Indiana Law Review


A Study of Medieal Malpraetiee Insiiraiiee:
Mamtaining Rates and Availaliility

I. Introduction

An ugly situation has arisen in the past two years which has
precipitated much ill feeling among the professions involved and
potentially could have a severe negative effect on the American
public—a crisis in the availability of medical malpractice insur-
ance. Although attorneys, insurers, and patients must cope with
recent changes in the insurance business, physicians are particu-

larly affected by increased premium rates for insurance to pro-
tect them from financial distress in the event of a malpractice
suit. The malpractice insurance rate problems have been the sub-
ject of numerous medical journal articles and editorials over the
last 20 years. ^ In the past, physicians were able to cope with
rising premium costs, often passing them on to their patients,""
and enough com.panies competed for the business to enable physi-

cians to obtain insurance at some price. Only recently has there
been serious concern about the continued availability, even at

exorbitant rates, of such insurance.^

Presently, both the number of medical malpractice claims
and the amounts of settlements and judgments on these claims'^
are on the increase; and as the costs of malpractice suits have in-
creased, so have malpractice premium rates.^ In fact, some com-
panies no longer consider the risk insurable.^

^See, e.g., Tucker, New Answer to High Malpractice Rates, 35 Med. Eccn.
71 (1958) ; Malpractice Insurance Rates, 86 Calif. Med. 127 (1957) ; Problem
Clinic: Malpractice Insuraiice, 36 Med. Econ. 161 (1959).

^''[H]e cannot absorb such mounting costs without some form of re-
imbursement." Malpractice Insurance Rates, 86 Calif. Med. 127 (1957).
Often, however, those costs are "passed on to patients, their health care in-
surance companies, and federal programs." Ribicoff, Medical Malpractice:
the patient vs. the physician, 6 Trial, Feb.-Mar. 1970, at 10.

'See, e.g., Parade, Feb. 16, 1975, at 8; American Medical News, Jan. 6,
1975, at 9, col. 1; N.Y. Times, Jan. 12, 1975, §5, at 6, col. 2; Wall Street
Journal, Dec. 12, 1974, at 10, col. 4.

^Bergen, *. . . not a medical problem,' 6 Trial, Feb.-Mar. 1970, at 24.

^Ribicoff, supra note 2, at 13.
^Asserting that doctors have become "virtually uninsurable," St. Paul

Fire & Marine Insurance Company decided to cease offering traditional
insurance coverage. N.Y. Times, Jan. 24, 1975, at 35, col. 1. An insurance

594



1976] MEDICAL MALPRACTICE INSURANCE 595

A myriad of medical, legal, social, and economic factors have
combined to create this problem. The contribution of each factor
to the decline in available and reasonably priced insurance in,

however, difficult to ascertain because theories and statistics vary
according to their sources. Some studies attribute the increases
in malpractice claims and av^ards to a rise in the demand for
medical services disproportionate to the number of practicing
physicians. Thus, the probabilities of a malpractice claim are in-

creased.^ Others consider the sophistication of modern medical
practice a cause. As therapeutic developments "offer both greater
potential benefit and significantly more risk than heretofore,'"
there is an increased likelihood of medically induced complications

in no way related to malpractice. Even the media is criticized
for fueling patients' expectations that modern medicine can effect

cures for almost any ailment' and for triggering litigation through

extensive coverage of high malpractice judgments,
^°

In a vicious circle, phj^sicians, attorneys, and insurance com-
panies blame one another for creating and aggravating the prob-
lem. Physicians criticize attorneys for abusing the contingent fee

system;'' both groups berate insurers for having impersonal busi-

ness philosophies.'^ The medical profession itself is attacked by
attorneys, insurers, and patients for its diminishing ph7/sician-
patient rapport and for permitting malpractice misadventures.'^

Whatever the im^petus, the expensive cycle continues, as higher
judgments and settlements result in increased costs for insurance

coverage. These costs are passed on to patients, who are now in-
clined to sue when dissatisfied with treatment and faced with high
bills for medical care.'"" As one attorney explains:

industry source is quoted as saying: '^Unless there are drastic changes, the
industry feels that malpractice is an uninsurable risk." Moves Afoot To Shore
Up Sagging Malpractice Coverage, 10 HOSP. Prac. 24, 25 (1975).

^Bergen, supra note 4, at 24. "Insurance companies report that in grow-
ing suburban areas, malpractice suits tend to rise in some direct proportion
to the population growth." Ribicoff, supra note 2, at 10.

^Dornette, Medical Injury Insurance—A Possible Remedy for the Mal-
practice Problem, 1 J. Legal Med, 28 (1973). See also Smith, The Malprac-
tice and the Insurance Carrier, 64 J. Med. Ass'n Ga. 10 (1975).

'Pohlman, Testimony on Malpractice Insurance, 70 Ohio Med. J. 656
(1974).

'^Ribicoff, supra note 2, at 10.
^

' Pohlman, supra note 9.

'^Gibbs, Insurance Crisis: Availability to Physicians in Jeopardy, 3 J.
Legal Med. 29 (1975).

'Ud.

^"^Ribicoff, supra note 2, at 11. "Studies of insurance companies and
medical societies show that a large percentage of malpractice suits are filed
in reaction to high bills and bill collection agency tactics." Id.



596 INDIANA LAW REVIEW [Vol. 9:594

There's been a mixed reaction to that $4,000,000 award

—

a grudging admiration for the brilliance of the attorney

who won it, but a lot of shaking of heads to the effect
that this is getting awfully close to killing the goose that

lays the golden eggsJ
^

The subject of medical malpractice extends too far to allow
a comprehensive study of its causes, frequency of occurrence, abil-

ity to be controlled, and overall effect within the limited space of

one Note. Therefore, this Note will focus on the problem of main-

taining the availability of medical malpractice insurance at reason-

able cost. To present some background in the area before offering
any solutions, this Note will examine the role of the insurance

company: the need for professional liability insurance,'* the fac-

tors that have caused companies to retreat from the business, the

effect of substantial increases in the number of claims and the
amounts of judgments and settlement on premium rate-setting,
and the manner and means of state regulation of insurance. Within
that scope, the Note will examine proposed and enacted legisla-

tion dealing with malpractice insurance and analyze possible means

by which states can maintain insurance availability and supervise

rates through control of an insurer's activities. Finally, the Note

will suggest a workable solution, composed of elements from re-
cently enacted legislation, proposed bills, and existing statutory

powers.

'i

II. The Malpractice Insurance System

A. The Need for Insurance

Malpractice insurance plays a vital role in a legal system in

which fault is the basis of liability. Much has been written about
the viability of systems of compensation for medical injury which

would not require any determination of fault. The discussion has
centered on suggestions of strict liability in the form of no-fault

medical insurance funds, '^ patients' self-insurance against surgical

'^21 Cong. Rec. S305 (daily ed. Jan. 16, 1975) (remarks of Senator

Nelson).

^'The terms "malpractice insurance" and "professional liability insur-

ance" will be used interchangeably in this Note.

^^See, e.g., S. 215, 94th Cong., 1st Sess. (1975), which would establish a
medical injury compensation fund supported by premiums charged to par-
ticipating health care providers. Strict liability for medical maloccurrences

would be optional under the plan, which also would provide federal malprac-

tice insurance for traditional tort law suits, if patients choose not to bring

claims in the federal no-fault system.



1976] MEDICAL MALPRACTICE INSURANCE 597

risks, similar to "trip insurance/"® and some form of social in-

surance." Although no state has legislatively authorized a com-

plete departure from the traditional tort system, debate continues

as to the advantages and disadvantages of instituting such plans.
^''

Under a tort theory, a physician must have negligently caused an

injury in order to be held liable for money damages to the injured

party. On the other hand, a purely compensatory system would

'^U.S. Dep't of Health, Education & Welfare, Report of the Secre-
tary's Commission on Medical Malpractice 128 (1973) (Hoffman, Dis-
senting Statement) [hereinafter cited as HEW Report]. The dissenting
statement describes patients' self-insurance as similar in theory to health,

disability, accident, and life insurance. Limited to surgical patients, insur-
ance could be purchased by an individual to cover any unanticipated adverse
consequences upon entering the hospital. Insurance benefits received under
the plan would be offset against damage awards. In a variation of that idea,
a physician could surcharge patients for surgical events and pay the sur-
charge to his insurer prior to performing the operation. In the event of
medically induced injury to the patient or a worsened condition, and in place
of damages, the insurer would compensate the patient for medical expenses
and loss of income, and make some adjustment for pain and suffering as
well as future detriment. See Brophy, Why is Coverage for Errors and
Omissions Evaporating? What Can be Done About It?, A.B.A. Sect. Ins.,
Neglig., & CoMP. L, Proceedings 354 (1970).

^'Social insurance is explained as a government-financed disability sys-
tem concerned only with the fact that a disability arose in connection with
medical treatment, whether or not it was an expected or even beneficial re-
sult of treatment. Rubsamen, No-Fault Liability for Adverse Medical Re-
sults—Is it a Reasonable Alternative to the Present Tort System?, 117 Calif.
Med. 78, 91 (1972). A fallacy of the proposal is that compensation would
not be available for a patient whose condition remained unaltered by treat-
ment, though negligently so, while a patient whose disability resulted neces-
sarily from a life-saving operation would be covered. Id. A limited form of
social insurance would be similar to workmen's compensation, with strict re-

quirements as to compensable disabilities. The plan would necessitate a de-
termination of causation to ascertain whether a patient's physical condition

arose out of and in the course of treatment or was pre-existing. "[B]enefits
would be scheduled by legislative enactment depending on the type and extent

of injury, without regard to negligence, and claims would be handled by state

officials or boards." 1 D. Louisell & H. Willla.ms, Medical Malpractice
§ 1.07, at 12 (1973).

^°See, e.g., Dornette, supra note 8, at 28. One medical-legal authority
offers the example of Massachusetts' no-fault automobile liability insurance

to show that the number of claims and average claim costs should decrease
substantially. Id. Another authority foresees a flood of administrative pro-

ceedings for establishing causation and determining compensable events, and

a continued need for analysis of medical facts to separate preventable from

truly unpreventable, recognized risks of treatment. Rubsamen, supra note 19,

at 83-84. Rubsamen also points out constitutional problems of equal protec-
tion in denying tort actions and jury trials for patients suing physicians and

hospitals, but not for tort actions against others in society, noting that no-

fault automobile statutes apply only to comparatively minor injuries, the

tort system covering the rest. Id.



598 INDIANA LAW REVIEW [Vol. 9:594

not require proof of malpractice for a patient to merit compensa-

tion for medical injuries. Since a physician assumes responsibility
under the tort system for medical injuries he causes, insurance

can help him bear financial liabilities he might incur. The risk of
a malpractice judgment shifts to the insurer in exchange for the
consideration of the premium price.

The hesitancy of states to abandon tort liability in the face
of the insurance crisis echoes the opinion of the Department of
Health, Education, and Welfare Commission on Medical Malprac-
tice regarding no-fault and other medical injury compensation

systems: ''The Commission . . . does not believe that we should
leap headlong from a system that works (with however many
faults) into an untested one that may cause even more severe
problems."^' Putting the merits of the various alternatives aside,

as long as the present system requires that physicians be held

responsible for medical injuries negligently induced by malprac-
tice,^^ professional liability insurance will be essential.'

23

B. The Nature of a Malpractice Insurance Contract

Whether for physicians, attorneys, architects, or engineers,

malpractice insurance is by definition specialized and limited in

coverage as compared to comprehensive insurance; nevertheless

malpractice policies are very similar to general liability insurance

policies.^^ In its most simplified terms, a liability insurance pol-

icy is defined as a contract whereby one party, the insurer, agrees
to assume loss or liability imposed by law on the other party, the
insured, in exchange for a specified consideration, a premium.^^

More particularly, professional liability insurance protects physi-
cians, attorneys, or other members of a profession from liabil-

^^HEW Report, swpra note 18, at 101.
^ ^"Medical malpractice" is defined as the failure of a physician or sur-

geon to exercise the required degree of care, skill, and diligence. The standard
is stated as follows:

A physician need only exercise the ordinary degree of skill, care, and
judgment exercised by members of his profession practicing in the
same or a similar locality in the light of the present state of medical
science.

1 R. Long, The Law of Liability Insurance § 12.01, at 12-2 (1975).
^^The Secretary's Commission found that continued availability of ade-

quate malpractice insurance was an "absolute necessity." HEW Report,
supra note 18, at 38.

2^1 Long, supra note 22, § 1.02, at 1-4. The insurable interest under a
liability insurance contract is the legal obligation of the insured to pay
damages for injury to another resulting from his carelessness. Id. § 1.05,
at 1-10.

25/d § 1.02, at 1-4.



1976] MEDICAL MALPRACTICE INSURANCE 599

ity arising from special risks inherent in the practice of their
profession.^*

Many conflicts similar to those arising from general liaVjility
policies appear in a professional liability insurance context. Since

insurance companies dictate and draft the terms of standard form

insurance policies,^^ these policies are recognized as classic exam-

ples of adhesion contracts.^^ The potential insured party, with
little or no bargaining power as to the terms of the contract, has

only a choice among standard insurance provisions. An opportu-
nity for oppression underlies such contracts, especially since the

insured, unlike some other consumers dealing with standardized

contracts, receives only the conditional promises of the policy as

his benefit in the bargain. Therefore, there exists a possibility

that the insurer may avoid its responsibilities.
From the liability insurer's point of view, however, the selec-

tion and limitation of the risks he assumes is vital in order to

meet the financial burdens of the business. Courts have recognized

this need and have held that insurance provisions limiting liability

do not violate public policy if the terms are unambiguous.^' **An

insurer may limit the risk it assumes and fix its premium accord-
ingly,"^° and if it is unwilling to cover certain risks, it may exempt
them from policy coverage.^' Beyond the wording of the policy,
insurance underwriters also attempt to control their risks by care-
fully selecting whom to insure.

To counterbalance the apparent control given to insurance
companies in liability insurance transactions, a number of court
decisions have favored the insured party. For example, profes-
sional liability policies are subject to the rule that courts will in-

terpret adhesion contracts in light of the insured's reasonable ex-

2*Grieb v. Citizens Gas Co., 33 Wis. 2d 552, 556-57, 148 N.W.2d 103,
106 (1967).

^^"Even the provisions prescribed or approved by legislative or admin-

istrative action ordinarily are in essence . . . adoptions ... of proposals made
by insurers' draftsmen." R. Keeton, Basic Text on Insurance Law 350
(1971). See also Kessler, Contracts of Adhesion—Some Thoughts About Free-
dom of Contract, 43 Colum. L. Rev. 629, 631 (1943).

2sZogg V. Penn Mut. Life Ins. Co., 276 F.2d 861 (2d Cir. 1960) ; Gray v.

Zurich Ins. Co., 65 Cal. 2d 263, 419 P.2d 168, 54 Cal. Rptr. 104 (1966); Re-

statement (Second) of Conflict of Laws § 332a (Tent. Draft No. 6, 1960)

;

Schultz, The Special Nature of the Insurance Contract: A Few Suggestions
for Further Study, 15 Law & Contemp. Prob. 376, 379 (1950).

^'Samuel N. Zarpas, Inc. v. Morrow, 215 F. Supp. 887 (D.N.J. 1963);

Sherwood v. Stein, 261 La. 358, 259 So. 2d 876 (1972); Lehr v. Professional

Underwriters, 296 Mich. 693, 296 N.W. 843 (1941).
3°1 Long, supra note 22, § 12.10, at 12-14.

''Id.



600 INDIANA LAW REVIEW [Vol. 9:594

pectations.^^ If doubt or ambiguity exists in a policy, the question
will be resolved against the insurance company." As a result, an
insured has some leverage in a dispute as to coverage under his
contract.

Several provisions found in professional liability insurance

contracts also operate to an insured party's advantage. Medical

malpractice policies offer cancellation provisions that allow the

physician to deliver the policy to the insurer w^ith notice of can-

cellation at any time. The company, however, must deliver notice
to the insured or his agent ten days in advance of the cancella-

tion date.^^

Another provision peculiar to medical malpractice insurance

policies,^^ the settlement clause, offers physicians considerable con-

trol. This clause gives a physician the right to determine whether

his insurance company should settle a particular claim or suit.^*
Hov/ever, if the physician refuses to settle and the insurance com-

pany loses the suit, the company's liability might be limited to

the settlement offer.^^ Conversely, the refusal of an insurer to

accept a reasonable settlement offer satisfactory to its insured

may establish the company's liability for the full judgment, even
if it exceeds policy coverage limits.^® One policy form provides

"Orion Ins. Co. v. Firemen's Ins. Co., 46 Cal. App. 3d 374, 120 Cal. Rptr.

222 (1975) ; Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 419 P.2d 168, 54 Cal.
Rptr. 104 (1966) ; Corgatelli v. Globe Life & Accident Ins. Co., 96 Idaho 616,
533 P.2d 737 (1975).

"Casey v. Transamerica Life Ins. & Annuity Co., 511 F.2d 577 (7th Cir.
1975) ; Leist v. Auto Owners Ins. Co., 311 N.E.2d 828 (Ind. Ct. App. 1974)

;

Town & Country Mut. Ins. Co. v. Owens, 143 Ind. App. 522, 241 N.E.2d 368
(1968); Safian v. Aetna Life Ins. Co., 260 App. Div. 765, 24 N.Y.S.2d 92
(1940).

^^U.S. Dep't of Health, Education & Welfare, Appendix to Report
OF THE Secretary's Commission on Medical Malpractice 508 (1973) [here-
inafter cited as HEW Appendix]. Realistically, physicians are not likely to
cancel policies with frequency, so the benefits of the provision are few.

^^Id. at 109. But cf. Bergen, supra note 4, at 25 (written consent is also
required for an attorney's malpractice settlement).

^'Note, however, that some companies have eliminated the provision, be-
lieving that the individual doctor is not in a position to judge negligence.
Other carriers have written provisions in group plans that either the indi-
vidual doctor or some sort of peer review committee must give consent in
order to settle a claim. HEW Appendix, supra note 34, at 508.

^''Hirsh, Insuring Against Medical Professional Ldability, 12 Vand. L.
Rev. 667, 679 (1959) ; McNeal, Patients, Litigation and Patience, 33 Ins.
Counsel J. 408, 410 (1966).

^^Traditionally, only if the insurer was guilty of bad faith in refusing
an offer of settlement would it be liable for the entire amount of a judgment
against its insured without regard to policy limits. See State Farm Mut. Auto.
Ins. Co. V. Skaggs, 251 F.2d 356 (10th Cir. 1957); Dairyland Ins. Co. v.

Hawkins, 292 F. Supp. 947 (S.D. Iowa 1968); Critz v. Farmers Ins. Group,



1976] MEDICAL MALPRACTICE INSURANCE fJOl

that if the insured physician refuses to settle, the matter can be
submitted to an advisory committee of the state medical society.
That committee's majority decision is made binding on the in-
surer and the insured.^'

Another policy provision extending advantages to the insured
party deals with coverage limitations. At present, many medical
malpractice and other professional liability policies are written

on a "claims-incurred" or an "occurrence" basis, as opposed to a

"claims-made" basis. The traditional "occurrence" policy insures
against liability arising from incidents occurring within the policy
dates, regardless of when claims are made.^° "Claims-made" poli-
cies, on the other hand, only insure against those claims brought

within the coverage dates of the policy.'^' Claims initiated after

expiration of the policy, although based on acts occurring within

policy dates, are excluded from coverage in claims-made policies.
The advantage of "occurrence" provisions is, therefore, that an
insured physician is protected for years after the possible com-

mission of a negligent act.

C Risk-Spreading Among Liability Insurance Companies
Before entering the malpractice or any liability insurance

market, companies must consider how they will bear the risks.
Within the insurance industry, companies spread the risks they
carry by means of reinsurance contracts with other insurance
companies. The need for reinsurance depends on the size of the
primary carrier. Large companies who carry a full line of insur-
ance find it less essential than smaller companies, who are more

230 Cal. App. 2d 788, 41 Cal. Rptr. 401 (1964) ; Note, Liability Insurance—

A

Move To Limit the Excess Judgment Damages Award, 42 Fordham L. Rev.
439, 440 (1973). In Crisci v. Security Ins. Co., 66 Cal. 2d 425, 426 P.2d 173,

58 Cal. Rptr. 13 (1967), the California Supreme Court altered the traditional
**bad faith" standard of dishonest or fraudulent dealings to include unreason-

ableness of behavior. In Crisci the insurance company's refusal of a settle-

ment agreeable to the insured constituted unreasonable behavior. The legal
presumption in Crisci is further defined in Garner v. American Mut. Liab.
Ins. Co., 31 Cal. App. 3d 843, 107 Cal. Rptr. 604 (1973). In that case, the

insurance company was held liable for a judgment greater than the policy
limits because it failed to accept a reasonable settlement offer. In Gruenberg

v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032, 108 Cal. Rptr. 480 (1973),
as in Crisci, the California Supreme Court recognized tort damages for emo-
tional distress suffered by an insured because the insurer did not settle the

claim in good faith.

^'l Long, supra note 22, § 12.08, at 12-11. See Garner v. American Mut.
Liab. Ins. Co., 31 Cal. App. 3d 843, 107 Cal. Rptr. 604 (1973).

"^^Comment, The ''Claims Made'* Dilemma in Professional Liability Insur-
ance, 22 U.C.L.A.L. Rev. 925 (1975).



602 INDIANA LAW REVIEW [Vol. 9:594

specialized and who utilize reinsurance in order to compete with
the larger companies/^ Relatively few insurance companies ac-
tively engage in reinsurance/^ although the availability of re-
insurance is of vital concern to issuers of malpractice policies.

Thus, although established liability insurers at present have few
difficulties in obtaining reinsurance, evidence indicates that for-

mation of new companies is limited by a "thin" malpractice re-
insurance market/^

Another way in which established liability insurance com-
panies spread risks is by writing umbrella policies which cover
liabilities expressly excluded from or not mentioned in basic poli-
cies; they also write excess insurance which covers liability for

damages exceeding those covered by other valid and collectible
insurance. The purchase of an umbrella or excess policy is predi-
cated on the existence of a primary malpractice policy with cer-

tain minimum limits."*^ If two companies are involved, one offer-
ing primary coverage and another selling other protection to the

same insured, the financial risks are divided between them. At
the same time, the physician is insured against the possibility that

losses within the coverage period will be greater than the liability

covered by the primary policy.
A third but less often utilized means of transferring risks

consists of offering a deductible clause in the policy. Companies
can afford to lower premium costs to insured parties and to pro-
vide insurance to high risk medical specialties if insurers know
they will not be liable for certain minimum claim losses or for
defense costs. To a degree, a deductible clause makes physicians
self-insurers on some expenses.

III. The Economics of Malpractice Insurance

A. Rate Setting and Investment of Income

The basic objective of an insurance company is to sell insur-
ance at a competitive and profitable rate. This rate is determined

by actuaries, who predict future losses and expenses that must be

^^HEW Report, supra note 18, at 39.
''^HEW Appendix, supra note 34, at 546 (while there are hundreds of

companies engaged in primary casualty insurance, there are only two dozen
companies in the United .States mainly engaged in reinsurance).

^'Id. at 523, 547.

"^'Malpractice policies are usually written with a given dollar limit per

occurrence and an aggregate limit on all occurrences per policy year. Id. at
505. A typical policy has limits of $100,000 per occurrence and $300,000 per
year. High-risk doctors may have difficulty obtaining umbrella coverage if
their primary insurance covers less than $200,000/$600,000. Malpractice In-
surance Outlook: Brightening, 48 Med. Econ. 103, 104 (1971).



1976] MEDICAL MALPRACTICE INSURANCE 603

paid from present premium income. Although the actuarial prin-
ciples are similar for all lines of liability insurance/* rate setting

in the malpractice area presents unique difficulties and demands
a high degree of expertise.

Early rate structures failed to take into account the extended

delay between an injury and the filing of a malpractice claim, and
actuaries failed to anticipate a substantial increase in the number
of malpractice suits.^^ Due to the nature of medical malpractice
litigation, insurance companies must set aside large reserves to
meet future claims,^® and when the amount is underestimated, com-
panies faced with excessive losses have been forced to withdraw
from the market.'^' Dramatic changes over the last 10 years in the
frequency and size of malpractice claims,^° as well as inflation,
have complicated the estimation. During an economic recession,
the value of insurance reserves declines, making malpractice lia-
bility insurance less attractive to insurers,^' who rely on reserves
for investment funds.

The malpractice insurance market is so small in proportion
to the entire liability insurance business that it is difficult to

formulate malpractice rate structures ;^^ therefore individual car-

riers have insufficient loss experience data to establish a valid

rating base.^^ Actuaries take into account a physician's specialty,

practice, geographical location, and the amount of requested cov-
erage when determining his premium rate. Physicians in the most
hazardous specialties pay much higher premiums than those in
the lowest rate category. As claims payments and legal defense
costs have risen, however, premium rates for all classes have in-

''^Insurers develop rates to produce sufficient premium volume to cover
losses and administrative expenses and to provide a margin for contingencies

and profit.
'^^HEW Appendix, supra note 34, at 511; Brant, Medical Malpractice In-

surance: The Disease and How To Cure It, 6 Valp. U.L. Rev. 152, 163 (1972).
"^^One company reported that malpractice insurance accounted for only

5% of its total premiums but for 10% of its reserves. Uhtoff, Handwriting
on the Wall, 70 N.Y.J. Med. 1673 (1970).

"•'Ribicoff, supra note 2, at 13; Sanders, Money Well Spent, 6 Trial,
Feb.-Mar. 1970, at 16.

^°Three times as many malpractice suits were filed in the greater-Detroit
circuit courts in 1974 as in 1970. N.Y. Times, Aug. 3, 1975, at 41, col. 5.

^'Wall Street Journal, Jan. 20, 1975, at 1, col. 6.

^^The premium volume for medical professional liability insurance does
not exceed 2.5% of the total property-liability insurance premium volume.
HEW Report, supra note 18, at 41. Cf. HEW Appendix, supra note 34, at
511 (1%). Other government statistics indicate that only 0.3% of the billions
of dollars garnered annually by fire and casualty underwriting represents
medical professional liability insurance. Gibbs, supra note 12, at 29.

"HEW Report, supra note 18, at 44; HEW Appendix, siipj^a note 34,
at 529.



604 INDIANA LAW REVIEW [Vol. 9:594

creased sharply/^ Malpractice policy protection contains higher

limits than in the past in order to protect adequately against rising

claim amounts/^ The higher limits alone, however, do not account
for rates increasing as much as 949% for surgeons and 541% for
other physicians in the 10 years from 1960 to 1970/^ Insurance
companies continue to insist that malpractice insurance is a poor
business proposition/^ One cogent argument supporting that con-
tention is that increasing defense costs and claim losses^® have di-

^'^In New York, while premiums increased 332%, insurers' losses increased
375%. Uhtoff, Medical Malpractice—The Insurance Scene, 43 St. John's L.
Rev. 578, 586 (1969).

"In 1950 policy protection rarely exceeded $100,000, while in 1972, 90
percent of practicing physicians had larger policies, the average protection
being $300,000. Brant, Medical Malpractice Insurance : The Disease and How
To Cure It, 6 Valp. U.L. Rev. 152, 158 (1972).

^'^'Between 1960 and 1970, premium rates rose 115% for dentists, 540.8%
for physicians and 949.2% for surgeons. HEW Report, supra note 18, at 13.
Other statistics add perspective to the HEW figures. For example, in New
York between 1950 and 1967, the size of the average malpractice premium
rose 170%, the consumer price index 36%, physicians' fees 81%, and hospital
costs 246%. Uhtoff, Medical Malpractice—The Insurance Scene, 43 St. John's
L. Rev. 578, 586 (1969). A more recent table shows the cost of a standard
malpractice policy in Ohio in 1969 and 1974, with increases ranging from $109
to $475 for class 1 physicians (no surgery) and from $1080 to $3217 for
class 5 physicians. Pohlman, supra note 9, at 656. Some specialists now pay
as much as $30,000 a year for liability protection. Newsweek, June 9, 1975,
at 60.

^^Smith, supra note 8, at 10. "Not one insurer has made money in writ-
ing medical insurance in recent years." Brant, supra note 55, at 6 (no au-

thority given). See Important Information on Professional Liability & De-
fense, 69 N.Y.J. Med. 2427, 2428 (1969) (Table: Malpractice Insurance

Losses in New York). See also Dornette, supra note 8, at 31 (table analyzing
distribution of malpractice insurance premiums indicates significant loss).

^^Although statistics on defense costs are relatively scarce compared with

the wealth of information on premium increases, it has been estimated that
of malpractice insurance costs, 30% represents the amount recovered by the
patient, while 15% goes to the patient's attorney, and 55% is consumed by
defense attorney fees and defense investigation. Ribicoff, supra note 2, at 13.

High defense costs are attributed to the complexity of malpractice litigation,

which requires expert medical testimony, expensive diagnostic procedures, and

experienced legal counsel, even if the claim is settled prior to trial. Brant,

supra note 55, at 159. Despite 1972 HEW statistics indicating relatively few
claims leading to large settlements or judgments (6.1% exceeding $40,000),
it was recognized that the number of large awards or settlements was in-
creasing. HEW Report, supra note 18, at 10. A medical-legal authority
states, however, that

[a] wards and settlements in six and seven figures are extremely rare.

In 1970, they accounted for only 3 percent of all payments to plain-

tiffs. Even in this group, the great bulk are within $300,000.
Curran, The Malpractice Insurance Crisis, 293 New Eng. J. Med. 24, 25
(1975). Insurance industry sources reported the average malpractice settle-



1976] MEDICAL MALPRACTICE INSURANCE 605

minished the pool of potential investment capital. American In-
surance Association statistics report that policies in force during

1966 generated $13.6 million in premiums, but that by 1974,
claims covered by 1966 policies had caused $18.2 million in losses.^''

A number of noninsurers contend that the carriers' losses
merely represent declining profits^° because the insurance indus-

try's concept of profit is underwriting profit, not net profit from
the total funds invested, regardless of the source of the funds.*'

Underwriting profit is calculated by subtracting incurred losses
and expenses from the amount of earned premiums. This calcula-
tion does not include investment income, with the result that in-

surers can incur high loss premium income ratios yet still make
a profit from returns on the investment of their reserves." The
vagaries of economic and stock market trends have unquestionably

had an impact on insurance company business planning. Fire and
casualty insurers suffered sizeable stock market losses in 1974

and 1975.*^ The issuance of malpractice policies appears particu-
larly vulnerable in such a situation, because most companies con-

sider malpractice insurance a marginal venture. Whenever a com-
pany decides upon a curtailment of its activities, medical malprac-

tice insurance is considered expendable.

ment in 1970 as $5000, and In 1973 as $8000, but noted that a $1 million
judgment is becoming less unusual, particularly in California. 33 Cong. Q.
Weekly Rep., April 5, 1975, at 709. Other authorities suggest that costs are
actually increasing at a disproportionate rate, noting that the average cost

per claim in New York rose from $6,000 in 1965, to $23,400 in 1975, and point-
ing to the fact that 13 of the judgments or settlements over $1 million in
New York history have occurred within the last 28 months. Newsweek, June
9, 1975, at 59.

^'Newsweek, June 9, 1975, at 63.

*°According to one physician, the formula "cost plus profit equals pre-

mium" has made insurance a powerful and successful venture. Id. An attor-
ney expressed the opinion that if insurance companies were to make their
books public, **we'd find their claims are spurious." Id. at 65. There is little

official data backing up insurance company reports of unprofitability except
that more claims are filed and paid. 33 Cong. Q. Weekly Rep., April 5, 1975,
at 709.

*^King, A Critique of the Report of HEW's Medical Malpractice Com-
mission, 2 J. Legal Med., Mar.-Apr. 1974, at 49, 51. Comment, Insurance
Ratemaking Problems: Administrative Discretion, Investment Income, and
Prepaid Expenses, 16 Wayne L. Rev. 95, 101 (1969).

^^HEW Appendix, supra note 34, at 522-23. But see 121 Cong. Reg.
1288 (1975) (remarks of Representative Hastings). Employers Insurance of

Wausau lost $120 million over 25 years, even taking into account income earned
from their reserves, and at least two other companies—California Insurance
Exchange and Casualty Insurance Company of California—"went broke of-
fering this type of coverage." Id.

"Wall Street Journal, Aug. 11, 1975, at 4, col. 2.



606 INDIANA LAW REVIEW [Vol. 9:594

B. Insurance Company Responses to Losses

Faced with substantial financial losses caused by actuarial
and investment miscalculations, insurance companies have few al-
ternatives. They may become increasingly selective about which
physicians to insure/'^ tighten policy provisions governing the

scope of their assumed risk,*^ continue to raise malpractice pre-
mium rates/* or withdraw from the malpractice market com-
pletely/'

One company that was compelled to pursue the most drastic
alternative, discontinuing its malpractice insurance line, was Argo-
naut Insurance Company, a subsidiary of Teledyne Corporation.
Although the facts are in dispute, the Argonaut incident illus-
trates the insurers' predicament. The incident also reflects the
reluctance of insurers, when justifying business decisions, to sta-
tistically separate losses resulting from general economic trends
from losses attributable to the peculiarities of malpractice insur-
ance.

^'^In response to reduced surpluses caused by economic reverses in stock
and bond markets, casualty insurance companies immediately began to change

their "book of business" and stopped renewing the highest risk classes of
medical liability insurance. Cast, Indiana's Medical Liability Problem, 68 J.

Ind. Med. Ass'n 21 (1975). See also Smith, supra note 8, at 10. The presi-
dent of St. Paul Fire & Marine Insurance Company, which insured about 17%
of the physicians in the U.S., claimed it did not have the capacity to take on

any new malpractice policyholders except where the company was sponsored
by a state medical society and would not renew existing policies except in

states where insurances departments permitted the company an adequate rate
for profitmaking. In Indiana, for example, St. Paul stopped renewing the

two riskiest specialty classes. Med. World News, July 28, 1975, at 76.
^"Comment, Risk Control in Professional Liability Insurance, 1960 DUKE

L.J. 106, 107.

•^^Premium rates trigger intense reactions in the medical world.

Rate increases stem from fear of future losses, not from current
experience, and companies tend to ask for all they think they can get
to protect against future fiscal calamity.

10 Hosp. Prac. 24 (1975). Massachusetts physicians have expressed concern
that insurance carriers are attempting to collect higher premiums than are
necessary to cover actual and projected losses in Massachusetts, which used
to rank as one of the six lowest risk states. The physicians allege that the
higher premiums are used to offset losses in investment portfolios and in
other higher risk areas of operation. Gibbs, supra note 12, at 29.

*^Pacific Indemnity & Star Insurance Company unexpectedly withdrew
from the malpractice field at the end of 1974. Los Angeles Times, Jan. 7,
1975, § I, at 1, col. 1. Earlier, in 1969, the Nettleship Company, a combine
of insurance companies providing malpractice insurance in Southern Cali-

fornia, "lost $22 million . . . with the result that six companies ended par-

ticipation with the combine." Jarrett, Arizona's Medical Association Mal-

practice Insurance Plan, 27 Ariz. Med. 12 (1970).



1976] MEDICAL MALPRACTICE INSURANCE 607

In 1974, the insurer of the New York State Medical Society's
program withdrew its insurance coverage, and Argonaut con-

tracted to be the new carrier. According to one source. Argonaut
believed it could succeed where Employers of Wausau had failed
as Argonaut was new to the program and had doubled existing
premium rates. Owing to the delay of several years between pre-
mium collections and payouts for claims, the company reasoned
that it could collect a large reserve in premium income to invest

before having to pay out much in claims.^® The company also ex-
pected to allocate most of the business to reinsurers. However,

Arognaut could not interest reinsurers and ended up holding the

majority of the business.*' When company statistics indicated
heavy losses and Argonaut's requests for large rate increases met

with resistance from the state insurance superintendent,^° Tele-

dyne insisted that Argonaut cease its malpractice insurance busi-

ness when the group plan expired on June 30, 1975. It has not
been established whether Teledyne handed down the ultimatum
because of losses from Argonaut's stock market investments^^ or,

as Teledyne contends, because "actuarial projections of huge losses

. . . threatened to make Argonaut insolvent."^^ A third reason
suggested by Argonaut's former president is that "Argonaut's

ability to write medical liability policies was ^curtailed' by its

parent company's withdrawal of a $21 million tax credit last

September [1974]."" Whatever the reason, the result was that

New York, Florida, California, and four other states were ad-
versely affected by Argonaut's withdrawal from the field. ^^ A
House Subcommittee on Public Health and Environment is exam-

ining Argonaut's loss projections to determine if they were highly

inflated.^^

^°Med. World News, Feb. 24, 1975, at 22-23.

^no Hosp. Prac. 24, 33 (1975).

70Curran, Malpractice hisurance, 292 New Eng. J. Med. 1223, 1224
(1975). Argonaut received a 93.5% premium increase in June 1974, but its
request for a 196.8% increase to continue coverage after January 10, 1975,

was rejected. 16 Med. World News, July 28, 1975, at 76.
7^ Med. World News, Feb. 24, 1975, at 23.

^"^Id.y July 14, 1975, at 23. For statistics on Argonaut's financial down-

fall, see Regier, Insurer's Insecurity, 3 J. Legal Med., Jan. 1975, at 32.

7^Med. World News, July 14, 1975, at 23.

^^Id., July 28, 1975, at 76. Ironically, however. Argonaut still writes mal-

practice insurance in Hawaii and makes a profit there. Id.

''Id.



608 INDIANA LAW REVIEW [Vol. 9:594

IV. Public Interest and State Regulation of Insurance

A. The Res'ponsihility of Insurance Companies

Insurance companies attempt to exercise reasonable business

sense in eliminating financial risks to curtail losses. It is argued,

however, that insurers should not have independent power to take
extreme actions. Insurance companies have been criticized as

woefully lacking in any recognition of the fact that their
business must be geared to public interest. The industry
has a duty to the public, a responsibility to the public and
an accountability to the public. It cannot be given license

to underwrite losses and then get out of the less profit-
able areas and concentrate on selling types of insurance
where it collects premiums and pays out few losses.'76

Indeed, there are constant echoes of statements suggesting that

insurance companies should assume greater responsibility in re-
ducing malpractice insurance problems.^^

The insurance industry can utilize its resources beneficially
by researching new techniques of risk selection, ratemaking, re-
insurance and claims prevention, and establishing more refined sta-
tistical data collection systems on malpractice claims and costs. If

insurers publicized information as to premiums collected, amounts
of reserves, investment income, and ratios of premiums to claims
payments, and reviewed their underwriting practices more strin-
gently, the exercise of state regulatory powers to demand such
information would be unnecessary.

B. Stojte Regulation of Insurance

The business of insurance is affected with a public interest
and is therefore subject to reasonable regulation by the state. ^®

One explanation for the public interest aspect of insurance is that
it has become such an important mechanism for shifting risks
within our economic system that supervision is essential to assure

^*Low, Malpractice Suit Citizen's Weapon, Atlanta Journal, Mar. 4, 1975,
at 15A.

''•'See, e.g., Bernzweig, Lawsuits: A Symptoin Not a Cause, 6 Trial, Feb.-
Mar. 1970, at 14, 15.

''^California State Auto. Ass'n Inter-Ins. Bureau v. Maloney, 341 U.S.
105 (1951); Lewis v. Manufacturers Cas. Ins. Co., 107 F. Supp. 465 (W.D.

La. 1952) ; Bouis v. Aetna Cas. & Sur. Co., 91 F. Supp. 954 (W.D. La. 1950)

;

Department of Ins. v. Schoonover, 225 Ind. 187, 72 N.E.2d 747 (1947). Regu-

lation of malpractice insurance might also be deemed appropriate in light of

the state concern in licensing of physicians. See, e.g., Ind. Code §§ 25-22-1-1

to -11-2 (Burns 1974).



1976] MEDICAL MALPRACTICE INSURANCE 609

the solvency of insurers/' This interest in solvency requires some
regulation of rates since the industry cannot effectively function

in an atmosphere of unrestrained competition. For example, severe
competition might lead to deceptive and unsound financial prac-
tices such as reducing premium rates below a level sufficient to
cover losses.®° The main reason for government regulation, there-
fore, is to protect the public from the effects of destructive com-
petition and, at the same time, from the excesses resulting from
collaborative activity.®'

Historically, the regulation of insurance was viewed as a
state concern and was not regulated by the Federal Government
through commerce clause powers, even though policy contract
transactions stretched across state lines.®^ However, in 1944 the

Supreme Court held in United States v. South-Eastern Under-
winters Association^^ that the business of insurance involves inter-

state commerce subject to federal regulation. As a consequence,
federal antitrust laws were made applicable to the regulation of
insurance, thus prohibiting collaboration among companies for
purposes of pooling loss statistics and fixing rates—actions the
state lav/s had permitted. Confusion in the insurance industry
and the state governments as to the application of the South-

Eastern Underwriters decision led Congress in 1945 to pass the

McCarran-Ferguson Act®"^ to clarify federal intentions.

The McCarran-Ferguson Act provides that no federal law
shall impair any state law regulating insurance unless the federal
law specifically relates to the business of insurance.®^ Federal
antitrust laws, therefore, apply only to the extent that the insur-

ance business is not regulated by state antitrust law.®^ Only a

^'Dineen, Gardner, & Proctor, Insurance and Government, in Symposium
ON Insurance and Government, University of Wisconsin, 1960, Vol. II,
No. 1, at 12.

Since the insurance consumer purchases a policy with the expecta-
tion that claims made under it will be paid, the insurer bears a fidu-
ciary responsibility to him v/hich requires the insurer's continuing
financial stability.

Note, Insurance Regulation and Antitrust Exemptions: McCarran-Ferguson,
the Boycott Exception, and the Public Interest, 27 Rutgers L. Rev. 140, 156
(1973).

®°Dineen, Gardner, & Proctor, supra note 79, at 14.
°^ Comment, Insurance Ratemaking Problems: Administrative Discretion,

Investment Income, and Prepaid Expenses, 16 Wayne L. Rev. 95, 97 (1969).
^^United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533.

647-48 (1944).
«3322 U.S. 533 (1944).
e^Act. of Mar. 9, 1945, ch. 20, §§ 1-5, 59 Stat. 33-34 (codified at 15 U.S.C.

§§1011-15 (1970)).
«n5 U.S.C. § 1012(b) (1970).



610 INDIANA LAW REVIEW [Vol. 9:594

partial exemption from federal regulation is granted, however,
because even if state laws regulate agreements to boycott, coerce

or intimidate, the Sherman Act°^ still applies to such activities
by insurance organizations.®®

The McCarran-Ferguson Act exemption has been further in-
terpreted as applicable only when the insurance company is en-
gaged in the "business of insurance."®' That activity is narrowly
defined as the relationship between insurer and insured, questions
surrounding interpretation and enforcement of insurance policies,
and other activities of companies closely related to their reliability

as insurers.'° Courts also have held that a state law must spe-
cifically regulate the insurance relationship if the insurance com-

pany is to claim a McCarran-Ferguson Act exemption from fed-
eral regulation.''^ The degree to which restraints of trade will be
permitted, in contravention of federal law, depends on the extent

of state regulation and the unreasonableness of the restraint.'^

Exemption of the industry from federal antitrust laws gen-
erated a great deal of criticism when the McCarran-Ferguson Act
first became effective in 1945. State antitrust laws had not been

^^Id. § 1013(b). In one interpretation, "the McCarran-Ferguson Act ap-
proves violations of federal antitrust laws so long as public regulation is

provided." Comment, InsuraTice Ratemaking Problems: Administrative Dis-
cretion, Investment Income, and Prepaid Expenses, 16 Wayne L. Rev. 95, 100
(1969).

^'SEC V. National Sec, Inc., 393 U.S. 453 (1969).
'°Id.

^'Id.; Hart v. Orion Ins. Co., 453 F.2d 1358 (10th Cir. 1971) ; Steingart
V. Equitable Life Assurance Soc'y, 366 F. Supp. 790 ( S.D.N.Y. 1973).

^^The common law rule that only unreasonable restraints of trade violate
the law has been adopted by the Sherman Act, 15 U.S.C. §§ 1-7 (1970). The
types of conduct held to violate the Sherman Act per se include price-fixing
agreements, group boycotts, agreements to divide markets, and tie-in sales.

E. KiNTNER, An Antitrust Primer 21 (2d ed. 1973). Indiana's statutes, for
example, broadened regulation of trade practices in the insurance business

in accordance with the McCarran Act, adopting Sherman Act terms concern-
ing contracts to restrain commerce and prohibit monopolistic restraints. Indi-

ana Code section 27-4-1-4(4) includes in the definition of unfair and decep-

tive acts and practices in business,

[e]ntering into any agreement to commit, or individually or by a

concerted action committing any act of boycott, coercion or intimi-

dation resulting or tending to result in unreasonable restraint of, or

a monopoly in, the business of insurance.

IND. Code §27-4-1-4(4) (Burns 1975). The statute also condemns excessive

or inadequate charges for policy premiums and unfair discrimination in pre-

mium rates between policyholders of the same class dealing with essentially
the same hazards. Id. § 27-4-1-4(7) (c).



1976] MEDICAL MALPRACTICE INSURANCE 611

effectively enforced in the past,'^ and it was argued that the size
and power of the nationally organized insurance industry pre-
sented **the same difficulties for state control as . . . national rail-
roads and giant manufacturing organizations."''* This bleak pro-
jection has some basis in fact 30 years after the passage of the
McCarran-Ferguson Act. One recent study of the Act has criti-
cized states for having ''failed to use their regulatory power effec-
tively or to investigate and curtail anticompetitive practices in

the industry."'^

Fears of monopolies and other antitrust activities have re-

appeared in recent months. The New York state legislature has
formed a task force which in part will study antitrust implica-
tions in the simultaneous surfacing of the malpractice insurance

crisis in many states across the country.'*
As fewer insurance companies sell malpractice insurance, a

lack of competition may aggravate monopolistic tendencies. One
study estimates that only ten companies sell 90% of the policy
coverage.'^ The continuing surge in group insurance, particu-
larly through state or county medical societies, also explains prob-

lems of rising rates and withdrawal of coverage affecting whole
or large portions of states.'® The growing reluctance of companies
to write policies for physicians in high risk classifications, except

through group plans, forces those physicians to join medical so-

cieties. At the same time, high participation in the group plan

'^^C. Edwards, Maintaining Competition—Requisites of a Governmen-
tal Policy 75 (1949).

'^Note, Insurance Regulation and Antitrttst Exemptions: McCarran-Fer-
guson, the Boycott Exception, and the Public Interest, 27 Rutgers L. Rev.
140 n.2 (1973). Another study concluded that the existing administrative
structure does not protect the public interest. Comment, Insurance Rate-
making Problems: Administrative Discretion, Investment Income, and Pre-
paid Expenses, 16 Wayne L. Rev. 85, 133 (1969). Even earlier, a 1960 Senate
report concluded that state regulation of the insurance industry was deficient
in enforcing capital and surplus requirements and in scrutinizing under-
writing and reserve activities, and that state departments were ineffective
in dealing with mergers and liquidations. Evidence also indicated lax super-
vision of statutes governing restraint of trade, monopoly, and unfair trade
practices. Senate Comm. on the Judiciary, The Insurance Industry, S.
Rep. No. 1834, 86th Cong., 2d Sess. 237-47 (1960).

'^Indianapolis News, May 30, 1975, at 3, col. 1.
'^^Moves Afoot To Shore Up Sagging Malpractice Coverage, 10 HOSP.

Prac. 24, 25 (1975).

'^In 1970, an HEW study of the malpractice insurance market predicted:
Within the foreseeable future, it is possible that group plans may so
totally dominate the market that insurance carriers will cease sell-
ing policies to individual hospitals or practitioners.

HEW Appendix, supra note 34, at 494.



612 INDIANA LAW REVIEW [Vol. 9:594

discourages writers of individual policies from entering the state.''
Some ''good risk" physicians who might be offered better insur-
ance rates outside the group plan then find such policies un-

available.

Advantages to the insurance industry of physician group in-

surance plans include economies of scale in marketing and admin-

istration, risk spreading, and more reliable data on loss experi-
ence. '°° Although group plans might involve potential monopolistic

tendencies, in that even slightly anticompetitive activities have a

broader impact on malpractice insurance as fewer companies domi-

nate larger market segments, the tendencies could be controlled

by legislative action. Class action litigation would not be neces-

sary if states regulate the insurance industry to protect the public

against monopolistic activities and the resulting harmful practices.

C. The State Insurance Commissioner

Via their regulatory powers, states have created special de-
partments to deal exclusively with the insurance business. The
Department of Insurance in Indiana, for example, has charge of
the "organization, supervision, regulation, examination, rehabili-

tation, liquidation, and/or conservation"^ °' of insurance companies.
If an insurance company conducts its business in an unlawful, un-
safe or unauthorized manner, allows its capital or surplus funds
to fall below a certain level, or fails or refuses to comply with
any order, rule or regulation of the department, the insurance
commissioner can direct correction of the problem by written order
to the insurance company's board of directors.' °^ If that effort

fails, he may enjoin or compel the act.'°^ Other powers of the
Indiana insurance commissioner, which are representative of those
granted by statutes in other states, '^"^ include authority to revoke a
company's license to do business in the state, '°^ to compel for-

feitures,'°^ to issue cease and desist orders,^°^ and to seize com-
pany assets.' °° The regulation of rates is the prime consideration

'9/cZ. at 514.

^°°7d at 521.

^°^IND. Code §27-1-1-1 (Burns 1975).
i°2/d. § 27-1-3-19.

104:
'E.g., Cal. Ins. Code § 1065.1 (1972) ; N.Y. Ins. Law § 127 (McKinney

1966).

^°=IND. Code §27-1-3-10 (Burns 1975).
""'Id. §27-4-1-12.

'"'Id. §§ 27-4-1-6 to -9, & -12.
'°^Id. §§ 27-1-4-1 & -4. See Pfennigstorf, The Enforcement of Insurance

Laws, 1969 Wis. L. Rev. 1026, 1032-67 (discussion of insurance com-
missioners' powers).



1976] MEDICAL MALPRACTICE INSURANCE 613

here, and the Indiana law, in language typical of statutes in other

states, proposes to

promote the public welfare by empowering the commis-
sioner of insurance to regulate insurance rates to the end

that they shall not be excessive, inadequate, or unfairly

discriminatory, and to encourage reasonable competition

among insurance companies . . . and to permit and regu-
late, but not require, cooperative action among insurers,
as to rates, rating systems, rating plans and prac-

tices . . . /°'

As in other states, "° insurers in Indiana must either file rating
schedules or plans with the commissioner or belong to a licensed

rating organization that doesJ^' The commissioner is empowered

to make any rules and regulations he deems necessary to exercise
his enumerated powersJ '^

There is some question as to whether insurance commissioners
are using their powers effectively to regulate industry activity.

Problems generated hy group insurance programs, for instance,
could be limited if insurance commissioners adopt plans providing

six months of insurance coverage in the event of the carrier's
bankruptcy,''^ requiring substantial advance notice of cancella-

tion,''^ and allowing public hearings for physicians denied cover-

age by the group. "^ Although state insurance commissioners can-
not absolutely compel the issuance of medical malpractice poli-

cies,"* commissioners apparently can condition the sale of other

types of insurance on assumption of part of the malpractice busi-

^°9lND. Code §27-1-22-1 (Burns 1975).

^^°See Donovan, Regulation of Insurance Under the McCarran Act, 15
Law & CONTEMP. Pros. 473, 485-86 (1950).

'^'IND. Code § 27-1-22-4 (Burns 1975).

''^Id. §27-1-3-7.

''^HEW Appendix, supra note 34, at 553. See Ind. Code §§27-6-8-2 to
-18 (Burns 1975) (dealing with the contingency of a company's bankruptcy).

'^^^HEW Appendix, supra note 34, at 553.

'''Id. at 555.

^'^In St. Paul Fire & Marine Ins. Co. v. Insurance Comm'r, 339 A.2d 291
(Md. Ct. App. 1975), the Maryland Court of Appeals struck down an attempt

by the insurance commissioner to order St. Paul Fire & Marine Insurance
Company to continue writing insurance for its physician-polieyholders. The
court held that the insurer's withdrawal from the malpractice field was not

prevented by a Maryland statute, Md. Ann. Code art. 48A, § 234A (1972),
providing that an insurer could not cancel or refuse to underwrite a particu-

lar insurance risk for arbitrary, capricious or unfairly discriminatory reasons.

See also Curran, The Malpractice Insurance Crisis, 293 New Eng. J. Med.
24 (1975).



614 INDIANA LAW REVIEW [Vol. 9:594

ness."^ They may require supporting data from insurance com-
panies proposing premium rate increases and refuse to permit
unjustified rates. That commissioners often have not done so in
the past'^® is further reason to encourage new exercise of their
powers.

In numerous ways, insurance commissioners could take an
active role in insurance supervision. Recently the Texas legisla-
ture gave the state insurance board control over medical liability

rates,"' an extension of the power of most commissioners to re-
view and approve but not fix rates. '^° The board immediately
exercised that control by freezing premium rates. '^' In another
illustration of the potentialities, the Pennsylvania insurance com-
missioner settled a suit by the state medical society against Argo-
naut Insurance Company. The commissioner approved a 206%
rate increase for Argonaut but added provisos that the company
underwrite the state's physicians for four years and that pre-
miums be justified by claims experience.^ ^^ In the past, insurance
commissioners have shied away from mandating insurance com-
pany efforts to solve the malpractice insurance crisis, relying in-
stead on state legislative actions. Conceivably, within their broadly

enumerated powers, commissioners could find authority for re-

quiring companies authorized by law to sell all types of liability
insurance to set up an assigned risk pool to cover all physicians

who otherwise could not obtain insurance.^" Such a plan would
be analogous to automobile liability assigned risk programs for

drivers who cannot find insurance in the free market. Alterna-
tively, states could legislate on an emergency basis that any insur-
ance company withdrawing from the malpractice business would
be barred from writing other insurance business in the state. The
danger, however, of attempting to force insurers to cover mal-

practice risks is that companies will opt to leave the state rather

than risk subjecting their businesses to what they view as immi-
nent financial distress. On the positive side, a broad and equitable
apportionment of risks among insurers might prove economically
reasonable, if not necessarily profit-generating.

^^^JUAs have not yet been attacked on constitutional grounds. Curran,
supra note 116, at 24.

'^®States are criticized for not exercising "their police powers In im-
pounding for careful expert scrutiny the purported losses and requests for
rate increases of any professional liability insurance company . . , ." Gibbs,
supra note 12, at 32.

'''Tex. Ins. Code art. 5.82 (Cum. Supp. 1975-76).

'^°E.g., N.Y. Ins. Law §184 (McKinney 1966).
'2' American Medical News, Aug. 4, 1975, at 10, col. 1.
'"Med. World News, July 14, 1975, at 23.
'2^21 Cong. Rec. 306 (1975) (remarks of Senator Nelson).



1976] MEDICAL MALPRACTICE INSURANCE 615

An insurance commissioner's powers, therefore, are presently
more preventive and punitive than affirmative. If a state legisla-
ture were to provide the commissioner with express statutory au-
thority to initiate programs and rules regarding malpractice in-
surance, however, he would feel supported in taking more posi-
tive actions to regulate insurers.

D. New State Legislation

In the first half of 1975, most states either passed emergency

bills which dealt with malpractice insurance availability, or estab-

lished a commission to study the problem.^ ^'^ Such legislation was
generally directed towards the stabilization of insurance premiums
and the attraction of malpractice insurers into a state. Whether
these acts will eliminate the dangers of monopoly, deceptive rate-

making, and coercive activity by insurance companies remains to

be seen. Noteworthy changes in the new acts include restrictions
on statutes of limitations, often eliminating the rule that the stat-

ute does not begin to run until discovery of an injury, dollar **caps"

on total recoveries available to injured plaintiffs, and arbitration

panels.' ^^ Certainly, all of those changes meet insurance industry

suggestions to ease ratemaking problems in that the "long tail"

on claims is replaced by a set time period within which claims

must be brought, clear limits on insured physicians' liability elimi-

nate guesswork as to inflation of future awards, and arbitration

panels can save defense expenses and settle "nuisance value"

cases.
'^*

One point that cannot be ignored in reviewing the new legis-
lation is that insurance companies made no commitments to main-

'^'^Curran, Malpractice Crisis: The Flood of Legislation, 293 New Eng.
J. Med. 1182 (1975).

^2^Med. World News, July 28, 1975, at 80 (chart of malpractice laws by
state as of mid-July 1975). The Indiana act, Ind. Code §§ 16-9.5-1-1 to -9-10
(Burns Supp. 1975), provides for the following: A two year statute of
limitations running from the date of the occurrence, id. §§16-9.5-3-1, -2; a
$100,000 limit on physician-insurer liability, id. § 16-9.5-2-2 (b), with an ex-
cess insurance fund covering liability up to the maximum recoverable of
$500,000, id. § 16-9.5-2-2 (a) ; and arbitration, in the form of a mandatory, non-
binding screening panel, preliminary to court suit, id. §§ 16-9.5-9-1 to -10. Sev-
eral states have statutes similar to Indiana's. See ch. 75-9, §§ 1-17, [1975]
Laws of Fla. 13 (to be codified in scattered sections of Fla. Stat.) ; ch. 796,
§§ 1-27, [1975] Ore. Laws 2306 (to be codified in scattered sections of Ore.
Rev. Stat.) ; Act of Aug. 4, 1975, No. 817, §§ 1-3, [1975] La. Sess. Law Serv.
No. 4, at 1382 (West 1975), to be codified as La. Rev. Stat. §§ 40:1299.41-.47.

^^^Indisputably, physicians gain tremendous advantages from having their
liability limited by time and amount and reviewed prior to trial or settlement.
On the other hand, there are obvious disadvantages to plaintiff-patients and
questions as to the constitutionality of limiting redress for injury resulting
from malpractice.



616 INDIANA LAW REVIEW [Vol. 9:594

tain reasonable premium rates and no guarantees to insure physi-
cians in high risk classes. '^^ The Indiana medical malpractice
law,'"^ as one example, offers unique solutions to the malpractice
insurance problem, but the law's inherent weakness lies in the
absence of means to enforce the continued availability of insur-
ance.'*' Therefore, other facets of the the new laws attract par-
ticular interest as they affect the insurance domain: joint under-
writing associations or risk pools, malpractice insurance funds,

and physicians' self-insurance companies.^ ^°

The National Association of Insurance Commissioners urged
authorization of joint underwriting associations (JUAs), or man-
datory risk-sharing pools, as a temporary solution to the problem
of unavailability of insurance.^ ^^ Several state legislatures fol-

lowed the advice. '^^ A typical JUA plan requires all companies
-^^Titing personal liability insurance in a state to participate in the

malpractice insurance business.^ ^^ Most laws provide for the plan
to be temporary or operational at the insurance commissioner's
option. ^^"^ JUAs provide primary coverage for physicians or re-
insurance of policy liability over a certain amount. They might
cover only those physicians otherwise unable to obtain insurance

^^^One reason for the reluctance of insurers to speak to the issue of rates

might be that the Indiana act is not retroactively effective; section 7 of chap-

ter 1 explicitly excludes application to any act of malpractice occurring before

July 1, 1975. IND. Code § 16-9.5-1-7 (Burns Supp. 1975).

'^^Id. §§16-9.5-1-1 to -9-10.

'29/d. §16-9.5-7-1.

'^°By mid-July 1975, there were at least seven states establishing joint

underwriting associations by new laws. Ch. 75-9, § 2, [1975] Laws of Fla. 15,
to be codified as Fla. Stat. § 627.852; Idaho Code §§41-4101 to -4114 (Cum.

Supp. 1975); Act of Sept. 12, 1975, Pub. Act 79-962, [1975] III. Legis. Serv.

No. 6, at 1619-26 (West 1975), to be codified as III. Rev. Stat. ch. 73,

§§1065.201-.221; Md. Ann. Code art. 48A, §§504-18 (Cum. Supp. 1975); ch.
296, [1975] Nev. Sess. Laws 398-400 (Nevada Essential Insurance Associa-
tion) ; V/is. Stat. Ann. §619.01 (Spec. Pamphlet 1975).

At least two states established physician-supported insurance funds. Ind.
Code §§ 16-9.5-4-1 to -3 (Burns Supp. 1975) ; Act of May 12, 1975, Pub. Act 43,
[1975] Mich. Legis. Serv. No. 1, at 89-94 (West 1975), to be codified as Mich.

COMP. Laws §§ 500.2500-.2517.
Five states authorized the formation of physicians' self-insurance com-

panies. Md. Ann. Code art. 48, §§ 548-65 (Cum. Supp. 1975); Mo. Rev. Stat.
§§ 383.010-.040 (Vernon Cum. Supp. 1976); N.Y. Ins. Law §§ 681-95 (McKin-
ney Supp. 1975-76) ; N.D. Cent. Code §§ 26-40-01 to -15 (Supp. 1975) ; ch. 796,
§ 12, [19751 Ore. Laws 2313-14, to be codified as ORE. Rev. Stat. § 731-504.

i^^Med. World News, July 28, 1975, at 76. The American Insurance
Association also supported JUAs. Id., Mar. 25, 1975, at 25.

''^Id., July 28, 1975, at 80.

i^^E-.^r., Idaho Code §41-4103(1) (Cum. Supp. 1975).
''""E.g., id. §41-4103(3).



1976] MEDICAL MALPRACTICE INSURANCE 617

or they may be the exclusive writers of malpractice policies. Re-
serve funds for such plans are accumulated either from surcharges
on JUA policies or assessments of all state physicians, according
to the scope of the program.

A second approach involves malpractice insurance fund plans
such as those in Indiana' ^^ and Michigan.' ^^ These plans, which

also offer insurance for physicians who cannot purchase protec-
tion elsewhere, are supported by premiums and assessments on
physicians. They are administered by a risk manager under the
authority of the department of insurance, rather than by an orga-
nization of all liability insurance companies. A third innovation
is exemplified by Maryland's plan,'^^ which authorizes a $300 tax
charge on every doctor in the state for creation of a physicians'

mutual liability company to handle medical malpractice insur-
ance.'^^ Any licensed physician may become a member upon pay-
ment of the tax.'^^ The company will be governed by an eleven-
member board, of which not more than five may be physicians. '^°

The main criticism that can be directed at these three pro-
grams is that, while they have dealt with the present availability
of insurance, they do not guarantee reasonable rates. In fact, all

require surcharges or special reserve fund charges in addition to

regular premiums.'"^'

Compromises form the basis of this body of legislation

—

compromises on the part of physicians, on the part of insurance
companies, and on the part of insurance commissioners. Given
the uniqueness of the predicament, no one can postulate with cer-
tainty the correctness of any one solution. Possibly, a combina-
tion of proposals addressed to the ratesetting and availability as-
pects of the malpractice insurance dilemma might be implemented
without much difficulty.

V. A Proposal

Notwithstanding the wealth of no-fault proposals, '^^ arbitra-

'^'^IND. Code §§16-9.5-1-1 to -9-10 (Burns Supp. 1975).

'36MICH. COMP. Laws Ann. §§ 500.2500-.2517 (West Supp. 1975).
'37Md. Ann. Code art. 48A, §§548-56 (Cum. Supp. 1975).
'^^Id. § 552(b).

''"Id. § 552(e).

''*°The physician members of the company will elect the board. Id. § 551.
'^^American Medical News, Aug. 4, 1975, at 10, col. 1. In the case of the

Maryland physicians' self-insurance company, rates are expected to increase
100%. Id.

'^^See, e.g., Carlson, Conceptualization of a No-Fault Compensation Sys-
tem for Medical Injuries, 7 Law & Soc. Rev. 329 (1973) ; Havighurst &
Tancredi, ''Medical Adversity Insurance"—A No-Fault Approach to Medical
Malpractice and Quality Assurance, 1974 Ins. L.J. 69; Keeton, Compensa-



618 INDIANA LAW REVIEW [Vol. 9:594

tion plans/ ^^ and federal insurance bills, '^'^ a system combining
several other proposals might alleviate the need for drastic revi-
sions in the present manner of dealing v^ith medical malpractice
cases. The traditional system requiring a determination of negli-
gence in order to hold a physician liable for damages could be
preserved, and responsibility for insurance supervision could re-
main with state governments. A data collection system for rate-
making, adoption of claims-made policies, creation of physicians'
self-insurance companies, and government-sponsored reinsurance
comprise the four elements of this proposal.

The first requirement, a data collection system for malprac-
tice insurance statistics, would be supervised and utilized by insur-
ance commissioners to compare rates and rating practices among
companies.'''^ Commissioners could then determine the extent of

insurance availability and the reasonableness of rates without re-
sort to medical society or insurance industry statistics. Companies
could forecast losses and set rates more accurately than in the past
with the aid of accurate data. In particular, newly-established

physicians' companies would have at hand the factual informa-
tion that has previously eluded insurers to ease their financial

stabilization in the insurance business. Insurance commissioners

could apply appropriate pressures to keep companies in line with

rates and penalize rate deviations or attempts to manipulate the

market. However, those profit-oriented tendencies would be an-

ticipated only to a limited degree with physicians' self-insurance

companies, whose major concern would be coverage.
The next suggested action is more drastic : adoption of claims-

made insurance policies in place of the occurrence policies now
commonly offered. This step would eliminate the difficulties ac-
companying the current situation of having an indefinite number
of claims incurred but not yet reported. In a claims-made policy,
the insurer agrees to assume liability for acts of malpractice oc-
curring during the policy term only to the extent that a claim is

Hon for Medical Accidents, 121 U. Pa. L. Rev. 590 (1973) ; O'Connell,
No-Fault Insurance for Injuries Arising From Medical Treatment: A Pro-
posal for Elective Coverage, 24 Emory L.J. 21 (1975).

'''See, e.g., S. 482, 94th Cong., 1st Sess. (1975). This legislation is en-
titled the National Medical Insurance and Arbitration Act. It would make
federal insurance available only to states with programs for initial arbitra-
tion of malpractice claims. The bill sets forth procedures for initiation of
arbitration, appointment of the arbitration panel, hearing procedures, law
governing tne panel's decision, and proceedings subsequent to the panel's
decision.

'''See, e.g., S. 482, 94th Cong., 1st Sess. (1975); S. 215, 94th Cong., 1st
Sess. (1975).

"^See HEW Report, supra note 18, at 38 (stressing the need for such a
reporting system).



1976] MEDICAL MALPRACTICE INSURANCE 619

made within the policy period.^''* Coverage under an occurrence
policy, on the other hand, extends to any acts of malpractice oc-
curring during the policy period, regardless of when claims are
madeJ ^^ Since an insurer's retrospective and prospective liability
are limited under the claims-made policy, he can predict losses,

determine rates, and set aside reserves with a higher degree
of accuracy.

Physicians have voiced strong objections to claims-made poli-

cies, largely because the physicians would be forced to purchase
coverage even after they discontinued practicing in order to be

protected.'^® Since the policy only covers claims or suits brought

in the specific period of the policy, a retired physician would still
need an insurance policy in case a patient brought a claim within
the statute of limitations but after the physician's last year of

practice. That expense must be weighed against the elimination
of inflated premium charges, and presumably the premium could
be reduced each year as the possibility of a claim declined. One
final charge could cover all remaining exposure to liability after

a predetermined period. '"*' Alternatively, state insurance depart-

ments could form risk pools for coverage of retired physicians or
the estates of deceased physicians. '^° Claims-made policies are

also criticized for offering no more than a short-term reduction
in malpractice insurance costs if other malpractice litigation ex-

penses continue to rise. Nevertheless, coverage at a reasonably

calculated though increasing rate could be assured, and at least
one company actively championing the claims-made concept pre-
dicts a lowered rate.^^' Another argument insists that there is no
need for claims-made policies following passage of statutes, such

as Indiana's, which reduce statutes of limitation to two or three
years '^^ and strictly limit recoverable damages. ^^^ In response to

that point, a caveat applies. If those statutes do not operate retro-

^''^ Comment, The "Claims Made" Dilemma in Professional Liability In-
surance, 22 U.C.L.A.L. Rev. 925 (1975).

'^'Id.

^"^^Lanzone, Products Liability and Professional Liability No-Fault: A
Defense Lawyer's View, 47 N.Y. St. B.J. 185, 216 (1975).

^^'St. Paul's claims-made plan offers "reporting" coverage for retired

physicians or deceased physicians' estates in a three-year installment plan.

Med. World News, July 14, 1975, at 78.
^^°Lanzone, supra note 148, at 216.

'^^St. Paul plans a five-year premium rate increase per physician, with
the coverage "maturing" in the fifth year, and predicts that the mature
claims-made rate will be less than the occurrence rate would be at that time.

Med. World News, July 14, 1975, at 78.
i^^lND. Code §16-9.5-3-1 (Burns Supp. 1975).

''Ud. § 16-9.5-2-2.



620 INDIANA LAW REVIEW [Vol. 9:594

actively, as Indiana's does not,'^^ acts of malpractice occurring

prior to the effective date of the statute are not covered. In those

cases, the previous laws allowing open-ended awards and extended
statutes of limitation would apply. Thus, insurers would need the
definite terms available in claims-made policies.

Claims-made policies have aroused controversy wherever in-
surance companies have attempted to obtain approval of them;
Indiana, among other states, has not been receptive. '^^ Although
new to medical malpractice insurance, claims-made provisions have
increasingly been used by insurers of architects, engineers, law-
yers, brokers, and accountants,'" and the validity of those pro-
fessional liability insurance contracts has been litigated.^" The
benefits of such policies have been well recognized. In thirty-one

of the forty-four states in which St. Paul Fire & Marine Insur-
ance Company filed requests for claims-made policies, the requests
have been approved.^" The approach of the California legislature
seems the most reasonable. A 1975 statute^" permits claims-made
policies to be issued, subject to the conditions that the fact that

coverage is limited to liability for claims made against the in-

'^^M § 16-9.5-1-7.

^^^Interview with Lawrence G. Kaseff, Deputy Commissioner, Patients

Compensation Authority, Indiana Department of Insurance, in Indianapolis,

Ind., August 29, 1975. Mr. Kaseff confirmed the fact that the Indiana insur-

ance commissioner had rejected the claim-made policy form submitted by St.

Paul and predicted that the commissioner would not approve the forms in the

future.

^^*Comment, The "Claims-Made" Dilemma in Professional Liability In-

surance, 22 U.C.L.A.L. Rev. 925, 926 (1975).

^^^For examples of courts striking down claims-made policies, see J.G.
Link & Co. v. Continental Cas. Co., 470 F.2d 1133 (9th Cir. 1972), cert, de-
nied, 414 U.S. 829 (1973) (ambiguous claims-made provision in architect's

policy construed in favor of insured) ; Gyler v. Mission Ins. Co., 10 Cal. 3d

216, 514 P.2d 1219, 110 Cal. Rptr. 139 (1973) (attorney's claims-made policy

held ambiguous) ; Jones v. Continental Cas. Co., 123 N.J. Super. 353, 303

A.2d 91 (Ch. 1973) (professional engineer claims-made policy held invalid as

contrary to public policy in limiting coverage). Cases in which courts upheld

claims-made policies include Cornell, Rowland, Hayes & Merryfield, Inc. v.
Continental Cas. Co., 465 F.2d 22 (9th Cir. 1972) (court relied on plain lan-

guage of policy to deny recovery to engineer-policyholders) ; Livingston Parish

School Bd. V. Firemen's Fund Am. Ins. Co., 282 So. 2d 478 (La. 1973) (engi-
neer's claim to reasonable expectations of coverage held defeated by un-

ambiguous provisions clearly limiting protection) ; J.M. Brown Constr. Co.
v. D & M Mechanical Contractors, Inc., 222 So .2d 93 (La. Ct. App. 1969)
(court found forthright statement on face of broker's policy as to coverage

was clear).

'^^American Medical News, July 21, 1975, at 10, col. 2.

'^'Cal. Ins. Code § 11580.01 (West Supp. 1975).



1976] MEDICAL MALPRACTICE INSURANCE 621

sured while the policy is in force be conspicuously recited on the

application and on the front page of the policy.
'^°

Approval of claims-made policies by state insurance commis-
sioners would facilitate implementation of the next step in this
suggested plan, which is establishment of physician-owned insur-
ance companies. The idea has been tried and found workable. For
example, in 1957 a group of Colorado physicians reduced their

insurance costs by forming their own insurance company, Empire
Casualty Company,'^' and in 1971 the entirely doctor-owned and
doctor-run company insured 55% of the private physicians in the
state.'" The financial uncertainties which plague self-insurance
companies as well as other insurers would be minimized by the
first two steps of this plan since companies could begin operations
with a surer footing in ratemaking and investment planning. The
obvious advantages to physicians and to general liability insurers

of having physicians develop their own companies range from lift-
ing a financial burden from the established general insurers to
providing an opportunity for the specialized company to develop
expertise in malpractice insurance writing and defense. General

liability insurers would no longer feel pressured to compensate

for malpractice insurance losses by raising rates of other insur-

ance lines, and the cooperative companies could concern them-

selves more with coverage than with profitmaking.
In setting up an insurance business, two hurdles are raising

the initial capital required by state law to prove financial sol-
vency and obtaining reinsurance. Assessments of all medical so-
ciety members and initial surcharges of insured physicians can
be used to build capital and reserves. Physician-owned insurance
companies in New York, Maryland, Michigan, and Northern Cali-
fornia are presently implementing those procedures.'*^ Under
most state laws, companies must restrict their coverage to some
percentage of their reserves if they do not have reinsurance.'*^
This critical requirement could be met either by a state-operated
JUA which would function exclusively for the purpose of offering
reinsurance to physician-owned companies, or by a federal re-

'^°See Comment, The ''Claims-Made" Dilemma in Professional Liability
Insurance, 22 U.C.L.A.L. Rev. 925 (1975), for a critical study of the validity

of claims-made policies, concluding with an endorsement of the California

statute. See Trout, Malpractice Insurance: Claims-Made Policies Pose a Neiv
Dilemma, 3 J. Legal Med. 33 (1975), for a similar analysis.

'^^ Tucker, New Answer to High Malpractice Ratesy 35 Med. Econ. 71
(1958).

^ ^"^Malpractice Insurance Outlook: Brightening, 48 Med. Econ. 103, 104

(1971).

^^^See American Medical News, July 28, 1975, at 1, col. 2.

'^""See, e.g., Ind. Code § 27-1-13-6 (Burns 1975).



622 INDIANA LAW REVIEW [Vol. 9:594

insurance program. Under one proposed federal program, com-
panies could make payments into a federal reinsurance fund, which
would cover all payments beyond the first $25,000 of each claim.' *^

Under acts such as Indiana's,'*^ which limit recovery amounts for
malpractice injuries, the need for reinsurance would diminish as
fewer suits are brought under past laws.

By incorporating these four steps into one system, states could
continue their regulation of the insurance industry with limited
federal interference. Within carefully delineated bounds, a private
insurance system could operate efficiently and competitively.

VI. Summary

Maintenance of insurance availability at reasonable rates will

not solve the malpractice problem, nor is it intended to do so. As
long as physicians commit acts of malpractice and are held liable
for resulting injuries, however, medical malpractice insurance will

remain a necessity. This Note approaches the malpractice crisis

from the viewpoint of insurance, showing the need for profes-
sional liability insurance under the existing system of laws and
examining the causes and effects of the malpractice insurance
crisis. Various economic factors stimulated drastic and far-reach-
ing responses from insurance companies regarding malpractice
insurance. Unfortunately, many state insurance departments did
not react so quickly. What this Note has attempted to demon-
strate is that state governments have been deemed the appropriate
entities to control the business of insurance and that states have

an obligation to fulfill that role. Insurance companies, in turn,

have a responsibility to the public and should exercise that duty

in the course of business.

New state laws clarify these powers and responsibilities;
nevertheless changes in attitudes, as well as laws, are needed.

The proposal set forth in this Note does not demand a major
overhaul of approaches to malpractice insurance, but in essence

the proposal does require that insurance commissioners exercise

long dormant powers and actively police the industry. The crisis
in malpractice insurance availability warrants affirmative efforts

by physicians, insurers, and insurance departments to assure con-

tinued coverage at reasonable rates.

Heather M. Wiske

'*^S. 188, 94th Cong., 1st Sess. (1975), entitled the Federal Medical Mal-

practice Insurance Act. Requirements of arbitration and uniform rates as

they appeared in that bill would not be endorsed as necessary to this pro-

posed solution. See also H.R. 2804, 94th Cong., 1st Sess. (1975).

^*6iND. Code §§16-9.5-1-1 to -9-10 (Burns Supp. 1975).