Medical Groups: Are You Really Covered by Your E&O Policy?

By Mike W. Smith, CPA

Professional Liability is a broad term applied to the liability of professional service firms or individuals arising from the conduct of their business for either providing or failing to provide a professional service. Professional liability among other things may include liability for claims associated with:

  • Errors and Omissions
  • Malpractice
  • Directors and Officers
  • Employment Practices
  • Fiduciary and Crime

Most IPA management organizations are familiar with each of the above terms primarily because of the requirements imposed upon them by HMO’s, Employer Groups, Regulatory authorities, Directors, Officers and others. These terms are discussed at conferences, at board meetings and at payor negotiating meetings. Typically, IPAs are requested to provide evidence of E&O coverage in the amount of at least $1 million prior to entering into any contracts with Payor groups and others. Most IPAs maintain at least $1 million of E&O coverage and many maintain similar amounts of Directors and Officers (D&O) Liability insurance, however, most IPAs never review their polices and are not aware of what is actually covered and what is not covered under their existing policies; leaving them virtually unprotected in the event of an actual loss.

In the event of a loss, not only is the organization at risk for a potentially uncovered loss, thus jeopardizing the financial viability of the organization, the Directors and Officers can be held personally liable for mismanagement for failing to maintain proper insurance coverages. Potential plaintiffs could include members, other directors, shareholders, payers and even providers.

Future articles will focus on other forms of Professional Liability. This article will focus primarily on Errors and Omissions and key aspects to review in an IPA policy.

What is an Error or Omission?
Is it simply a mistake? Maybe, maybe not! It is an unintentional act that may cause another damages through either providing or failing to provide a professional service. An error or an omission may be either direct or indirect. An example of a direct error or omission would be related to the denial of an admission or a procedure based on a protocol that is in adequate, out of date or otherwise inappropriate. An indirect error or omission could be related to the vicarious (by association) liability associated with a network physician that is accused of Medical Malpractice. The error or omission in that instance for the IPA would be for allowing a physician to become part of an IPAs credentialed network that should not have been allowed in the IPA network. This may be in the form of inadequate credentialing procedures, Board and committee standards or collusion.

What’s Covered by an E&O policy
E&O policies are designed to cover sums, which an insured becomes legally obligated to pay as damages arising from a Negligent Act committed in the course of providing or failing to provide Professional Services. Well, that sounds simple enough, however, what is an insured, a Negligent Act or a Professional Service? It may be clear to you, however, the policy wording may specify otherwise. Without careful consideration of what is and what is not covered, an IPA can be simply left without coverage. I have taken the liberty of addressing a few items that most certainly should be addressed in an IPA E&O policy. Please take in mind that all companies are different other items may be more relevant to a specific organization.

Insured
The insured is the owner of the policy. They are the one with the ability to make changes in the policy, make claims, and pay premiums. The insured should be the one that is providing the Professional Service. For example, many IPAs are non-for-profit (in the legal sense, not necessarily in the financial sense, but that’s another article). They also may have a foundation, a for-profit management company or other related group. We have often found that only the main non-for-profit organization is listed as the insured on the policy. That could be particularly devastating if the ownership is slightly different and if there are slightly different Boards for related companies. Many policies will extend coverage to greater than 50% owned subsidiaries, however, most IPAs are not organized in a corporate/subsidiary relationship, rather a series of common ownership or similar companies operating in tandem. For example, a physician group may own the IPA and a group of investors may own the Management Company. These entities usually have combinations of for-profit and non-for profit entities. E&O policies do not automatically extend to these entities unless they are specifically named on the policy.

Many payors will require that they be named as an additional insured on the IPA policy. In three words —- Don’t Do it. If the Payor is named as an additional insured under the IPA E&O policy, they are now insured under the policy. As an insured, they cannot collect under the policy. Therefore, if the payor were to sue the IPA, that suit would not be covered under the policy.

Common mistakes relating to the identification of who is an insured:

  1. Not listing all the companies providing services
  2. Not securing separate coverage for the Medical Director, if they actually provide medical care.
  3. Naming your Clients as additional insureds on your policy
  4. Not listing employees, officers, directors and subcontractors as insureds
  5. Not filling out the application properly

Professional Services
On the Declarations page of the policy (Usually the first page that lists the limits of the policy, the premium and the insured), it usually states a description of Professional Services to which this policy will respond. Most people don’t realize that the application becomes an integral part of the policy and what is listed in the description of services on the application will serve as the basis for the description of services for the policy.

For example, If an Organization lists on the Professional Liability application that they are a physician group do not indicate that they perform utilization management, claims processing or credentialing services, their E&O policy will most likely exclude such services. Another common mistake is to omit on the application that these services, such as claims processing, UM, or other services covered by capitation or other contracts, are subcontracted to other companies. If it is not noted on the application and subcontractors are not listed as insureds covered under the IPA policy, it will most likely not respond to a subcontractor’s error. Even if the subcontractor may have an E&O insurance policy, the entity may still have to defend itself and pay an indemnity in the event of a judgment or settlement. Most policies specifically exclude subcontracted services unless endorsed to the policy or added as an insured under the policy.

Common Omissions from the Description of Professional Services:

  • Credentialing Services
  • Utilization Management Services
  • Claims Processing
  • Enrollment
  • Subcontracted Services
  • Committee Work
  • Non-For Profit Board Work

What is a Negligent Act?
Negligent Acts, either real or imposed, are those acts, which are alleged, could have been performed differently by a reasonable prudent person and therefore prevented an incident from occurring. Such negligence can be alleged for both providing and also for failing to provide a Professional Service. At the end of the day, an E&O policy should respond to those “negligent acts” for which the insured is legally obligated to pay. Is an IPA legally obligated to pay the defense and claims of an officer or employee that moonlights at a local hospital, if there is no mention of indemnification in the By-Laws of if there is no separate agreement? The answer is NO.

Common Examples of Negligence for an IPA may include:

  1. Improperly Credentially a Physician or failing to Recredential
  2. Failing to follow established Guidelines for participation
  3. Failing to discipline physicians upon the occurrence of non-quality behaviors

Miscellaneous Professional Liability Policies
Many insurance companies issue a Managed Care Organization (MCO) policy that addresses most managed care issues, however, most IPA E&O policies are written on a Miscellaneous Professional Liability (MPL) policy. This means that the IPA is being covered by a policy that may be used for real estate professionals, CPAs’, medical groups or any other organization that does not have a specific policy on file with that insurance company for IPAs. This policy must then be endorsed for coverages specific to the IPA. This includes adding back into the policy many coverage features not covered by or specifically excluded by a standard MPL policy.

Common exclusions to the MPL policy include any claim arising out of:

  1. Any direct medical services provided by an employee of the insured
  2. The administration of any ERISA plan.
  3. The intentional delay of claims payment
  4. Claims processing
  5. Subcontracted Services
  6. Vicarious Medical Malpractice
  7. Punitive Damages, fines and penalties
  8. Any illegal act
  9. Anti-Trust

In one example, the IPA was sued because its medical director provided services to a nearby hospital as part of his own practice, completely unrelated to the IPA or its members. The IPA was sued simply because he worked at the IPA part-time. The incident did not occur during any performance of his duties for the IPA. In this instance the IPA may be completely unprotected in their E&O policy because the claim was a medical malpractice claim, not an E&O claim and the policy specifically excluded the direct medical services of by employee. The solution to this problem could have been to have the Medical Director add the IPA as an additional insured on his own medical malpractice policy. You must note that when adding the IPA as an additional insured, it should be only for those claims for which the insured was responsible so as to not dilute the coverage of the physician. This IPA, even though in no way responsible for the incident may have to defend itself from this case. Almost any claim related to a patient of the IPA will eventually find its way back to the IPA regardless of who else has insurance and whether any thing else, even if the TPA is at fault.

Retro Active Date
Most IPA E&O policies are written on a claims-made basis. This means that the policy only covers claims that are reported during the policy year. Often times when companies change insurance carriers they fail to make sure that the new policy has the same retroactive date as the expiring policy and they have a gap in coverage. Most E&O policies will pick up the retroactive date consistent with the expiring policy. If for some reason, the new carrier will not pick up the prior exposure, the expiring policy will have an Extended Reporting Endorsement (ERE or Tail Coverage), which should be purchased. The ERE usually costs from 100% to 200% of the expiring premium and will usually cover claims reported for up to two years that occurred during the policy period.

Additional Insured
Many brokers and executives will require that subcontractors such as TPAs, UM companies and others add the IPA as an additional insured under the policy. Although, conceptually that sounds good, it really is a bad idea. One reason is that although as an additional insured under the policy, the IPA would be defended by the underlying company’s E&O policy, it puts the IPA at the liberty of the coverages and limits of the subcontractor. Additionally, and most importantly as an additional insured you are precluded from coverage in the event the IPA sues the subcontractor. It doesn’t’ prevent the IPA from suing the subcontractor, only collecting under their policy.

The IPA should, however, require its physicians to add the IPA as an additional insured in their individual malpractice policies. This can usually be done for free. The wording to the endorsement reads something like this:

“In consideration of the premium charged, it is hereby understood that the persons or entities below shall be named as additional “insureds” under this policy, but only as respects to their liability for your negligent acts or omissions.”

Name of Entity: ABC IPA, Inc.

It is further understood that this inclusion shall not serve to increase the limit of liability under this policy. All other provisions of this policy shall remain the same.

This type of endorsement will not reduce provide coverage for the IPA, unless it is brought into a suit as a result of the physician.

Punitive Damages
Punitive damages are those damages you read about in the newspaper. In most cases the larger $10, $20, $200 million judgments are related to punitive damages. In many states, insurance companies are prohibited from paying punitive damages, however, many states do allow it. There are insurance policies that will pay for punitive damages and some that will allow for a change in venue to a more favorable state in order to provide the coverage.

Take the case against one TPA for failure to pay claims timely for a self-funded group. They were awarded by a jury approximately $6 million in damages. However, the actual damages were only $30,000; the remaining balance above the actual damages was assessed in punitive damages as punishment and a deterrent to others, which are excluded by most policies. Further, since the case was related to the administration of an ERISA benefit plan, it is possible that the entire claim could be excluded from their E&O policy. Most IPAs tend to believe that this type of claim may not happen to their organization, because they do not process claims, however, take in mind that most IPAs utilize separate TPAs to process their own claims. They have no idea what the day-to-day operations of the TPA are like and how they actually pay the claims. Even if the IPA performed a site visit, it really may not give an accurate picture of what goes on day to day. We have been involved in fraud cases where the TPA actually hired actors and rented computers and furniture in order to pass site visit inspection. If the TPA is sued, rest assured that so will the IPA.

This article is too short to address all the issues that should be addressed in an Errors and Omissions policy, however, I hope the items addressed provided some insight into some of the more important issues. Listed below are some additional issues that should be addressed.

  1. Defining the use of the Company’s Website
  2. Providing a full description of all Related Entities that should be covered under the policy
  3. Describing specifically what the company does relating to credentialing and utilization management
  4. Describing Specifically the use of all Subcontractors
  5. Properly addressing the use of hold harmless agreements and indemnifications
  6. Providing a full description of the claims handling and utilization management services provided by or subcontracted by the IPA
  7. Describing the Fiduciary responsibilities of the IPA.
  8. Assuring segregation of a party guilty of an intentional act from the coverage for the entity
  9. Anti-Trust issues relating to the Network
  10. Fiduciary Coverages (Not part of the E&O policy)
  11. Extended Reporting Endorsements

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