Indemnity Contracts vs. Tort Law

 
 

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A 35-year-old woman arrives in an emergency room complaining of a headache. The patient is first triaged by a hospital-employed nurse and then seen by an emergency room physician’s 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’s assistant, the supervising physician, the practice group with whom the physician is associated, along with the hospital, are all named in a lawsuit. The plaintiff demands $5 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 up paying the entire settlement. Although the hospital was named because treatment was physically rendered in their emergency room, the agreement protected the hospital from paying its share under traditional tort 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 for its own indemnity and defense costs should a lawsuit occur. (They also detail minimum limits of liability coverage required to maintain privileges at hospitals and other practice sites.) These agreements basically provide an “out” 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 or 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 the responsibility of the physician or his practice 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 compared to what traditional tort remedies would dictate.

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

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

It must be kept in mind, however,  that the physician or his practice group can also enforce these agreements if the primary or sole direct negligence was on the part of the hospital. For example, in a birth injury case, where the nurses failed to notify the 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 aspects of such indemnity agreements are clear, these agreements remain a potential sleeping giant in medical malpractice lawsuits. The impact of their use or non-use remains to be seen.  A key factor in determining their potential may be the wealth and insurance limits of the physician or practice group. If one goal in these agreements is to achieve an equitable outcome that tort law would not provide and physician groups knowingly agree to these provisions, the 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 self-insured retentions create flexibility and if they include business and other financial advantages. Smaller groups, however, may need to review their limits as well as their policy language related to the use of such agreements. A physician does not 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 physician’s exposure under the 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 $3 million and its indemnity agreement limits the amount it will contribute to its available insurance, then the hospital would pay the $2 million balance.

All agreements of this kind should be reviewed by a health care attorney as well as a practice manager, broker and professional liability carrier. This will help ensure that all potential implications are known and considered.

Indemnity or hold harmless agreements are 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, the key to their success relies on the working relationships of the contracting parties.

 

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About the Author

Jayme T. Vaccaro, JD, is director of professional liability claims at Sedgwick, where she oversees hospital, physician and allied health provider professional liability claims for the western United States.

 
 

5 Comments

  • In Texas, the typical mutual indemnity clause may not be enforceable due to common law requirements.

     
  • The practice works on a wide range of asylum cases and handles over 100 asylum cases per year.

     
  • This is a excellent article and sheds light on indemnity contracts and tort law dealing with health care.

     
  • Thank you for this great article. Based on this I think we are going to review our liability insurance policies and client agreements. It is quite scary to see how big claims can become and who is paying in the end.

     
  • But does this treat the PA as a independent contractor by the hospital or the facility? Is the indemnity contract an employment contract also or a separate agreement all together? Plus with the "deep pockets", how can the hospital protect itself in every case? Truly a case by case situation.

     
 

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