Law & Medicine

Understanding malpractice insurance


Doctors typically purchase their insurance from a commercial carrier that specializes in malpractice liability, or subscribe to a physician mutual, also called "bedpan" mutual, which is a "risk-retention" group authorized under federal law in 1986 to underwrite malpractice liability. Not all risk-retention groups are successful. For example, the Tennessee-based Doctor’s Insurance Reciprocal went into bankruptcy in 2003, leaving some 3,000 doctors scrambling for coverage.

Malpractice insurance policies typically pay for all legal fees, including attorney and expert fees, as well as discovery and court costs. They pay damages up to the limit of the policy; a $1 million/$3 million claims-made policy means the limit for each claim is $1 million, and the limit for all claims in a given policy year is $3 million. If the judgment exceeds the policy limits, the doctor is personally liable for the remainder.

This has caused fear among some doctors, because their personal assets may then be at risk. A reassuring article in "Medical Economics" put it this way: "In theory, yes. But in reality, doctors rarely lose their personal assets."

Reasons why both sides usually settle for the policy limit or less, notwithstanding a higher amount decided by the jury, include:

• Until and unless there is a post-trial agreement between the parties, the plaintiff may experience undue payment delay, receiving nothing for any and all expenses in the meantime.

• The plaintiff lawyer’s contingency fee is likewise held up.

• The defense may appeal the decision to a higher court, especially where damages are large – and this can delay payment by years, or even wipe out the judgment entirely if there is a reversal of the verdict.

• Fear of backlash against the trial lawyers in the community for publicity surrounding any attack on a doctor’s personal assets.

• Usually, there are other deep pockets, for example, the hospital, to go after in the same case to jointly reach or approach the award amount.

Although most policies allow the doctor to make the final decision regarding whether to settle and for how much, it is the insurer that recommends and hires the defense counsel, who then directs any settlement negotiations and/or trial strategy.

However, the defense lawyer’s primary duty is to the doctor, not to the insurer who pays his/her fees, and this can raise a conflict of interest. Doctors have been known to sue an insurer and its retained attorney for bad faith and negligent representation, as evidenced in a recent Florida stroke case over a $217 million jury award.

Thus, it’s important to look for the language in the "consent to settle" clause of the policy. In a recent case, the Rhode Island Supreme Court ruled that the insurer was within its right to settle – against the doctor’s wishes – in the middle of a trial. The policy contract had stipulated that the company could settle any claim or suit "as it deems expedient," a phrase the court interpreted as giving the insurer full authority and discretion.

Occasionally, a doctor refuses to settle for an amount within the insurance limits, preferring instead to proceed to trial. Should the doctor lose at trial, and the judgment is in excess of the earlier settlement amount, he or she may be personally liable for the difference, even if the amount is still within the policy limit. Some policies protect the insurer against this situation by containing such a provision, popularly termed "the hammer," as a way of persuading the physician to settle.

On the other hand, courts have held insurers financially responsible for trial awards that exceed policy limits if they had rejected an earlier settlement amount that was within those limits.


AMA Policy Research Perspectives, "Medical Liability Claim Frequency: A 2007-2008 Snapshot of Physicians," August 2010.

• Rice, B. "Could a malpractice mega-verdict wipe you out?" (Med. Econ. 2003;80:89-91).

Mohan Papudesu v. Medical Malpractice Joint Underwriting Assn. of Rhode Island, 18 A.3d 495 (R.I. 2011).

Dr. Tan is emeritus professor of medicine and a former adjunct professor of law at the University of Hawaii. This article is meant to be educational and does not constitute medical, ethical, or legal advice. It is adapted from the author’s book, "Medical Malpractice: Understanding the Law, Managing the Risk" (2006). For additional information, readers may contact the author at

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