Malpractice insurance: Understanding the importance of coverage limits

Roy W. Breitenbach, JDWhen shopping for a medical malpractice liability insurance policy, most physicians focus on premium costs. But physicians shopping for a malpractice policy should also focus on getting the right coverage limits.
If limits are too low, the physician is needlessly exposed to personal liability. Too high, and the physician is paying for more coverage than needed. 

A coverage limit is a provision in a policy under which the insurance company says that it will only pay for losses sustained by the policyholder up to a certain dollar amount. If the loss exceeds that dollar amount, then the policyholder is responsible for paying the excess.

In malpractice insurance, most policies have two coverage limits: A per-occurence limit and an aggregate limit. The per-occurrence limit states how much the insurer will pay for a single loss, claim, or occurrence. An aggregate limit is the total amount an insurer will pay for all claims in a given policy period, typically for one year.

The most common coverage limit seen in a medical malpractice liability insurance policy is $1 million per occurrence and $3 million in total per year.

There are several complicated issues that physicians need to be aware of when dealing with coverage limits. The first is the issue of related claims. Most medical malpractice liability insurers will take the position that two separate claims of medical malpractice arising out of a similar set of related facts constitutes a single occurrence or claim for insurance purposes. 

This is important because if multiple claims are considered a single occurrence for insurance purposes, the claims will be governed by a single per occurrence coverage limit.

Another important issue is defense costs. In most medical malpractice liability insurance policies, defense costs-attorney, expert, and court fees-are not included in the coverage limits. If there is a $1 million per-occurrence limit and a medical malpractice judgment award is $900,000, but prior to judgment the insurance company incurred $300,000 in attorney’s fees and costs to defend the insured, the entire $900,000 judgment award will be considered by the insurer to be within the coverage limit. 

However, some medical malpractice insurance policies are self-liquidating, meaning that defense costs are included within the coverage limits. If this is the case, the coverage limits are actually lower than the physician would ordinarily expect them to be. If defense costs are included, it significantly reduces the coverage limit of the policy.

What happens when the coverage limit is reached? In most circumstances, the insurer simply tenders the defense of the claim back to the insured. This means that it is now the insured’s responsibility to hire attorneys to defend the claim. Some policies do provide that the insurer will continue to provide a defense even after the coverage limit is reached.

Excess insurance or an umbrella insurance policy is coverage over and above a primary policy. If a judgment exceeds the limits of a primary policy, the physician is personally liable for the difference, at which point an excess or umbrella policy kicks in. This is an important safeguard for physicians.

Roy W. Breitenbach, JD, is a partner at Garfunkel Wild, P.C., in Great Neck, New York. Send your legal questions to [email protected].