Uncertainty surrounding the future of healthcare has led many physicians to consider merging with other practices or joining a healthcare system. While there may be significant benefits, these decisions should not be rushed, and require considerable due diligence. One of the most important issues for physicians in any transaction continues to be professional liability insurance.

A recent NJ Appellate decision sent physicians another reminder of this fact. In Webb v. Witt, a physician employed by Cooper Hospital was sued for negligence. The insurance policy that covered her had a provision known as a "consent to settle" clause, which prevents an insurance company from being able to settle a case without the insured's consent. However, the policy was written in the name of the hospital, and the physician was not specifically added as a "named insured."

In refusing to extend the consent to settle clause to the physician, the Court noted, "One course of action available to [the physician] - is to negotiate insurance policies in the future that provide a consent to settle clause. Then, upon being sued for malpractice, [physicians. . . ] may decline coverage under the Hospital's policy and proceed under their own policy."

The bankruptcy at St. Vincent's Hospital in New York revealed a more alarming issue when hospitals provide coverage for their employed-physicians. Though these physicians were promised that their medical malpractice claims would be covered, the trust that St. Vincent's set up to respond to these claims was "badly underfunded." Consequently, many physicians are now being forced to pay money into a fund to protect themselves, or "opt-out," leaving themselves personally and fully exposed to negligence suits.

Physicians can encounter similar problems when merging into larger groups that control the professional liability insurance. Some large groups have set up their own alternative risk models, such as a captive or some other form of shared risk or high deductible plan. These plans, akin to St. Vincent's trust, often require the groups themselves to maintain adequate capital to meet self-insurance requirements and ensure that all related agreements - such as reinsurance treaties - are renewed. Whenever solvency or even claims become a concern, these deals tend to quickly fall apart.

Other groups looking to save a few dollars may entertain another risky insurance solution: joining an untested risk retention group. Risk retention groups have mushroomed in popularity over the past decade, as insuring against medical negligence claims is now perceived to be a profitable venture. If history is any indication, many of the nearly 150 healthcare risk retention groups will fail.

There is a critical difference between the failure of an "admitted" insurance carrier, and a risk retention group. Admitted carriers are typically subject to state regulation and backed by guaranty funds set up in the various states that admit them. But many risk retention groups are not regulated and do not participate in these funds, so if they fail, members may find themselves without coverage. The fortunate ones may be able to replace coverage, albeit at a potentially exorbitant rate. Others may be personally liable for new or pending claims, and face the possibility of declaring personal bankruptcy.

Until recently, employed-physicians only needed to confirm that proper coverage would be provided during the term of their employment. Given all of the alternative risk transfer models that are "in vogue" though, much more due diligence is necessary.

Regardless of how good the terms of any deal may seem on the surface, physicians should always consult with specialists that understand all its associated intricacies. Securing appropriate professional liability insurance can be risky business, and the best way to protect oneself is by addressing it before it is purchased. Otherwise, a professional liability problem may well become a personal one.

Brian S. Kern, Esq. is a co-founder and principal with Argent Professional Insurance Agency, LLC. He can be reached at bsk@insuranceagent.com