Malpractice Insurance:
There Might Be Less There Than You Think
by Martin G. Tracy, JD, ARM
President and CEO, Professional Risk Management Services, Inc.

I. Introduction

My employer, Professional Risk Management Services, Inc., has been the administrator of the American Psychiatric Association’s endorsed professional liability insurance program since 1986, and I have worked for PRMS since then. As a result, I know a lot of psychiatrists, I have seen a lot of malpractice cases against psychiatrists, and I have seen huge changes in the practice of psychiatry.

The purpose of this paper is to raise the practitioner’s awareness of some of the complex insurance coverage issues presented by the modern practice of psychiatry. I believe that the vignettes presented demonstrate that almost every psychiatrist is at some risk of "going bare" with respect to one or another aspect of medical practice, broadly defined. The lawyer who interacts with psychiatrists and psychiatric patients should be sensitive to the fact that not everything a psychiatrist does is covered by a malpractice or professional liability insurance policy.

Psychiatrists today practice in joint ventures, independent physician associations, physician hospital organizations, LLCs, LLPs. They accept salaried appointments as staff physicians, and they sign contracts with police departments, nursing homes, school districts, and Fortune 500 corporations.

They specialize in ways that were never even considered 10 years ago: geriatric psychopharmacology, addictionology, adolescent eating disorders, and dissociative identity disorder. Some psychiatrists now perform acupuncture; others recommend that their patients ingest herbal compounds. Still others are stepping up to treat illnesses and conditions that would usually be considered outside the scope of psychiatry: diabetes, high blood pressure, and gastric ulcer.

What does all this mean to the lawyer representing psychiatrists in the defense of a malpractice case, or in structuring a group practice, or the plaintiff’s attorney seeking to recover damages from a psychiatrist?

It means that there may not be coverage for the claim you are handling; it may mean that the operations of the group practice might be substantially uninsured. It means that lawyers will have to become more familiar with the workings of D&O or managed care E&O insurance. It may mean that you will have to pursue the doctor personally, uncovering assets and asserting claims in bankruptcy court, to protect an injured patient’s interests.

What does this mean to an underwriter of psychiatric professional liability insurance? It means that psychiatrists may not have the coverage they think they have, with potentially catastrophic results for both the psychiatrist and the underwriter. It means that the carrier has to be vigilant in reviewing claims to determine whether the actions or omissions giving rise to the complaint comport with the representations the psychiatrist made in the application. It means that psychiatrists have to look carefully at the coverage they buy – policies differ substantially in elements other than the price of coverage.

It means that you may expect to see more declaratory judgment actions. You may end up representing or pursuing general liability carriers, directors’ and officers’ liability carriers, and managed care errors and omissions carriers in defending a psychiatrist, or in filing suit against psychiatrists.

In this paper, I will examine a few of the insurance coverage issues inherent in the modern practice of psychiatry. Please note that all vignettes in the following sections are entirely fictional. I believe, however, that they fairly represent several of the key issues facing many psychiatrists practicing today.

II. Coverage issues arising from "new-fangled" practice arrangements

Dr. A is the principal shareholder in a behavioral healthcare managed care organization (BHMCO) that has contracted with Large Employer, Inc. (LEI) to provide all necessary services for a fixed fee to LEI’s employees and their families. He and a team of his colleagues wrote the protocols guiding the practice. These protocols determine what kind of treating professional sees the patient first (a physician, a psychologist, a social worker, a nurse), how often the patient should be seen for follow-up; when a patient should be hospitalized; which hospitals will be used; how long a patient can be hospitalized; etc.

Dr. A also treats patients who come for care to the group practice. Finally, Dr. A continues to treat a few long-time patients outside the bounds of the LEI contract. These patients pay him directly, or he bills their insurance carriers.

You represent a patient who wants to sue "somebody." The patient had been treated by Dr. A for over ten years. Two years ago, the patient was hired by LEI and was covered under its medical plan. When he resumed psychiatric treatment a few months ago, he was first seen by an MSW employed by the BHMCO; the MSW referred him to a Ph.D. psychologist under contract to the BHMCO. He saw Dr. A only once after being referred by the Ph.D.; Dr. A refused to hospitalize him, but as the patient deteriorated, he was seen by Dr. B, another psychiatrist associated with BHMCO, because he was on call that weekend.

The thrust of the patient’s complaint is that he was discharged from the hospital too early by Dr. B and his condition deteriorated. He missed a lot of time from work, and he was fired. He was discharged from the hospital because the protocols used by the BHMCO directed that he should be. Dr. A has continued to treat him on an out-patient, direct pay basis subsequent to this episode.

If you sue Dr. B in his capacity as the patient’s psychiatrist, that suit will be covered by his professional liability policy. But you may also be suing Dr. A as the author of the protocols. That is probably not covered by his professional liability policy. If you sue Dr. A for failing to hospitalize at the first opportunity, that will be covered by his professional liability policy. When you learn that the Ph.D. is not properly licensed in the jurisdiction, you need to consider a negligence claim against the BHMCO. If the MSW testifies that he referred the patient to the psychologist, rather than a psychiatrist, because the MSW was never provided with a copy of the protocols, or if he was, he was never trained in their use, you may have another claim against the BHMCO. You need to ascertain what coverage BHMCO is carrying.

Situations such as this one become more common every day: loose "affiliations" between treaters and incorporated entities; individuals playing multiple roles in the treatment of patients and the management of the organization; physicians continuing to treat patients as they acquire, lose and reacquire coverage under different reimbursement protocols.

Traditionally, professional liability coverage is designed to provide protection for doctors involved in the direct treatment of patients. As physicians, including psychiatrists, become more intricately involved in the behind-the-scenes, business organization structures, and as patient care is increasingly provided by employed or contracted professionals, you need to look far and wide for coverage.

Even the most progressive liability insurance carrier is often behind the curve in developing insurance products which truly match the needs of the practitioner. Appropriate representation of your client, whatever role he or she may play in this scenario, requires that you think beyond malpractice coverage.

III. Coverage issues arising in the flight from managed care

There is a definite trend among psychiatrists to look for opportunities to practice outside the traditional provision of direct patient care. Tired of being second-guessed and filling out forms and waiting on hold to talk to reviewers, they are looking to forensic psychiatry and occupational/organizational psychiatry as refuges from managed care.

Please understand that both of these specialties are well respected. The concern, from an underwriter’s point of view, is that the "duties" inherent in these practices are different from the duties implicit in the provision of direct patient care.

We all know that the concept of "duty" is the foundation of American tort law; further, we know that a professional of any stripe is in peril when he or she loses track of what duties are owed to whom.

Dr. C has contracted with the Gotham City Police Department to perform "fitness for duty" examinations for all recruits for the GCPD police academy and for all police officers who wish to return to duty after being treated for substance abuse or other mental illness. Dr. C sees Officer Smith, a ten-year veteran, who has been on medical leave for six months after admitting to being an alcoholic and entering treatment. She examines Smith to determine whether his police powers can be safely restored, and she determines that Smith is ready to return. She writes a report detailing her findings to the GCPD chief; Smith gets his badge back. A few weeks later, Smith asks Dr. C whether he can speak to her about another matter. Smith makes an appointment and sees Dr. C in her office. He pays for the visit out of his own pocket. Smith explains to Dr. C that he has begun drinking again, and wants Smith to help him return to sobriety.

To whom does Dr. C owe a duty and what duty does she owe? The point here is that once a psychiatrist begins mixing direct patient care with other kinds of practice, she runs the risk of practicing at least in part without coverage. Many malpractice policies do not contemplate "occupational" practice. They are oriented towards providing coverage arising from direct patient care. When Dr. C examines Officer Smith, he is not a "patient"; he is the "subject" of an examination. Dr. C owes a duty to Gotham City's police chief. She is obligated to conduct the examination in conformity with the standard of care for such examinations, and to prepare a detailed report. There is no duty to maintain the confidences of the subject of an examination.

In the second instance, however, Smith is most likely a patient. If Dr. C has purchased a policy limited to the practice of occupational psychiatry, then she may not have coverage for the old-fashioned malpractice suit that will surely come if she reports Smith to the chief.

Claims not covered by malpractice insurance might also arise when a psychiatrist becomes a principal in a business (non-medical) venture. We hear about a psychiatrist who starts a medical billing software company; one who offers Medicare compliance training programs; another who barters his services for stock in a start-up company that has retained her to act as a "team-builder" for the staff and to work with management in resolving personal conflicts among the executives. Oftentimes, when something goes wrong in these ventures, psychiatrists look to their malpractice insurance policy for help. It becomes clear upon even the most cursory reading of the policy, however, that it was never intended to cover claims arising from business ventures, "educational malpractice," and "corporate boundary violations."

IV. Coverage for Administrative Actions

You receive a call from Dr. D, who is extremely angry. He received a certified letter from the state licensing board, notifying him that he has 30 days to provide a written response to a complaint filed against him by a former patient. The patient is accusing him of failing to treat her obsessive-compulsive disorder appropriately; specifically, he did not prescribe medication but instead relied on psychoanalysis and behavioral modification over a period of many months. The letter warns him that failure to reply by the deadline will result in immediate suspension of his license and a report to the National Practitioner Data Bank. It also reminds him of the penalties for practicing without a license. He had immediately called his liability carrier, but the carrier advised that since there was no demand for "damages," there is no "claim," and therefore no coverage under his policy. He was advised to find his own lawyer to represent him in this matter. He got your name from a colleague.

In many jurisdictions, the licensure board has become the court of first resort for aggrieved patients and their lawyers. In response to the organized medicine’s push for tort reform in the 1980’s and 1990’s, legislators often agreed to provide relief only if the doctors themselves became more aggressive in policing their own ranks. Accordingly, whereas disciplinary actions were rarely initiated and even more rarely resulted in penalties (and were almost always conducted in secret), now licensure authorities are more assertive in quickly suspending or limiting licenses, assisting patients in filing complaints, and reporting their findings to the public.

The plaintiffs’ bar has responded by "practicing" their cases in this tribunal. Counsel can assist the patient in filing a complaint without lining up experts or going through a long and costly discovery process. Procedural rules are often very informal. If the licensure board finds that the complaint has merit, counsel may be encouraged that there was malpractice involved, and a settlement may be achievable. Further, a finding adverse to the psychiatrist may be admissible in civil court. If, on the other hand, the complaint is found to be without merit, the plaintiff’s lawyer can advise the patient that further proceedings in civil court may be fruitless, saving considerable time and money. Even further, a ruling adverse to the complainant can spotlight the weaknesses in the case, making it easy for the complaining party and counsel to bolster the case if they elect to go to court.

In response to this trend, many carriers have rewritten their definition of a claim, and others will intervene in these matters under a reservation of rights. Still others have now added to their liability policies coverage for legal costs incurred in the handling of these administrative actions, usually in the amount of $5,000 to $50,000. These companies understand that they may significantly mitigate the expense and damages of a later civil case through early intervention at the administrative level. Older liability policies, however, almost never provide such coverage, and a carrier may be reluctant to offer a defense outside the terms of the policy for fear that it will set a financially ruinous precedent.

V. Cutting Edge Practice Issues

Dr. F recognizes that many people are unwilling to come for psychiatric treatment for fear of the stigma attached to it. He determines that for minimal cost, he can provide therapy via the internet and sets out to do so. He establishes a web site, advertises it widely through links on other mental health related sites, and operates a chat room each day from 7 PM to 10 PM. He invites those with questions about mental illness or those who believe they may need treatment to contact him. His materials state that anyone contacting him in this way is assured of anonymity. It works. Each evening, his chat room attracts a number of people who are looking for advice and counseling.

One chat room participant (known to Dr. F only as SoSad) asks, "If you often think about killing yourself, what should you do? I find myself thinking about this almost every day. I’m afraid I’m going to do it soon." Dr. F replies: "Almost everyone occasionally thinks about committing suicide, so I don’t think you should worry too much about this. If you find that these thoughts are becoming intrusive, or if you begin thinking about how you would actually end your life, you should contact a psychiatrist in your community; you can also check with your family doctor."

Several months later, Dr. F is sued by the parents of SoSad, who was in fact a 15 year-old girl in New York. They have filed suit in New York State Court. Almost immediately after chatting with Dr. F, SoSad ingested one hundred acetaminophen tablets and a pint of vodka; she died from liver failure the next day. Her parents knew she had spoken to Dr. F because she had printed out her exchange with him on her PC’s printer.

Dr. F is licensed to practice in the states of Georgia and Florida only. He submits the suit papers to his liability carrier; they disclaim coverage completely, stating that because he was practicing in a jurisdiction in which he was not licensed, he had voided his coverage.

Does he have coverage? No one knows. There is no question that some states would view Dr. F’s activity as the practice of psychiatry and prosecute him for the unlicensed practice of medicine. Others would not. Still others have not yet addressed the issue. It is clear that if he is found to be practicing in a jurisdiction where he is not licensed, he will not have coverage. Why?

Insurance companies base their rates on the risks of practice in specific states or counties. They routinely ask on the application for details about where a doctor practices and what procedures he routinely performs. They base their decisions to grant coverage, and how to price the coverage, on the answers to the questions. Carriers are entitled to honest answers to their questions, and insureds are obligated to advise their carriers when the nature or scope of their practices changes.

The key point here is that as doctors move to push the envelope on practice styles (900 numbers? therapy by e-mail? chat room group therapy?), they need to know that there are a number of licensure issues which are still unresolved.

VI. Conclusion

The purpose of the paper was to make lawyers aware of how the increasing complexity of modern psychiatric practice affects the insurance coverage which psychiatrists have, or think they have purchased.

As psychiatrists, along with other physicians, have moved to restructure traditional practices to take advantage of changes in business organization law and to fight for market share in a highly competitive market, they find themselves facing new liability issues created, or exacerbated, by the practice structures.

The increasing interest in practice free from managed care restraints also presents insurance coverage issues, as does the newly aggressive self-policing of the profession.

Finally, as psychiatrists move to take advantage of electronic technology to enhance the services they provide, and to expand the number of potential patients they can reach, they may be leaving their insurance coverage behind.