The physician - insurance company contract dictates whether a physician has the right to consent to settlement. There are three approaches to the consent issue, demonstrated by the following language from malpractice insurance contracts from three different insurance companies.

Physician has No Right to Consent

“We’ll defend any suit brought against you for damages covered under this agreement. We’ll do this even if the suit is groundless or fraudulent. We have the right to investigate, negotiate and settle any suit or claim if we think that’s appropriate.”

Right to Consent, with a Hammer Clause

“We have the right and will defend any claim. We will:

1. do this even if any of the charges of the claim are groundless, false or fraudulent;
   
2. investigate any claim as we feel appropriate;
   
3. not settle any claim without your consent.
   
   

If we recommend a settlement to you, which is acceptable to the claimant and you do not agree, our limit of liability is reduced to the total of the amount for which the claim could have been settled plus the amount of claim expenses up to the time we made the recommendation.”

Physician Has the Right to Consent

“The Company shall not compromise any claim hereunder without the consent of the Insured.”

It is apparent from reviewing this language that it is critical that the emergency physician be aware of his or her rights regarding consent. Failure to understand the operation of a hammer clause can result in significant personal liability. All other things being equal, an insurance contract in which the physician has the right to consent to settlement is more costly than an insurance contract with a hammer clause, or a contract in which the insurer retains all rights to settle.

Case # 1 The “triadic” relationship: Insurance company, physician and defense attorney.

This case arises out of the settlement of a medical malpractice action that had been brought against Dr. Lieberman, neurosurgeon, by a former patient for injuries allegedly resulting from a negligently performed arteriogram. The patient sought $3,000,000 in damages. Dr. Lieberman’s professional liability insurer retained and assigned outside counsel to defend Dr. Lieberman against that medical malpractice claim. Contrary to Dr. Lieberman’s express wishes, the insurer eventually settled the medical malpractice suit. As a result of this settlement, Dr. Lieberman’s malpractice premium increased substantially.

During the course of the lawsuit, Dr. Lieberman had met with a representative of the insurance company, and as a result of the meeting, he had signed a consent form authorizing Employers “to settle the claim of Philip DeSarno against me, within the limits of my policy with Employers Insurance”. After signing the settlement consent from, Dr. Lieberman received information indicating possible fraud or malingering on the part of DeSarno. This information was communicated by Dr. Lieberman to both Employers, and the attorney, Mr. McDonough. Dr. Lieberman then informed Employers both orally and by certified letter, that a trial would be preferable to settlement under these circumstances. The letter indicated that “... I should like to state that no settlement is to be made in the case of DeSarno vs. Lieberman, ...”. A copy of this letter was sent to Mr. McDonough.

Just before trial, DeSarno’s counsel offered an attractive settlement figure of $50,000. At that point, Mr. McDonough telephoned Employers and was instructed to settle the claim then and there. The case was settled, without communicating with Dr. Lieberman.

Dr. Lieberman then sued Employers Insurance of Wausau (Employers) for breach of contract, and attorney McDonough. The insurance company claimed that consent, once given, can not be withdrawn. The attorney claimed that he had acted appropriately, as the agent of the insurance company.

The court’s language regarding the relationship between the insured and the insurance company is instructive. The court said the with respect to the settlement of claims “the relationship of the insurance company to its insured regarding settlement is one of inherent fiduciary obligation.” While the insurer is not compelled to disregard its own interests in representing or defending an insured, the insured’s interests must necessarily come first. The court held that “In the absence of a policy provision that the consent, once given, may not be withdrawn, or of proof that the insurer has acted upon such consent to its detriment, we discern no sound reason for holding the consent to be irrevocable.” The Court also stated that although the issue may be ambiguous, based on a reading of the contract that any ambiguity must be resolved in favor other insured physician.

The Court then turned to the “triadic” relationship of insurer, insured, and counsel, and pointed out that insurance defense counsel routinely and necessarily represent two clients: the insurer and the insured. However, the Court asserted that “nevertheless, the intrusion of the insurance contract does not alter the fact that the relationship with the insured is that of attorney and client. It cannot be overemphasized that the relationship is the same as if the attorney were hired and paid directly by the insured.

The Court held that 1) the revocation was effective, and that Employer’s settlement of the claim constituted a breach of contract, and the insurer has incurred liability to its insured; and 2) Mr. McDonough breached a duty owed to Lieberman inherent in their attorney-client relationship. The attorney’s “dereliction” was two-fold. First was his failure to inform Dr. Lieberman of the conflict of interest between Employers and Dr. Lieberman regarding settlement, and second was his involvement in the actual settlement of the claim against the wishes of his client. This serious breach of duty constitutes actionable professional negligence or malpractice by the attorney.

Case Commentary

Although this fact pattern is lengthy, it is extremely educational. This case provides an excellent description of the relationship between physician, insurance company and attorney. When dollars are paid to one entity (the insurance company), for services provided by another (defense attorney), sometimes the rights and obligations between parties become blurred. If an emergency physician has dollars removed from his or her paycheck for the purpose of funding a malpractice insurance policy, the attorney has a fiduciary relationship with the physician. During the course of litigation, lines of authority and responsibility may be blurred, and not all state court decisions are uniform. However, in this case the Court’s analysis was correct: although hired by the insurance company, the attorney was hired with the emergency physician's dollars: ...defense counsel owes the insured the same unqualified loyalty as if he had been personally retained by the insured...” This creates a legal obligation, a fiduciary relationship, the attorney:client relationship.

It is important for the emergency physician to understand the concept of fiduciary duty. Fiduciary duty is defined as “a duty to act for someone else’s benefit, while subordinating one’s personal (or corporate) interests to that of the other person (or entity). It is the highest standard of duty implied by law (e.g. trustee, guardian). In this case the Court points out the fiduciary relationship between physician-insurer and physician-attorney. The physician can and should expect that the insurers and the attorney’s highest obligation is to the physician, unless that right is given away contractually.

It is also important to understand the conflict of interest issue. Once the attorney detected a clear conflict of interest, the Court found that McDonough had a duty to withdraw from the case completely or to terminate his representation of either the insured of the insurer. In some jurisdictions the attorney can continue to represent both parties if there is full disclosure of all issues, and informed consent of both parties. Emergency physicians should be sensitive to conflict of interest issues in this and other legal arenas.