Captives – Key Points to Consider Before Buying Insurance

When considering insurance from a captive insurance entity versus a regular, commercial insurance company, there are important distinctions to consider. Generally, the following are some key points to think about:

Shared versus Individual Limits of Liability
One of the attractions of most captives is that they typically have higher limits of liability than most commercial carriers. However, in the event of a claim involving multiple physicians or entities (which is very common), most captive insurers require all physicians to share a single set of policy limits. For example, let us say there are seven doctors insured in a captive and they are all named in a lawsuit. Each believes he has $5 Million/$10 Million in coverage. In this situation, all seven parties would be sharing that $5 million limit of protection on this claim.

With most commercial insurance companies, each physician has his or her own liability limit, even when named in a claim with multiple physicians and entities. In the above example, if all seven doctors were insured with a commercial carrier and each had $1 Million/ $3 Million policy, then each would have his or her own guaranteed $1Million in protection. With this claim, the total amount of protection with the commercial carrier would be 7 X $1 million or $7 million versus $5 million with the captive.

Shared versus Separate Legal Counsel
In the event of a claim involving multiple physicians, most captives require that all defendants share the same attorney or law firm. Sometimes this “shared representation” approach may be perfectly acceptable. In other situations, it may not be in the insured’s best interest. There are many circumstances when physicians need to have their own attorney to defend their particular interests versus those of a group of defendants.

Commercial malpractice carriers typically allow physicians to have their own attorney to represent them. This allows for separate and distinct representation of a physician’s interests from anyone else involved in the case.

The State Guaranty Fund – Not for Captives
Most states, including Massachusetts, operate a “Guaranty Fund” which provides a minimum level of coverage in the event of an insurance carrier insolvency. For example, if a commercial medical malpractice carrier became insolvent, the state’s Guaranty Fund would pay for legal defense and claims, up to a current maximum of $300,000. Captive insurers are not part of the Guaranty Fund. Therefore, if medical malpractice captive becomes insolvent, there is no Guaranty Fund protection.

Retro Dates - Many Captives Do Not Offer
Captives generally offer only claims made coverage. When a new physician with a claims made policy joins a practice insured by a captive, the captive usually will not offer a “retro” date to the new physician. In this instance, the physician will need to buy a tail from his or her previous insurer, which can be very expensive.
In most cases, commercial medical malpractice companies will offer retro dates to new claims made insureds, therefore eliminating the need to buy a tail. Practices hiring physicians that already have claims made coverage may find that not being able to get “retro” coverage for a prospective employee can cause problems. New hires may have to buy tail coverage or the local practice could end up paying for it, which could be very expensive.

Moonlighting
When physicians are insured with a commercial carrier, coverage will generally follow them wherever they practice within the state. Physicians can decide to work in multiple locations, anywhere in the state and their commercial coverage will cover them.

Captives tend only to provide coverage for a specific area, (i.e., the immediate practice or affiliated practices and the local hospital, which are insured by the captive.) This is perfectly acceptable. However, if a physician wants to “moonlight” at a location outside the captive’s coverage area he or she may need to purchase an additional “moonlighter” policy from a standard insurance company, if available.

These are some of the differences between captives and the typical commercial malpractice carriers. In some cases, a commercial carrier charges more for coverage, depending upon physician classification. When weighing the pros and cons between the two types of protection, it is important to consider all the consequences before making your final selection.