Medical Malpractice Insurance Complete Guide (2023)

A.M. Best ratings – Medical malpractice insurance companies are given ratings by independent analysts, based on the financial and operating strength of the company. A.M. Best Company is considered the leading insurance industry analyst, and rates companies with a range from “A++” (Superior) to “D-“ (Poor). Other rating analysts include Duff & Phelps, Moody’s, Standard & Poors’ and Weiss Research. Ratings are an important indication of the financial health of an insurance company, and it is advisable to avoid purchasing a policy from an insurance company with a poor rating.

Absolute liability – Liability regardless of fault or intent to do harm.

Adjudication – Legal process of settling a dispute or determining an issue in court.

Admitted assets – Assets that can be liquidated into cash in order to pay claims.

Admitted carrier – An insurance company that is licensed to sell insurance to the public in a given state.

Allocated loss adjustment expenses – Expenses paid for defense attorneys, expert witness and investigations that are specific to an individual claim.

Annual aggregate limit – For a claims-made policy, the maximum amount the insurance company will pay for all claims arising from events that occurred and were reported during a given policy year.

Arbitration – The use of an impartial third party to settle a dispute. Both parties in the dispute must agree on the choice of arbitrator. They must also agree in advance to abide by the arbitrator’s decision regarding the resolution of the dispute, including any award issued.

Assessable policy – Policies that can require policyholders to pay additional costs above and beyond their premiums to cover past company losses for which there are insufficient reserves. Certain types of medical malpractice insurance companies may have assessable policies, including trusts, joint underwriting associations, and certain types of mutual insurance companies.

Assets – The total financial resources and property owned by an insurance company.

Assumed premium – The payment an insurance company receives for providing reinsurance to another company.

Attorney-in-fact – The entity charged with managing an inter-insurance or reciprocal insurance exchange. The Attorney-in-fact has the authority to exchange insurance among the various subscribers (aka policyholders).

Cancellation – Termination of an insurance policy before its expiration date. Either the insurance company or the policyholder can cancel a policy. If it is cancelled by the insurance company, a formal cancellation notice that specifies how any unearned premium is to be returned to the policyholder must be provided, usually at least 30 days prior to the cancellation date.

Captive agents – Agents who sell insurance products for only one company. Though they do not work directly for the company, they are usually banned from representing other companies in the marketplace.

Claim – Another term for a lawsuit which demands money.

Claim frequency – Rate at which claims are made. Claims frequency is considered to be high when multiple claims are reported in a short time frame.

Claim severity – The size of payment that an insurance company has to make on behalf of the insured. The larger the size of the indemnity payment, the greater the level of claims severity.

Claims reserves – Amount of money that is set aside to meet future payments associated with claims incurred but not yet settled as of a given date.

Claims-made policy – Insurance policy that only covers the insured while the policy is in effect. This means that, should the policy be terminated or not renewed, there would no longer be coverage for any incident that happened while the policy was continuously in effect. Claims-made policies are the most common type of medical malpractice insurance policies.

Claims-paid policy – Policies with premiums based only on those claims that were settled during the previous year, along with claims that are anticipated to be settled during the next year. Claims-paid policies are often assessable, either for a certain time period or indefinitely. This means that the policyholder may be charged extra fees, above and beyond the premium, to cover unexpected losses by the insurer should the insurance company have insufficient reserves.

Consent-to-settle clause – Requires the insurer to obtain the written approval of the insured prior to settling a claim. However, some policies contain a hammer clause, which means that, if the insured does not agree to a claim settlement, then the insurer will no longer be liable for any additional funds to settle a claim or to cover defense costs accrued to continue to fight the claim, over and above the original settlement amounts. Physicians will want to have a consent-to-settle clause without a hammer clause, as it gives them more control over the outcome of the claims process.

Coverage trigger – An event that must occur to activate a liability policy. For an occurrence policy, the coverage trigger is the actual event, since coverage will be provided no matter when the claim is made as long as there was coverage at the time of the incident. Under a claims-made policy, the coverage trigger happens when the claim is made or, in some cases, when an incident is reported. A claims-made medical malpractice insurance policy may have either an incident trigger, meaning that the insurance company will accept a report of an incident and recognize it as a report of a claim, or a demand trigger, meaning that only a formal written demand for money or an actual suit is accepted as a claim. An incident trigger is more favorable for physicians, as it may provide an opportunity to alleviate a situation before it becomes a claim. Also, an incident trigger is advantageous as a new insurer is unlikely to provide coverage for an incident a provider is aware of but has not, but may, turn into a formal claim.

Credentialing malpractice report – Provides current information on a physician’s medical malpractice insurance policy and claims experience.

Date of incident – Also known as the date of occurrence, the date on which an alleged incident of malpractice occurred.

Date of reporting – Date an alleged incident or claim was reported to an insurance company.

Declarations page – Usually found on the first page of an insurance policy, it includes the name and address of the insured, as well as the policy period, amount of coverage, premiums and any restrictions in coverage.

Deductible – Amount an insurer deducts from a loss prior to paying for the loss, up to the policy’s limits. There are several types of deductibles associated with medical malpractice insurance policies. Voluntary Deductibles allow the policyholder to agree to pay a preliminary amount of a claim payment and, in exchange, the policyholder will pay a lower premium for assuming that risk. An Involuntary Deductible is assessed by an insurance company because of adverse risk characteristics of a policyholder, and does not provide a premium reduction. Deductibles can also be split between the policyholder and the insurance company, which is known as a Franchise or Quota Share Deductible.

Defense costs – The cost of defending a claim, including legal fees, court costs and expert witness fees. Defense costs can either be ‘inside’ or ‘outside’ the limits of liability for the policy. If defense costs are inside the limits, this means that the cost of defending the claim would be subtracted from the total amount of liability. For example, if a policy provides $1,000,000 in liability, and the defense cost is $150,000, than there is only $850,000 left to payout any settlement. If the defense cost is ‘outside’ the limits of liability, than it will not count against the total amount of liability, meaning that the full $1,000,000 would still be available to payout any claim, and the $150,000 in defense costs is assumed by the insurance carrier. Defense costs outside can either be unlimited or they can be capped with their own separate limit.

Direct writers – Medical malpractice insurance companies that sell their insurance products directly to customers using in-house insurance agents. Direct writers will also provide customer service functions for their insureds.

Direct written premium – The gross premium of an insurance company, before deducting any premiums paid to a reinsurer.

Dividend – A payment made to policyholders or shareholders. Dividends are not guaranteed, and are given out based on the insurance company’s financial performance or in the event of funds exceeding the amount needed to pay claims. Depending on the type of insurance company, dividends can be distributed either to policyholders as discounts on premiums, or dividends can be paid out to shareholders.

Domiciled – The state in which an insurance company is regulated and licensed to operate.

Earned premium – Amount of the premium that was earned by the insurance company for the coverage period that has elapsed.

Economic damages – Amount needed to compensate an injured person for an actual monetary loss. Economic damages include things like lost wages and medical expenses.

Endorsement – An incident that may or may not become a claim. A medical malpractice claims-made policy will sometimes allow for events, sometimes referred to as incidents, to be reported, which may be beneficial as a solution can be developed before the event becomes an actual claim.

Excess insurance – A secondary insurance policy that covers the policyholder for damages in excess of a stated amount, above that of the insured’s primary policy.

Exclusion – A provision in an insurance policy which identifies circumstances that are not covered by the policy. For example, sexual misconduct with a patient is generally excluded from coverage under a medical malpractice insurance policy.

Exemplary damages – Also called punitive damages, exemplary damages are awarded to punish a defendant for malicious or wanton conduct. Exemplary damages may or may not be covered by a medical malpractice insurance policy, depending on state laws.

Experience rating – Process of determining the degree of risk of a given insured, based on that person’s or group’s loss experience as compared with the actual loss experience of risks in that industry. Experience rating is generally not used in determining medical malpractice insurance premiums, as the claims experience of individual physicians is too variable over short time periods, making it challenging to produce a stable estimate of an individual’s risk. Instead, physician premiums depend primarily on specialty and geographic location. Experience rating may be used more often with hospital insurance, which have a more stable claims experience than individual physicians do.

Extended reporting endorsement/tail coverage – Coverage that is purchased after a claims-made or claims-paid policy is terminated. See more here.

Guaranty Association/Fund – A fund which, by law, must be maintained by each state’s insurance commissioner. This fund provides protection to policyholders in the event that their insurance company cannot meet its financial obligations.

Incident – An occurrence that may lead to a claim being filed by a plaintiff.

Incurred but not reported losses (IBNR) – Estimated liability for events that have occurred but have not yet been reported to an insurance company.

Incurred losses – Amount of paid claims and loss reserves in a given time period. Incurred but not reported losses are not generally included.

Indemnity – Restoration to a victim of a loss, up to the amount of the loss.

Indemnity reserves – Claims reserves that are set aside to pay the portion of claims costs expected to be paid directly to claimants.

Independent agents – Agents that contract with various insurance companies to sell and service their products. Independent agents may represent one or several insurance companies. Those who represent many insurance companies will be able to shop coverage to the different carriers to make sure the insured receives the best policy.

Informed consent – The duty of a physician to fully explain a medical treatment or procedure to a patient prior to performing it. After the explanation is provided, the physician should obtain the patient’s consent for the treatment. If this is not done, there will be a presumption of negligence on the physician’s part if any injury results from the treatment.

Limits of Liability – Maximum amount an insurance company will pay on a claim. Limits are indicated in the policy terms and are often expressed as per occurrence, or per claim, and aggregate based, meaning all losses for a single policy or policy period.

Locum Tenens – Locum tenens physicians are doctors who temporarily work in the place of the regular physician when that physician is absent or away due to vacation, illness or for other reasons. Locum tenens physicians often work through a staffing agency, and, in many cases, the staffing agency will provide the locum tenens physician with medical malpractice insurance. In some states, it may be possible for the absent physician to receive an endorsement to extend coverage to an approved locum tenens physician, so that the locum tenens physician is covered under the absent physician’s medical malpractice policy for the duration of his or her time filling in at the practice. Availability of such an endorsement varies by state and insurance provider.

Loss reserves – Amount set aside for indemnity payments and loss adjustment expenses for open claims.

Mature premium – Premium amount a claims-made policy holder will pay once their policy has matured, usually five to seven years after the policy is acquired. Claims-made policies have lower premiums in the first year, after which the premium will increase each year until it is considered mature.

National Practitioner Data Bank – Electronic database created by Congress, which contains information on medical malpractice payments and certain types of adverse actions related to healthcare practitioners and providers. Information is confidential and not available to the public, but certain types of organizations are allowed to access reports and use them in making licensing, credentialing, privileging and employment decisions.

Net Earned Premium – Net written premium plus assumed premium, minus unearned premium.

Net Written Premium – Amount maintained by an insurance company after it has paid for reinsurance.

Non-admitted carrier – A carrier that is not licensed to sell insurance in a given state, but is allowed to do so anyway because they fill a special need that is not being met by the admitted carriers. Also called surplus carriers, non-admitted carriers are not covered by a state’s guaranty fund, so policyholders will not be protected if their insurance company goes bankrupt. The insurance purchaser or their broker must provide a statement that there was a good faith attempt to obtain coverage through an admitted carrier before buying a policy through a non-admitted carrier. Non-admitted carriers are governed by the Surplus Lines Association in each state, and subject to special taxes and fees. Non-admitted carriers are sometimes able to offer lower rates than admitted carriers.

Non-assessable policy – An insurance policy provided by an insurer that does not have the right to assess policyholders for additional amounts to make up shortfalls in operating costs.

Non-renewal – Cancellation of an insurance policy at the expiration date, initiated by either the policyholder or the insurance company.

Noneconomic damages – An award to compensate an injured person for things that are not based on actual monetary loss, such as pain and suffering and emotional distress.

Occurrence policy – A policy that cover the insured for any incident that happened while the policy was in effect, no matter when the claim is reported.

Paid losses – Amount paid in losses by an insurance company during a specific financial reporting period.

Patient compensation fund – A fund maintained by a state that provides excess insurance coverage to healthcare providers. Physicians and other healthcare workers and entities in states with patient compensation funds have their per claim exposure capped at a threshold specified by the state. The patient compensation fund pays for any excess amount for claims that are greater than the cap. Patient compensation funds are paid for by a surcharge on healthcare providers, usually a percentage of the provider’s annual medical malpractice insurance premium.

Per claim limit – The maximum amount an insurer will pay on one claim under the terms of the policy.

Policy term – The length of time (usually one year) for which a policy is written.

Premium – Amount of money paid to an insurance company to receive coverage.

Premium credits – A credit included in a premium computation that reflects a reduction in hazard, meaning that the insured is considered a better risk. Physicians can frequently receive premium credits for things like completing specific CME coursework or membership in certain professional associations.

Premium discounts – Discounts applied to a premium for having a favorable claim history. Premium discounts can also be given to insureds who reduce their level of risk through things like completing risk management coursework.

Prior acts – Coverage that dates to before the official start date of a new claims-made policy. For example, if a physician cancels a claims-made policy, he or she would no longer have any coverage for any incidents that occurred during the term that claims-made policy was in effect. Acquiring prior acts coverage from a new insurer solves this problem by providing coverage back to the date when a claims-made policy was first acquired, referred to as the retroactive date.

Profit or Loss – A combination of underwriting results with investment income, expenses and taxes is used to calculate profit or loss. Actual profit occurs when underwriting profit plus investment income exceeds losses, expenses and taxes. An insurance company can also profit if their investment income offsets underwriting losses, expenses and taxes. If investment income is not sufficient to offset underwriting loss, expenses and taxes, then the company will have an actual loss, which must be offset by using the company’s surplus. If a company offers assessable policies, they can also impose payments on policyholders to amend the loss, as is possible with joint underwriting associations, trusts and some types of mutual insurance companies.

Punitive damages – See Exemplary Damages.

Re-underwriting – When an insurance company reassesses policyholders and imposes appropriate surcharges, deductibles, or even non-renewal in cases where the policyholder’s claims history or other experiences shows that they are an undue liability risk.

Reinsurance – An agreement in which one insurance company accepts all or part of the risk of another insurance company. Often, smaller insurance companies are only able to cover a small portion of their liability limit and must pay large premiums for reinsurance. Larger insurance companies can cover more of their liability limit, leading to smaller reinsurance premiums and indirectly reducing the cost of insurance for their own policyholders.

Retroactive date – the date back to which prior acts coverage is provided. For example, a new claims-made policy acquired on January 1, 2016 might have a retroactive date for prior acts coverage of January 1, 2010, if that was when the original claims-made policy was acquired.

Retrospective rating – A rating plan that adjusts the premium amount at the end of a policy year based on loss experiences so that it more accurately reflects the current loss experience of the insured. Retrospective ratings can cause premiums to go up or down.

Risk classification – Based on the number and amount of losses that can be expected from a physician’s specialty and procedures.

Risk management – Process of systematically identifying, evaluating and reducing the possibility of an unfavorable outcome from a prescribed medical treatment.

Standard risk – Person or entity that is eligible for insurance with no restrictions or surcharges, according to a company’s underwriting standards.

Substandard risk – Person or entity that is required to pay higher premiums and may be subject to special coverage restrictions because they have a higher level of risk than other similar persons or entities, according to the insurance company’s underwriting standards.

Surplus – Amount by which an insurance company’s assets exceed its liabilities. Surplus is a key indicator of the financial health and solvency of an insurance company.

Surplus contributed and surplus earned – For a mutual company or reciprocal exchange, surplus contributed is the amount of capital the policyholders must provide during the first years of the company’s operation. Surplus earned is the earnings of the company after losses, expenses and taxes. As the company expands and grows its financial strength, earned surplus can be added to contributed surplus, and the contributed surplus returned to the early policyholders who provided it in the first place.

Surplus lines – See also Non-admitted carriers. Surplus lines of insurance provide coverage that is not offered by admitted insurance carriers in a given state.

Trust – An alternative to a traditional insurance company, a trust provides coverage to members, who are usually required to provide a capital contribution in order to join. Depending on the state, trusts may not be regulated by state insurance departments or covered by the state’s guarantee funds in the event of insolvency. Trust members are retroactively assessable, if the trust is unable to pay its losses. If a physician joins a trust, he or she may be obligated to remain assessable, even if the physician later leaves the trust.

Underwriting – Process of deciding whether to accept a risk and determining the amount of insurance and the rate at which the company will underwrite said risk.

Underwriting results – Profit or loss of an insurance company, not including investment losses or income. Underwriting results are computed by subtracting the amounts paid out and reserved for losses and expenses from the earned premium. If there is a residual amount left over, this is an underwriting profit. However, if deductions exceed earned premium, it is an underwriting loss.

Unearned Premium – Portion of a premium that is paid in advance of a coverage period, usually paid to the insurer at least one quarter in advance of the actual coverage period. The payment begins to become earned on the first day of the coverage period.

Vicarious liability – Liability for someone else’s actions, as when one party is held partly responsible for the actions of a third party, even though the first party is not directly responsible for the injury.