State Volunteer Mutual Insurance Company – 2012 Financial and Claims Data- A Follow-Up Post

Last week I wrote a post titled " State Volunteer Mutual Insurance Company -2012 Financial and Claims Data" that resulted in an unusual number of emails and phone calls.  To those that took the time to reach out and thank me for the information, thank you – I appreciate your efforts.

One caller brought up an excellent point that needs to be shared.  I mentioned that I thought SVMIC was seeing an increase in the number of insureds because of increased competition and expanding group practices (if a physician joins an existing group that does not do business with SVMIC the insurer loses an insured).  The caller pointed out that another reason for the decline in the number of SVMIC insureds is the fact that more and more doctors are being employed by hospitals.  These doctors then fall within the insurance package carried by the hospital, and have no individual need to buy coverage (except perhaps for tail coverage for their prior work history).  This phenomena  impacts other professional liability insurers as well, but certainly impacts SVMIC given its dominating percentage of the professional liability market for Tennessee physicians.

The other point that people mentioned was the issue of the increasing amount of money spent on defense costs in Tennessee medical malpractice cases.  I noted that the company indicated defense costs had increased over fifty percent in the last five years.  Remember, this has occurred even though the number of lawsuits filed against the company’s insureds has decreased significantly over the last five years.  I cannot share that percentage decline in the number of lawsuits filed against SVMIC insureds in the last five years – I don’t think that information is publicly available.  But, in the fiscal year ending June 30, 2012, there were 374 medical malpractice (now called health care liability) cases filed in Tennessee’s circuit courts.  Five years earlier, in the fiscal year ending June 30, 2008, there were 537 medical malpractice cases filed in our circuit courts. That is a decrease of 153 cases, a 30 percent decline.

Thus, assuming that SVMIC insures the same percentage of defendants actually sued across the state in medical malpractice cases as of June 30, 2012 as it did as of July 1, 2007, the companies defense costs have increased more than fifty percent while the number of claims has decreased thirty percent.

You see the significance of that, I am sure.   Assume that five years ago the company had 10 lawsuits and spent an average of $100,000 each defending each case, for a total expenditure of $1,000,000. Now, fast forward five years, drop the number of lawsuits to 7 but increase the defense costs by 50% to $1,500,000.  What is the new average defense cost per claim?  $214,000+.  

So, if overall defense costs increase by more than 50% at the same time the number of cases being defended decreases by 30% the defense cost per case increases more than 100%.

Now, there are only a couple of explanations for this.  First, the hourly rates of defense counsel and experts, etc. could be increasing.  Second, the amount of time worked on the filed cases is increasing.  And third, there is some combination of the first two factors at work.  

As I indicated in the original post, I do not know if my brothers and sisters who defend SVMIC insureds have received a rate increase in the last five years, but I can say with a high degree of certainty that they have not received a rate increase that would explain a more than 50% increase in defense costs when the number of lawsuits has dropped 30%.  No, my guess is that conventional wisdom in correct, and defense lawyers with less to do are working the cases they do have harder in an effort to increase revenue.  One defense lawyer told me that SVMIC is the only insurer who has never challenged  him/ her (I will protect my source) on his / her requests to spent money on the case or his ; her actual bills.  

SVMIC knows that if  cases are worked harder by their lawyers it costs them money in the short run but it increases the costs for the lawyers for patients, thus decreasing the profitability of the cases and impacting future case selection by plaintiff’s lawyers.  That helps drive down future filings by plaintiff’s lawyers, which decreases future costs for the company.  Through in damage caps, and profitability really shoots up. 

One last point.  Some might read these words and think that if SVMIC paid 99 claims last year and there were only 374 medical malpractice cases filed last year in the entire state against all health care providers that SVMIC pays indemnity dollars to a large percentage of claimants.  That is wrong.  There is a difference between a claim and a lawsuit.  A claim is a opened by SVMIC when an insured fears or gets notice of a potential lawsuit.  Lots and lots of claims never result in lawsuits, and while some claims result in an indemnity payment even though no lawsuit is not filed, most claims result in no lawsuit and no indemnity payment.

Also, although it is true that SVMIC paid 99 claims in 2012, those 99 claims include (a) pre-suit settlements and (b) settlement of cases which could involve claims against two or more insureds. Stating (b) a little differently, a single lawsuit may count on SVMIC’s books as multiple claims, depending on the number of its insureds have been named in the case.)  Thus, don’t undertake the investigation of a medical malpractice case under the assumption that it will be settled if you rattle your saber loud enough.  Nope, it doesn’t work that way.