Need-to-know medical liability considerations when selling a practice

21 September 2010

Today more and more independent physician groups are considering whether selling their practice to a health system is in their best interests. Many factors go into a decision to sell the practice; this article focuses on an important matter that is sometimes overlooked, implications regarding the group’s professional liability insurance.

It is crucial to initiate discussion and investigate this area fully before a contract is signed. Though the Medical Society of Virginia Insurance Agency (MSVIA) staff are not attorneys and are unable to give legal advice, they welcome the opportunity to assist with questions concerning professional liability coverage or other insurance coverage.

The following are some points to consider regarding professional liability insurance when selling a practice:

First, seek a copy of the health system’s professional liability policy and review its coverage terms and conditions. The health system’s policy may or may not be comparable to your current policy. MSVIA is happy to do a comparison of the terms and conditions free of charge for its clients. In some circumstances, it is possible for the physician group to maintain its current professional liability policy (subject to approval of all parties).

Some questions to think about include:

• Is the policy with a company that is subject to the Guaranty Fund and subject to the Virginia Bureau of Insurance regulation?
• Will the health system’s policy cover each physician’s prior acts from the time they started in private practice? Is this coverage taken away elsewhere in the policy? In reviewing policies for clients, MSVIA has discovered that some health system policies maintain a doctor’s retroactive date, but then include a clause later in the policy stating that only actions “while employed by the hospital” are covered, thus negating the retroactive date.
• Do physicians each have their own separate limit of liability or are they covered generally under the health system’s limit of liability?

Second, review the Extended Reporting Period Coverage (“tail” coverage) provided under the health system policy. This is important in the event that any of the physicians in the group decide to go back into private practice in the future. Insurance companies will review their entire work and insurance history to make sure there were no lapses in coverage.

• Will the health system’s coverage provide a “tail” policy to any doctors who leave and/or retire? If so, what are the terms?
• Will physicians receive their own separate limit for the “tail” policy, or will coverage be included under the health system’s limit of liability? (If “tail” coverage is provide under a broad hospital limit, “tail” coverage could be lost should the corporation shut down in the future without purchasing a “tail” for all parties insured under it in the past.)
• What is an estimated cost for a “tail”? Who pays for it?
• If the health system’s professional liability policy provides retroactive coverage to include each physician’s prior private practice, will any “tail” provided by the health system continue with the same retroactive dates, or will coverage only apply to the time employed by the health system?

Last, investigate how the defense will be provided in a malpractice lawsuit. When a physician in private practice is involved in a claim, he or she is assigned a defense attorney by his or her professional liability company. This attorney is engaged by the insurance company to defend the physician’s best interests. When the doctor and the health system are insured together, it is important to understand what happens in the event of a claim.

• Who must give their consent to settle a claim – the physician or the health system or both? Can the health system insurance company decide to settle a case without the physician’s consent?
• What happens if physicians in another group specialty are also involved in the claim?
• Will a separate defense counsel be provided if both the physician and health system staff are named in a claim?
• If a settlement is made against the hospital and the physician, how is the liability for the settlement allocated? (This is important because the settlement amount allocated to the physician becomes part of his/her loss record and must be reported to future insurers.)

Other important considerations include determining how the coverage for ancillary employees like nurse practitioners or physician’s assistants will be addressed, noting the length of time before the contract is renegotiated and making certain vital professional liability policy terms and conditions remain unchanged.

In summary, physicians who are considering a sale of their private practice to a health system should not neglect to examine the issues surrounding professional liability insurance. For additional information and further discussion, please call the Medical Society of Virginia Insurance Agency at 877 | 226 - 9357.