Risk Retention Groups: A Coverage Solution for Long-Term Care Liability By Thomas A. Player1
404-504-7623
Liability insurance for long-term care facilities is not readily available in a number of states, leaving many facilities with nowhere to turn for adequate coverage. In response to this situation, more and more facilities are looking to risk retention groups (“RRGs”) as a source of affordable and stable liability coverage. In some states, this trend has received the support of state government, notwithstanding a history of state hostility toward RRGs. Indeed Florida and Pennsylvania – two states where the crisis in liability insurance is especially acute – recently provided direct financial assistance for the development of RRGs serving long-term care providers. Although these developments are encouraging, more needs to be done to ensure that state and federal regulators and policymakers understand the important of RRGs and support their development.
Long-term care is the broad name given to various types of facilities providing subacute, custodial, residential and/or rehabilitative care primarily for aged individuals and includes nursing homes and similar institutional care facilities for the elderly. Long-term care facilities were one of the first businesses to feel the effects of higher rates and diminished capacity for medical malpractice liability insurance, a result of significant losses and increased liability exposures in the late 1990s.2 Since then, the situation has only become worse.
In 2003 Aon Risk Consultants, Inc. (“Aon”)3, at the request of the American Health Care
Association, conducted an actuarial analysis of the cost of general liability and professional liability claims (GL/PL) to the long-term care industry operating in the United States. The study noted that “[n]ational trends in GL/PL losses are increasing at an alarming rate.”4 According to the study, liability losses for nursing homes have increased at an annual rate of 24%, from $290 per bed in 1990 to $2880 per bed in 2002.5 National costs are now ten times higher than they were in the early 1990s and the average size of a GL/PL claim has tripled from $63,500 in 1991 to just under $200,000 in 2002.6 The report noted that claims caused commercial insurers to raise premiums dramatically--by 143% from 2001 to 2002. Nationwide long-term care operators incurred 14.5 claims per year for every 1000 occupied skilled nursing care beds.7 This is three times higher than the 1991 frequency claims per 1000 beds. Insurance markets have responded to the increase in frequency and the size of claims by severely restricting their capacity to write
1 The author is a partner in the law firm of Morris, Manning & Martin, LLP, with offices in Atlanta, Washington, DC and Charlotte, and he wishes to acknowledge the substantial contribution to the article made by Kristin Zimmerman of the Atlanta office.
2 The National Journal in February of 2002 listed the 100 top litigation verdicts for 2001. Four of the top 50 verdicts were awarded against nursing home providers for negligence and malpractice. The seventh largest verdict was handed down by a jury in Texas in Fuqua v. Horizon/CMS Healthcare Corp. (N.D. Texas, No.
4-98CV1087Y)(February 9, 2001) for over $300 million.
3 THERESA W. BOURDON & SHARON C. DUBIN, AON RISK CONSULTANTS, INC., LONG TERM CARE GENERAL LIABILITY PROFESSIONAL LIABILITY ACTUARIAL ANALYSIS (March 3, 2003).
4 Id. at 3. 5 Id. 6 Id. 7 Id.
long term-care GL/PL insurance. Many insurers have decided to stop offering coverage altogether.
In the sunbelt states, which have the highest rates of litigation, commercial carriers are dropping out of the market at a significant rate. For example, in Texas the number of state licensed insurance carriers providing liability insurance dropped from eight in 1996 to two in 2002.8 In Florida, insurance capacity is basically non-existent for long-term care liability.
Tort Reform, Although Helpful, is Only A Partial Answer
Many commentators have argued that tort reform is the answer to the long-term care liability crisis, particularly with regard to the impact of patient rights laws. Allegations against nursing homes and other long-term care facilities often include causes of action based upon nursing home patient protection laws or elder abuse laws. More than half of the states have some sort of patients’ rights laws. These laws introduce new causes of action for patients or residents in long-term care facilities, allowing them to sue a facility for a breach of patient’s rights. Several states that have higher than average loss cost trends have patients’ bill of rights statutes specific to the long-term care industry. These states include Texas, Arkansas, California and Florida, among others.9
Legislative reform may help to ameliorate the situation in these and other states, but the jury is still out on how much this will help and how soon. In 2001, Florida took legislative action to rein in frivolous lawsuits against long-term care providers based on Florida’s Patients Bill of Rights. The impact of these reforms, however, remains unclear. The Aon study found that the statutes appear to have had no effect on reducing claim frequency in Florida.10 A more recent study, however, shows that the number of lawsuits against nursing homes last year are down seventeen percent, compared with 2000. 11 Adding to the uncertainty about the effect of the 2001 reforms, the Florida State Agency for Health Care Administration reports that the number of notices of intent to sue nursing homes trended down slightly in 2002, but the numbers edged up again in 2003.12 Further, adding to the uncertainty of the impact of tort reform, the
Aon study found that despite the correlation in Florida, Texas, Arkansas and California, not all states with patient rights statutes have experienced the same upward trends in the cost of GL/PL claims. A clear assessment of the Florida reforms will probably have to wait until more time has passed and pending lawsuits have had time to work their way through the system.
Whatever the true impact of tort reform, it seems clear that even if reforms are enacted in other states, or at the federal level, any tangible relief in the form of lower rates and greater availability will take time to appear. Tort reform may be able to help, but even with caps on non-economic damages, the current level of rates indicates that more than just tort reform is needed to protect the solvency of long-term care facilities.
8 2003 Market Update of Nursing Facilities published by the Centers for Medicare & Medicaid Services. 9 See, ARK. CODE ANN. § 20-10-1204 (2003); CAL. HEALTH & SAFETY CODE § 1599 et seq. (2004); FLA. STAT. ANN. § 400.022(2004); TEX. HEALTH & SAFETY CODE ANN. § 242.501 (2004).
10 AON at 11.
11 Mike Salinero, Reforms Appear to Have Curtailed Nursing Home Suits, Study Shows, TAMPA TRIBUNE, Jan. 19, 2004.
Risk Retention Groups Are a Viable Alternative to the Traditional Market
Long-term care providers increasingly are turning to RRGs as a solution to their liability insurance problems. In 2003, for the first time since Congress passed legislation 18 years ago authorizing RRGs to insure general and professional liabilities, 11 RRGs were formed to provide coverage for long-term care facilities. Prior to 2003, no RRGS insuring liability exposures for these types of facilities existed.13
Federal legislation authorizing the formation of RRGs was first enacted in 1981. At that time, RRGs were limited to providing coverage for product liability. Five years later, Congress enacted the Federal Liability Risk Retention Act of 198614 (the “Act”), which broadened the authorization of RRGs to all liability insurance and preempted the application of most state regulation to RRGs. The Act was intended to facilitate the ability of groups to secure liability insurance and stabilize liability insurance rates. Under the Act, an RRG’s domiciliary state is of key importance, serving as the primary regulatory authority of the RRG, with non-domiciliary states given limited authority to regulate only in areas specified by the Act.
The Act provides insureds with an important alternative risk management strategy. The Act was designed to help insureds in the same or similar industries band together to achieve greater economies of scale and spread their risk. An RRG must be chartered and licensed as a liability insurance company and authorized to engage in the business of insurance under the laws of one U.S. jurisdiction. Each of the members of the group must have an ownership interest in the RRG and the RRG must make available insurance coverage to all owners. Members are required to be engaged in businesses or activities “similar or related with respect to the liability to which they are exposed by virtue of any related, similar, or common business, trade, product, services, premises or operation.”15
Since the passage of the Act, some state regulators have not been particularly receptive to RRGs. In particular, regulators have expressed concerns about potential problems regarding the financial security of liability insurance purchased under the Act, especially when the RRG providing the coverage is chartered in another state. Some states have exhibited open hostility towards RRGs, making it difficult to expand into new markets.16
Recent actions by state regulators and policymakers, however, indicate that the states are beginning to realize that RRGs serve a vital function by providing needed capacity where the traditional market is not available.
Florida is a good example of a state that appears to be embracing the value of RRGs. While commercial coverage of long-term care facilities is almost non-existent, by law, Florida
13 Eleven RRGs Formed in 2003 to Insure Nursing Homes, THE RISK RETENTION REPORTER, Dec. 2003. 14 15 U.S.C.A. § 3901 et seq.
15 15 U.S.C.A. § 3901 (a)(4)(F).
16 For example, in the mid 1990s then-Louisiana Insurance Commissioner Jim Brown said that the RRGs licensed in other states would have to meet a number of state-specified requirements to do business in Louisiana. A federal court later said the Federal Risk Retention Act preempted this action. Further, since the inception of the Federal Risk Retention Act a number of states have attempted to impose various fees on RRGs.
requires that every nursing facility carry general liability coverage and professional liability coverage.17 This requirement, for example, can result in the bizarre situation where a facility finds an unlicensed insurer willing to provide a $500,000 policy for $550,000 or more. 18
In an attempt to rectify the situation, the state of Florida teamed up with US Re to create an RRG called the Florida LTC Risk Retention Group. The Florida LTC Risk Retention Group provides general and professional liability protection to skilled nursing, assisted living, and independent living facilities. The Florida Legislature authorized the state’s Agency for Health Care Administration to capitalize the Florida LTC Risk Retention Group with an interest-free $6 million surplus note. The note will be repaid from capital contributions of shareholders, ranging from $148 to $780 per insured bed over three years, in declining installments.19
Florida’s long-term care RRG is the first RRG created with state financial support and it is an example of a creative public/private initiative to address a serious insurance problem. The state’s support is striking when compared to the years of opposition many states displayed toward RRGs.
Pennsylvania also has entered into a public/private RRG long-term care partnership. In March 2003, Pelican Insurance, a Vermont domiciled RRG was licensed to provide GL/PL coverage to Pennsylvania county-owned and operated facilities and nonprofit facilities which are members of the Pennsylvania Association of County Affiliated Homes. Pelican received its initial capitalization through a $5 million grant from the Pennsylvania Department of Public Welfare. Unlike Florida, Pennsylvania did not seek to recoup the $5 million granted to Pelican. These states’ backing of long-term care RRGs may reflect a changing attitude among state policymakers and regulators towards RRGs. In addition, state backing reflects the states’ increasing understanding that with typical long-term care facilities’ reimbursement limited by governmental methodologies, including Medicare and Medicaid, it is close to impossible for long-term care providers to shift the expense of increased premiums to third-party payors for health care.
As opposed to other possible remedies, the formation of an RRG is a long-term strategy. RRGs help create long-term coverage, and pricing stability, ensuring level costs in contrast to the up and down cycle in the commercial market. RRGs write insurance for a single industry, resulting in a specialization that allows them to better manage the risk of that industry and often have lower expenses than a multi-line insurer. Moreover, RRG owners/policyholders are more heavily invested in the RRG’s success and outcome than in a traditional market, ultimately benefiting the RRG, the facility, and the patients.
It is important that the government at all levels support responsible alternative
mechanisms to manage risks that are not serviced by traditional insurance markets. But this is not yet the case. For example, recently the Department of Housing and Urban Development published Notice H 04-01 regarding “Professional Liability Insurance for Sec. 232 Programs,”
17 FLA. STAT. ANN. § 400.141 (20) (2004).
18 William Kanapaux, Litigation and Increasing Liability Insurance Devastate Long-Term Care, GERIATRIC TIMES, July/August 2003.
proposing liability insurance requirements. According to the notice, long-term care facilities receiving HUD financing are required to carry professional liability insurance coverage. Notice H 04-01 requires facilities to carry liability insurance from an “A” rated carrier. None of the RRGs formed in the last year are rated by A.M. Best, and therefore would not meet the HUD requirement. The National Risk Retention Association has argued that the requirements for medical professional liability insurance contained in Notice H 04-01 will damage the ability of healthcare and nursing facilities to obtain Section 232 financing.20 While HUD acknowledges the lack of availability and affordability of liability coverage, the notice advises that coverage can be obtained through a fronting program. However, available fronting programs are limited and with the insolvency and regulatory oversight of Reliance Insurance Company and Frontier Insurance Company in 2001, both of which had active fronting businesses, regulators are even more wary of fronting arrangements. Further, fronting programs add another layer of expense.
What conclusions may we draw? First, that the availability and affordability of liability coverage for long-term care facilities is not getting easier. Second, while state regulators are still concerned about the financial viability of RRGs, many have accepted these facilities as the only viable current answer. Third, state regulators, and their governors, have become more concerned than ever that private facilities must be encouraged to fill the shortfall of state and federal
funding for healthcare services. A viable long-term care industry helps. Thus, we may see more emphasis on public/private funding for facilities such as RRGs which provide much needed liability coverage.
20 See, Letter to letter to Mr. Michael McCullough, Director of Office of Multifamily Housing Development, U.S. Department of Housing and Urban Development, from Wendy S. Fisher, Chair, National Risk Retention
