Physician Malpractice Consent to Settle

Buyer Beware: Physician Consent to Settle Malpractice Cases May Not Be Required

By: Michelle D. Bayer, Esq.
Featured in the Michigan Medical Law Report, 7 M.L.R. 49 (Winter 2012).

Malpractice and liability insurance is considered essential for any physician practice. Yet, some physicians may not carefully vet insurance providers, or read and fully understand the fine print of their policies.

What these physicians may not realize is that under some insurance policies, an insurer can unilaterally make the decision to settle a malpractice case without the physician’s consent – or even against the physician’s express wishes. Accordingly, physicians should carefully review their liability insurance policies to make sure that they understand the settlement requirements. Otherwise, practitioners may end up in the unfortunate position where they need coverage, only to discover that they do not have the options they desire.

Overview of Liability Policies

An insurance policy is a contract and is interpreted the same way as any other contract. Thus, unless the language is ambiguous, the contract will be construed according to the plain and ordinary meaning of its terms and the party signing the policy will be deemed to be bound by its requirements.

Some insurance policies contain “deem expedient” provisions that allow the insurer complete discretion to settle a liability claim. “Consent to settle” provisions are certainly preferred; however, even some “consent to settle” provisions do not give the physician complete control over the settlement of liability claims. For example, some “consent to settle” provisions allow the insurer to consult with a panel of its choosing if the insurer disagrees with the physician’s settlement decision. Furthermore, other “consent to settle” policies include provisions known as a “hammer clause” under which if the insured refuses to settle after settlement is recommended by the insurance company, the insured will be liable for any judgment in excess of the recommended settlement amount.

Settlement Consent Limitation Provisions are Upheld by Courts

A recent decision by the Supreme Court of Rhode Island, Papudesu v. Medical Malpractice Joint Underwriting Association of Rhode Island, et al., highlights the pitfalls of these settlement consent limitation provisions. In Papudesu, the Rhode Island Supreme Court affirmed the decision by an insurer to settle a malpractice case over the objection of one of the named defendants, Dr. Papudesu. Dr. Papudesu and several others were sued in a wrongful death action after a woman in her eighth month of pregnancy delivered a stillborn baby.

During the ensuing jury trial, the insurer decided to settle the case as to all the defendants for $500,000. However, Dr. Papudesu strenuously denied any wrongdoing in the case, claiming that he was not on call during the time leading to the delivery; he had not received a call from the answering service about the patient; and he would prevail on the merits at trial. The case settled despite Dr. Papudesu’s objections, and he filed suit against the insurer for (1) breach of contract; (2) negligence; (3) bad faith; (4) breach of fiduciary obligation; (5) civil conspiracy; (6) tortuous interference; and (7) malicious falsehood and commercial libel. However, the trial court dismissed his complaint. On appeal to the Rhode Island Supreme Court, the Supreme Court affirmed the trial court’s ruling.

Notably, the insurance policy at issue in Papudesu contained a provision stating: “the [insurance] company may make such investigation and settlement of any claim or suit as it deems expedient.” The Rhode Island Supreme Court examined the “deems expedient” language of the policy and ruled it to be “straightforward and readily understandable.” The Court acknowledged that while the language gave the insurer a great deal of discretion, that was “precisely what the insurance contract provided for.” The Court also ruled that the inclusion of this provision and the insurers’ conduct in settling the case was not “bad faith.” Specifically, the Court held that the insurer performed in accordance with the policy’s terms, and there was no duty by the insurer to conduct a more thorough investigation into the possible harm that the settlement would cause to the physician.

This decision in Papudesu is consistent with Michigan case law. In 1989, in Jayakar v. North Detroit General Hospital, the Michigan Court of Appeals affirmed an insurance policy with a similar “deems expedient” provision. In Jayakar, the named insured was the defendant hospital, not the individual physician, and the power to consent to a settlement rested only with the hospital as the named insured. Dr. Jayakar, the individual physician defendant, was particularly upset by the settlement as it was picked up by local media and he was not happy with how he was portrayed in the coverage.

Unfortunately for Dr. Jayakar, the Court held that the plain language of the insurance policy did not provide Dr. Jayakar with a contractual right to participate in settlement or require his consent to settle.

Conclusion

Settlement of a malpractice action can have a significant impact on a physician. Clearly, there is an emotional component when being forced to settle a case when the physician strongly believes he committed no wrongdoing. Further, as seen in Jayakar, a physician’s professional reputation may be harmed by a settlement. The settlement may also be reported to the National Practitioner Data Bank which is accessible by hospitals and third party payers. If a“hammer clause” exists there can be a steep financial consequence as well.

Accordingly, it is important for all physicians to:

  • Understand who is the “insured” for purposes of the insurance policy, the physician or the practice/hospital, or both; and
  • Review the language of policy to determine the scope of coverage and consent to settlement rights.

This article does not address sufficiency of coverage and other issues which should also be reviewed and understood by a physician when obtaining liability coverage. Further, this article provides only a summary of a single, yet important issue, and should not substitute for candid discussions with your insurance agent and legal counsel. It is recommended that all important agreements, including employment agreements, partnership agreements, property purchase agreements, liability insurance coverage, and the like, should be discussed with and reviewed by legal counsel.