The EP should be cautious in dealing with insurance companies. Most EPS know a colleague or friend who was insured by an insurance company that went bankrupt. In that event, there will be no coverage, or possibly, reduced coverage from a state insurance guarantee fund. The EP should be able to evaluate certain basic aspects of any malpractice carrier, to determine if the chosen company is in good business health. In addition, the EP may want to seek the assistance of a professional insurance adviser.

As a prospective policyholder, the EP should evaluate a company’s financial management and review its annual report and other financial statements. It is vitally important that an insurance carrier have sufficient financial resources to meet all current and future claims against policyholders. This can be determined by examining several measures of the financial strength of an insurance company.

Surplus. This first key financial element is the amount by which a company’s assets exceed its liabilities. Surplus can be determined by adding these items on a balance sheet that may be referred to as “capital paid in”, “surplus”, “surplus paid” or “earned surplus.” Surplus is the net worth of the company and represents the company’s safety net. A company accumulates surplus to assume risk and to pay for unanticipated deficiencies in loss reserves, thereby assuring its ability to maintain its strength and fiscal integrity.

Net written premium. This important financial element is the amount held by the company after it has paid for reinsurance. (Companies do not want to assume all the risk of their policies, so they buy insurance--called reinsurance--from other insurers.) This item is usually shown on the annual report’s statement of income.

Loss reserves. This figure is shown on the balance sheet under such items as “reserves for future claims,” “loss reserves” and “claims reserves.” The three categories of loss reserves are indemnity reserves, allocated loss adjustment expense reserves (called ALAE), and unallocated loss adjustment expense reserves (called ULAE). Indemnity reserves are set aside to pay the portion of claims costs paid directly to claimants. ALAE reserves are set aside to pay present and future costs attributable to specific claims, such as defense attorney fees or expert witness fees. ULAE reserves are set aside for the future management of open claims.

The three elements: surplus; net written premium; and loss reserves, make up the basis for the following important financial ratios that should be evaluated by the Contractor before selecting an insurance carrier:

1. The ratio of net written premiums to surplus (P/S) indicates the company’s ability to assume risk. Industry regulators and rating services suggest a ratio between 1:1 and 3:1.

2. The ratio of loss reserves (including reserves for loss adjustment expenses) to surplus (R/S) indicates the company’s ability to cover unanticipated reserve deficiencies. Industry regulators recommend that this ration not exceed 4:1.

The financial and operating strength of a company is also indicated by the rating it receives from the A.M. Best Company and other independent analysts of the insurance industry. These companies evaluate the performance of insurance companies in vital areas, such as: competency of underwriting; control of expenses; adequacy of reserves; soundness of investments, and capital and surplus sufficiency.

Case # 1 Emergency Group loses malpractice coverage - still must defend claim

In June 1993, a malpractice claim for misdiagnosis was filed against Dr. Ata Ulhaq, who was working in the emergency department at Jewish Hospital. Dr. Ulhaq then learned that his insurer, United Physicians Insurance Retention Group, had been placed into receivership the previous August, and his emergency group, Trauma Services, had failed to obtain other coverage.

Dr. Ulhaq won a judgment requiring Trauma Services to provide a defense for him in the malpractice case, insure him for any judgment in that case and remit costs incurred in pursuing this declaratory judgment.

The appeals court affirmed that judgement stating that Trauma Services was obligated under contract to provide Dr. Ulhaq with malpractice insurance, and had in fact done so until the policy was canceled. The company breached its duty by not obtaining other coverage.

Case Commentary

This case underscores several important points. Dr. Ulhaq was able to take his case to court and win a decision because he had a written contract which detailed Trauma Services obligation to provide medical malpractice insurance coverage. If Dr. Ulhaq had an oral agreement, or the relationship was silent on this point, it is not at all clear that Dr. Ulhaq’s legal challenge would have been successful.

Dr. Ulhaq would have been well served by an initial inquiry regarding the financial health of the United Physicians Insurance Retention Group. How was the company rated when Dr. Ulhaq started with the group? What did the company hold in loss reserves? Was it a good idea for Dr. Ulhaq to create a contractual relationship with Trauma Services, knowing the specific condition of that corporation’s insurance company?

This case also makes the important point that when an emergency contract group makes a contractual promise, it is legally bound to follow through. The fact the Trauma Services lost its insurer, did not find a new insurance company, and may have been faced with a huge liability, does not alter the contractual obligation. It is unfortunate that Dr. Ulhaq had to spend his quality time mounting a legal battle, but it does appear that justice was served.