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June 1999
Volume 63 |
Number 6
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Insured But Not
Covered:
The Emperor's New Clothes - Part II |
Stephen R. Strelec,
M.D.
The September 1998 issue of the ASA NEWSLETTER began with
an editorial titled "The
Emperor's New Clothes" and reiterated the classic fable of
the emperor who was deceived into believing himself elegantly
dressed though only wearing his underwear.1
Many physicians similarly consider themselves as adequately insured
against medical malpractice claims when in fact they may not be.
The insolvency of several insurers doing business in Pennsylvania
in 1998 brought home this lesson particularly hard for several
thousand physicians practicing in that state. An analysis of some
of the general issues and specific details surrounding these insolvencies
should help each of us avoid certain pitfalls when purchasing
malpractice insurance.
1998 Pennsylvania Insurance Landscape
Malpractice insurance is a prerequisite for medical licensure
in Pennsylvania, so "going bare" (ala the emperor) is not an option.
Pennsylvania physicians purchase malpractice insurance in a two
layered fashion; the 1998 standard was primary coverage of $300,000
per occurrence obtained from a commercial carrier and excess liability
of $900,000 per occurrence obtained from the state run CAT (Catastrophic
Loss) Fund. The CAT Fund premium surcharge is based upon a multiple
of the primary insurance premium. Pennsylvania, like many states,
has an insurance guaranty association (PIGA); an association funded
by assessments on private companies that serves as the insurer
of last resort when a primary carrier declares bankruptcy. Pennsylvania
law (Section 605, Act 111) stipulates that the CAT Fund serves
as the primary insurance company for all malpractice actions filed
four years or more after the date of occurrence.
A Tale of Three Insurance Carriers
The insolvency of a malpractice insurance carrier is not an
unprecedented event in and of itself. The cratering of one Pennsylvania
company was in fact heralded by the insolvency of its Texas subsidiary
in 1997.2 The uniqueness of the
Pennsylvania experience is based on the multiplicity of insolvent
carriers, the number of doctors involved and the different nature
of the carriers in jeopardy.
The PIC insurance group was a Pennsylvania-based insurance carrier
that wrote occurrence-type malpractice policies beginning in the
mid 1980s. The PIC strategy was to market aggressively low priced
policies to high-risk specialists. PIC succeeded all too well,
for 25 percent of Pennsylvania physicians (11,000) were PIC insured
in January 1997 when PIC stopped renewing its policies. When PIC
was ordered into liquidation a year later in January 1998, it
was estimated that 3,500 open malpractice cases were on the PIC
files, with possibly 1,000 malpractice actions yet to be filed
against PIC insured doctors.3
The PIE Mutual Insurance Company was an Ohio-based carrier started
in 1975 by a group of Ohio physicians. PIE also grew rapidly based
on a strategy of aggressive premium pricing, and, at the time
of its demise, PIE was one of the largest doctor-owned liability
carriers in the country, doing business in nine states including
Pennsylvania and Ohio and insuring over 15,000 physicians including
about one-third of those in Ohio.2
When the Ohio insurance department declared PIE insolvent in April
1998, more than 1,000 open PIE malpractice cases were on the books
in Pennsylvania alone.
AHSPIC is a unique insurance carrier known as an offshore captive
company and was a subsidiary of the now bankrupt AHERF, a conglomerate
of the former MCP and Hahnemann Medical Schools and several large
Pittsburgh hospitals. AHSPIC insured nearly 1,500 physicians in
1998 and though not insolvent itself, bankruptcy proceedings against
the parent AHERF now threaten the escrowed premiums paid by AHSPIC
physicians.
What Now?
The unfortunate physicians insured by PIC, PIE and AHSPIC were
all left scrambling for alternative malpractice coverage in 1998.
The thornier issue is what to do about the claims already filed
or that will be filed against them. There is no easy or single
answer. One partial solution is the Pennsylvania Insurance Guaranty
Association (PIGA). PIC and PIE insured doctors enjoy the PIGA
safety net, but it has large holes in it. PIGA initially issued
a claims barred date of one year after the PIC and PIE
bankruptcy filings, after which it would not accept defense of
a case. Worse still, PIGA provides a $300,000 coverage cap per
claimant (i.e. plaintiff), meaning the defense and settlement
costs of multiple defendant doctors for any one case could only
total $300,000, far less coverage than their original policies
provided. The only good news is that this coverage is better than
the $100,000 per claim cap provided by the state of Kentucky.2
AHSPIC insured physicians do not even enjoy this. The Pennsylvania
CAT Fund is a second safety net with even bigger holes. The CAT
Fund provides excess coverage only above $300,000 in liability
and claims must arise within four years after a malpractice occurrence
for the CAT Fund to serve as primary insurer. Many states including
Ohio lack even this protection however. The final option open
to the suddenly "bare" physician is to purchase prior acts coverage,
an often expensive undertaking costing up to several times a normal
year's premium.
Collateral Concerns
Several other complex issues arise from an insurers insolvency.
One of the worst problems is payment of a claim already determined
by trial or settlement, but not yet paid off by a now insolvent
insurer. Management of active claims is also complicated, for
any new insurer may disrupt the smooth equilibrium; e.g., alternative
defense attorneys may be appointed and the physician's right of
"consent to settle" may be undermined. Retired physicians may
once again have malpractice worries if their tail coverage was
provided by a now bankrupt carrier. Physicians not even insured
by insolvent carriers also suffer collateral damage, for plaintiff
attorneys seeking deeper pockets often shift the focus of their
efforts to other physicians with more reliable insurance coverage.
A problem unique to Pennsylvania is the underfunding of its CAT
Fund, whose own premiums were based on multiples of unrealistically
low primary PIC and PIE premiums.
Lessons Learned
Malpractice insurance companies are not all the same and purchasing
reliable insurance is one of the most important professional decisions
that you must make. The so-called safety nets that exist if an
insurance company fails are inadequate protection at best. Ultimately,
any gap in coverage translates into personal liability with the
physician's assets at risk. Chilling words to remember are those
of an Ohio attorney who observed, "If I have to chose between
letting an M.D. keep personal assets and getting my client what
she deserves, I am going after the doctor even if it means bankrupting
him."2
Bottom fishing for the lowest insurance premium is one of the
worst ways to choose a malpractice carrier. An informed decision
can only be made after taking several steps; asking your insurance
agent tough questions about the company he/she represents, reviewing
the financial statements of the company itself, inquiring of your
state insurance department about any problems with a particular
carrier and finally reviewing the ratings of the insurance carrier
as determined by Standard and Poor's, A. M. Best, or Weiss Ratings
service. When buying malpractice insurance you should choose your
insurance carrier as if your assets depended on it.
References:
- Lema MJ. Ventilations. ASA NEWSLETTER.
1998; 62(9):1.
- Rice B. When a malpractice insurer sinks.
Medical Economics. 1998:188-209.
- Guadagnino C. Malpractice coverage in
jeopardy. Physician's News Digest. 1998; 3(11):1-7.
Stephen R. Strelec, M.D., is Assistant
Professor of Anesthesiology, MCP/Hahnemann School of Medicine,
Allegheny University of the Health Sciences, and Senior Attending
Staff, Department of Anesthesiology, Allegheny General Hospital,
Pittsburgh, Pennsylvania.
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