The Pitfalls of Assessability

by William Fleming, R.P.L.U., A.I.S., Director, Product Development

In the unique sector of professional liability insurance, there are distinctions among the types of organizations offering coverage and the strings attached to the coverage. Making the wrong decision can cost a physician tens of thousands of dollars and years of legal trouble. Alternative models to traditional medical malpractice insurance protection can be suited to very large corporations, public entities, or medical schools, but these products can expose solo and small group physicians to unlimited liability and uncertainty regarding the ultimate cost of insurance protection.

Assessable Insurance Products

Imagine reading the financial statement of a company that you do business with and finding your office building and accounts receivable listed among its assets.

An assessable insurance policy means that the insurer can “assess” its policyholders for capital in addition to premiums. This can leave a physician in the unenviable position of a Lloyd’s of London “name”—guaranteeing the liability of untold others.¹ The setting of insurance premiums involves projecting the future cost of claims, and for that reason, insurers must have the financial strength to withstand claim costs that exceed the projections. One way that an insurer or similar company can create financial strength it doesn’t otherwise have is by relying on the personal assets of its members. If premiums prove insufficient to pay claims, the insurer with an assessable policy can assess each member to raise capital in addition to premiums already paid. This means that each member—even if he or she has never had a claim—is pledging all of his or her personal assets to cover the liability of the entire membership.

Does Doctor-Owned Mean Assessable

The majority of physicians in the United States are covered by doctor-owned insurance providers. But member-owned doesn’t necessarily mean that a company’s policies are assessable. Some doctor-owned companies sell assessable policies, and some do not. Many insurance advisors recommend against purchasing an assessable policy unless a nonassessable policy isn’t available, because of the inherent risk.

Risk Retention Groups, Captive Insurers, and Trusts

Risk retention groups (RRGs), captive insurers, and trusts have very different structures, but they have some common features that must be evaluated before you consider joining. These types of organizations are not unique to medical professional liability, though they tend to form in places and times of crisis. Common features include:

• Less regulatory oversight
• Favorable tax treatment
• Lack of state guaranty fund protection
• Mandatory unsecured surplus deposit
• Offshore domicile
• Shared and potentially unlimited liability

A captive is a form of selfinsurance. A “pure captive” is an insurance vehicle created for a large corporation—over half of the Fortune 500 companies cover some part of their insurance program through a captive insurer. Other iterations include group captives, which are owned by a small number of substantially sized but unaffiliated organizations.

RRGs are typically subject to little or no oversight by state regulators. Some observers are concerned that this increases the risk of insolvency. Effective state regulation ensures that premiums are neither excessive nor inadequate and that insurers maintain the ability to pay claims. Recently, a risk retention group insuring over 10,000 doctors was placed in receivership and ordered to be liquidated when it was found to be insolvent by over $200 million. ² Concerns regarding RRGs prompted the United States Government Accountability Office (GAO) to issue a lengthy report that stated, in part, “The combination of single-state regulation, growth in new domiciles, and wide variance in regulatory practices has increased the potential that RRGs would face greater insolvency risks.”³

Trusts typically require additional capital contributions up front in the form of noninterest-bearing unregistered securities, with repayment solely at the discretion of the company. The insurance product may also be assessable, and at least one trust controls its own law firm, rather than using independent lawyers to defend its members. And members of certain trusts can have difficulty leaving, even when signs of financial distress become apparent, because continued participation can be required in order to maintain coverage for unresolved claims.

Claims-Paid Trusts

One alternative insurance mechanism is a claims-paid trust. Unfortunately, even the best doctors get sued. When that happens, a trust participant has entered the insurance version of the Eagles’ hit “Hotel California”—“you can check out any time you like, but you can never leave.” This is because claims will be paid only while a physician is a member of the trust. So if a physician gets sued, he or she cannot leave the trust while the claim is pending, often for years, unless he or she is willing to pay the claim out of his or her personal assets.

PIT: A Case Study

Physicians Interindemnity Trust (PIT) was formed by hundreds of doctors in 1986 to provide an alternative to medical malpractice insurance. The trust grew to approximately 800 members and was controlled by a board of trustees. Each member paid an initial capital contribution and annual contributions, which were pooled and placed into the trust. The interest on the trust corpus, annual contributions, and assessments were intended to pay medical malpractice claims and the administrative costs of the trust.⁴ Assessments are additional monies required of members in order to meet the trust’s obligations and can be required at any time.

The Trust Went Bust

By the summer of 1995, malpractice claims against several members of PIT had increased in number and severity to the point that PIT could not continue in operation without levying and collecting a massive assessment against all the members.⁵ In September 1995, the PIT board concluded that PIT faced unbearable exposure to future defense and liability claims. It was announced that PIT would be wound down and that there would be a multimillion-dollar assessment against the member doctors. The majority of the member doctors refused to pay the assessment. PIT ceased providing malpractice coverage.⁶ A steady stream of litigation ensued, including four cases that made their way to the California Court of Appeals and were ultimately concluded up to 10 years later.

The receiver appointed by the California Department of Corporations sued members for unpaid assessments. The physicians lost.⁷ The physician members sued the trust’s lawyer and the board of trustees.⁸ A physician member sued the receiver to prevent payment of a claim for a member who was not entitled to coverage.⁹ A physician member whose million-dollar claim wasn’t covered because of the insolvency sued other trust members.¹⁰ The receiver sued the board of trustees.¹¹

When the cloud of litigation finally dissipated, physicians who thought they’d bought adequate insurance found themselves underinsured or uninsured.

Questions to Ask About Alternative Forms of Coverage

• Is the company relying on my assets for its financial strength?
• Is the policy or contract assessable?
• Can the insurance provider make any type of “capital call” on those who buy its coverage?
• Does my state department of insurance have authority over the company to monitor its claims-paying ability?
• Will my state’s insurance guaranty fund protect me if the insurer becomes insolvent?

Final Note

When The Doctors Company was formed by physicians in 1976 in response to a lack of available insurance protection, our first policies were assessable. But the status of perpetual nonassessability was conferred on the company by the California Department of Insurance 10 years later. This means that our policies are not assessable: You’ll never have to worry about a capital call.