Important Update on Liability Insurance Program

Malpractice insurance is an essential prerequisite to psychiatric practice. With the current insurance cycle driving some carriers from the market and throwing others into financial turmoil, the availability of coverage that we mostly take for granted has—for many psychiatrists—been placed in question. Unfortunately, the recent problems with Legion Insurance Company, which, for many years, issued policies to members through the program currently endorsed by APA, have brought anxiety and uncertainty to many APA members. What happened with Legion Insurance Co., and what are its implications for our member insureds? A bit of history is helpful in appreciating the current situation.

In the mid-1980s, during the last major malpractice crisis, APA created the American Psychiatric Association Insurance Trust and sponsored a program designed to provide malpractice insurance coverage for its members. In 1988 Legion Insurance Co., which is a subsidiary of Mutual Risk Management (MRM), became the insurer for the program. Until recently, Legion maintained a high rating from A.M. Best, the international insurance-rating agency.

In 2000, on the basis of its ongoing evaluation of the program, the insurance market, and members’ needs, APA concluded that the program would be stronger if it were backed by the assets of a top-rated insurance carrier and one of the world’s largest reinsurers. APA advisers—insurance professionals from whom we have sought counsel at every step since the beginning of the program—concurred. As a result, the program was sold to Legion. At the time of the sale, Legion was rated “A” (Excellent) by A.M. Best. It is important to note that as part of the sale transaction, the financial strength of the program was substantially enhanced to better protect the interests of APA’s insured psychiatrists.

Legion continued its role as the policy-issuing insurance carrier for the program. Professional Risk Management Services Inc. (PRMS), which has served as the administrator of the program from its outset, was purchased by Legion and continues to manage the program. The Psychiatrists’ Purchasing Group (PPG), another independent corporation, became the sponsor of the program and has provided educational and liaison services to insureds, as it had prior to the sale. Finally, APA agreed to endorse the insurance program for five years, until October 2005. As a condition of its endorsement, APA required the insurance carrier for the plan to maintain at least a B+ (very good) rating. At the beginning of 2002, more than 7,500 members were covered by Legion.

In February 2002 Legion was downgraded by A.M. Best from A- (superior) to B (fair), reflecting, as we understand it, problems with other Legion insurance lines. Under our contractual agreement, Legion had 120 days either to improve its rating or to put in place a substitute insurance carrier. Accordingly, Legion and PRMS began a search for a more highly rated carrier to assume responsibility for the program.

On April 1 the insurance commissioner of Pennsylvania, who regulates Philadelphia-based Legion, petitioned the Pennsylvania Commonwealth Court to place Legion in rehabilitation. Under rehabilitation, the insurance commissioner takes control of the insurance company, oversees its finances, and maintains its day-to-day operations.

In late August the insurance commissioner petitioned the Commonwealth Court for an order of liquidation. Legion’s parent corporation, MRM, has intervened and is opposing the liquidation. At this writing, the court has not made a final decision.

As soon as APA received word that Legion’s A.M. Best rating had fallen below an acceptable level, a task force of APA members chaired by former APA president Harold Eist, M.D., was established to monitor the situation closely and keep our members informed. This has been a difficult and frustrating task. Although APA endorses the program, the Association has no control over any of the companies involved (that is, Legion, PRMS, and PPG), which operate as independent entities. While we don’t always have immediate answers to important questions, we are working with PRMS to obtain them.

Where do things stand now? As of early May 2002, PRMS arranged for two highly rated member companies of the American International Group (AIG), one of the largest and strongest insurers in the world, to replace Legion as the insurance carrier issuing policies to members insured in the APA-endorsed program. These two companies—National Union Fire Insurance Company of Pittsburgh Pa. and Lexington Insurance Company—both carry A.M. Best’s A++ (superior) rating.

At this time, one or the other of these entities is authorized to provide insurance in every U.S. state and Washington, D.C. Insured members have been contacted to inform them of their eligibility to apply for coverage with these new carriers. Despite the availability of new coverage by these strong carriers, those who are or have been insured by the program could still encounter problems. As long as Legion continues to operate in rehabilitation, it retains responsibility for defending and, if necessary, paying claims against member insureds.

But what would happen to claims if Legion were to be liquidated? Every state has a guaranty fund that covers the obligations of liquidated insurers, up to a defined cap. The amount varies from state to state. In many states the cap is $300,000; however, levels vary from a low of $100,000 to a high of $1 million in New York state. Further, insurance professionals tell us that 95 percent of claims against psychiatrists settle for under $300,000, and that plaintiffs and their attorneys have a strong incentive in these circumstances to accept the amount available from the state guaranty fund.

Nonetheless, one of the benefits of insurance is to offer security from even a small chance of personal risk, and APA fully understands why many member insureds remain concerned about their liability in the event of a Legion liquidation. Thus, APA has steadily urged PRMS to identify a mechanism for providing “prior-acts” coverage options for our members. APA was told that members who had claims-made or modified occurrence coverage and who are continuing with National Union or Lexington may have coverage for claims arising from acts while they were insured by Legion. The extent of such retroactive coverage is specifically described in each new National Union or Lexington policy. Since individual circumstances differ, insureds are encouraged to review their policies carefully and to call PRMS if they have any questions.

We have also been encouraging PRMS and various insurance consultants to find a suitable alternative for insureds who may not have sufficient retroactive coverage and may wish to purchase “prior-acts” coverage. As of this writing, some options are being investigated by PRMS and consultants, but it is too early to say whether any such option will prove to be feasible. We will keep you informed of any progress on this front.

In a piece like this, it is impossible to address all the nuances of this situation that may affect our member insureds. If you have specific questions about your policy, please contact PRMS by phone at (800) 245-3333 or by e-mail at [email protected]. As we learn more, we will use the pages of Psychiatric News and other means as appropriate to keep you updated. Updates are also being posted on the PRMS Web site at www.psychprogram.com. ▪