Judicial Enforcement of Joint & Several Liability

The idea of joint and several liability beyond the insurance facility that you participate in is a very bad outcome for the self-insured group industry and a very good example of why the group captive approach is a superior insurance vehicle. There is no joint and several liability among separate captive entities and most captive insurance companies organizational documents remove joint and several liability beyond the captive participants contributed capital. In other words, if the New York employers considering how to fund their workers compensation risk chose to proceed under the group captive approach rather than the self- insured group or trust approach, they would have avoided the $1 billion assessment they are now confronting.

Legislative Attack on MEWAs

State legislative bodies have a long history of making life difficult for health plans known as multiple employer welfare arrangement or MEWAs. Now, the federal government has picked up the lead and included dramatically increased criminal enforcement and reporting requirements in PPACA (Patient Protection and Affordable Care Act also known as “Obama Care”).

Common sense indicates reserves for known and unknown claims are necessary for any viable insurance facility. The difficulty arises when an insurance facility does not know or anticipate who or how those reserves will be established. This is the environment that MEWAs face with regulators throughout the states. While MEWA assessments have not to this writer’s knowledge reached the $1 billion mark like New York workers compensation groups, many an employer funding its health benefits through a MEWA have received a disturbing letter informing them their estimated health premium was not enough and they now must pay more. Adding insult to injury, the determination that the reserves are not enough often appears arbitrary, unfounded and even a veiled attempt by the state regulator to push the MEWA out of the health insurance business.

Compare this uncertainty with a group captive program insuring health benefits where there is no such thing as an assessment. Premiums, reserves and the process for establishing are determined upfront before an employer/participant joins the group captive. No ex-post facto surprise that the budgeted premium expense was not enough and more money is due.

It’s the Price *#X%!

If joint and several liability along with federal and state regulatory pressure on self-insured groups and MEWAs is not enough to push an employer into a closer look at a group captive insurance program for its workers compensation or health benefits, then how about the ultimate cost. Today’s market for health insurance is doubling every five years. Double digit premium increases are the norm in many markets and workers compensation coverage is unavailable for many classes of business. Yet, all of our workers compensation and health benefits group captives returned distributions to their participants this year. This is especially impressive when you consider these programs compete with the standard market from an upfront premium expense perspective.

The market dynamics that group all insureds together when doling out premium rate increases provide a fertile ground for employers to exit the standard market. Employers are better served by joining with other like-minded employers in a group captive offering a lower overall cost through the return of underwriting and investment profits. Just make sure the insurance facility does not allow for surprises like regulator assessments.

Who is Roundstone?

Roundstone Management, Ltd. based in Westlake, Ohio is an insurance organization focused on the development, underwriting and servicing of specialty insurance programs, including single parent, agency and group captives. Roundstone offers intermediaries and buyers an expertise in the captive and specialty insurance marketplace with an unbundled services approach.

Michael A. Schroeder is President of the Roundstone organization. Mike offers more than twenty years of insurance industry management experience with responsibilities in the captive market, self insurance pools and trusts, publicly held insurance companies and the regulatory environment.

Sydie v. Murad, [2011] O.J. No. 5381, November 28, 2011, Ontario Superior Court of Justice, P. Lauwers J.

This was an application by the defendants in an action seeking a declaration their insurer under a professional liability insurance policy was required to defend them and that they were entitled to select counsel of their own choice for which the insurer was obligated to pay. In the main action, the plaintiffs sued the defendants alleging breach of contract and negligence in respect of a home inspection done by the defendants in May 2007 on a home subsequently purchased by the plaintiffs. The plaintiffs became aware of a rodent infestation after they moved into the home and contacted the defendants regarding the situation in July 2007. In September 2007 the defendants obtained the professional liability insurance policy. In November 2007 the plaintiffs began the main action and the defendants sought coverage under the policy. The insurer denied coverage, claiming the defendants made a material misrepresentation at the time of application for the insurance. In the alternative, the insurer denied coverage of the basis of an exclusion in the policy which excluded coverage for any claim arising out of any act, error, or omission prior to the inception date of the policy and which the insureds knew or could reasonably have foreseen might be expected to be the basis of a claim.

The court reviewed the jurisprudence on the issue of the duty to defend, which establishes that there will be a duty to defend when there is a mere possibility that a claim within the policy may succeed. Because the threshold for the duty to defend is just the possibility of coverage, the burden is on the insurer to show that an exclusion clearly and unambiguously excludes coverage. The test for whether an insured has knowledge of an event or circumstance that could result in a claim is objective.

The insurer argued that the defendant insureds were aware of a potential claim as soon as they were contacted by the plaintiffs advising of the rodent infestation and asserting the defendants had misled them on the home inspection report. The defendants argued that the content of the inspection report and limitation clauses incorporated in the report were exculpatory and on that basis the defendants did not believe they faced a professional negligence claim from the plaintiffs. The evidence on what was communicated between the plaintiffs and the defendants was conflicting and were issues of fact that should be determined at trial. In the circumstances, the motions judge was unable to determine conclusively that the insurer did not owe the defendants a duty to defend. In the result, the insurer was ordered to proceed with the defence, without prejudice to its right to re-argue the issue later.

With respect to the defendants’ application that they be entitled to choose their own defence counsel, to be paid for by the insurer, the court noted that in cases where there is an active and ongoing coverage dispute, the insured might reasonably perceive that defence counsel’s loyalty lies with the insurer and this might undermine the confidential relationship that should exist between counsel and client. The motions judge held that the prudent approach in this case was to avoid both the perception and the actuality of a conflict of interest by permitting the defendants to retain their own counsel, with the insurer being obligated to pay reasonable fees, disbursements, and taxes.

This case was digested by Emily M. Williamson and edited by David W. Pilley of Harper Grey LLP.

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Not surprisingly, the answer lies in a solution that brings together the best of each idea.  This article focuses on a delivery method for insurance coverage known as  a Group Captive.  One of the most attractive features of a Group Captive is it provides the ideal insurance platform to deploy many of the cost saving ideas being discussed in the health care reform debate.  The ‘skin in the game’ structure of a Group Captive encourages stakeholders to seek innovative cost saving ideas.  In fact, the wellness programs, Rx delivery methods and coverage strategies we hear about as the latest innovation of today have all been tested by self insureds; not surprising when one considers who directly benefits when a medical expense saving is achieved.

What is a Captive?

A Captive is an insurance company that is owned and/or controlled by the insureds.  Captives had their start in the 1960s as a solution for insurance coverage that were not readily available in the standard insurance marketplace.  Over the last fifty years, captive’s have evolved from covering the uninsurable risks of a Fortune 500 Company to insuring everyday exposures like Workers Compensation and Auto Liability of groups and associations.  It is the application of this group ownership approach to medical expense coverage that creates the Medical Expense Group Captive Opportunity.

Like other Group Captive’s, the Medical Expense Group Captive is owned and/or beneficially controlled by the group member insureds.  Similar to other Group Captive members or participants, Medical Expense Group Captive participants are commonly homogenous in their business pursuits.  An example of groups that have successfully implemented Group Captive strategies in the property & casualty marketplace include physicians, trucking companies, contractors and accountants.  In all cases, the homogenous group agrees to band together and share a certain portion of the risk that is common in all of their businesses.  The objective of moderating and reducing the cost of insuring their risk is realized when the group’s risk management strategies reduce losses both before and after they happen.

How Does It Work?

Like standard insurance for medical expenses, a Group Captive program requires infrastructure for the effective delivery of claim payments, including a claims administration or TPA company, an insurer to issue the policies and a reinsurer to cover the large or unforeseen loss events.  The Group Captive Program then adds a Captive facility that is controlled by the group to assume a portion of the risk that typically retained by the insurer.

The formation of the Captive facility historically caused the captive solutions to be one limited to larger organizations that could afford the time and upfront investment in actuarial, legal and regulatory professionals.  Fortunately, the innovation of the segregated account rent-a-captive facility enables the middle market to access the benefits of a Captive solution.  These segregated account Captive facilities like our Bermuda domiciled Roundstone Insurance, Ltd. (AA-3194213) enable an insured or group of insureds to efficiently form a Captive that can serve as the risk assumption entity for the Group Captive Program.  This Group Captive entity is functional in weeks with no upfront investment in professional expenses or surplus.

Once the Captive facility is formed and the program’s service providers are engaged, the Group Captive members purchase insurance the same way they do in the standard market; they send in their underwriting information, receive a quote and bind coverage.  The execution of a contract referred to as a participation agreement follows along with a contribution of collateral before the insurer issues the medical expense coverage.

The Group Captive then functions like any other insurance company and reports to its owners its financial performance with premium earnings, loss payments, expenses and investment performance activity.  Through retaining risk in the Captive and the application of innovative program services designed to prevent and reduce medical expenses, the Group captive members may experience underwriting outcomes for their Captive reinsurer that enable a return of underwriting and investment income.  Without the Captive participant by the insured members, these positive underwriting outcomes would have inured to the benefit of the insurance company alone.  The return of underwriting and investment income obviously reduces the insured members cost of insuring their medical expense insurance coverage.

Why Does it Work?

A Group Captive delivers better results to participating members for several reasons.  First, by retaining risk in the captive facility, the insured members are able to capture a portion of the underwriting and investment income a traditional insurance company typically retains.  The profit and overhead component of the standard insurance transaction can be anywhere from ten to thirty percent of the premium dollar paid by an insured.  When these profit and overhead dollars are captured by the insured members, their overall cost of medical expense insurance is reduced.

Group Captive members also realize results that surpass their traditional insurance experience because of the shared incentive the members have with each other and the other risk takers.  Unlike th traditional insurance transaction where you pay your premium and losses are largely irrelevant to you, when a Group captive member contributes capital to a risk bearing enterprise that is dependent on the Group’s loss experience, the incentive is for the member to police its claim activity more diligently.  This is the “Skin in the Game” concept.  Reduced expenses such as reinsurance are also realized by the Group Captive members who exhibit claim experience more attractive than the overall medical expense insurance marketplace.  Shared incentives create shared expense benefits.

Of course, the environment of loss prevention is also stimulated as the Group Captive members search for the most efficient way to deliver Rx, purchase medical procedures and deliver wellness ideas or practices.  It is not surprising that many of the best in class health care solutions being advocated by the experts in the national debate have their origin in the Captive or self insurance marketplace.  When a new method to mitigate the health risk of patients can be correlated to a premium dollar savings, it is not surprising the members of Group Captives have a higher commitment level to better health outcomes than the typical insurance buyer.  Creativity, commitment, oversight and consistency all contribute to the Group Captive offering the best overall price and solution to escalating medical expense cost.

What Can Go Wrong?

The devil is in the details.  The benefits a Medical Expense Group Captive offers can be lost when details such as provider networks, excess reinsurance terms, transaction fees and wellness programs are ignored or mishandled.  Should the Group Captive also not utilize the efficiencies offered by established turnkey Captive facilities, the organizational costs required to establish a regulatory adequate Captive facility can take years to recover.  Experimenting with a new wellness program can deliver returns with little downside but trying a new service provider without the knowledge and experience with reinsurance could contribute to increased costs for the Group Captive members.

Conclusion

A Group captive approach to insuring your medical expense risk is one of the many strategies escalating medical costs head on.  Take control by not only improving your approach to how health care is delivered to your organization, but how the insurance dollar is spent and returned.  When the best possible cost containment services are combined with an efficiently built risk retention facility, the conclusion that a Medical Expense Group Captive offers the lowest cost solution for insuring your health care is evident.

For more insight, go to http://www.roundstoneinsurance.com/solutions/stoploss.html