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Shopping for Liability Insurance

By Kevin M. Quinley
Posted: May 19, 2008, from the April 2007 issue of Skin Inc. magazine.

A new kind of spa is gaining popularity—the medical spa.
       These facilities offer services such as laser hair removal, Botox* injections and other anti-wrinkle shots. Often located in plush environments, medical spas may have a physician on staff and cater to affluent consumers who crave relaxation and pampering.
       Potential liability headaches, however, may prompt medical spa owners and operators to desire some relaxing spa time for themselves. The lawsuit industry is always looking for the next deep pocket, and some attorneys think that the medical spa industry is a juicy target.

Stuff happens
  To paraphrase a popular bumper sticker, “Stuff happens.” An accident virtually guarantees that anyone within 50 feet of the mishap will end up being dragged into court. Consider these suit-producing scenarios:

 

  • A client undergoing a chemical peel claims that she was negligently burned or suffered an adverse reaction.
  • A client alleges that he fell off a massage table and sprained his shoulder.
  • A client is dissatisfied with her Botox injections, claiming that spa personnel did not adequately warn her of discomfort and side effects.
  • A client slips and falls while walking between rooms.
    Financial Health Information

    Medical spa owners or their agents can contact the following rating services for this type of financial health information:

    A.M. Best—908-439-2200
    Demotech, Inc.—800-354-7207
    Duff & Phelps—866-282-8258
    Moody’s—212-553-0377
    Standard & Poors—800-523-4534
    Weiss Research—800-289-9222

     

      Personal injury attorneys can use any of these situations to pursue a lucrative injury claim. Mishaps are rare, but they are not
    purely theoretical. In 2005, for example, a North Carolina woman died after overdosing on a numbing cream she received before a laser hair removal treatment.1 Attorneys are eager to portray medical spas as under-regulated entities operating on the fringes of medicine and staffed by people of suspect qualifications.

    Liability insurance
           By their very nature, medical spas court the risk of injury to others. When injury occurs, spa owners and managers may find themselves in court, needing the financial protection of liability insurance.
           As small-business owners, spa professionals must have clear specifications when shopping for general and professional liability insurance, the main financial tools for safeguarding financial assets from liability claims.
           Insurance policies are two-party deals between a spa and an insurance company. The most common liability policies for commercial enterprises are Commercial General Liability (CGL) and Business Owner’s Policies (BOP). CGL policies often cover larger companies, while smaller spas might buy a BOP.
           Liability protection for medical spas has two key components. One is general liability that applies to slips, falls and other mishaps which occur on your property. The second is professional liability that covers disputes which arise from personal services such as massage and nutrition consulting. Spas should make sure they have both types of coverage.
           Both parties—the insurer and insured—agree to certain terms of protection. Those terms cover the specifics of your spa’s products and operations. Since an insurance company’s literature rarely reveals everything you may need to decide if a policy is right for you, ask the company’s representative the following questions before becoming a full-fledged buyer.
         
           Do I have both general and professional liability coverage? “Make sure you are covered for both general and professional liability coverage,” suggest Pat Swingle, senior vice president of Phoenix-based insurance agency Lovett & Touche, a firm that specializes in coverage for spas. “If possible, put this coverage with the same insurer.”
           Swingle cautions that BOPs have professional liability exclusions. This can be problematic for medical spas, although if a facility is large enough, Swingle states, it might be able to get the insurer to eliminate the professional liability exclusion. Many insurers still get nervous when they hear the word “massage” and fear of sexual harassment claims. Consider purchasing a separate policy for professional liability or medical malpractice insurance. You will need professional liability coverage for any activities undertaken by medical staff, ancillary medical personnel or anyone involved in patient care.
         
           How do you determine the cost of coverage? Insurers who offer coverage likely will factor in your spa’s annual revenue, the annual volume of patient visits, the type of procedures done on premises and what type of staff—a registered nurse or physician, for example—performs the procedures. The bigger your business and the more clients you serve, the more you can expect to pay. Other factors determining your cost will be your claims history and the amount of insurance limits you want to buy. Liability coverage may cost $7,500–25,000 annually.
         
           Can I see a sample copy of the policy? You would not buy a car without taking a test drive. Unfortunately, you cannot audition an insurance policy for size, fit and comfort before paying your premium. Nevertheless, you can demand a specimen copy of the policy and all endorsements—add-on provisions that customize the coverage to your specific needs—before deciding to buy. Invest time in reading each policy and review the differences between the policies you have perused. Enlist your insurance agent or broker to help. If one price quote is noticeably lower than another, proceed with caution—sometimes one insurance policy is less expensive than another for a reason. One such reason is skimping on service after the sale.
         
           How good is your claims service and what specifically differentiates it from your competitors? Weigh the candidate insurer’s claims-handling reputation. Does it care for policyholders and handle claims quickly? Will there be a person available locally to take care of a claim or will you have to dial an 800 number and wait on hold? Does the insurer evade obligations, contesting cases and litigating gray areas by exploiting fine print? If a loss occurs, you do not want to find yourself fighting a war on two fronts: one with the aggrieved customer over injury and another with your insurance company over coverage.
         
           What safety and risk management services do you offer? Seek an insurer that not only offers financial protection, but also will help you promote safety and risk management. Some insurers offer on-site safety visits and audits with specific tips on how to “suit-proof” your medical spa. Others publish free newsletters with safety tips or offer safety seminars or in-service training for policyholders. Press for details on post-sale services and ask if these services are customized to medical spas.
         
           How much is my coverage or liability limit? Normally, the policy section titled “Declarations of Coverage” lists the amount of available insurance, along with the inception and expiration dates of coverage. Coverage of $1 million per loss/$3 million aggregate, for instance, means that a spa has coverage for up to $1 million per claim and up to a total of $3 million per year.
      Other medical spa policies have a combined single limit, where a facility’s total coverage is $3 million. Whether you have one $3 million claim or six claims valued at $500,000 each, $3 million is the maximum the policy will pay. The moral of the story is that you need to determine the size of your financial security blanket. This leads to the next question.
     
         Is the insurance company financially strong? Your customers want assurances that your facility will be around tomorrow, next week and next month. Similarly, medical spas want insurers that will be around for the long haul, especially since claims sometimes surface months after incidents.
           While most insurers are financially strong, some suffer periodic woes. Check the strength and stability of every candidate insurance company placed before you. Independent rating agencies grade insurers based on their financial strength. Make sure your liability insurer, or at least all of the candidates on your short-list, has a high rating. A cheap premium quote does little good if the insurer ends up broke or delivers poor service. (See Financial Health Information.)
           Limit insurance placement to companies with the highest grade of financial rating, usually expressed by letters such as A+++ or A+. Avoid insurers graded B or lower. You will sleep better knowing that your insurer has rock-solid financial stability, even if your premium is higher. If your medical spa’s coverage evaporates due to insurer insolvency, you will find little comfort in the fact that at least you saved money on the premium.
         
           Am I buying enough insurance? One million dollars in coverage may sound impressive, but when million-dollar jury awards are fairly common, you invite financial disaster if you are underinsured. The answer to how much coverage is enough is like Abraham Lincoln’s reply to the question of how long a man’s legs should be: “Long enough to reach the ground.”
           No easy formula exists to determine the level of insurance limits a medical spa should carry. An experienced insurance agent or broker can help you decide, factoring in your facility’s financial health, claims history and your risk tolerance. Do not risk a lot by saving a little on an insurance premium.
           A final reminder: Read the policy. If anything varies from what the insurance company’s representative told you, question it and keep careful records of all correspondence.
           With forethought, medical spa owners and operators buying liability protection can design their insurance program as carefully as they would assemble a successful facility. For medical spas willing to invest the time, broader coverage and lower premiums will be their reward.

    REFERENCE
    1 RL Rundle, Medspa Boom Has Become a Bust for Some, The Wall Street Journal B5 (Nov 21, 2006)