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Independent Representation

Under a traditional insurance contract, the carrier agrees to provide the insured with independent representation. This means that the insurance company pays an attorney to represent the defendant as if the defendant had hired the attorney directly: the defense attorney must put the insured's interest before the insurance company's interest. Paying the cost of this representation is a major benefit of malpractice insurance because attorney costs account for approximately one-third of premium dollars. This duty of independent representation is taken to an extreme in medical malpractice insurance policies that allow the physician to veto a settlement.

The most pervasive problem with the duty to provide independent representation is that it puts the insurer in an adversary position with its defense attorneys. As independent counsel representing the insured, the defense attorney is ethically bound to put the insured's interests first. This conflict of interest hurts the insurer in several ways: (1) counsel may not provide the insurer adverse information learned about the insured during the investigation of the case; (2) the ethical duty to represent the insured zealously means that counsel must do everything possible to defend the case, even if these activities are not cost-effective; and (3) the insurer is prevented from presenting a unified defense when a case involves several insureds.

Putting aside the marketing value of allowing physicians to believe that they control settlements, independent representation is important to insureds to protect their reputation and their assets. An adverse settlement in a malpractice case can put a physician at a competitive disadvantage. This has become more important with the requirement in many states that settlements and judgments be reported to the state board of medical examiners.

The more significant threat to the physician is that the insurance company will fail to settle a case in which the plaintiff wins a verdict in excess of policy limits. When an excess judgment is possible, an insured has a right to expect either independent representation or protection against loss of assets. The physician with $1 million in coverage with possible damages in excess of $1 million (such as a brain-injured baby case) has reason to worry. The insurance company may want to take the risk of a trial because its losses are capped at $1 million plus legal expenses.

The theoretical risk of verdicts in excess of policy should diminish as more states adopt periodic payments rules and caps on damages. However, historical data indicate that the bulk of claims dollars are paid for settlements and verdicts below the level of caps on damages. It is possible that insurers could agree to protect physicians against excess judgments without increasing their costs. This will become more probable as the lowest policy limits approach the caps on damages. If physicians cannot buy policies for less than $1 million coverage and the statutory cap is $1 million, then there cannot be an excess judgment.

The effect of protecting insureds against excess judgments is to remove the inherent conflict of interest between the insurer and its insureds. If this conflict were removed, the insurer could modify its contract of insurance to allow greater latitude for managing its litigation. This could be combined with a requirement that all litigation information be released to the insurer. Under these contractual provisions, the insurer would be free to present the best defense of the common assets, to the benefit of all insureds.

This rationalization of litigation would be especially important in cases involving multiple defendants. Under most policies, each defendant is entitled to an independent counsel. This can lead to an explosion of defense costs. More troubling, unlike single-defendant cases, a defendant in a multiple-party case can avoid liability by blaming another defendant, increasing the probability of an adverse settlement or judgment. It also pits one company's insureds against each other and against the company, with disastrous public relations consequences.

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