Imagine…Your malpractice costs just went up 30%, without having an adverse judgment or being a party to a lawsuit! That’s right, your hospital system is now requiring you to double the limits on your malpractice coverage from industry standard 1 million per occurrence and 3 million annually to 2 million/6 million, (which translates into a 30% increase in your premiums)! This very event was described to the CSA by one of our members. The issue was assigned to the Legislative and Practice Affairs Division of the CSA, and we examined the issue in depth at our meeting in January. The following is a summary of the issue written by CSA attorney, Phillip Goldberg, Esq. As an added member benefit, Mr. Goldberg also talks about a common clause in hospital exclusive contracts which only benefits the hospital and could cost an anesthesiologist dearly. These clauses are called contractual indemnity clauses. Read on….
Insurance and Indemnity: What Anesthesiologists Need to Know
by Phillip Goldberg, Esq.
Last year CMA chief executive Dustin Corcoran sent a letter to Catholic Health Care West (CHW) chief executive Lloyd Dean about troubling provisions CHW was including in its service contracts with hospital-based physicians. One of the provisions was a requirement of increased limits for the hospital-based groups’ malpractice to $2 million per claim and $6 million annual aggregate. The other provision required the hospital-based groups to indemnify the hospital for claims brought against the hospital arising out of the group’s conduct. Although the provision on higher malpractice limits is far less common than the contractual indemnity provision, this article will discuss both provisions and what anesthesia groups can do when presented with a contract that includes either provision.
The fact that CHW has even asked for limits of $2 million/$6 million indicates not much thought has been given to the provision, since not all malpractice companies even offer these limits. (The more common higher limits above the standard $1 million/$3 million are $2 million/$4 million.) The reason the hospital asks for higher limits is obvious: it wants another deep pocket to share the cost of defending and resolving malpractice claims when both the hospital and the hospital-based group are named as defendants.
There are very good economic reasons for declining to accept a higher limits contract provision. The premium for $2 million/$4 million limits is likely to be 20% to 30% higher than the premium for $1 million/$3 million limits. This will immediately hit the group’s bottom line. From discussions with underwriters at malpractice companies in California, I understand higher limits are offered but are not necessarily encouraged by the companies.
Studies have shown that malpractice claims resulting in payments in excess of one million dollars are rare, although not unheard of. As such, an anesthesia group may conclude that higher limits impose an additional cost without offering correspondingly greater benefits. On the rare occasion a hospital contract has included a provision with higher malpractice limits, I have advised my client to decline to accept the term. Anesthesia groups need to know they have the ability to negotiate hospital contract terms. Although I do not think it is necessary or appropriate to increase limits, an anesthesia group that wants to accommodate the hospital’s proposal might agree to accept the higher limits on the condition that the hospital reimburses the additional premium.
Whereas the higher malpractice limits provision in hospital contracts is rare in my experience, contractual indemnity provisions are almost universal. My experience has also been that hospitals are less willing to eliminate indemnity provisions altogether. Although increased limits create an immediate and certain cost to the anesthesia group, the contractual indemnity provision creates only a potential cost, but one that could be significantly greater. The risk the group assumes with the contractual indemnity provision can best be explained by way of an example.
Consider the situation where a bad outcome occurs and a lawsuit ensues with both the group and hospital as defendants. If the case proceeds to a judgment where the hospital is exonerated but the group is found liable, the hospital may well have incurred costs of $200,000 or more in successfully defending itself. If the anesthesia group has a contractual indemnity obligation to the hospital, it may find itself presented with a bill for the hospital’s costs. If the group passes that bill to its own malpractice company, the claim will be denied as a contractually-assumed indemnity obligation. The exclusion for contractual indemnity is virtually universal in professional liability policies since it necessarily increases the risk insured. As such, the contractual indemnity provision makes the anesthesia group assume a potential liability against which it cannot effectively insure.
In my experience, the contractually-assumed indemnity provisions are often mutual. That is, the hospital agrees to defend, indemnify and hold the group harmless where the hospital is the cause of the claim just as the group agrees to do so for the hospital when the situation is reversed. This does not make the provision more fair and even-handed. Most physician malpractice coverage is “first dollar” coverage so that all costs of defense and indemnity payments within limits are paid by the insurance company while the insured group pays nothing.
By contrast, most hospitals have either self-insured programs where they may pay most or all of costs of defense and payments to claimants or have high deductibles or self-retention amounts. Accordingly, the hospital is much more likely to have an incentive to make the indemnity demand on the anesthesia group than the other way around. The anesthesia group, by contrast, has no practical benefit from the indemnity claim against the hospital. I typically recommend anesthesia groups confronted with a contractually-assumed indemnity provision simply suggest that both parties rely on their own insurance coverage to provide defense and indemnity for both valid and specious claims and not look to each other to serve as insurance companies.
The leverage an anesthesia group has with the hospital in contract negotiations varies significantly from contract to contract and hospital to hospital. There are a multitude of factors that need to be considered when increased limits or contractual indemnity are included in the contract the hospital presents to a group. Anesthesia groups need to understand they have the right to negotiate terms with the hospital and need to consider how important the insurance and indemnity provisions can be.