Since the last major medical professional liability (MPL) insurance crisis in 2002, new companies have emerged to fill a significant “availability gap.”
Many of these new companies had strong management teams and exercised discipline to enjoy long-term growth in both premium and surplus. Over time, however, three common outcomes surfaced. Some have sold to larger companies and their physician shareholders were paid substantial surplus distributions. A second subset remains operational, continuing to grow surplus today., but a third subset experienced far less success. This subset of MPL companies – unable to adequately grow surplus – was inevitably forced to cease operations.
When MPL companies close their doors, the way in which they unwind their operations has major implications on the physicians they insured.
Sale vs. Book Roll
Sale:
When MPL insurers sell, the assets and liabilities transfer to the buyer, thus protecting (the selling) physicians from future claims. In the event of a sale, policyholders often receive distributions based on the selling company’s surplus. Policyholders with claims – whether already reported or “incurred but not reported” – do not have to worry about whether or when the acquired company will run out of money. The buyer steps into the shoes of the seller and handles all covered MPL lawsuits.
Book Roll:
A book roll is essentially just a transfer of a customer list (“book”). Generally, the company selling its book (the “transferor”) becomes a broker, making a commission on any policyholder who renews with the purchasing company. Reported lawsuits remain the responsibility of the transferor.
If the transferor’s reserves and surplus are depleted, physicians are left to personally deal with any fallout. If the transferor is what’s known as an “admitted” company, a state guaranty fund will often provide limited protection for a limited time. If the company is a risk retention group (RRG), it has no such state protection.
Runoff
Although each situation is unique, MPL insurer failures typically follow the same cycle. The first stage is what’s known as a runoff, during which any remaining money is allocated to pay existing claims. If/when liabilities are projected to exceed assets and the company is declared insolvent, it would then go into liquidation. Regulators often have discretion to get involved prior to liquidation to try to rehabilitate the company, but almost always take over the liquidation process. It is during liquidation when physicians covered by that insurer are informed when and how they must file any claims (“notice of claim”). Statutes of limitations (SOLs) become critical, but exceptions that extend those deadlines, such as for “discovery” or for minors, can increase physician anxiety.
The type of coverage provided to physicians also has important implications during this process.
Coverage Types
Claims-made:
Physicians who have claims-made coverage can transfer it to another insurance company, assuming the new company is willing to pick up the “prior acts.” Thus, any new claim that arises becomes the responsibility of the new company. (Note: claims already known and/or reported will not be transferred.*)
Occurrence (“pre-paid tail”) coverage:
Physicians with occurrence-type coverage have few options. Ideally, any reported lawsuit already has adequate reserves assigned, and no new claims will arise.
“Run on the bank”:
Once a company failure is reported, physicians with pending claims tend to want to settle all known cases as soon as possible so they are not left personally holding the bag. Settlements beget settlements. Settlements also attract lawsuits. More lawsuits lead to more settlements.
Options
If your MPL company is undergoing a significant change, it is essential to understand what type of transition is occurring and how it will impact you as a policyholder.
Some key questions:
- Is the transaction a sale or a book roll?
- What will happen to my claims (pending and/or future)?
- Will I be receiving a distribution, and, if so, under what circumstances?
- Where will the proceeds of the transaction go?
In the case of major company failures, the commercial market may come up with solutions. For example, a company may sell retroactive coverage over a liquidated company.
Regardless, the most important action physicians can take when their MPL carrier undergoes a major change is to obtain a specialized broker – one who can not only lay out all their options, but also protect their rights.
*In rare cases, physicians may be able to buy a tail over known claims.
Brian S. Kern, Esq. is a partner with Acadia Professional, LLC, the nation’s most respected MPL brokerage. He is also Of Counsel with Frier & Levitt, LLC, a national boutique health law firm.