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Professional Liability: A Prudent Business Plan

Malpractice claims can prove to be a financially risky proposition. Michael Kortbawi and Barry Greenberg compare the professional liability landscape in the US and the UAE. The necessity of obtaining Professional Liability Insurance (PL Coverage) is a component of any prudent professional’s business plan. This article compares and contrasts the PL coverage landscape in the United States, that being representative of a prominent international jurisdiction, with that existing in the GCC, and how this affects the business planning of professionals in the respective jurisdictions.

The necessity of obtaining Professional Liability Insurance (PL coverage) is a component of any prudent professional’s business plan. This article compares and contrasts the PL coverage landscape in the United States, that being representative of a prominent international jurisdiction, with that existing in the GCC, and how this affects the business planning of professionals in the respective jurisdictions.

Professional Liability coverage - often referred to as Errors and Omissions, or Malpractice coverage - is a form of third party liability coverage offered to individuals and business entities practicing in the various professions, including attorneys, doctors, and architects/engineers. PL coverage indemnifies against claims alleging a professional failed to properly advise, treat, diagnose, render, design, or otherwise act on behalf of the client, as a professional in that specific field would reasonably be expected to do.
United States
In the United States, any professional who is remotely abreast of developments in their field is acutely aware of the financial risk they are exposed to when faced with such a claim. Medical malpractice judgments in the U.S. often run in the millions, and even tens of millions of dollars. Occasionally, they reach mind numbing heights. Consider the case of Tiffany Applewhite, a 12 year old girl from New York City who went into shock after being administered a steroid shot to treat an eye condition. The ambulance that took her to a nearby hospital was delayed, allegedly, on the advice of NYC emergency medical technicians, who recommended that she await transport by an ambulance equipped with more advanced lifesaving devices. Tiffany sustained brain damage with paralysis; her guardian sued the health care practitioner who administered the steroid injection as well as New York City, and in 2014 obtained a jury verdict of over $170,000,000.00 (AED 625,000,000). While this amount may ultimately be reduced on appeal, cases such as this serve as a cautionary tale as to the professional risks involved and the necessity of carrying a PL policy.

U.S. Lawyers can face huge exposure as well for their malpractice. In 2010, a Mississippi jury awarded $103,000,000 (AED 380,000,000) against the large law firm Baker and McKenzie, who allegedly misrepresented its client in oil rig business transactions. While that case is an outlier, the median settlement/verdict in a legal malpractice case has been reported to be in the mid six figures and some plaintiff’s legal malpractice firms tout their multi-million dollar recoveries in these cases as marketing tools.

While not limited to professional malpractice cases, large jury awards result from the American legal system allowing a plaintiff to prove both negligence as well as damages by what is termed a “preponderance of the evidence”, a quantum of proof that demonstrates that the alleged negligence and damages is more likely than not to have occurred. This relatively low burden of proof is weighed by a jury, rather than a judge in most civil cases, increasing the chance of a “runaway verdict”, as a jury is more likely than a judge to find in favor of a sympathetic injured plaintiff, despite that the evidence may be lacking, and thereafter award substantial monetary damages. And while the appellate courts have discretion to reduce the amount of a jury verdict, they tend to defer to the juries’ determination, often leaving all but the most egregiously high verdicts intact.
The Result
PL insurers are understandably concerned by the risk of these massive trial verdicts, and often settle what might otherwise be viewed as questionable claims for substantial amounts. In fact, studies indicate that approximately 95% of all medical malpractice claims in the United States are settled prior to suit or before proceeding to trial. This is due to both the aforementioned risk of a windfall verdict, as well as the fact that the Plaintiff also bears the risk of no recovery if they proceed to trial and lose on the merits. Another factor that encourages settlements, and also drives premium rates, is that the PL policy provides for the carrier to not only indemnify its insured, but to defend as well. The legal defense costs alone can be prohibitive, even if the case is ultimately dismissed in favor of the defendant/insured.

Partially as a result of this, PL premiums in the US are quite high, and have reached crisis levels in parts of the country. A general surgeon in an urban area may pay $100,000 (AED 367,000) per year and an Obstetrician may pay over $200,000 (AED 735,000) per year for their PL coverage. These high costs in turn drive up the cost of professional services, as they have become a large portion of the professionals’ cost of doing business. Additionally, these costs are at least partially responsible for medical professionals abandoning their practices in some regions, as well as some practitioners refusal to treat high risk individuals and to otherwise over-treat patients, practices referred to as “defensive medicine”. While the true causes and full extent of the economic costs of professional liability exposure are difficult to calculate, they have long been a major political issue in the United States.
In the GCC: Reasonable Coverage
Contrast this with the PL landscape in the GCC countries, where both tort litigation and the concept of PL insurance have only recently been developing. For example, U.A.E. Federal Law 10 of 2008 (Medical Liability Law) was only recently enacted, allowing a person alleging medical malpractice reliance on a specific statute, rather than the more general Civil and Penal Code provisions.

Damage awards in the GCC are much lower than in the U.S., and the cases are heard very differently. Firstly, these cases are not tried by a jury. For example, in the U.A.E. and other GCC jurisdictions, in medical malpractice cases the existence of professional negligence is referred by the Judge to a Medical Committee of Experts who will determine whether any negligence occurred and if so, the percentage of disability sustained. The Judge will then calculate the actual medical expenses the injured person has sustained, which may include both future medical expenses and loss of earnings. There may also be an award for “moral damage” pursuant to U.A.E. Civil Code section 293, but the overall awards that are granted remain far below what would be likely if the same case arose in the U.S. In fact, an award of 5,000,000 AED (approximately $1,350,000) in a medical malpractice case is considered an extraordinary amount in the GCC. The result of this lesser exposure is lower premium rates.

The table below compares the costs of PL coverage as an illustration of the greater cost of coverage in the U.S. Based on these examples, the US General Practice MD will pay approximately twenty times as much as will the UAE GP MD, for each dollar of coverage provided. The US Obstetrician may pay over forty times as much as will the UAE Obstetrician. Given this cost disparity, the GCC medical professional will expend a far smaller percentage of its fixed costs on this coverage then will his U.S. counterpart. The cost per dollar/coverage disparity for attorneys and architects is far less dramatic, but what stands out is the amount of coverage the US professional will need to purchase; many such professional firms will carry an excess layer above their primary PL policy, thereby further increasing their fixed coverage expenses well beyond what a GCC professional would incur.


US Annual Premium/Cover Limits

UAE Annual Premium/Cover Limits

Physician - GP

$25,000 / $1,300,000

$367 / $367,250

Physician - Obstetrician

$200,000 / $1,300,000

$ 1,361 / $367,250

Architect – 2 person firm

$21,000 / $1,000,000

$2,178 / $367,250

Law Firm - midsized

$190,000 / $10,000,000

$21,783 / $5,000,000

There are other reasons for GCC professionals to obtain PL coverage beyond economic risk, including regulatory requirement. GCC nations, including the U.A.E. and K.S.A., may require medical professionals to provide proof of PL coverage before issuing a license to practice. Architects and engineers in the GCC may encounter commercial pressure, if not outright regulatory requirement, to obtain PL coverage before engaging locally. And it is worth noting that professionals employed by multinational entities covered by international policies may still need to obtain coverage issued by a carrier admitted in the GCC jurisdiction in which they engage.

Thus, in summary, while the GCC professional may not face nearly the same financial risk as their U.S. counterparts, obtaining sufficient PL coverage is a necessary part of its business plan. Given the relative cost of this coverage, it is also a far less onerous one.

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Published: January 2015
Publication: Premium
Title: Professional Liability: A prudent business plan
Practice: Insurance & Reinsurance
Authors: Michael Kortbawi, Barry Greenberg
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