M.D.s Responsible for Debts of Bankrupt Insurer

Some physicians who thought they had ferreted out a good deal on their malpractice insurance premiums learned the hard way that the adage “you get what you pay for” still rings disturbingly true.

In December psychiatrists and other physicians who had purchased their insurance through Physicians Reliance Association Inc. (PRA) and its subsidiary, Physicians National Risk Retention Group, learned that the company had saddled them with its debts. The company had filed for Chapter 7 bankruptcy nearly a decade ago and is no longer in operation.

What many of the physician subscribers did not realize was that the contract they signed to obtain malpractice coverage through PRA indicated that the insureds could be held responsible for repaying a share of the company’s financial obligations.

The situation arose because PRA was selling “accessible” malpractice policies, which meant that while premiums were attractively low initially, the insured physicians shared the company’s claims risk. That is, if claims ran higher than projected during a particular year—thus leaving the company with a revenue shortfall—the physicians were required to make up the difference in higher premiums in the following year. Most of the policies said that these assessments could be as much as $2,000 to $4,000.

Physicians who chose to buy the relatively inexpensive coverage were in effect gambling that scenario would go just as the insurance company predicted it would, and thus their coverage would continue to be cheaper than other malpractice policies on the market.

It turns out, however, that the insured physicians who bought the type of liability policy that PRA was selling are also liable for the company’s debts.

After the company filed for bankruptcy, some of its creditors turned to collection agencies and courts to compel physicians insured through PRA to pay a share of the debts the company left in its wake. From 1988 through 1992 the company endured losses of about $368,000 to $18 million, with a final tally of more than $35 million.

In December physicians who bought these policies began receiving letters from attorneys representing the trustee that a Georgia bankruptcy court appointed to collect “money due the bankruptcy estate of PRA.” The bankruptcy court agreed that each physician’s liability would be $2,000 for every year that the physician was insured through PRA. If a physician was insured for three years, for example, he or she would be liable for paying an assessment of $6,000.

Several angry psychiatrists have called APA or Professional Risk Management Services (PRMS), administrator of the APA-endorsed professional liability insurance program, to complain or ask for help in dealing with the fallout from the demise of PRA. A few have blamed APA for giving its approval or endorsement to PRA’s malpractice policies. In fact, APA never gave its imprimatur to PRA in the form of endorsement, approval, or any other type of support.

Martin Tracy, J.D., president of PRMS, advises psychiatrists who have received legal notices ordering them to pay the assessments, which are $2,000 for each year they had a malpractice insurance contract with the company, to contact either the Louisiana Department of Insurance (PRA was based in that state, though its administrative offices were in Georgia) or their own lawyer, who, he added, will probably tell the client to go ahead and write a check to the creditor. If physicians fail to pay their assessment, they will likely face additional legal difficulties since a court has determined that the contracts they signed bind them to assume some responsibility for the corporate debts the company left behind.

Remitting a check to the bankruptcy trustee, as they have been ordered to do, will absolve physicians from any further liability in this case, according to the bankruptcy trustee’s letter. ▪