Captive Insurance, Medical Malpractice, and Dobbs

Editor's note: This is an excerpt from an article that originally appeared in  Captive Insurance Company Reports (CICR). Subscribers can read the full article in the June 2023 issue of CICR on Vertafore ReferenceConnect or IRMI Online.

In general, criminal acts are not covered by insurance. While this is standard language in property and general liability Insurance Services Office, Inc. (ISO), policies, there is no standard professional liability or medical malpractice contract. Most forms generally do exclude criminal conduct with language like the following: "Any knowingly wrongful, dishonest, fraudulent, criminal, or intentionally malicious act, error or omission by an Insured; any knowing or willful violation of any law, statute, rule or regulation by an Insured; or the gaining of any profit, remuneration or advantage by an Insured to which such insured was not legally entitled; including but not limited to healthcare fraud. However, for the purposes of this exclusion, no act of one Insured will be imputed to any other Insured who did not participate in and had no knowledge of such act, error, or omission."

The sample coverage exclusion above reveals a fast-growing issue for medical malpractice captive insurers. Is there coverage for medical procedures involving an abortion, drugs that may be used in an abortion, or services tangentially related to abortions? By way of example, if a woman suffers a miscarriage and requires medicine such as mifepristone, then does the doctor's prescription of that drug constitute a "knowingly ... criminal act" within the meaning of the coverage exclusion?

Medical malpractice captive insurance providers lost the luxury of staying out of the hypercontentious abortion debates. The federal law relating to abortion expanded to mifepristone, a drug used for therapies beyond ending pregnancy, and creates potential coverage issues for medical malpractice claims. Prudence suggests that medical malpractice professionals take a moment to assess the situation for claims related to these issues.

The Legal Landscape

In June 2022, the Supreme Court held that the US Constitution does not provide a right to an abortion. This holding overturned Roe v. Wade, 410 U.S. 113, 93 S. Ct. 705 (1973), which held that the right to have an abortion arises out of the right to privacy emanating from the First, Fourth, Fifth, Ninth, and Fourteenth Amendments. The Dobbs v. Jackson Women's Health Org., 142 S. Ct. 2228 (2022), decision clarified that while it did not find the right to an abortion in the Constitution, it did affirm the general right to privacy as understood as a right to avoid unwanted disclosure of information and as the right to make decisions without government interference.

On April 7, 2023, a US District Court in the Fifth Circuit issued an injunction effectively removing mifepristone from the US market in the case of Danco Labs., LLC v. Alliance for Hippocratic Med., 29 Fla. L. Weekly Fed. S.748 (U.S. April 21, 2023). The drug is commonly used in abortions, procedures relating to miscarriages, and other medical procedures. On April 21, 2023, the US Supreme Court stayed the injunction until the Fifth Circuit had an opportunity to hear the appeal. For now, this returns the legal field to the status quo of (1) no right to an abortion and (2) medical providers may use mifepristone as part of various medical procedures.

The holding from the US District Court goes into effect only if (1) the Fifth Circuit affirms it, and (2) the Supreme Court either denies the resulting writ of certiorari or grants certiorari and affirms the Danco injunction. The stay issued by the Supreme Court on April 21, 2023, remains in effect until the legal issue is clarified either by the Fifth Circuit or the Supreme Court.

Unfortunately, the legal issue is more complex because the stay issued by the Supreme Court was alleged by Justice Samuel Alito to be an improper use of the so-called Shadow Docket. The Shadow Docket is a term used to describe decisions from the US Supreme Court made outside of its regular publicized docket.

How To Cover Illegal Activities

Surprisingly, there is precedent for how to navigate these types of claims: The legality of insurance coverage for cannabis depends on the jurisdiction, the type of insurance, and the purpose for which cannabis is used. Since cannabis remains a Schedule I substance, federal law complicates coverage for many cannabis activities.

One of the threshold issues that a cannabis insurer and policyholders confront is whether the insurance coverage disputes will be governed by state or federal law. If state law applies in a jurisdiction where an insured's cannabis business was operating legally, the insurance contract will likely be enforceable. However, if federal law applies, or if an insured is operating outside the bounds of applicable state law, the insured may be deemed to be engaged in illegal cultivation or distribution, leaving the contract potentially unenforceable.

Cannabis demonstrates that where the law is ambiguous, the issue of coverage for insured activities hinges on the facts of each case, including the following.

• Whether the claim is brought in a state or federal court
• The acts that are at issue in the claim
• The language of coverage
• The language of exclusions, if any

Medical Malpractice and Captive Insurance

Thus, the answer is "it depends." If a state carte blanche bans abortion, then any claims for medical malpractice arising out of abortion-related services are not likely to be covered. Note that, given the scrutiny of the Internal Revenue Service (IRS) into the language of captive insurance policies, it is unreasonable to neglect the issue since "we have a captive, we'll cover the claim." The IRS is clear that captive insurance companies are expected to behave like any other insurance company, and that includes excluding claims for coverage issues.

The answer is unclear when a state bans abortion, but the services fall in a gray area of the law. For example, if there is an 8-week abortion ban and there is ambiguity on the start date of the pregnancy, then coverage should be issued pursuant to a reservation of rights until the timing issue is clarified within the lawsuit.

Finally, the answer is very unclear if there is disagreement at the federal level. For example, if the Supreme Court affirms a decision from a circuit court via the Shadow Docket that conflicts with Court precedent, then there is basically no right answer. The proper decision for the insurer is to cover the malpractice claim until (1) the Supreme Court clarifies the legal issue at hand or (2) the resolution of the underlying lawsuit.

Summary

Overruling decades of precedent creates waves, and captive insurance companies enjoy no goodwill from the IRS with regard to the operation of their captive. Getting coverage correct is necessary for all captives providing medical malpractice coverage, and claims coverage determinations must stay abreast of the latest developments in state and federal law, as well as the Shadow Docket, as part of best practices for navigating claims in this area of medicine.