Indemnity Contracts vs. Tort Law [Risk Management]

A 35-year-old woman arrives in an emergency room complaining of a headache, The patient is first trug«) by 3 hospital-employed nurse and then seen by an emetgency mom physicians assistant who is employed by an outside practice group. The patient is diagnosed with a migraine and sent home.

The next day, the patient suffers a .stroke resulting in permanent, severe brain damage- The physician'.» assistant, ihe supervising physician, the practicc group with whom the physician is associated! along with the hospital, are all named in a lawsuit. The plaintiff demands S5 million to settle the case.

Although all parties are named, because of the indemnity agreement in place, only the physician's assistant, supervising physician and practice group end «? paying the entire settlement- Although the hospital was named bccausc treatment was physically rendered in their emergency room, the agreement protected the hospital from paying its share under traditional ton law.

More hospitals are opting to exercise their contractual rights under these agreements. The cumulative effect is changing the traditional outcomes that have historically taken advantage of the deep pockets of hospital co-defendants.

The Impact of Indemnity Agreements

Most business contracts between hospitals and physicians (or physician practice groups) include indemnity or "hold harmless" agreements that make each party responsible fox its own indemnity and defense costs should a lawsuit occur. (They also detail minimum limits of liability coverage requited to maintain privileges al hospitals arid other practice sites,) These agreements basically provide an "our" for the party that is not considered to be directly negligent.

Traditionally, a tort-based theory, like ostensible agency, would create potential exposure for the hospital whether ol not any of its employees were negligent. But because of the contract between the hospital and physician/group, the entire settlement or verdict, as well as the lawyer's fees and court costs of the hospital, instead become (he responsibility of the physich ? or his practicc group.

So in the event a medical malpractice lawsuit is filed naming the hospital and physician as co-defendants, these agreements can dramatically change the allocation of fault and damages compiled to what traditional tort remedies would dictate.

In the migraine example, if the physicians assistant is found negligent, traditional tort taw allows for the hospital to also have exposure. Under the doctrine of joint and several (lability and other tort reform initiatives (depending upon jurisdiction) that address apportionment or allocation of fault, the hospital could end up paying more than the physicians assistant, the practice group and supervising physician. This is because the hospital is usually the "deep pocket" in targe cases. (Because of this, hospitals generally maintain higher self-insured retentions and ckch limits than most physicians and their groups.)

If the hospital chooses to cnfoicc its indemnity agreement, however, a tender of indemnity, and possibly the costs and fees associated with the legal defense, could change the allocation of Joss based on the outcome. A tender is often made at the onset of a C3se or after liability is determined through discovery. The physician group will either disagree with the tende; or find that its contractual obligations trump what would have been a less expensive outcome for the physician group under ton law.

It must be kept in mind, however, that the physician or his practice group can also enforce these agreements if [he primal}' of sole direct negligente was on the pair of the hmpid. Foi example, in a birch injury cme, where the nunes failed to notify che physician of key developments during labor, it is the physician who may benefit from an indemnity agreement.

Higher Limits for Physicians and Practice Groups

While both the positive and negative aspect! of such indemnity agreements arc clear, these agreement remain a potential sleeping giant in medical malpractice lawsuits. The impact of their use or non-use remains ?? be seen, A key factor in determining their potential may be the wealth and insurance limits of the physician 01 practice group. If one goal in these agreements is to achieve an equitable outcome that tort taw would not provide and physician groups knowingly agree to these provisions, [he physician must have adequate assets or limits of liability.

Large practice groups may be able to afford to engage in these agreements, especially if their íelf-insurcd retentions create flexibility and if they include bus«» and other financial advantages. Smaller groups, however, may need to review their limits as well as their polio· language related to the use of such agreements. A physician docs nut want to be in a situation where this type of agreement is enforced by the hospital but denied by the carrier.

Safeguards within the agreement should also be considered. For example, consider limiting the physicians exposure under (he agreement to her professional liability policy limits. If she does take on the hospital s exposure. there is a limit to how much she will pay. In the migraine example, if the group limits are S3 million and its indemnity agreement limits the atnounr it will contribute to its available insurance, then the hospital would pay the S2 million balance.

All agreements of this kind should be reviewed by a health tare attorney as weil as a practice manager, broker and professional liability carriet, This will help ensure that all potential implications arc known and considered.

Indemnity or hold harmless agreements arc found in almost all hospital-based practice service or business agreements. Their use may give the parties more acceptable outcomes than traditionally found in tort law, but ultimately, die key to their succès.·; relies on the working relationship.! of the contracting parties. *

INDEMNITY AGREEMENT CHECKLIST

Some basic questions need to be asked before engaging in Die negotiation and enforcement of an indemnity agieemont:

1. What does your agreement say related to indemnification, and will it hold up if legally tested?

1. Can the physician/group afford to pay the hospital's tort exposure?

3. Doos the professional liability insurance policy provide coverage for the physictan/group under such ? agreement?

4. Does the phystclan/group realize what it has contracted for and the addi lional exposure it has taken gn?

5. Does the physician have the ability to influence and change systemic prob lems or practices that predispose it to risk?

6. Can the hospital afford not to enforce the indemnity agreement?

7. Will that decision Impact the hospital's coverage?

3. Will enforcement damage or enhance the business relationship between the hospital and the physician/group?

9. If there is disagreement on the terms or enforcement of the agreement, how and when do those issues get resolved? Do the parties heve an alternative forum to resolve these differences rather than reveal them In front of the plaintiffs attorney?

10. By enforcing the agreement, have the parties driven up the ultimate settlement or Jury value by revealing the tensions between co-defendants to the plaintiff's attorney?

Jaymt ? faccarv, JD, ii director (f profesional liability claim m Sedgwick, where ibt oversea hasp imí, p&ytirian and aliitd ??a?? preeider prof anana! liability claims for the western United States,