Glossary of Basic Medical Malpractice Insurance Term

Accident-year basis—The annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Actuary—One who uses statistical analysis to compute insurance risks and premiums, and to develop financial forecasts. Such forecasts are based on claims experience, price, utilization trends, product competition and other societal and marketplace conditions that affect the company's financial condition.

Admitted carrier/company—An insurance company authorized to do business in a certain state. Just because a company is admitted in a state does not mean that it is allowed to write business in that state. In order to write business, the company must also file rates and have them approved by that state's Department of Insurance. Once a company has a license in a state, the license remains in effect as long as the company pays a fee every year to renew it. Synonym: licensed carrier/company.

Adverse selection—An applicant who is a greater-than-average risk; occurs when policy premium does not cover cost.

Application—A written statement by a prospective insured that provides information about the applicant to be used in determining insurability.

Arbitration—An alternative to a court trial for resolution of a dispute or claim between two or more parties. In arbitration, a case is heard and resolved by an arbitrator or a panel of arbitrators. Arbitration may be entered into by agreement or may be mandated by statute, and the decision may be binding or nonbinding. A binding decision cannot be retried in the courts.

Assessability —A characteristic of some insurance policies in which policyholders are obliged to pay money, in addition to premiums, if the insurer experiences losses.

Assets—All the property and financial resources owned by an insurance company. Nonadmitted assets are assets—such as real estate (other than home office), furniture and other equipment—that are not recognized for solvency purposes by state insurance laws or insurance department regulations.

Assumed premium —Consideration or payment an insurance company receives for providing reinsurance for another company.



Bodily injury—Defined in the SCPIE policy as "death, physical injury, sickness or disease sustained by a person."

Broker—A person or company that finds the best insurance deal for a client and then sells a policy to him or her, usually for a percentage of the premium. SCPIE deals with numerous brokers.

Bundling—The practice of grouping several individual procedures or services together for the purpose of paying for them as one package.

Capitation—A fixed periodic fee paid to a healthcare provider by a healthcare carrier for each covered member eligible to receive healthcare services under the terms of an HMO-type plan, regardless of how many times the member uses the service.

Captive insurance company—A wholly owned subsidiary of an association or group, organized for the purpose of insuring the risks of the association or group.

Carrier—A synonym for an insurance company.

Claim—A written or oral notice, demand, cross-claim or lawsuit (including an arbitration proceeding) received by the insured as a result of an occurrence (see definition). A claim is "reported" when an insured provides written notice of a claim to SCPIE.

Claim severity—Refers to the amount of financial liability resulting from settling a claim. A claim that is settled with no payment for damages is generally considered to have a "small" claim severity, while a claim in which SCPIE pays the full limits of a policy is a "large" severity claim. Trends in claims severity on a specialty-by-specialty basis are important factors in setting rates each year.

Claims-made coverage—The most common type of professional liability coverage available, it provides protection for claims that occur and are reported while the policy is in effect (coverage period). Within the conditions of a claims-made policy, a claim must be reported to the carrier in writing by the insured. SCPIE was one of the first companies to offer claims-made coverage, and continues to do so because premiums are generally less costly than with other coverage types. Tail coverage, or a Reporting Endorsement, provides coverage for claims that occur during the coverage period but are reported after the policy terminates.

Combined Ratio—The sum of the loss ratio and the expense ratio expressed as a percentage. Generally, a combined ratio below 100% indicates an underwriting profit, above 100% an underwriting loss.

Commercial carrier—A for-profit insurance company, also known as a traditional or traditional line company. It is regulated by state laws and must qualify financially to do business in a state.

Composite rate—A composite rate is a unique component of claims-made insurance coverage. Composite rates are used by actuaries to calculate premiums in specific cases in which the future claims risk has been significantly reduced or increased. One example of SCPIE's applying a composite rate is that of a doctor who changes his or her practice from full-time to part-time status. SCPIE offers a 50% discount on premiums for eligible part-time physicians. However, the full discount does not take effect immediately upon conducting reduced practice hours. Initially, the part-time discounted premium is a composite rate based on the likelihood of claims not yet reported, but that stems from both past and present risk exposures. This composite rate is based on both the length of time that the physician practiced full time and the length of time spent in part-time practice. In claims-made coverage, composite rating is necessary to ensure that sufficient premiums are reserved for the higher full-time (past) exposure as well as for the part-time exposure (current). The composite rate will continue for five years, with a gradually larger discount each year, until the full 50% part-time discount is reached. Composite rates are also applicable in cases of change of specialty and practice location.

Cost containment—Programs designed to help control healthcare costs by encouraging the use of the most cost-effective medical services and by discouraging unnecessary medical services.

Coverage exclusions—Each coverage in a policy has an exclusion section that describes the circumstances under which coverage of the physician, entity or other insured, will not be applicable. For example, all SCPIE policies contain coverage exclusions for criminal acts and fee disputes.

Credentialing—The granting of medical staff membership and specific privileges to a physician by a hospital governing body and medical staff.



Declarations insert—Also referred to as a "face sheet" or "dec page," this is a prominent part of the policy. The declarations insert is provided with a SCPIE policy as the top or cover page to the policy booklet. This "dec page" specifies the name or names of insured members, describes the covered activity or activities and lists the following:

   1. the policy number
   2. coverage limits
   3. policy period — dates when the policy becomes effective and when it terminates
   4. a retroactive date if coverage became effective prior to the current policy period
   5. the policyholder's premium paid or due
   6. any nonstandard coverages provided, such as excess personal liability or any special policy endorsements.

Deductible—The amount of the loss the insured is responsible to pay before benefits from the insurance company are payable.

Definitions section—A section in a SCPIE policy booklet defining specific words and phrases used in the policy. For example, in the SCPIE policy for individual physicians, the definitions section is the first section in the policy booklet.

Direct writer—An insurer that sells policies through salaried employees instead of through independent agents or brokers.

Discovery—Pretrial procedures to learn of evidence in the possession of, or known to, an opposing party or witnesses. Discovery is designed primarily to minimize the element of surprise at the time of trial.



Earned premium—The portion of a premium that has paid for (earned) coverage, as opposed to the portion of a premium that will pay for (unearned) coverage. A quarterly premium paid in January will have two months of earned premium on February 28, and one month of unearned premium still remaining.

Expense Ratio —Incurred expenses (e.g., policy acquisition costs and other underwriting expenses) divided by written premiums, expressed as a percentage.

Experience rating—Used by virtually all carriers, this is the practice of basing insurance premiums on the past loss history of individual insureds or entities.



Frequency of claims—Refers to the number of claims that are filed. Frequency and average severity of claims are the fundamental variables used in determining insurance premiums.

Fronting company—A company whose name is on the face of an insurance certificate. Different from the intermediary company that is actually writing the policy and taking on the risk.



Gatekeeper—The HMO's method of controlling patient referral(s). A patient must first see a primary care physician (PCP), who will then refer to a specialist if necessary. The term gatekeeper is considered derogatory by many.



Health maintenance organization (HMO)—A legal corporation that offers health insurance and medical care. HMOs require their subscriber members (patients), except in a medical emergency, to use the services of designated physicians, hospitals or other providers of medical care. HMOs typically use a capitation payment system that rewards providers for cost-effective management of patients.

Hold-harmless clause—A hold-harmless clause (also known as an indemnification clause) attempts to shift liability from one party to another (e.g., from an HMO to an employed physician). Courts may modify or refuse to uphold such agreements if they are deemed harmful to the public or the parties are perceived to have unequal bargaining power.



Incident—An incident is an event with the potential to result in a claim through injury or property damage, a worsening of an injury or condition and in the worst-case scenario, a patient death. The following are some of the most common types of incidents that can result in claims: departures from established medical procedure or policy, an event resulting in an injury to a patient, an unfavorable delay in treatment, a premature discharge of a hospital patient and a failure to give informed consent.

Informed consent—An agreement obtained voluntarily from a patient for the performance of specific medical, surgical or research procedures after the material risks and benefits of these procedures and their alternatives have been fully explained in nontechnical terms.

Injury—A legal term that consists of two types. The first, more obvious, definition refers to bodily or physical injury. The second is broader in nature and includes claims resulting from false arrest, detention, imprisonment, wrongful entry or eviction, malicious prosecution, libel, slander, a violation of an individual's right to privacy, assault or battery, and includes mental anguish, mental shock or hallucination.

Insurance gap—When a physician has professional liability insurance under a claims-made policy, once the coverage period has expired without renewal, claims that have not yet been made and reported to the carrier (insurance company) during the "active" policy period are not covered. In such cases, a physician is said to be "bare" (uninsured), unless he or she has purchased an extended reporting endorsement (tail coverage) from the former carrier, or has obtained "prior acts" (nose) coverage from a new carrier.

Insurance policy—The document that defines contractual responsibilities between a physician and an insurance company is an insurance policy. The purpose of an insurance policy is to provide for the transfer of risk of financial loss from the physician to the insurance company within the financial limits defined by the policy. This contractual transfer generally occurs when a physician provides payment (a premium) to the carrier in exchange for the carrier's promise to defend and/or pay covered claims against the insured.

Insured premises—As defined in the definitions section of the SCPIE policy (important to office premises liability coverage) for individual physicians and their solo medical corporations: "Insured Premises means the premises used by the named insured physician as a professional medical office at the address listed in item two (2) of the declarations insert and at any additional location named in an endorsement to this policy, and includes the ways immediately adjoining such premises on land." In other words, the primary place where the insured regularly sees patients and practices medicine.



Limits of coverage—The maximum professional liability amount that can be paid under the terms of a policy. Professional liability policies typically specify limits per claim and a cumulative limit for all claims incurred during the term of the contract, which in SCPIE's case is during the calendar year. The SCPIE policy provides per-claim and aggregate per-calendar-year limits of coverage options of $500,000/$1.5 million, $1 million/$3 million and $5 million/$5 million. With some carriers, defense costs are counted against the policy limit, whereas with SCPIE, defense costs do not offset limits—policy limits are entirely available for paying indemnity only.

Litigation—The process of resolving a dispute in a court of law to determine factual and legal issues, as well as the rights and duties between the parties to the controversy, and to award damages or other relief.

Not all claims received by SCPIE ever make it to the litigation stage, and only a small percentage of cases in litigation ever go to trial.

Locum tenens—A substitute physician who temporarily takes the place of a named insured policyholder or physician member of a medical group. Under the terms of the SCPIE policy, this coverage is contingent upon the SCPIE policyholder or member physician not practicing during the period in which the Locum Tenens coverage is in effect.

Loss ratio—SCPIE has two types of loss ratios: paid loss ratio and incurred loss ratio. A paid loss ratio is the amount of premium a policyholder has paid to SCPIE through the years versus the amount SCPIE has paid out on his or her behalf for defense and indemnity. For instance, a paid loss ratio of 50% means SCPIE has paid out 50% of what we've received in premium from a particular policyholder. A paid loss ratio of 100% means we've taken in the same amount as we've paid out—broken even. Anything more than 100% is not good—it means we're paying out more than we're taking in.

An incurred loss ratio is the amount we have paid out (defense and indemnity) plus the amount we expect to pay out (reserves) for a particular policyholder versus the amount of premium a policyholder has paid to SCPIE throughout the years. A policyholder who has never filed a claim has a 0% incurred loss ratio.



Mature premium—SCPIE uses a step rating system to set premiums for its claims-made policies. The mature premium is the fee a policyholder will pay during the sixth year of coverage.

The first level premium is substantially lower than a mature premium. It is designed for policyholders who are new to practice and therefore have no claims history. The mature-level rate reflects the fact that the majority of claims are filed within four to five years of an incident.

MICRA—Medical Injury Compensation Reform Act of 1975. Legislation passed by the California Legislature in an emergency session in response to a medical liability insurance crisis that resulted in proposed skyrocketing increases in physician medical liability insurance premiums of between 300% and 500%. MICRA places a $250,000 cap on noneconomic damages (pain and suffering), limits attorney contingency fees and allows periodic payments of future damages in excess of $50,000. MICRA created the Board of Medical Quality Assurance (now the Medical Board of California).



Nose coverage—Nose coverage covers claims first made against the physician after the effective date of coverage on the SCPIE policy. To be covered, such claims must arise out of the physician's acts or omissions prior to the SCPIE policy's effective date and after its retroactive date. (Both dates are shown on the declarations page of the policy.) A final note: Nose coverage is also known as retroactive coverage or prior acts coverage.



Occurrence—This term refers to an accident, or a single act or omission, which results in injury or property damage to any person or corporation. An occurrence may include any continuous or repeated exposures to conditions that result in injuries or property damage. Covered injuries are only those that are accidental, meaning unexpected and unintentional on the part of an insured. For the purpose of determining liability, SCPIE considers all injuries to a person that result from an act or omission, or a series or related acts or omissions, and all bodily injuries and property damage that arise from continuous or repeated exposure to substantially the same general conditions, as constituting a single occurrence.

Occurrence coverage—A policyholder is covered for any event that occurs during the term of the policy, regardless of when the claim arising from the event is reported. This coverage was formerly the most prevalent professional liability insurance, but today it is generally not available due to its higher cost.



Periodic payments—synonym: structured settlements. Damages paid over a period of time instead of in a lump sum. Periodic payments may be mandated when damages exceed a certain amount. Some periodic payment awards cease upon the death of the plaintiff.

Policy endorsement—Also called "riders," "policy changes" and "amendments," they alter basic policy provisions by adding, excluding or modifying coverages. As defined within the SCPIE policy (for individual physicians), "endorsement means a document that modifies the coverage or other provisions set forth in the policy. If the terms of any endorsement are inconsistent with the terms of this policy, the terms of the endorsement supersede the policy." SCPIE often uses endorsements to tailor a policy to individual practice situations.

Primary insurance—Insurance that covers an insured from the first dollar of loss, after any deductible or self-insured retention (as distinguished from umbrella or excess insurance).

Prior acts (nose) coverage—This is a supplement to a claims-made policy; it is purchased from the new carrier when a healthcare provider changes claims-made insurers. Prior acts coverage, also known as "nose" coverage, protects physicians from liability associated with incidents that occurred prior to the beginning of their new claims-made policy with a new insurance company, but that have not yet been brought as a claim against the physicians. Such coverage is an alternative to an "extended reporting endorsement," or tail coverage (discussed in its definition) that is purchased from the original carrier when a change in carriers is made.

Professional liability coverage—Liability coverage for professionals such as physicians for acts or omissions that cause injury during the performance of their professional duties. When an insured is liable for injury or damage due to professional negligence, a carrier pays the injured party on behalf of, and with the consent of, the insured.

Punitive damages—Also known as exemplary damages. Awarded to the plaintiff in cases of intentional tort or gross negligence to punish the defendant or act as a deterrent to others.



Reinsurance—A contractual arrangement in which one insurance company buys insurance from another company to transfer part of the risk that the first company has insured. The company transferring the risk exposures is called the primary insurer, and the company accepting the exposure is the reinsurer. The amount of risk transferred varies from one company to another. SCPIE uses reinsurance for spreading out its risk exposures and reducing the effects of large losses to ensure financial stability.

Reserves—Money set aside and invested by an insurance company to pay estimated future losses. A company's claims department typically specifies a reserve amount for every claim that is filed, which may be modified as the claim proceeds in the courts.

Retroactive date—The date on which a policy's coverage begins. The retroactive date may be the same as or earlier than a policy's effective date.

Reunderwriting—The process by which the company reevaluates policyholders and, as necessary, imposes surcharges, deductibles or nonrenewal in cases where the policyholder's claims history or other experience presents a consistent pattern that creates an undue liability risk.

Risk purchasing group (RPG)—A group of similarly situated persons or entities that are permitted under federal law to organize across state lines to buy insurance. The carrier that sells insurance to the group must be licensed in at least one state but need not be licensed in every state where a member of the group resides.

Risk retention group (RRG)—A group of similarly situated persons or entities that are permitted under federal law to organize across state lines for the purpose of pooling their liability risk and self-insuring. If the group is licensed in one state, it is permitted to solicit business and sell insurance nationwide without fulfilling each state's licensure requirements.



Standard of care—A term used in the legal definition of medical malpractice. A physician is required to adhere to the standards of practice of reasonably competent physicians, in the same or similar circumstances, with comparable training and experience.

Stop loss insurance—Insurance offered to medical groups and hospitals that hold managed care contracts. This insurance covers the policyholder in case its patients suffer catastrophic medical conditions beyond the standard and customary.

Surcharge—An extra charge applied to an account. At SCPIE, surcharges for individual physicians are determined by SCPIE's Physicians Underwriting Committee. Surcharges may be applied to policyholders with a high frequency of claims and/or settlements, or those whose claims receive negative medical expert review.

Surplus—The amount by which an insurer's assets exceed its liabilities.



Tail coverage—This supplemental insurance covers incidents that occurred during the "active" period of a claims-made policy but are not brought as claims against an insured, nor reported to the insurer, by the time the claims-made policy has been terminated. Generally needed at the time of retirement, upon the decision to change claims-made carriers, or due to death or total disability of the member, tail coverage is purchased from an insured's previous claims-made carrier.



Utilization review (UR)—Evaluation of the level, frequency and necessity of medical care. Helps ensure proper use of healthcare resources by providing for the regular review of such areas as admission of patients, length of stay, services performed and referrals.