Beware of captive’ med/mal coverage

Physicians often get raked over the coals,’ source says

Don’t buy malpractice insurance. Let’s set up a captive for you instead!" might be a tempting offer coming from a financial planner or accountant.

"Most of the time, physicians will get raked over the coals and set up with something that is not really right for them," warns Jonathan Katz, president of Oros Risk Solutions, an Orlando, FL-based insurance and consulting agency specializing in selling medical professional liability insurance.

Often, it turns out that a true captive, which means the physician group is actually forming its own insurance company, is not being offered. Instead, it’s a "microcaptive," with physicians paying money to a third party instead of an insurance company. "It is very suspect if they ask you to overfund the captive and make up coverage with premiums that you are not actually paying for," says Katz.

Physicians also are typically charged various fees for administrative costs and reinsurance by the third parties setting up the captive. "It’s a way for the people pushing it to make money off doctors," says Katz. "And if the doctor happens to actually have some malpractice claims, it all falls apart."

Misuse is common

Generally, a captive insurance company provides physicians with more control over settlement and ultimate decisions. Scott Martin, JD, a partner in the Kansas City, MO office of Husch Blackwell, says, "It also eliminates the risk of bad faith, which can lessen the settlement value of a claim."

Because the elements of bad faith cannot be present when the insurer and insured are controlled by the same decision-makers, a claim for bad faith only makes sense when one entity is making a claim against a separate insurer, Martin says. The possibility of a future bad faith claim can increase the overall settlement value because an insurer might be pressured into paying a higher amount because of the possibility of a verdict in excess of the policy limits.

"The excess verdict exposes the insured to liability which could have been avoided with a settlement within policy limits," says Martin. "No insurer wants to allow the possibility that its exposure is not limited to the actual policy limits."

However, there need to be some corporate elements in place to maximize the protection, such as the captive maintaining its own corporate structure with officers and policies, says Martin. "There are multiple additional legal hurdles to manage [in creating a captive] that would otherwise be done by the insurance company," he says. "This requires more work, but is generally a cost savings if done correctly."

The possibility of making a profit instead of paying premiums to an insurance company is appealing to many physicians. Katz says, "Captives are often promoted as tax shelters and asset protection vehicles, but this is how we often see them misused."

To decide if a captive is the right choice, Katz says physicians should have an actuarial study done. This study looks at industry data and the premiums paid by the physician practice over years. Next, physicians should have a feasibility study done by an independent consultant. A physician group might pay for the study, only to be told they are better off continuing with their current policy.

"You don’t know if a captive is right for you until you do the work," says Katz. "This means a lot of upfront money, which is a barrier of entry for smaller medical groups."

Most often, it’s large medical groups paying millions in annual premiums who are best-suited for captives. However, in some cases smaller groups are good candidates. Katz recommended a captive for one anesthesiology group that had virtually no losses in 20 years, for example. "The only reason for going with a captive is that you can do better on your own," he says. "You have to well outperform the average on a consistent basis."