Malpractice: Why you may be forced to settle

In a money bind, insurers are putting the squeeze on defense lawyers. This can mean trouble for doctors desperate to defend their professional integrity.

By Berkeley Rice
Senior Editor

Doctors hit by higher malpractice premiums—up an average of 15 percent last year—might assume that at least they're buying the best possible defense for their money. That assumption may be naive. In fact, they may be paying more and getting less.

Because of rising legal costs, malpractice carriers are pushing defense lawyers to keep expenses down. For physicians who've been sued, that may mean a second-rate defense, and more pressure to settle. "It's a dirty little secret in the industry," says one defense attorney, "and most doctors don't know anything about it."

They'd better learn, because if their lawyer can't spend what it takes to mount an effective defense, they're likely to lose or settle an otherwise winnable case. And while settling may make economic sense for the carrier, the payment must be reported to the physician's hospitals, HMOs, state licensing board, and the National Practitioner Data Bank.

As David Karp, a risk management consultant in Cloverdale, CA, says: "When a doctor's attorney tells him to bail out and settle, he should know if the attorney is motivated by economic pressure from the insurer. After all, you can always find reasons to settle, and doctors will always be scared by the risk of going to trial and losing."

Cutting costs with "managed law"

Typically, most defense attorneys bill insurance companies at an hourly rate plus expenses. While the carriers usually supervised the defense to some extent, the lawyers generally conducted the cases as they saw fit. The problem with such an arrangement, according to some claims supervisors, is that it gives lawyers carte blanche to bill for as many hours as they deem necessary, thereby running up the total tab.

That tab can mount quickly. In complex cases, defense attorneys may spend thousands of dollars just for medical records and reviews. Each medical expert they consult or depose may charge $1,000 for his time, plus thousands more in fees and travel expenses if he testifies at trial. As a result, a typical defense can easily cost $25,000 to $50,000 for the discovery phase, and well over $100,000 if the case goes to trial.

Concerned about these rising tabs, insurance carriers have been clamping down. Some companies have frozen or even cut their lawyers' hourly rates. Some are also limiting the amount they'll pay for medical experts, depositions, travel expenses, and even medical records—or they're requiring prior approval of those expenses.

Many experienced defense lawyers claim that such cost-cutting measures interfere with their ability to represent their clients effectively. "Say you want to hire an additional expert," says Rick Evans, a San Antonio defense attorney. "The insurer may approve, but not an amount that will get you the best expert because he charges too much. Or they'll question the cost of attending an out-of-town deposition, and suggest that you send an associate instead. These restrictions can be very frustrating."

Flat fee case rates mean pressure to settle

Under a controversial but increasingly common arrangement, some insurance carriers now offer defense lawyers a flat-rate, per-case fee (plus limited expenses) as part of their standard retainer contract, with additional payments only in difficult cases. Or a carrier might break a case into separate phases for discovery and trial, with a fixed fee for each.

"These arrangements are dangerous for the doctor, because they create pressure to settle," says John Fitzpatrick, a malpractice defense lawyer in Richmond, VA. "If we settle early, we stand to make more money—and the carrier stands to lose much less—than if we fight the case and go to trial.

"But if I have a decent case," he explains, "I don't want to settle, because I don't consider a settlement a victory. I want to take the case to trial because a defense verdict is the only way the doctor can clear his name. That's why I won't accept a flat-fee arrangement: It creates a clear conflict of interest."

Rick Evans feels the same way. "When you're being nickel-and-dimed by some number cruncher at the insurance company," he says, "it prevents you from giving your client your best representation. That's why at our firm, if we feel a carrier's cost-containment measures would limit our ability to pursue a case properly, we'll turn the case down."

Who's the real client: Doctor or carrier?

The underlying issue here is that malpractice defense lawyers really have two clients: the doctor they're defending and the insurance company that hires them—and pays their bills. Often there may be no conflict between those two obligations. But when there is—say when the carrier wants to settle and the doctor doesn't—the lawyer may be caught in the middle.

That's what happened to Neil Ugrin, a defense lawyer in Great Falls, MT, who'd become increasingly concerned about restrictive guidelines imposed by several of the state's big malpractice carriers. "They call them 'guidelines,' " says Ugrin, "but in fact they're really rules, and you have to sign a contract agreeing to follow them. It's clear that if you don't, you won't get cases from that insurer."

When Ugrin refused to accept the conditions imposed by St. Paul Insurance Co., the carrier dropped his firm. In 1998, Ugrin and two colleagues filed a petition with Montana's Supreme Court, seeking a ruling on whether billing and practice rules imposed on defense lawyers by St. Paul and several other insurers (including Allstate, Zurich American, TIG, and USF&G) conflict with lawyers' ethical obligations under the state's Rules of Professional Conduct.

In his petition, Ugrin cited the following passage from the rules: "A lawyer shall not permit a person who . . . employs or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services." The petition asserted that any requirement of prior approval "impermissibly interferes with a defense counsel's exercise of his independent judgment, and his duty of undivided loyalty to his client."

Lawyers representing the carriers didn't deny that their billing and practice rules "impose conditions [upon attorneys] limiting or directing the scope and extent of the representation" of their clients. But they argued that the guidelines pose no conflict because the interests of the insurers and the insured physicians usually coincide, since both are "co-clients" of the defense counsel.

In April 2000, however, the court held that under the Rules of Professional Conduct, the insured physician must be the defense attorney's "sole [the court's emphasis] client." The justices concluded that the insurers' requirement of prior approval "fundamentally interferes with defense counsels' exercise of their independent judgment," as required by the rules.

As a result, the court ruled, defense lawyers "who submit to the requirement of prior approval violate their duties under the Rules of Professional Conduct to exercise their independent judgment, and to give their undivided loyalty to insureds."

While this decision is not binding outside Montana, it's likely to influence courts—and insurers—in other states. In fact, some big national carriers, including St. Paul, have already made their guidelines less restrictive. (In December, St. Paul announced that it will drop its medical malpractice business when current policies expire.)

Even those loosened restrictions, however, may threaten the doctors' chances of getting the strongest possible defense.

How to get the best defense

As the accompanying article illustrates, the lawyer who represents you in a malpractice suit may be burdened by financial pressures from your carrier that limit his ability to defend you. What can you do to protect yourself?

"When it comes to buying malpractice coverage, most doctors aren't very intelligent," says defense attorney John Fitzpatrick of Richmond, VA. "They usually look at the cost of the premium, and the amount of the coverage, and figure that if one company charges a few thousand less for the same coverage, it's a better deal."

Such policies may be no bargains, however, if they restrict the quality of your defense. "I often get calls from doctors who've been sued and are stuck with what they feel is poor representation," says Rick Evans, a San Antonio defense lawyer and counsel for the county medical society. "They ask me what they should do, but by that time they really can't do much."

What you can do is ask your colleagues, lawyer friends, or the local or state medical society—before you buy a policy—which carriers have a reputation for defending claims aggressively, and which ones seem too eager to settle.

Then find out which lawyers your carrier uses in your area, and check their reputations. Try to learn how much trial experience they've had, vs how often they settle. "It's just like choosing a surgeon," says Fitzpatrick. "You want one who actually does a lot of procedures."

Ask your carrier's claims rep questions that will help you determine how vigorously the company controls defense costs: Does the company limit legal fees, or the cost of experts? Does it pay its lawyers on an hourly or a flat fee basis? Also ask whether insured doctors have any say in the decision to settle or go to trial.

Read the policy carefully. If it gives the carrier the right to settle without your consent, it may be a bad deal, regardless of price. If the policy doesn't contain a settlement consent clause, ask whether you have the right to appeal if you and the carrier don't agree.

If you're sued, and your carrier assigns a lawyer to defend you, ask him if he has a contract or any other arrangement with the company that limits his expenses. If he does, ask him or the carrier for a copy, and have your own attorney review it for potential conflicts of interest.

If a question about legal expenses arises during the case—say you sense that the lawyer is reluctant to hire a top expert—call the carrier and stress the importance of getting that expert. After all, your career is at stake.

"Not all carriers have such restrictive arrangements with their defense lawyers," says Evans. "Some have reasonable cost constraints. If doctors do their homework, they should be able to choose a carrier that will let the lawyer provide the best possible defense."

 

Berkeley Rice. Malpractice: Why you may be forced to settle. Medical Economics 2002;4:20.