Worried about Nuclear Malpractice Verdicts? Grab a Paddle.

Editor's Note: Hylant Global Captive Solutions contributes this Thought Leadership article examining the role captive insurance can play in covering medical professional liability exposures.

As traditional medical professional liability insurers react to the spate of so-called nuclear verdicts awarded by judges and juries, they've kept premiums high and lowered coverage limits. Some have even started to nonrenew insureds, whether or not those practices and practitioners have been the targets of big verdicts.

With coverage choices drying up or subjected to stringent limitations, it's no surprise many medical professionals feel like they're traveling up an increasingly treacherous creek. We may not be able to do anything about the creek, but fortunately, those increasingly desperate practices and professionals can grab a paddle to help them steer a safer course. That paddle? Addressing the risk by exploring a captive.

While the medical professional liability coverage market remains hard, the good news is that we have not seen dramatic premium increases that have been common over the past several years with other coverages, such as property and auto liability. The not-so-good news is the exit of some insurers from this market and stricter limits and exclusions for those who remain. Observers who thought the insurance market might soften as insurers became accustomed to ever-more-generous juries have been disappointed as premiums remain flat for the most part.

There's also a regional component to the challenges. If your practice is out in the wide-open spaces, you probably haven't had much exposure to excessive verdicts, but your counterparts in highly litigious jurisdictions like Chicago, Los Angeles, and New York have grown accustomed to news of staggering damage awards.

Organizations have long-established captives to cover short-tail risks like automotive property damage or low-frequency, high-severity catastrophic events. Creating a captive to address medical professional liability is different. Depending on the nature of the practice and the care delivered, claims may be somewhat frequent and severe.

Ensuring a captive for medical professional liability is successful demands taking a different viewpoint. Practices and professionals must be able to wrap their brains around the idea of socking away large sums of money and letting it generate over 10 or 15 years, building up enough to cover a nuclear verdict.

With medical professional liability, using captives is more about capacity than cost. Captives allow their owners to access the reinsurance market, providing some peace of mind about excessive verdicts. Whether the captive is used to build tiers above and below a traditional liability policy or take on most of the risk below reinsurance levels, it can place affordable coverage within reach, even if the amounts remain burdensome. After all, most practices and medical professionals have to ensure they're working with an admitted insurer to comply with contractual provisions or municipal regulations.

A captive may be an excellent choice for medical professional liability for groups and practitioners with constantly increasing premiums that seem to ignore their professional expertise, excellent claims history, sound clinical and business practices, and overall diligence. If your practice has gone without paying a major claim for many years, you will likely be in a good position to retain most or a portion of your liability risk through a captive (or a risk retention group).

That's especially true if your insurer has placed the bulk of your risk with the reinsurance market. By using a captive, you gain control of how those risks are addressed, and you get to capture the profitability that's currently enriching your insurer instead of rewarding you for wise management. You can even establish a captive that doesn't directly retain risk but acts as a vehicle to tap into reinsurance and other strategies.

We recently worked with a medical practice that did exactly that, obtaining their coverage through the reinsurance markets. While they saved little on premium spend, they could trim fat and make enough profit to realize substantial cost savings. Plus, as their own insurer, they were more motivated to minimize the potential for claims.

Some states offer medical practices limitations on claim amounts and other aspects of tort reform. A practice can agree to build up a million-dollar retention in a captive and purchase excess coverage for catastrophic protection or use the state's limits as a ceiling.

Medical malpractice coverage is expensive—and that will not change in the foreseeable future. That puts the onus on practices and practitioners to explore strategies, such as those described here, to protect themselves financially while limiting costs. As long as judges and juries are free and easy with other people's money, you'll still find yourself traveling up that creek of premium increases. At least this way, you'll have a paddle that allows you some control.