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Harm to Self-Insured Captives Likely Without Appropriate Legislative Interventions

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The global health crisis caused by COVID-19 has impacted nearly all aspects of healthcare delivery. Our hospitals, health systems and nursing homes are on the frontlines of a war against an invisible enemy. While administering effective critical care and keeping employees safe and healthy is the top priority—senior leadership should also begin considering the operational impact on their self-insurance programs. Depending on how liability is assessed, captives and other self-insurance vehicles likely are not adequately funded for the potential number and severity of COVID-19 related claims.

The Need for Legislative Liability Waivers for Frontline Healthcare Workers
Failure to prevent exposure of the virus, inadequate staffing, supply chain shortages for personal protective equipment (PPE), delays in treatment, and allocation of resources are all concerns that may lead to an influx of claims for medical professional liability. This possibility is especially concerning in the nursing home and long-term care environment. The recently enacted CARES Act provides provisions for protection of volunteers responding to the COVID-19 crisis and many states have issued executive orders providing waivers for medical liability. While the state-level executive orders are a great start, there are risks with this approach. In a recent white paper, the American Tort Reform Association (ATRA) explains “…Executive action has not been tested in court. Plaintiffs’ lawyers are certain to challenge the governors’ authority to provide this liability protection through use of emergency powers. It may be years before these cases reach the appellate level. If invalidated by a state high court, those who provide medical care during the COVID-19 outbreak will be exposed to liability under a bare negligence standard.”

As a result, many (including the American Medical Association) believe that broader legislative protections are necessary as a backstop to protect those administering care in this extraordinary time. The ATRA calls for this legislation to use the “gross negligence standard when the act or omission occurred in the course of providing medical services in good faith in support of the state’s response to COVID-19” as opposed to a bare negligence standard. Depending on how gross negligence is defined in a particular state even that standard may not be adequate protection for a nursing home.

Individual Claims versus Aggregated Claims and its Impact on Your Captive
Without such broader liability protections, healthcare providers that are self-insured through a vehicle such as a captive are facing financial risk, as their actuarial funding did not anticipate a pandemic. Likely, the number of claims (especially in places like New York and New Jersey) and the severity of those claims will result in these organizations’ captive’s funding being depleted and their reinsurance limits being significantly impaired.

One critical factor that remains to be seen is whether all COVID-19 cases would be aggregated into one single claim or be treated on an individual basis. If treated individually, each would have its own retention. Because few claims likely are going to be more than the typical self-insured layer (the amount below the reinsurance attachment), every dollar of the claim would come out of the captive. If the claims are all batched together, there would be a single retention for all COVID-19 claims which the captive could handle. The question then becomes whether or not batching these claims will be possible under the terms of the reinsurance.

Self-Insured Workers’ Compensation Concerns
Organizations that are self-insured for workers’ compensation (WC) face a similar question. Individual WC claims almost certainly will not trigger an excess policy but may, if aggregated together. While claims from healthcare professionals will be many in number, it appears that few will be of a significant size. WC benefits should not trigger until an individual receives a positive test result (and wage benefits are not triggered – in most states – while in quarantine awaiting test results) and is symptomatic (rendering them unable to continue working). Additionally, the costs of most COVID-19 treatments are minimal, often only including the cost of the test, a telemedicine visit, minor treatment for symptoms, etc. Cases that require hospitalization, ICU and use of a ventilator are expensive but still on average may not be as costly as a major back surgery which is a common workers’ compensation claim. Again, the most significantly impacted will be nursing homes and long-term care facilities whose employees became inflected before testing was available because the environment in which they work is not typically equipped, like a hospital, to avoid potential transmission.

Exclusions May Be Coming
Another major impact of the COVID-19 crisis is the potential for pandemic exclusions on these coverages or ‘clarifications” that batching claims is restricted. Underwriters are now beginning to have these discussions which may impact reinsurance, but more likely would impact first dollar coverage for those institutions who are not self-insured.

Questions? We are here to help.
No one could have predicted the emergence of such a life-altering pandemic. The situation is new and fluid and how this plays out at all levels of healthcare, business and life, is yet to be determined. We are committed to staying at the forefront as developments that affect our clients continue to emerge. If you have any question about your captive, medical professional liability coverage, workers’ compensation or more, please reach out to an RCM&D advisor today.