Have Your Captive’s Coverage Forms Kept Up With Your Needs? Developing & Updating Your Captive’s Coverage Forms

Have Your Captive’s Coverage Forms Kept Up With Your Needs?Developing & Updating Your Captive’s Coverage Forms John B. Mumford, Jr. Hancock, Daniel, Johnson & Nagle, P.C. Richmond, Virginia

Developing & Updating Your Captive’s Coverage Forms • One of the primary benefits of a captive insurance program is flexibility: • Flexibility to tailor coverage forms/policies issued by captive to meet your needs – provide the coverage that you want • One size does not fit all • Question - Where did the policies we are using now come from? • Have we reviewed policies recently (ever) to make sure they provide the coverage we want/expect?

Coverage Forms – The Policies • For a healthcare captive, the primary focus is on the professional liability/malpractice policy issued by captive • But there are some GL issues too. • When we review policies, what issues should we look for?

Framework For Review Suggested framework for review: • Who are we insuring and for what? • Have we included everyone who should be insured? • What categories of conduct will be covered? • What acts do we not want to cover? • How will limits of liability apply? • What conditions do we want/need to include?

Who are we insuring and for what? • Answer found in “Insuring Agreement” of captive’s professional liability policy (usually one of the very first provisions). • Typical Insuring Agreement provides: “We will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of injury arising out of a Medical Incident that occurs during the Coverage Period and for which a Claim is first made against the Insured and reported to the Company during the Reporting Period.” • Key to answering question – who is insured and for what – is found in the concepts of “Insured;” “Medical Incident;” and “Coverage Period.”

The basic definition of Medical Incident: • “Any act or omission in the furnishing of professional health care services to any person, including, but not limited to: (i) the furnishing of food, beverages, medications, or appliances in connection with such services; and (ii) the postmortem handling of human bodies.” • This covers your basic hands-on care and treatment of a patient

“Medical Incident” – Beyond the Basics: The definition of Medical Incident is also extended in many healthcare professional liability policies beyond direct patient care to include: • Peer review / credentialing activities; • Administrative acts as medical director of a department; • Acts or omissions as part of clinical drug study; • Others? (e.g., maintenance of privacy of health records) • Must be VERY CAREFUL in defining these. • What is the intended scope of coverage?

“Medical Incident” – Beyond the Basics: What is the intended scope of coverage? • For example, peer review committee member bad mouths competitor-physician to other physicians and patients, and gets sued for defamation. • Is this “peer review”? • Depends on the definition in the policy of “peer review”. • Some policies have amazingly broad language. • Medical Director reviewing surgical techniques as part of peer review, steps in and assists in surgery which results in medical malpractice case. • Is this an administrative act triggering coverage under captive’s policy? • Or should Medical Director’s PPL policy cover this?

Who is Insured? • Named Insured – You can find our names in the policy • Just Plain Insureds – We are insured as a class of persons in the policy based on our relationship to a Named Insured, but we are not specifically identified by name in the policy.

Who Is Insured? The Basics – Coverage for Entities (typically the Named Insureds) • Who are the covered entities? • Are all the entities we want the captive to insure included as named insureds? Or is there some broader inclusion for subsidiaries, etc., within a health system? • For ease of future use and administration, best to name all entities as “named insureds”

Who Is Insured? The Basics – Coverage for Entities (typically Named Insureds) • How are newly created entities treated? • Must we add them immediately as named insured for coverage to apply; OR • Are they automatically covered until the next renewal or because they are a subsidiary of a named insured (any ownership threshold)? • Maintaining coverage for dormant and dissolved entities. • Should we keep inactive or dissolved entities on list of named insureds in case of run-off claims?

Who Is Insured? A Bit More Complicated – Coverage for Individuals • What individuals are insured: • Officers and directors? • Employees (everyone other than physicians and physician extenders) - nurses included here? • Physicians and clinical extenders? • Non-employee department chiefs and clinical directors? • Peer review committee members? • Volunteers? • Students?

Who Is Insured? A Bit More Complicated – Coverage for Individuals • Key is to review exposures and make sure: • All of your operational entities are insured; • The people you intend to insure are included; • The people you do not want to insure – are not • Example - If your policy says, all employees are insured (without any limitation), then you have just picked-up coverage for all employed physicians – which is fine if that’s what is intended. • Make sure that concept of who is insured carries over into any excess policies.

Who Is Insured? A Bit More Complicated – Coverage for Individuals • In what capacity are these individual persons insured: • This is not an issue for entities • Officers and employees (including nurses). • Typically only insured for acts/omissions in performing services on behalf of named insured • No moonlighting coverage • No coverage for volunteer efforts (unless directed by named insured) • Peer review committee members, medical directors, preceptors, etc. • Coverage limited to acts in that capacity (see earlier discussion)

Who Is Insured? A Bit More Complicated – Coverage for Individuals • In what capacity are these individual persons insured: • Physicians: • Will coverage be limited to acts/omissions in performing services on behalf of named insured? • Or will coverage be similar to commercial market physicians’ professional liability policy and extend coverage to all professional services anywhere (including moonlighting, volunteering, etc.)

Prior Acts & Continuing Coverage • Is captive’s professional liability coverage “claims made” or occurrence (assume claims made)? • Distinctions • New developments as to definition of a claim. • Is captive’s general liability coverage “claims made” or occurrence? • Does captive provide prior acts coverage to insureds? • For entities – little risk if you know what they have been doing and where. • But what about acquired entities? • For individuals, most captive’s do not love idea of prior acts for individuals. But many compelling exceptions (recruitment, insolvency of commercial carrier, etc.) • Beware of skeletons in the closet (does your captive insuring risks in Virginia want to cover and defend a case in Jackson, Mississippi).

Prior Acts & Continuing Coverage • Does captive provide tail coverage (extended reporting endorsement) that can be obtained by insureds on separation from named insured? • Who can obtain? • How will it be priced? • Stated in policy? • Pursuant to captive’s underwriting guidelines then in effect (do these exist?) • Will reporting period be unlimited or limit to number of years? • Will it have its own limits or share limits with the captive policy issued to the named insured (applicable to year of issuance of the reporting endorsement)?

Defense Obligation • Joint Defense • Will the policy require a joint defense, where possible, in cases where the captive insures more than one defendant in a suit. • What language in the policy establishes this requirement: “With respect to suits filed against the Insured, the Insured acknowledges and agrees that the Company may appoint one defense attorney to represent the Insured and other co-defendants in the suit who are also insured by the Company (a joint defense), unless, in the opinion of such defense attorney, a conflict between the interests of the Company’s insureds precludes such joint defense.”

Defense Obligation • Does the policy place any limitations on reimbursement of defense costs – such as: • Who counsel will be (can only select from panel counsel) • Reasonable and approved rates • Compliance With Litigation Guidelines • Remember – It may not always be a “friendly” that we insure.

Defense Obligation • How do defense costs impact the “per claim” and “aggregate” limits of liability (and captive’s retention)? • Are defense costs outside limits? • Are defense costs within limits? • When does reinsurance or excess insurance kick-in to pick-up defense costs?

Exclusions • What conduct of employees will be excluded? • Practice specific exclusions (bariatrics); • Sexual acts exclusion (will captive still provide a defense where allegation of sexual impropriety – when can we get out of defense?); • Known claims • Antitrust (in peer review context) • Does policy contain innocent insured provision so that even if individual commits an excluded act, the entities retain coverage? • Are primary policy exclusions consistent with exclusions in any excess policy? Often not.

Limits of Liability • Limits issues: • Will insureds share “per claim” and aggregate limits or will certain insureds have separate limits? • Importance of consistency with excess / reinsurance policy in this area.

Limits of Liability • Limits issues: • Will acts or omission of multiple insureds over extended period of time with respect to a single patient constitute one claim or multiple claims? • Standard policy language = “Regardless of the number of insureds involved, all related acts or omissions in the furnishing of professional services to any one person, shall be considered one Medical Incident.” • Will claims of mother and baby relating to birth injuries be considered one claim or two claims (most policies address this – and standard policies treat as a single claim). • Significance of single claim versus multiple claims in terms of primary limits, excess limits, and reinsurance limits.

Limits of Liability Limits issues: • Tailoring limits to state law immunities – • Some states provide charitable immunity to certain nonprofit entities (such as hospitals) above any insurance coverage available to hospital (i.e., you are immune from judgment in excess of $100K except to the extent that you have insurance coverage above this amount). • But, in light of judicial move away from charitable immunity, no one feels comfortable carrying only $100K in limits. • As an alternative, policy can be endorsed to provide that limits are reduced to $100K where insured is protected by charitable immunity. • Untested. But good argument can be made that endorsement should be effective

Conditions Policy Conditions • Consent to settlement. • Policy should specifically address this. • Options: • Captive can settle any claim at any time. • Makes physicians nervous. • Insureds (such as physicians) have the right to block settlements to which they do not consent. • Makes captive claims manager nervous. • Hammer clause – If captive recommends a settlement and insured does not consent, insured on the hook to the extent that judgment exceeds amount of recommended settlement (plus defense costs from date of recommendation). • Very rare in captive setting. • Claims committee. • If captive and insured do not agree on settlement, binding decision is made by claims committee

Conditions Other Insurance Clause • Sets priority among multiple insurance policies that apply to the same loss. • Typical language – “When both this insurance and other insurance apply to loss on the same basis, whether primary, excess or contingent, the Company shall not be liable under this Policy for a greater proportion of the loss than the applicable limit of liability under this Policy for such loss bears to the total applicable limit of liability of all valid and collectible insurance against such loss. • Other language might say that “this policy is excess over any other policy applicable to the loss.” • What do courts do with this? • Typically disregard and treat both as primary (equal shares) unless clause drafted with specificity – such as “this nurses policy issued to you individually is excess over any other valid and collectible insurance issued to your employer and covering you as an additional insured with respect to the loss.

Conditions Other Insurance Clause • Tailor to meet your needs. • Example = Non-employed physician who serves on an insured hospital’s peer review committee is sued (along with hospital and other committee members) for negligent credentialing. • Physician has coverage for the suit under both hospital HPL policy (issued by captive) and physician’s PPL policy from commercial insurance. • Policy language – “[w]ith respect to claims, loss, or damages arising from peer review services, the insurance provided by this Policy is excess over any other insurance available to the Insured.” • Under this language, good argument that physician’s policy pays first. • If contractually asked to include someone as an additional insured, then usually must agree to be primary with respect to additional insured coverage.

Other Issues – Additional Insureds • Additional Insureds. • Insureds frequently required by contract to include third parties as “additional insureds.” Mostly for GL coverage, but sometimes on professional liability coverage. • How does captive handle this. • Case by case endorsement (time consuming) • Broad endorsement (loss of some control) • Example:

Other Issues – Additional Insureds • Any person or entity who is a party to a valid contract or agreement with a Named Insured that requires the Named Insured to include such person or entity as an insured under one or more coverages set out in this Policy is an Additional Insured under this Policy, but only to the extent of the specified coverage required in the applicable contract or agreement and subject to all of the limits and restrictions on such coverage set out in the applicable contract or agreement. Provided further that any such contract or agreement cannot expand the coverage provided under this Policy, and the Company shall have no obligation to provide any defense, indemnity, or other coverage to such person or entity that the Company would not otherwise be obligated to provide under this Policy. If the Named Insured disputes the obligation to provide coverage to such person or entity (or disputes the extent of coverage available to such person or entity), the determination made by the Named Insured of its obligation, if any, shall be binding.

Other Issues – Additional Insureds • This language allows captive to have some control over who attains additional insured status, without continually issuing additional named insured endorsements. • If issuing named insured endorsements, these need to be done correctly or can create big, big problems. • Example of additional insured endorsement issued to GE for GL coverage that in no way restricted scope of coverage. • Besides additional insured endorsements, outsiders can also attain coverage from captive through insureds’ indemnity agreement (considered an insured contract). • Some GL language out there would require captive to provide a defense to indemnitee in some circumstances (current ISO) • This is a big deal with property managers, snow removal contractors, and contracts for their services.

GL Issues • In addition to covering bodily injury and property damage under Coverage A, GL policies will typically include a Coverage B that provides coverage for: • False arrest, detention, imprisonment • Malicious prosecution • Publications that violate privacy rights (HIPAA?) • Defamation • Unauthorized use of advertising ideas in your advertisement • Copyright, trade dress, or slogan infringement in advertisement • Review of primary and umbrella/excess coverages – do they all line-up.

Thank You

Have Your Captive’s Coverage Forms Kept Up With Your Needs? Developing & Updating Your Captive’s Coverage Forms