Neither a physician nor any professional likes to be accused of wrongdoing or sued for negligence. Litigation is time-consuming and can be filled with anxiety regardless of whether the dispute ends in a verdict or settles during the litigation process.
According to Americans for Insurance Reform, a national coalition of public interest organizations that supports insurance industry reforms, approximately 85,000 medical malpractice lawsuits are filed annually. A physician who is sued and has professional liability insurance - most states require a physician to have this coverage - will generally have counsel appointed by his insurance carrier. A 2007 report published by the U.S. Department of Justice’s Bureau of Justice Statistics says that between the years of 2000 and 2004 - the most recent period for which information is publicly available - approximately 95 percent of all medical malpractice claims settled prior to trial.
Insurers are most likely motivated to settle claims to avoid the costs and risks associated with seeing a case through to verdict. The 2007 Bureau of Justice Statistics report suggests that insurance payouts for medical malpractice claims from 2000 to 2004 were at least two and one-half times greater for claims that went to verdict than those that settled before trial. Given these economic incentives, insurers may be motivated to settle claims where there is little or no evidence of negligence by the physician-defendant.
The impact of a settlement is more than a financial burden for the physician-defendant. A settlement can affect a physician’s reputation, state licensure status, and the ability to obtain affordable professional liability insurance in the future. Settlements are reported to the National Practitioner Data Bank (NPDB). This submission could affect the physician’s status with hospitals and third-party payers that have access to NPDB data.
In any situation in which a physician is named as a defendant in a professional liability action, the physician should review her professional liability coverage before the policy is in place - during the policy period prior to a termination or cancellation. A physician should also have the policy readily available for review if she becomes a defendant in a professional liability action. Because of the implications,
it is vital for the physicians to review and understand their policies and whether it affords them the right to control if and when a claim will be settled.
Many professional liability insurance policies require an insurer to obtain the consent of its insured before settling any claim. This requirement is also known as a "consent-to-settle" clause. A typical consent-to-settle clause may state that "[t]he insurer shall not settle any claim without the consent of the insured, unless otherwise agreed between the insured and the insurer."
A physician should not assume that his policy gives him the right to settle. Without a consent-to-settle clause, the insurance company is generally permitted to settle a claim or lawsuit without the physician’s approval. In essence, this consent-to-settle clause provides a physician with a veto power that he can use to override an insurance company’s decision to settle a claim.
This veto power comes with a price, of course. A physician can expect to pay more for a professional liability policy that includes a consent-to-settle clause. The amount of the increase varies depending on the insurer, the state in which the physician practices, and other factors. If a physician is interested in a consent-to-settle clause, she should ask a broker and/or the insurer how much this clause would cost. More importantly, the physician should carefully review the proposed text before agreeing to its inclusion. The addition of a consent-to-settle clause after the policy is issued, would likely result in a premium change.
At least two states - Florida and Maryland - prohibit consent-to-settle clauses in medical malpractice insurance policies. These prohibitions essentially encourage settlement of medical malpractice claims and are intended to reduce rising medical malpractice insurance premiums. Depending upon the state(s) in which a physician practices, the insurer may have restrictions on what can or cannot be placed in the professional liability policy.
Physicians should also be aware of the so-called "hammer clause." This is a variation of the consent-to-settle clause. A "hammer clause" provides the physician-insured with the right to withhold consent to a settlement proposed by the insurer, but it limits the insurance company’s financial exposure to the amount of the settlement offer if the physician "unreasonably" refuses to consent to a settlement. If a physician rejects a proposed settlement and the policy contains a "hammer clause," the physician will bear at least part of the financial risk that the case will end in a verdict that is higher than the proposed settlement amount. A "hammer clause" might state:
The insurer shall not settle any claim without the consent of the insured. If, however, the insured refuses to consent to any settlement recommended by the insurer and elects to contest the claim, the insurer’s liability for the claim shall not exceed the amount for which the claim could have been settled plus legal expenses incurred up to the date of such refusal.
A "hammer clause" therefore provides the physician with a limited veto power. A physician should override the insurance company’s decision to settle only if the physician’s decision to do so is reasonable. A "hammer clause," in terms of premiums will likely result in increased premiums, but not to the same extent as a pure consent-to-settle clause.
The reasonableness of a physician’s decision to withhold consent is a fact-intensive inquiry that can only be decided on a case-by-case basis. Factors contributing to the purported reasonableness of a physician’s decision include the degree of negligence, conflicts between the physician’s testimony and the testimony of others, the completeness of medical records, and any other personal or professional issues that could influence a jury.
If the physician-insured is an employee, he must understand the relationship between his employer and the insurance company and whether the employer is also named in the suit. For instance, if a physician is covered under a professional liability policy issued to a hospital or another third-party, the physician must determine who has the right to withhold consent to a proposed settlement.
Any policy coverage concerns should be reviewed and understood by the physician before he or she executes the physician agreement with his employer. Michigan and New Jersey courts have held that physicians do not have rights under consent-to-settle clauses in policies issued to hospitals or other institutional third parties. In these states, if a physician elects coverage under a hospital’s professional liability policy, the physician runs the risk that the hospital’s interest in settling will be different than the physician’s and that, as a result, the physician will lose the benefit of a consent-to-settle clause.
An insurance company should not request a physician to settle until her role in the case has been fully evaluated. In turn, the physician should consider whether to withhold consent until the consequences of her actions are known. Depending on the actual case, it may be necessary to wait until records regarding the case have been exchanged or the depositions of key witnesses have been taken. There is not one "right" time when this decision should be made and the opinion of an attorney can be invaluable. A physician may be forced to retain counsel separate from the counsel appointed by the insurance company to ensure there is an individual looking out solely for the physician’s best interests.
The following example illustrates the difference between a consent-to-settle and "hammer clause." Dr. Doe is sued for medical malpractice by a former patient. The claims asserted against Dr. Doe are baseless, but the former patient is seeking $1 million in damages for her injuries. After generating $100,000 in legal fees to defend Dr. Doe, his insurance company receives a settlement offer of $350,000 from the plaintiff’s attorney. Dr. Doe wants to reject the settlement offer because he believes he did not do anything wrong in his care of his former patient.
There are three possible outcomes depending on the language in Dr. Doe’s professional liability policy:
If Dr. Doe’s policy contains both a consent-to-settle clause and a "hammer clause," his insurance company is required to consult him regarding the settlement offer and Dr. Doe can reject the offer. Dr. Doe’s insurance company could cap its liability in the matter to $450,000 - the amount of the $350,000 settlement offer plus the $100,000 in legal fees incurred before receipt of the settlement offer. If he loses at trial and a $1 million verdict is entered against him, Dr. Doe may be required to pay $550,000 of the verdict - the difference between the $1 million award and the $450,000 liability cap imposed by the insurance company - plus the additional attorneys’ fees incurred in defending the claim.
A consent-to-settle clause affords physicians control over the decision to settle a malpractice suit and to assess the associated risk to their professional reputations. A "hammer clause" places the financial risks associated with taking a case to trial on the insured physician rather than on the insurance company. When considering a settlement offer, a physician whose professional liability policy contains a "hammer clause" must balance those risks with his professional reputation and any other potential pitfalls in agreeing to settle.
Given the nature of our society, a physician is likely to be named in a professional liability suit at some point in their career. It is crucial for a physician to know their rights with respect to the settlement of such a lawsuit. Finally, a physician should not select a professional liability insurance policy solely on the basis of the insurance premium without first considering the professional reputation and career ramifications that could result from settlement of a claim entered into without the physician’s consent.
Bruce D. Armon ([email protected]) is a partner in the Saul Ewing Health Care Group and advises physicians. Jennifer Beidel ([email protected]) is an associate in Saul Ewing’s litigation department who’s worked with clients in the insurance and healthcare industries, among others. Bruce and Jennifer can be reached at 1-800-355-7777.