By Christopher Guadagnino, Ph.D.

Published March 1998

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In late January the state Insurance Department announced that it was liquidating PIC Insurance Group, the surgical malpractice insurer based in Plymouth Meeting, Pennsylvania that once had 25 percent of the market. The company had stopped writing new business in January, 1996 and stopped renewing its 11,000 policies one year later.

Some 3500 Pennsylvania cases are in litigation, according to the Pennsylvania Trial Lawyers Association (PaTLA), and awards against PIC-insured physicians will be paid either by the Pennsylvania Insurance Guaranty Association (PIGA) or the CAT Fund. PIGA, which is funded by assessments on private insurance companies, covers claims up to $300,000, while awards greater than that would be paid by the CAT Fund up to $1 million per policy.

Last December, P.I.E. Mutual Insurance Company—an Ohio-based malpractice insurance carrier that has a sizable business in Pennsylvania—was placed under a court Order of Rehabilitation, granting a 90-day stay on P.I.E.’s cases to determine whether or not the company’s liabilities exceed its ability to pay claims. The stay was honored by the Court of Common Pleas in Philadelphia, Allegheny and Delaware counties, according to the PaTLA. P.I.E. would be the largest medical malpractice company insolvency by far to hit Pennsylvania physicians, CAT Fund Director John Reed told the Legal Intelligencer, adding that it is far from the last insurance insolvency that he expects to see.

The Ohio Insurance Department, which has been running P.I.E. since Dec. 15 of last year, filed a motion of liquidation against P.I.E. after determining that claims against it exceeded assets by at least $245.7 million, according to the Ohio Dispatch. The Ohio Court recently extended the Rehabilitation Order until early April, after which it will be determined whether or not to liquidate the company. PIGA would stand in for P.I.E.-insured physicians should liquidation occur.

Cited by nearly all observers as the cause of the recent insolvencies is reckless underpricing by the two companies. As one observer put it, PIC came in during the hard market of the 1980s and undercut the price of other insurers in the state, including the Joint Underwriters Association (JUA) rates, picking up a sizable chunk of the surgical specialty market. A soft market in the 1990s brought other carriers into Pennsylvania, including P.I.E., competing on price.

Policies in the state are typically "occurrence-based," meaning that a malpractice insurer’s coverage applies even after a policy is dropped, if a malpractice suit is later filed for an incident that allegedly occurred during the time a physician was covered. As the case backlog in Pennsylvania’s Court of Common Pleas was removed and cases were forced to trial, money from inadequately capitalized companies had to be paid out rapidly.

Further, the Ohio Insurance Department accused former P.I.E. officials of falsifying financial statements and embezzlement, and is suing three former executives to recover $11.5 million, plus interest, in corporate money, reported the Ohio Dispatch. Ohio’s Inspector General is investigating whether the former Ohio Insurance Department’s deputy director shielded P.I.E. from regulators and accepted gifts from P.I.E. officials and insurance lobbyists, the Dispatch added. Similar deal-peddling is rumored about PIC in Pennsylvania, an industry observer says, permitting it to charge less than its filed rates approved by the Insurance Department.

Consequences

Ironically, given widespread outrage by Pennsylvania’s physicians over the CAT Fund surcharges, the Fund appears to be an important protection for PIC and (if insolvent) P.I.E.’s physicians. As Ohio has no CAT Fund and Ohio’s guaranty fund covers only up to $300,000 per claim, P.I.E.-insured physicians in that state are potentially liable for any court settlements or judgments beyond that, notes the Plain Dealer.

PIGA will cover up to $300,000 in physician malpractice liability for Pennsylvania’s physicians, over which amount the CAT Fund’s coverage applies. There is a glaring gap in coverage, however.

PIGA is only required by statute to cover claims made within one year of an insurance company’s insolvency. For PIC insureds, that date is January 21, 1999. Since PIC wrote occurrence-based policies, it is still liable for claims brought after termination of a policy. Unless the interpretation of PIGA’s statute is changed, the physician will be responsible for claims filed after PIGA’s responsibility ends.

CAT Fund coverage, under Section 605 of Act 111, does not begin until four years after a malpractice company’s insolvency. PIC stopped renewing policies one year before it was declared insolvent and paid off claims for that year, leaving three years of exposure to occurrence-based policy claims after insolvency. PIGA’s clock started ticking January 21, 1998 and stops one year later at what is called the "claims barred" date, leaving physicians exposed to two years of possible future claims that cannot be covered by the CAT Fund.

The Pennsylvania Medical Society (PMS), which had been outspoken in its efforts to abolish the CAT Fund, is now working with the Pennsylvania Insurance Department to grant exceptions to PIGA’s statute. The PMS is close to getting a letter from the Insurance Department declaring that the claims barred date is not final and that PIGA is to grant coverage of all claims that are filed with PIGA in a timely fashion beyond that date, says PMS General Counsel Ken Jones, Esq.

Jones notes that the Insurance Department reserves the right to set a final claims barred date, and adds that the PMS is seeking clarification on the Department’s position on the issue. The PMS also hopes to obtain a similar letter from PIGA stating that physicians ought to be covered beyond a strict one-year claims barred date, says Jones. PIGA, which requires other malpractice insurers to subsidize its operations, has been supportive, according to Jones.

In light of the jeopardy these insolvencies thrust upon physicians, Jones declares, "We ought to re-examine our position on the CAT Fund." The issue would be taken up in October at the next PMS House of Delegates meeting, Jones says, unless a special meeting is called.

P.I.E.’s fate invokes a fresh round of challenges. If P.I.E. is liquidated, PIGA would cover P.I.E.’s insureds in Pennsylvania through reciprocal agreement with the Ohio Guaranty Association, notes PIGA official Stephen Perrone. The PMS will have to negotiate with the Ohio agency the same sort of claims barred agreement as it is doing with PIGA to ensure that the terms of the reciprocal agreement protect physicians in this state from liability exposure before the CAT Fund’s protections apply, notes Jones.

A new and untested statute—amended in 1996—may cause PIGA to handle cases differently from the way they would be handled by a physician’s private company, says Perrone. It is uncertain, for example, whether defense costs are to be included with PIGA’s coverage. Perrone did confirm that PIGA will honor a physician’s consent to settle clause, a typical part of malpractice insurance contracts. Since settlement data and trial results are part of a National Practitioner Data Bank available to hospital boards and health insurance companies for physician credentialing purposes, the physician must carefully consider the way his or her malpractice attorney handles a case.

The consent to settle issue may be significant, inasmuch as PIGA’s obligation to defend insureds terminates once they offer a plaintiff their policy limits, cautions CAT Fund Director John Reed. Defense of such a case may continue, thrusting more cost on the CAT Fund, Reed worries.

One outcome of the PIC and P.I.E. developments may be a temporary "flight to quality," where physicians choose a malpractice insurer for reasons other than cost, believes Sarah Lawhorne, president and COO of Pennsylvania Medical Society Liability Insurance Company (PMSLIC). Lawhorne acknowledges that PMSLIC’s rates have always been among the highest in the market, and adds that the company writes more physician policies than any other in the market.

On the other hand, there may still be physicians who will continue to shop for rock-bottom malpractice insurance prices. Jones points out that P.I.E. marketed to physicians who had policies with PIC before it went insolvent.

Few expect medical malpractice insurance premiums to increase dramatically in the short term. PMSLIC has no current plans to raise rates, says Lawhorne. Medical Protective Co. evaluates its rates every year, and doesn’t anticipate rate increases in the market for the next two to three years, says its General Counsel Tim Dirig, Esq. MedPro President Thomas Dietz anticipates a modest market price firming of five to ten percent in the next few years.

But several trends could spell trouble for surviving medical malpractice insurers, according to a 1997 Conning & Company market study:

• Too many insurers are chasing a shrinking number of contracts, given accelerating consolidation and integration of physician groups.

• As the malpractice insurance customer becomes larger and more complex, selling gets tougher.

• As health delivery systems get bigger, medical malpractice writers may get more high-risk, high-volatility claims.

• In a heatedly competitive market where pricing may be out of sync with increasing loss ratios, a crisis may be in the making.

Physicians are advised to check a company’s rating from Best & Co. or from Standard & Poor’s, says Dietz. P.I.E. had a very low rating, Dietz adds; anything lower than "A" should serve as a warning, he believes.

A multi-state carrier can more easily bear lack of financial growth in a given market, and can deploy capital from its other markets, notes Dirig. Companies that write insurance other than medical malpractice also have a wider variety of risk deployment to buffer short-term medical malpractice losses.