary requirement)

• The expiring Declaration’s Page (showing proof of current coverage and/or prior acts/retro coverage)

• Be Consistent. When renewing coverage, make sure all of the information from your previous year’s application is consistent with your current application. Changes in your practice, including claims that were previously open, should be duly noted. Any claim that has recently been closed or dismissed, with or without payment, needs to be disclosed. Previously undisclosed information that surfaces in a renewal application will more than likely result in a nonrenewal of coverage.

Nonstandard insurance carriers

When standard insurance carriers in your state are downgraded or go out of business, or when you are caught in the middle of a highly budgeted open claim, you may find yourself nonrenewed. You will then face the world of nonstandard insurance, or “excess and surplus lines” coverage.

An admitted insurer is one that is admitted to do business in your state and is usually tightly regulated by your state insurance administration. Surplus line carriers are approved to do business in your state despite being “nonadmitted” insurers.

By virtue of their nonadmitted status and by definition, they are not held to the same stringent underwriting guidelines and pricing restrictions as are admitted carriers. They have the flexibility to price their products in accordance with their own actuarial tables and can customize their products without the oversight and scrutiny of state insurance regulators. Though nonstandard carriers can charge much higher premiums, we have often found that policies from such companies can be ideal for clients who find themselves nonrenewed despite a decent claims history. In some instances, you can even save money.

If you replace your standard policy with a nonstandard policy, you must take a very important transitional step. It is generally recommended that you purchase the standard company’s Extended Reporting Period endorsement (ERP), or “tail” coverage, which covers you for incidents that occurred before your new policy begins. The option to purchase tail coverage will usually expire within 30 days from the expiration of your existing policy. Always obtain a quote for the ERP option as soon as possible.

In the event that you are offered prior-acts coverage in the nonstandard market, you should consult with your insurance adviser to determine which option would be most prudent for you - buying the tail from your old carrier or purchasing prior-acts coverage as part of a new policy.

Captive insurance companies (CICs)

A CIC could be a company owned by the physicians of a specific medical practice - that is, a “captive” company, or one owned by a small group of medical groups or regional physicians - a “closely held” company.

For physicians who may go without insurance completely - either voluntarily or because they have no other choice - a CIC is an outstanding option. This is because physicians who “go bare” have no tax or asset protection benefits whatsoever. Most simply put money away - on an after-tax basis that often leaves them completely exposed to creditors - in hopes that if they are ever sued, they will use these funds to defend themselves and pay out any judgments.

But physicians who use properly structured CICs can deduct the premiums they pay. If the CIC is created under one of the Internal Revenue Code’s two sections for small insurance companies - 510(c)(15) or 831(b) - the CIC may be fully or partially tax-exempt, thus creating a larger pool of funds to support future claims. Further, a CIC’s assets are not subject to a physician’s creditors, as the insurance statute only allows the CIC’s funds to be used to satisfy claims from the insureds themselves. For these tax and asset-protection reasons, the CIC is often an extremely attractive option to medical practices considering going bare.

Working with your agent

Your insurance agent should not only have a comprehensive knowledge of the market (beyond simply admitted carriers), but should also know how a policy fits into your overall asset protection plan. For example, if you choose to reduce your coverage limits, you should increase the protection of your practice and personal assets through other means. While the agent will likely not be able to provide many of these asset protection services, he should have a relationship with a firm that specializes in this discipline. This type of integrated service is “comprehensive risk management” - certainly needed in today’s environment.

Specifically on the issue of insurance, an insurance agent should be able to do the following:

• Explain the differences between the various types of coverage available. The two most common types of policies are claims-made and occurrence.

• Know which carriers to submit your application to and which underwriters are most likely to offer acceptable terms based on your individual risk profile. Medical malpractice insurance is underwritten and considered on an individual basis. Some carriers may favor certain specialties, practice locations, or venues around the country, and some are quite tolerant with regard to one’s claims history or even substance abuse.

• Leverage their relationships with top medical malpractice insurance carriers available in your state for your benefit. Larger producers do have more leverage with insurance carriers. This could work to your benefit.

• Be able to help you put together the most complete submission possible in order to procure the best coverage and terms at the most competitive rate.

In today’s very hard medical malpractice insurance market, physicians would be wise to submit perfect applications, look at alternative insurance arrangements including CICs, and work with an insurance adviser who understands different policies and how they can integrate with your overall asset protection/risk management plan. To do otherwise in today’s highly litigious environment would be financial malpractice.

David B. Mandell, JD, MBA, is an attorney, lecturer, and author of Wealth Protection, MD. He is also a cofounder of The Wealth Protection Alliance (WPA), a nationwide network of elite independent financial advisory firms whose goal is to help clients build and preserve their wealth. Kevin Perlberg, CFP, is principal of Quantum Advisors, a charter member of the WPA, and he provides sophisticated business planning to physicians around the country. Mandell and Perlberg can be reached at 800 554 7233, or via editor@physicianspractice.com.

This article first appeared in the May 2006 issue of Physicians Practice.