Medical Malpractice Terms & Definitions

Absolute Liability

Liability regardless of fault.

Accident-year Basis

The annual accounting period, in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Allocated Loss Adjustment Expenses (ALAE)

Expenses directly attributable to specific claims. Includes payments for defense attorneys, medical evaluation of patients, expert medical reviews and witnesses, investigation, record copying, etc.

Annual Aggregate Limit (claims made)

The maximum amount the carrier will pay for all claims arising from incidents that occurred and were reported during a given policy year.

Annual Aggregate Limit (occurrence)

The maximum amount the carrier will pay for all claims arising from incidents that occurred during a given year of insurance.

Assessability

A policyholders obligation to pay additional money, in excess of premiums, to cover past company losses for which reserves have proven to be inadequate. Trust arrangements and joint underwriting associations are generally assessable

Assets

All the property and financial resources owned by an insurance company. Admitted Assets are those assets that are liquefiable to raise cash to pay claims. Non admitted Assets are assets, such as real estate (other than home office), furniture, and other equipment that are not liquefiable.

Assumed Premium

The consideration or payment an insurance company receives for providing reinsurance for another company.

Attorney-in-Fact

The entity that manages an inter insurance or reciprocal exchange and to whom each subscriber (policyholder/owner) gives authority to exchange insurance among the subscribers.

Bundling

The practice of grouping several individual procedures or services together for the purpose of paying for them as one package.

Claim

A written notice, demand, lawsuit, arbitration proceeding or screening panel in which a demand is made for money or a bill reduction.

Claim Severity

Refers to the amount of financial liability resulting from settling a claim. A claim that is settled with no payment for damages is generally considered to have a "small" claim severity, while a claim in which the carrier pays the full limits of a policy is a "large" severity claim. Trends in claims severity on a specialty-by-specialty basis are important factors in setting rates each year.

Claims Reserves (claims-made policy)

Funds set aside to satisfy those claims that have been reported to the company but not yet resolved or paid.

Claims Reserves (occurrence policy)

An additional reserve must be set aside for incidents that occurred but were not formally reported during the policy year and are expected to be reported after the close of the policy year.

Claims-Made Coverage

The most common type of professional liability coverage available, it provides protection for claims that occur and are reported while the policy is in effect (coverage period). Within the conditions of a claims-made policy, a claim must be reported to the carrier in writing by the insured. Tail coverage, or a Reporting Endorsement, provides coverage for claims that occur during the coverage period but are reported after the policy terminates.

Claims-Paid Coverage

Under a claims-paid policy, premiums are based only on claims settled during the previous year and projected to be settled in the coming year. Many claims-paid policies are assessable for a number of years, or even indefinitely, after a physician has terminated the policy.

Composite Rate

A composite rate is a unique component of claims-made insurance coverage. Composite rates are used by actuaries to calculate premiums in specific cases in which the future claims risk has been significantly reduced or increased.

Date of Incident

The date on which a situation of alleged malpractice took place. Also called "date of occurrence."

Date of Reporting

The date of reporting is the date on which the incident was reported to the insurance company.

Declaration

Also called "Declarations Page," this portion of the policy states information such as the name and address of the insured, the policy period, the amount of insurance coverage, premiums due for the policy period, and any coverage restrictions.

Deductible (franchise or quota share)

Provides that the insured and the insurance company split all costs within the deductible amount, such as on a 50-50 basis.

Deductible (involuntary)

Is imposed by the insurance company due to the adverse risk characteristics of an insured. Involuntary deductibles do not include a premium reduction.

Deductible (straight)

Provides that all loss payments are reduced by the amount of the underlying deductible with no other considerations.

Deductible (voluntary)

Allows the insured to pay an amount of the "first dollars" of a claim payment and to pay a lower premium for assuming this risk.

Defense Cost

Inside - Such policies are called "defense within limits, wasting, self-consuming or self-liquidating" policies, because every dollar spent on defense is one less dollar available to settle the case or pay a judgment. For example, if a policy provides coverage of $1 million, that sum will be reduced by every dollar spent on defense costs. If $1 million is spent on defense, then nothing will be left of the policy. The policy will be completely liquidated, even if the litigation is in progress. Outside - Other companies will pay all costs of defending a lawsuit, including the costs of your defense counsel selected by the Company. The payment of defense costs does not reduce your limits of coverage.

Direct Written Premium

A carrier's gross premium written, adjusted for cancellations, before deducting any premiums paid or ceded to a re insurer.

Directors and Officers

The large exposure facing the Directors and Officers of a closely-held corporation in their role as corporate managers may well exceed the assets of their Company. For virtually any corporation, the cost of defending suits against its Directors and Officers can prove catastrophic. D & O Liability Insurance is designed to help protect both the assets of the company and the personal assets of these individuals. D & O Liability Insurance helps protect the Directors and Officers of the Company against claims alleging: employee discrimination or unfair employment practices,wrongful termination,disposal of corporate assets, without regard to the firm’s ability to pay for or secure the Company’s debts,wrongful denial or termination of credit to any customer or client,violation of the anti-trust laws or unfair methods of competition,violation of a loan covenant,exorbitant dividend payments or profit sharing contributions which were made by the Company,improper loans made to Directors or Officers.

Dividend

A partial return of premium to policyholders.

Domiciled

Refers to the state in which an insurance company receives a license to operate. The company is then regulated by that state's Department of Insurance.

Earned Premium

The portion of premium that applies to an actual coverage period. Insured's usually pay a calendar quarter or more in advance of the actual coverage period; the advance payment is initially unearned and becomes earned incrementally during the ensuing coverage period.

Economic Damages

Out-of-pocket damages, such as incurred medical expenses, lost wages, etc.

Endorsement

An amendment, sometimes referred to as a rider, added in writing to an insurance contract or policy.

Errors and Ommissions

Coverage for damages arising out of the insured's negligence, mistakes, or failure to take appropriate action in the performance of business or professional duties.

Excess Insurance

A separate insurance policy with limits above the primary (or "first dollar") policy.

Experience Rating

The system of rating or pricing insurance in which the future premium reflects actual past loss experience of the insured.

Extended Reporting Coverage

Extension of coverage on a claims-made liability policy after its expiration.

Hammer Clause

A provision included by insurers in some consent-to-settlement clauses to encourage the insured to accept a recommended settlement offer. It provides that if the insured refuses a settlement offer recommend by the insurer, the insurer's liability is limited to the amount of the recommended settlement offer. Example: The insurer recommends a settlement offer of $50,000. The insured refuses the offer, and the claim results in a judgment of $100,000 against the insured. The insurer will only pay $50,000, less any deductible. The insured is responsible for $50,000, plus any deductible amount.

Hold-harmless Clause

A hold-harmless clause (also known as an indemnification clause) attempts to shift liability from one party to another (e.g., from an HMO to an employed physician).

Incident

An occurrence that the plaintiff claims has led to culpable injury.

Incurred But Not Reported Losses (IBNR)

An estimate of losses for incidents that have occurred during a policy period (usually a year) but have not yet been reported to the company.

Incurred Losses

Includes both paid and unpaid (reserved) losses.

Indemnity

An insurance company's payment to a plaintiff in settlement or adjudication of a claim.

Indemnity Reserves

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

Informed Consent

An agreement obtained voluntarily from a patient for the performance of specific medical, surgical or research procedures after the material risks and benefits of these procedures and their alternatives have been fully explained in non-technical terms.

Insurance Gap

When a physician has professional liability insurance under a claims-made policy, once the coverage period has expired without renewal, claims that have not yet been made and reported to the carrier (insurance company) during the "active" policy period are not covered. In such cases, a physician is said to be "bare" (uninsured), unless he or she has purchased an extended reporting endorsement (tail coverage) from the former carrier, or has obtained "prior acts" (nose) coverage from a new carrier.

Limit

The maximum amount paid under the terms of a policy. A professional liability insurance policy usually has two limits, a per-claim limit and an annual aggregate limit.

Locum Tenens

A substitute physician who temporarily takes the place of a named insured policyholder or physician member of a medical group. This coverage may be contingent upon the policyholder or member physician not practicing during the period in which the Locum Tenens coverage is in effect.

Loss Ratio

A paid loss ratio is the amount of premium a policyholder has paid to the carrier through the years versus the amount the carrier has paid out on his or her behalf for defense and indemnity. For instance, a paid loss ratio of 50% means the carrier has paid out 50% of what they've received in premium from a particular policyholder. However, the loss ratio doesn't take into consideration the carrier's expense costs, which usually run an additional 25-35%. As a result, a loss ratio greater than 75% usually means the carrier is losing money. An incurred loss ratio is the amount the carrier has paid out (defense and indemnity) plus the amount they expect to pay out (reserves) for a particular policyholder versus the amount of premium a policyholder has paid throughout the years. A policyholder that has never filed a claim has a 0% incurred loss ratio.

Loss Reserves

Amount set aside to pay for reported and unreported claims. For an individual claim, a case reserve or estimate of the expected loss is set aside.

Malpractice or Professional Negligence

An abrogation of a duty owed by a health care provider to the patient; the failure to exercise the degree of care used by reasonably careful practitioners of like qualifications in the same or similar circumstances. For a plaintiff to collect damages in a court of law, the plaintiff's attorney must show that the provider owed the patient a duty and that the provider's violation of the standards of practice caused the patient's injury.

Mature Premium

A step rating system may be used to set premiums for its claims-made policies. The mature premium is the fee a policyholder will pay during the year the policy matures, generally the 4th through the 7th year. The mature rate reflects the maximum exposure (typically 4 years or greater) that the carrier is covering and will typically remain at this level, barring any underwriting changes, for the subsequent renewals.

MICRA

Medical Injury Compensation Reform Act of 1975. Among other things, MICRA places a $250,000 cap on non-economic damages (pain and suffering), limits attorney contingency fees, allows periodic payments of future damages in excess of $50,000 and establishes a statute of limitations of three years from an injury or of one year from the discovery of an injury and its negligent cause.

Moonlighting

Any professional activity arranged by an individual resident, which is outside the course and scope of the approved residency (includes fellowships) program, whether or not the resident receives additional compensation.

Net Earned Premium

Net written premium (plus assumed premium for reinsuring risk) minus unearned premium.

Net Written Premium

Direct written premium minus payments to re-insurers.

Non economic Damages

Pain, suffering, inconvenience, loss of consortium, physical impairment, disfigurement, and other non-pecuniary damages.

Non-assessable

A condition under which an insurance company is sufficiently sound so that policyholders are not obligated to pay additional money for past losses for which reserves are inadequate.

Nonstandard Risk

Those persons or entities that must pay higher premiums and be subject to special coverage restrictions based on underwriting standards.

Nose Coverage

Nose coverage covers claims first made against the physician after the effective date of coverage on the policy. To be covered, such claims must arise out of the physician's acts or omissions prior to the policy's effective date and after its retroactive date. (Both dates are shown on the declarations page of the policy.) A final note: Nose coverage is also known as retroactive coverage or prior acts coverage.

Occurrence Insurance

A type of policy in which the insured is covered for any incident that occurs (or occurred) while the policy is (or was) in force, regardless of when the incident is reported or when it becomes a claim. Occurrence insurance for medical liability coverage is rarely offered today because of the difficulty in projecting long-term claims costs under this type of policy.

Paid Losses

The amount paid in losses during a specified time period.

Policy

The contract between an insurance company and its insured. The policy defines what the company agrees to cover for what period of time and describes the obligations and responsibilities of the insured.

Policy Term

The length of time for which a policy is written.

Premium

The amount of money a policyholder pays for insurance protection. The amount is deemed necessary to pay current losses, to set aside reserves for anticipated losses, and to pay expenses and taxes necessary to operate the company during the time period for which the policies are in force. Premiums allow the company to generate a reasonable profit that reinforces future solvency and contributes to the company's growth. In the case of a reciprocal insurer, the premiums allow the company to offer insurance to new applicants without the need for additional capital contributions.

Premium Credits

A credit included in the premium computation that recognizes a reduction in hazard, which makes the account a better risk.

Premium-to-Surplus Ratio (P/S)

The ratio of net written premium to surplus. This ratio reflects a company's financial strength and future solvency. The ratio should not exceed 3:1.

Profit or Loss

Underwriting results are combined with investment income, expenses and taxes to calculate profit or loss. Actual profit results from underwriting profit plus investment income that exceeds losses, expenses, and taxes or from investment income that offsets the underwriting loss expenses and taxes. Actual loss results if the investment income does not offset the underwriting loss, expenses, and taxes. Actual losses must be offset by drawing on the company's surplus. Companies offering assessable policies can impose payments on their policyholders to amend the loss.

Punitive Damages

Also called "Exemplary Damages." Optionally covered by professional liability insurers. A few states require that punitive damages be covered. Other state laws prohibit insurance companies from covering punitive damages because such damages are intended to punish the defendant for willful, fraudulent, oppressive, malicious, or otherwise outrageous behavior that should not be covered by insurance.

Punitive damages (exemplary damages)

Punitive damages are separate and in excess of the compensatory damages awarded to a plaintiff in a legal suit that arises from the malicious or wanton misconduct of the defendant. Punitive damages are imposed to serve as a punishment for the defendant.

Rate Maturation

In the early period of coverage (typically the first four to seven years), claims-made insurance rates rise annually until they are considered "mature." Increasing the premium is necessary because the longer the physician is insured, the greater the potential for a claim. That is due to the delay between incidents occurring and patients filing claims from those past incidents.

Re-underwriting

The process by which the company reevaluates policyholders and, as necessary, imposes surcharges, deductibles, or non-renewal in cases where the policyholder's claims history or other experience presents a consistent pattern that creates an undue liability risk.

Reinsurance

An agreement between insurance companies under which one accepts all or part of the risk or loss of the other. Most primary companies insure only part of the risk on any given policy. The amount varies among carriers. The remainder of the policy limits is covered by reinsurance entities. The less primary risk that the company insures, the more premium it has to pay to the re insurer to cover the remaining policy limits. In general, smaller companies are able to cover only a relatively small proportion of the liability limit. This results in large premium payments to reinsures. Larger companies can cover a large proportion safely, thus reducing the payments they must cede to reinsures., which indirectly reduces the cost of insurance to their policyholders.

Reserves-to-Surplus Ratio (R/S)

A ratio that measures a company's financial ability to pay claims if reserves prove to be inadequate. Such payments must come from the insurer's surplus. This ratio should not exceed 4:1.

Retroactive (Prior Acts) Coverage

Under a claims-made policy, this coverage provides insurance for claims arising from incidents that occurred while a previous claims-made policy or policies were in effect, but that were not reported until that policy (or the last in a succession of policies) was terminated. With retroactive coverage, the new policy covers such claims. With such coverage, purchase of tail coverage from the previous carrier is not necessary. (See also )

Retrospective Rating

A formula of premium computation that reviews the previous loss experience and, after the policy year ends, adjusts the premium up or down based on the loss experience. Some plans provide a guaranteed maximum cost; some guarantee that the premium will not exceed the standard premiums otherwise applicable.

Risk Classifications

A classification based on the number and amount of losses that can be expected from a physician's specialty and procedures.

Risk Management

A systematic approach used to identify, evaluate, and reduce or eliminate the possibility of an unfavorable deviation from the expected outcome of medical treatment, and thus prevent the injury of patients due to negligence and the loss of financial assets resulting from such injury.

Standard Risk

A person who, by the company's underwriting standards, is eligible for insurance without restrictions or surcharges.

Stop Loss Insurance

Insurance offered to medical groups and hospitals that hold managed care contracts. This insurance covers the policyholder in case its patients suffer catastrophic medical conditions beyond the standard and customary.

Surplus

The amount by which a company's assets exceed its liabilities. A company's surplus allows it to take on risk and serves as a cushion in the event that the losses from that risk exceed the premiums intended to cover the risk. Stated another way, surplus can be used to make up for deficiencies in loss reserves that were set aside from earned premiums. Thus, surplus serves to provide strength and to maintain fiscal integrity in the face of adverse loss experience that was not actuarially anticipated.

Surplus Contributed and Surplus Earned

Surplus contributed is the amount of capital insured's must provide for a mutual company or reciprocal exchange during the early years of the company's operation. Surplus earned represents the earnings of the company after losses, expenses, and taxes. As the company stabilizes and grows in financial strength, earned surplus from profits is added to the contributed surplus, and the contributed surplus can be returned to the early policyholders.

Tail Coverage

This supplemental insurance covers incidents that occurred during the "active" period of a claims-made policy but are not brought as claims against an insured, nor reported to the insurer, by the time the claims-made policy has been terminated. Needed at various times including when leaving a claims-made carrier, upon the decision to change claims-made carriers, at the time of retirement, or due to death or total disability of the member. Tail coverage is purchased from an insured's previous claims-made carrier and is generally 125% to 250% of the prior year's premium.

Unallocated Loss Adjustment Expenses (ULAE)

Claims expenses of a general nature not directly attributable to specific claims. They include the salaries of claims personnel and the other costs of maintaining a claims department.

Underwriting Results

The profit or loss of the insurance company, computed by subtracting from earned premium those amounts paid out and reserved for losses and expenses. Any residual amount is called an underwriting profit. If those deductions exceed the earned premium this is called an underwriting loss. Underwriting results do not include investment income.

Unearned Premium

That portion of a premium that is paid in advance of a coverage period. Insured's usually pay a calendar quarter or more in advance of an actual coverage period; the advance payment is initially unearned and starts to become earned on the first day of the coverage period and incrementally thereafter during the ensuing coverage period.

Vicarious Liability

Liability for the acts of someone else.