Defense costs in a medical malpractice lawsuit aren’t cheap: the cost of retaining a malpractice defense attorney averages around $275/hour. Medical malpractice insurance eases this financial burden by covering some or all of these defense costs, but how that coverage works depends on your policy type.
Malpractice insurance policies often have coverage limits of up to $1 million for a single claim or $3 million in aggregate claims over the course of a year. However, a policy with $1M/$3M limits can look very different depending on how your insurer handles defense costs.
Some insurers cover defense costs inside limits, while others cover defense costs outside limits. In this article, we'll break down what these policy terms mean, what they look like in practice, and what to keep in mind when shopping for an insurance policy.
The average medical malpractice lawsuit comes with a number of defense costs, including attorney fees, court fees, and witness fees. There are two ways that malpractice insurance providers pay for these defense costs: "inside limits" and "outside limits". Here's what these terms mean.
"Defense costs inside limits" means that your defense costs are paid from your policy's financial limits. The policy covers defense costs first before covering indemnity payments, such as a settlement or damages.
This is also sometimes called "defense within limits" or "eroding limits", because the defense costs erode the money available to pay for indemnity costs if necessary.
In your policy, this might be phrased as "defense costs included in the limit of liability" or "claim expenses are part of the limits".
"Defense costs outside limits" means that your insurer pays your defense costs in addition to your liability limit, typically up to an unlimited amount. For example, if you have $1 million in coverage, your insurer will cover defense costs in addition to that, leaving the entire $1 million for indemnity payments.
In your policy, this might be phrased as "supplementary payments for defense costs" or "claims expenses paid in addition to limits".
Here's what eroding limits look like in practice:
Say you have a $1M/$3M malpractice policy with defense inside the limits. During your case, you incur the following defense costs:
This brings your total defense costs to $165,000. Your policy covers $1 million for a single claim cost. After subtracting these defense costs, you'll have $835,000 remaining to cover settlement costs.
Consider the same medical malpractice case, but say you have an insurance policy that covers defense outside limits. In this case, your insurer will cover the $165,000 in defense costs separately from your settlement costs, so you'll have the full $1 million policy available for settlements.
Ultimately, it depends on what type of policy you have. If defense costs are covered inside limits, they'll likely erode your total liability coverage. If defense costs are covered outside limits, they usually won't erode your policy limit. Check your policy's exact wording and endorsements to see how your insurer handles defense costs.
If you're involved in a malpractice lawsuit, you could incur both indemnity and defense costs. Most malpractice policies cover both, but it's important to understand the difference.
Indemnity costs are financial losses incurred as part of a settlement or judgment.
These include:
Defense costs, or claim expenses, are expenses incurred through the process of fighting the lawsuit.
These include:
Many malpractice insurance policies have allocation clauses, which specify which costs an insurer will and won't cover in a complex liability case. Here are some instances where allocation clauses may kick in:
Insurers often include these allocation clauses to protect themselves financially if you're involved in a complex malpractice case. However, this can change the way your insurance provider covers defense costs.
While every policy is different, an allocation clause could mean that your insurer will only cover a portion of your defense costs. While this doesn't necessarily erode your policy limits, it does mean you could have to pay your attorney fees out-of-pocket.
In your medical malpractice policy, you may notice that defense costs are referred to as "supplementary payments". Here's what that means and how it affects your coverage.
Supplementary payments are any costs your insurance company pays outside of your policy's liability limits. If you have a "defense outside limits" policy, your insurer will pay defense costs as part of your supplementary payments, so they won't be applied to the policy limit.
Here are some types of supplementary payments insurers cover for malpractice cases:
Some insurers offer unlimited supplementary payments, while others place some restrictions on payouts. There are a few common structures for supplementary payments:
Check your policy's endorsements---they'll specify what's covered and what's not. Many policies have very detailed exclusions and sub-limits for supplementary payments.
Most general professional liability policies also have endorsements for supplementary payments. However, general liability policies work very differently from malpractice policies.
In a general liability policy, virtually all lawsuit-related costs fall under supplementary payments. However, malpractice policies are much more specific. Most malpractice policies require policyholders to use panel counsel, which means you must use a pre-approved legal team.
Most malpractice policies have a "duty to defend" clause, but some have a "duty to reimburse" instead. Here's the difference between the two.
Duty to defend means that the insurance company will choose a legal team for you and is in control of the defense. This is also sometimes known as "panel counsel".
With panel counsel, you'll get pre-vetted attorneys who specialize in malpractice cases. These legal teams often have agreements with insurance providers to provide affordable billing rates. If you have a "defense within limits" policy, this helps minimize erosion and leaves more money for indemnity expenses.
In this situation, the attorneys must work within insurer guidelines when handling the case. However, many policies have a consent to settle clause, which means your insurance company cannot settle the case without your express permission.
If you have a duty to defend policy, your insurer will pay for defense costs incurred upfront, so you won't be responsible for handling anything out-of-pocket.
Some malpractice policies have a "duty to reimburse" or "duty to indemnify" clause. This means that you will select and pay for your own legal team up front, and your insurance provider will reimburse you later.
In this situation, you'll have to find your own legal team, so you won't get the same level of guidance from your insurer. You'll also need to pay defense costs upfront, which can be a financial burden. However, if you already have a preferred lawyer, this clause will allow you to work with them.
Duty to reimburse clauses are less common than duty to defend clauses. Here's when you're most likely to see them:
These clauses will affect the way you and your legal team handle malpractice claims.
If you have a duty to defend clause, you won't have to worry about covering legal costs yourself, which can make malpractice claims less stressful. Your insurance company can also help you find qualified legal support and resolve claims faster.
With a duty to reimburse clause, you'll need to handle legal costs on your own. However, you'll get more control over your legal team, which can be helpful for complex cases.
Regardless of which type of policy you have, it's important to get in touch with your insurer as soon as a malpractice incident happens. Frequent, detailed communication can help you avoid confusion and out-of-pocket expenses later on.
Additionally, keep detailed records of all defense costs. Get itemized receipts from your legal team, and record all additional court fees, witness fees, and other charges.
Insurance providers divide claim expenses into two categories: ALAE and ULAE. Here's what these two categories mean and how it affects your coverage.
Let's break down these two key insurance terms:
How ALAE/ULAE Show Up in Malpractice Policies
Most insurance providers include ULAE expenses in policy premiums. However, a few providers require policyholders to reimburse them for ULAE expenses after a malpractice claim. Review your policy's endorsements to see how your insurer handles this.
Additionally, every insurer has its own definition of claim expenses. For example, many insurers would categorize investigation fees as ALAE, but others might lump it in with ULAE costs since it's handled in-house.
If your malpractice policy covers defense costs within limits, your legal fees will lower your total liability coverage. It's important to understand how this coverage works before committing to a new policy, so you can avoid unwanted surprises if a malpractice lawsuit comes up. Here's what to look for when evaluating new policies.
Here are some common phrases that could indicate that your malpractice policy covers defense within limits:
Information about defense cost coverage can show up in several different parts of your policy, including:
Malpractice insurance policies are long, detailed, and full of nuance. However, this means there might be red flags hidden in the language. Here are some red flags that could indicate a "defense within limits" policy that erodes your coverage.
Some insurance policies require you to pay some of your defense costs out of pocket before coverage kicks in, either through a self-insured retention clause or a deductible. Here's how these two structures affect your defense payments.
If your policy has a deductible, your insurer will still offer panel counsel in most cases. In this situation, your insurer will assign you a pre-approved legal team and cover your expenses upfront, and then you will reimburse them for the deductible amount after the trial.
Policies with a high deductible amount usually have lower monthly premiums. Deductible structures can vary significantly, so review your policy to see which expenses you'll be responsible for. Some deductibles only apply if the case results in a settlement or judgment. Others will apply to some or all defense costs, even if you ultimately win the case.
Self-insured retention, or SIR, requires policyholders to assume responsibility for a percentage of legal costs before insurance kicks in. If you have an SIR policy, you'll need to find and pay for your lawyer up front, and your insurance provider will reimburse you for their portion later.
However, many SIR policies cover defense costs outside limits after you pay the initial out-of-pocket costs for legal support. This means the policy does not erode and you'll get the full policy amount to cover indemnity costs.
Many healthcare providers have both specialized medical malpractice coverage and general liability insurance. General liability coverage protects against accidental injury or property damage lawsuits that aren't covered by malpractice insurance, such as slip-and-fall accidents.
Malpractice and general liability policies handle defense costs differently, so here's what to watch for.
In most cases, general liability policies handle defense costs outside limits. It's rare for these policies to cover defense costs inside limits and erode the policy value.
While some malpractice insurers cover defense outside limits, many have switched to covering defense inside limits, which erodes the policy value. This is because defense costs for malpractice cases can be extensive, and insurers want to reduce their financial risk levels.
Insurance coverage for high-risk medical specialties is more likely to have defense costs covered inside limits. Surplus insurance carriers are also more likely than admitted carriers to have policies with eroding limits.
If you have both general liability and malpractice coverage, it's easy to assume that both policies work the same way. However, these two types of insurance coverage actually work very differently. Always review both policies in full to avoid surprises when dealing with future claims.
Laws and regulations for malpractice insurance can vary significantly from state to state. Some states also have more competitive economic markets than others, which can affect premium costs and policy structures. Here's what to know about state-specific malpractice insurance and how it affects defense coverage.
State requirements can affect how your insurance policy is structured, which in turn affects defense coverage.
Every state Department of Insurance has its own requirements for insurance companies. Insurers that meet these requirements are called admitted carriers, and they receive support from the state government. Insurers that do not meet these requirements are called non-admitted carriers, and they're more likely to provide high-risk or more individualized, custom-made policies.
Rules for admitted and non-admitted carriers vary from state to state, especially in terms of premium limits, policy endorsements, and risk levels. Different states also have different filing requirements that affect policy structures.
Some states have passed restrictions or outright bans on "defense within limits" policies to protect consumers. These states include Nevada, Minnesota, Louisiana, New York, New Jersey, and New Mexico. However, some of these states have exceptions for non-admitted carriers or large policy sizes.
Insurance brokers can help you navigate the ins and outs of your state's insurance market. Here's what to ask them when comparing policies.
Medical malpractice insurance policies are available with both defense within limits and defense outside limits. Both options are common, and the exact policies offered to you will depend on your location, insurer, and risk level. Some insurance providers may even give you a choice between the two policy types.
Insurers are more likely to require defense within limits in the following scenarios:
Many insurers prefer to cover defense costs inside limits because it reduces their financial responsibility in the event of a claim. However, many healthcare providers don't like policies with eroding limits, as it has a significant impact on their total settlement coverage.
The exact defense costs for a medical malpractice claim vary significantly from case to case. However, there are specific factors that can drive defense costs up or push them down. Here's what to be aware of.
Here are some notable factors that can drive defense costs up:
According to the most recent data, the average medical malpractice case costs $27,000 to defend. Unfortunately, that clearly out of date figure is from 2012 and the cited study specifically notes the sheer lack of available data in the literature and its reliability.
Obviously, defense costs for medical malpractice cases can vary significantly. While the cost of a relatively simple, short malpractice case may approach the 2012 figure, more complex cases could easily run into the six-figure range.
A malpractice case that results in a nuclear verdict could cost significantly more.
It's important to understand how your defense costs are covered before committing to a policy. Here's what to ask your broker when evaluating your options.
Clarify whether defense costs are "inside limits" or "outside limits". Review the exact definitions of "claim expenses", "defense costs", "loss", and "damages" in the policy.
If defense costs are outside limits, ask if these supplementary payments are capped or sub-limited, or if there are any exceptions that could still erode your policy limits. For example, some policies don't cover appeals interest costs outside limits.
Check whether your policy has a "duty to defend" or "duty to reimburse" clause, and whether you'll be able to choose your own counsel or whether you'll be assigned a defense team. Additionally, ask if the insurer has any billing requirements and how they handle defense cost disputes.
If your policy has an SIR clause or a deductible, ask if defense costs count toward this initial out-of-pocket cost. Clarify whether you or the insurance company handles defense costs until the SIR is fulfilled, and when the insurer's duty to defend kicks in.
Many malpractice insurance policies have consent to settle and/or hammer clauses. These clauses clarify when your insurer can and cannot settle a case for you. Ask your broker when these clauses apply and how they affect your defense coverage. Additionally, check to see if there are any specific reporting requirements or time limits on these settlement clauses.
Ask your broker for a copy of any relevant policy sections or endorsements for your review. Then, request a one-page written summary of how your insurer handles defense costs. Keep this document on file for future claims.
In a professional liability policy, "defense costs outside limits" means that legal fees and court costs are covered on top of the policy's liability limits and they are typically unlimited. This means that in a professional liability case, the entire policy limits are available to cover settlement costs, and the insurer handles defense costs separately.
It depends on the type of malpractice insurance policy you have. If you have a "defense within limits" policy, then defense costs will erode your policy limits in a malpractice case. However, if you have a "defense outside limits" policy, the insurer will cover your defense costs separately and your policy won't erode.
Yes, expert witness fees are usually included in defense cost coverage for malpractice insurance policies.
Indemnity insurance coverage pays for damages and settlements in medical malpractice cases. Defense expense coverage includes attorney fees, court costs, expert witness fees, and other costs of handling a lawsuit.
ALAE stands for allocated loss adjustment expenses, and are the costs associated with processing a specific insurance claim. These include defense costs and settlement claims. ULAE stands for unallocated loss adjustment expenses and covers the insurer's general operating costs, such as paying adjuster salaries. ALAE counts as claim expenses, while ULAE is often built into premium rates. However, some policies require medical providers to reimburse insurers for ULAE when they file a claim.
If your malpractice policy has a self-insured retention (SIR) clause, you'll need to pay your own defense costs up to a certain limit, and then the insurer's defense obligation will kick in. This means you'll need to pay your lawyer out-of-pocket for the SIR amount, and then your insurer will cover the rest.
It depends on whether your insurance policy requires panel counsel or requires personal counsel. If your policy requires panel counsel, your provider will choose a pre-vetted attorney for you. If your policy allows personal counsel, you'll be able to choose your own attorney. However, some insurance companies make you pay defense costs out-of-pocket if you want to hire your own attorney.
Defense costs can significantly affect your insurance coverage if you're involved in a malpractice case. If your insurer covers defense outside limits, you'll have the full policy amount available for settlement coverage. But if your insurer handles defense costs within limits, these supplementary payments could eat into your coverage.
Find a medical malpractice policy that works for your practice with Indigo. Our AI-powered quoting process assesses thousands of data points, giving you pricing options that are tailored to your individual risk level. We also partner with trusted local attorneys to provide the best possible defense in the event of a claim.
Contact us today to get a quote or learn more about our coverage options.
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