Medical Malpractice Insurance:
How to Reduce Costs or Build Assets

If you’re like most physicians, chances are you’re outraged and scared about what is going on in the medical malpractice insurance market these days. Not only are premiums going through the roof but many physicians are being dropped by their malpractice carriers altogether.

But even with ever rising premiums, many physicians have upped their malpractice coverage from $1 million/3 million (which is standard) to $2/4 or 3/5 million because they’re afraid of losing their personal assets. What they don’t realize is that raising their coverage is exactly the wrong approach.

Read on to discover how you can save money on your malpractice insurance and reduce your risks of getting sued at the same time.

Lower Policy Limits

As you can read in my other article, “Prevent Lawsuits: Minimize Your Malpractice Insurance,” you will not only save money by lowering your malpractice coverage, you will actually discourage lawsuits.

In fact, most personal injury attorneys are NOT interested in taking a medical malpractice case when the physician has low limits on their medical malpractice coverage, or no insurance at all. This is especially true if the liability is tough to prove and the plaintiff has high medical bills. The cost of litigation and the risk of not getting paid in the case of high medical bills is simply too high. On the other hand, too much malpractice insurance will practically paint a bull’s eye on your back.

Of course lowering your malpractice insurance is not enough to protect you from losing your asset

Type of Insurance to Buy

You should seriously consider switching from Occurrence Coverage to Claims Made Coverage for your malpractice insurance. The reason: Claims Made premiums are far lower, especially for beginning doctors, while you still get a comparable level of coverage.

There are differences of course. Occurrence Coverage pays for any occurrence during its coverage time no matter when a claim might be filed. Claims Made Coverage only pays for claims made during the time you’re covered.

In order to ensure you’ll be covered for claims that are filed later, you’ll have to purchase additional “Tail Coverage.” Still, with malpractice insurance premiums being what they are today, a switch to a claims based insurance will likely save you enough money so that if you invest some of it you can easily purchase the “Tail Coverage” when you leave. And many companies will give you a free tail policy if you are with them long enough. So ask about this if you look for a new policy.

For more details you should consult The Doctor’s Wealth Preservation Guide and one of our knowledgeable advisors.

Captive Insurance Company (CIC)

Has your office seen its premiums rise even though it has a clear or relatively clean claims history? If so, you should consider forming a Captive Insurance Company (CIC) as an option for lowering your premium and building equity in a separate corporation.

In fact, this may be your only option if you should get dropped by your primary insurance and then get dropped by the secondary as well, unless you want to quit medicine altogether.

A CIC allows you to retain underwriting profits and investment gains, while through the selection criteria developed by the Captive’s own members, the CIC can “create its own market.” Since it does involve forming a group, expert advice is essential when you choose to go that route.

However, it is often worth it. Over a period of time, if CIC losses are controlled and fixed-cost expenses are well managed, a CIC member can reduce malpractice costs by a significant percentage.

In fact, what you used to pay out in non-recoverable insurance premiums can now build as asset value in your own account. It goes into that account as a tax deductible expense, and (if managed properly and not used for claims) come out taxed at the capital gains rate after it is no longer needed. There is virtually no other strategy that can do that.

Click to see a “numbers” example of how a CIC can save you money. You can also watch my informative video powerpoint presentation in CICs.

And then order The Doctor’s Wealth Preservation Guide to learn more about this unique strategy, or sign up for a free consultation to ask one of our advisors any questions you have.

LINK to Physician Example/Captive Insurance Example:

Captive Paid Net Account
Year Rollover Premium Inv. Income Claims Balance

1 $150,000 + $10,000 $0 $160,000
2 $160,000 $150,000 + $20,000 $35,000 $295,000
3 $295,000 $160,000 + $28,000 $50,000 $433,000
4 $433,000 $100,000 + $35,000 $68,000 $500,000
5 $500,000 $0 + $28,000 $197,000 $331,000
6 $331,000 $240,000 + $36,000 $150,000 $457,000
7 $457,000 $100,000 + $33,000 $165,000 $425,000
8 $425,000 $225,000 + $45,000 $0 $695,000
9 $695,000 $0 + $40,000 $125,000 $610,000
10 $610,000 $320,000 + $60,000 $160,000 $830,000

Totals $1,445,000 $335,000 $950,000
Reserves $250,000
Total incurred $1,200,000

Notes: If the Captive participation terminated after year 10, the $250,000 in reserves could be used to pay any outstanding claims, and the group could realize a $500,000-$600,000 surplus ($830,000 – ($250,000 + administrative expenses)).

Investment Earnings assumption is 7%.

Reserves = the amount of claims that will be paid after the 10th year.

Number of Traditional Annual Total Claims
Year Surgeons Premiums to Current Carrier Paid

1 5 $160,000 $55,000
2 5 $200,000 $108,000
3 5 $200,000 $137,000
4 5 $200,000 $0
5 5 $200,000 $240,000
6 5 $240,000 $360,000
7 5 $240,000 $0
8 5 $240,000 $38,000
9 5 $288,000 $139,000
10 5 $288,000 $123,000
Totals $2,016,000 $1,200,000

- Assumes 25% increase after year one; 20% after year five; 20% after year eight.
- Assumes 60% loss ratio.

The above two examples illustrate three glaring points:

1) The traditional fully insured carrier made significant money on this relatively average group (40% of the premium). Average meaning the number of claims and payout over the ten-year period.

2) If this group had joined a CIC as an equitable owner, the group would have had in excess of $500,000 in equity in the Captive after ten years. This realization should give all readers pause to consider whether a Captive is an option worth looking into.

3) Even if the Captive was a break-even Captive, the premium paid to the Captive was $571,000 less than paying the normal fully insured carrier like Medical Assurance, Medical Protective, ProAssurance, CNA, etc . . .