Playing high-stakes poker: Do you fight—or settle—that malpractice lawsuit?

CASE Brachial plexus injury, then a summons

J.L., a 29-year-old primigravida, has gestational diabetes. When she goes into labor at term, she reports to the state-of-the-art hospital where you practice. Delivery is difficult and achieved using forceps. The infant weighs 9 lb 4 oz, and has obvious weakness in his right arm. A neurologist diagnoses Erb’s palsy, and the child undergoes brachial plexus exploration and repair of injured nerves.

Two years later, most arm function has returned. Soon thereafter, you receive a summons from the parents and their attorney demanding $3 million. Do you fight—or settle?

You could say there are two types of physicians: those who have been sued and those who will be.

This is an overstatement, of course, but not by much. In high-risk specialties such as obstetrics, most physicians will receive a summons at some point in their career. In fact, almost nine of every 10 ObGyns report that they have been sued at least once in their career, with an average of 2.6 claims each.^{Got malpractice distress? You can help yourself survive,” in the February 2008 issue of OBG Mangement, available at www.obgmanagment.comGiven how stressful litigation can be, there are a number of considerations that enter into the calculus of fight or settle. This article will focus on seven of those considerations (see the box above).}

How consent-to-settle clauses can protect you

For years, many carriers curried favor with physicians by barring settlement of a case unless the physician agreed to it. If the physician balked, the carrier was obligated to defend the case to the end.

This clause is still found in professional liability policies, but the number of carriers offering such flexibility has decreased considerably. Many carriers now base the decision to settle on both the merits of a case and the cost of defense. If the carrier determines that it would be much less expensive to settle a case for nuisance value than to defend it through trial, the carrier is within its rights to settle. Obviously, this posture has ramifications for the insured physician.

A consent-to-settle clause—or its omission—is usually established contractually at the beginning of coverage. If the ability to demand consent for settling is important to you, look closely for such language when you purchase or renew coverage. State law can also determine whether such a clause is included.

Beware of the hammer

In addition to a standard consent-to-settle provision, some carriers promote a “hammer clause,” by which an insurer’s liability is limited to a recommended settlement. Let’s say the carrier decides to settle a particular case for $100,000, the physician withholds consent, and a judgment of $300,000 is entered. The physician is individually liable for the “overage”—in this case, $200,000.

As if this were not complicated enough, there is also a modified hammer clause, which is a “kinder, gentler” approach. In this scenario, the physician is liable only for a percentage of any judgment above the recommended settlement. In the example just given, if the modified hammer provision were 50%, the carrier would pay its recommended settlement ($100,000) plus 50% of the overage—in this case, another $100,000, for a total of $200,000. The physician would be liable for the remaining $100,000.

Without a consent-to-settle clause, the physician is removed from decision-making. Further, a hammer clause or modified hammer clause should cause a physician to think long and hard before forgoing a recommended settlement.

When personal liability exceeds policy limits

Even if the carrier is bound, through its contract with you, to defend a case to the end, it will generally be limited to a maximum payout. Policy limits depend on the particular policy, with higher limits associated with higher premiums.

Carrying a very high limit can make you a more appealing target for a lawsuit, frivolous or otherwise. Many personal injury attorneys view medical malpractice as little more than a series of insurance transactions. If you have a high coverage limit, you will attract greater attention. This is of particular concern when there are multiple defendants and culpability varies significantly between the actors.