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State Guaranty Fund Would Cover ROA Claims

If Reciprocal of America is ordered into liquidation by the State Corporation Commission — which could happen as early as June 19 — outstanding legal claims against ROA’s hospital policyholders will be handled through a state guaranty fund association.

Faced with general confusion about what that means and how it will affect ongoing cases, Virginia Lawyers Weekly interviewed officials with the Virginia Bureau of Insurance and lawyers who have had experience with guaranty funds, to construct an outline of how claims likely will be handled under the liquidation.

At this point, the prospective liquidation affects lawyers who sue and defend hospitals. But others are watching as well — including those who were insured by American National Lawyers Insurance Reciprocal, also facing liquidation, which bought its reinsurance from ROA and is hoping to get its policyholders the same deal from the ROA distribution that the hospitals would get.

Lawyers who served as sources for this story include Stanley P. Wellman of Richmond, who had about 25 cases defending policyholders of Reliance Insurance Co., a property and casualty company which is being liquidated in Pennsylvania. That experience has gotten him a lot of business recently. “Attorneys and doctors around the country are retaining us to help them with this Reciprocal situation,” he said.

Reciprocal of America was put into receivership on Jan. 29, after insurance regulators determined it was in hazardous financial condition. The deputy receiver since has asked the SCC to declare the company insolvent and order liquidation. A hearing on the petition will be held June 19.

If liquidation is ordered, the Virginia Property and Casualty Insurance Guaranty Association would immediately be activated under Virginia Code Sect. 38.2-1604 et seq., said Douglas C. Stolte, deputy commissioner in the insurance bureau’s Financial Regulation Division.

That fund would handle Virginia claims. Other states where ROA does business also will activate guaranty funds. The rules governing those funds differ from state to state.

In Virginia, plaintiffs would have 91 days from the determination of insolvency to get their claims filed with the guaranty fund in Virginia, Stolte said. Suits against ROA or its hospital policyholders directly likely would be stayed for six months or longer, under Sect. 38.2-1616.

The guaranty fund’s money would come from other commercial Virginia-licensed insurance carriers who write medical malpractice business. Each insurer could be assessed up to 2 percent of direct written premiums annually to support the fund.

The Virginia Guaranty Fund Association would step into the shoes of ROA to settle and defend claims against Virginia hospitals. “Coverage generally depends on the residence of the insured, which often is the state in which the policy was written,” Stolte said.

Stolte emphasized that guaranty funds operate in a variety of ways under the statute, and the terms of the liquidation order also would affect the final distribution of ROA’s resources.

Virginia courts have rarely addressed guaranty fund issues, although they have been extensively litigated in other states, said Mark G. Carlton, an associate of Wellman.

Stolte addressed what could happen, and the lawyers talked about their experience, in response to the following questions:

* What does the guaranty fund cover? Claims by direct policyholders that existed before the determination of insolvency, as well as those that are filed within 91 days of the insolvency finding, Stolte said.

The ROA receiver identifies ROA’s direct policyholders as its hospital insureds — not its reinsurance clients, who include ANLIR, Doctors Insurance Reciprocal and The Reciprocal Alliance. Those companies are challenging that interpretation.

* Under the guaranty fund, would the defendant’s original lawyer be kept on the case? “It can go either way,” Wellman said. They might keep the original lawyer, “particularly if the file has been pending for some time.” Or they might turn the case over to someone from their preferred stable.

That’s why when Wellman learned of Reliance’s liquidation he immediately contacted that company’s Virginia guaranty fund administrator and adjustors, who are with Guaranty Fund Management Services in Boston. Wellman alerted him to the cases, offered to continue the representation and pressed for a quick response.

“I had to write a bunch of letters and make a bunch of phone calls, [asking], ‘Was I retained or not? There’s much to be done,’” Wellman said.

Eventually, the fund administrator agreed to retain him. “We were able to keep the same hourly rates,” and they were paid on a regular basis, Wellman said.

Stolte said it is not known yet who will administer the ROA Virginia guaranty fund if it is activated.

* How does the guaranty fund affect settlement negotiations? The process is pretty much the same as it would have been with ROA, although likely with a different claims staff, Stolte said.

Wellman said that in his dealings with guaranty fund adjustors, “I found them to be very hard-nosed and very aggressive,” but experienced and professional.

* How does the guaranty fund change the picture for the plaintiff whose case has not been resolved?

Several ways. First, forget the collateral source rule and subrogation against the fund. Under Sect. 38.2-1610, the guaranty fund deducts all other available insurance payments from what it is obligated to pay. In a hospital claim, that might mean a patient whose health insurance paid $10,000 to correct a medical error will have his guaranty fund award reduced by $10,000, for example.

That provision was upheld recently in the case of MacDougall v. The Hartford Insurance Group (VLW 003-8-057), Carlton said.

Then there’s the cap. The most a plaintiff can get through the guaranty fund is $300,000, which may or may not include defense costs.

Stolte says it does, based on Sect. 38.2-1603.

But Joshua D. Silverman, a Richmond plaintiff’s lawyer who has had two cases involving Virginia guaranty funds for other liquidated companies, said, “The statute doesn’t say that they deduct the defense costs.” One of his clients received the full $300,000 in a case with substantial defense costs.

Wellman, too, said his defense costs have never been deducted from the awards.

If, under the supervision of guaranty association, the case settles for $300,000 or less, the association likely will require that no further action be taken against the defendant individually.

* What about the plaintiff who goes to trial and wins a verdict that exceeds the $300,000, or who holds a large unpaid judgment obtained before ROA collapsed?

According to information provided by Stolte, the guaranty fund will pay $300,000. The plaintiff can sue the defendant individually for the rest. The defendant then can make a claim against the ROA receivership directly. Meanwhile, the guaranty fund can make a claim against the policyholder for the money it paid out if the policyholder’s net worth exceeds $50 million.

The ROA liquidator will determine how much the company can pay on the dollar. That same percentage must be applied to all policyholders making insurance claims. The receivership also must reimburse the Guaranty Fund at the same rate as policyholders.

In a simple example, suppose a plaintiff had a $1 million judgment and ROA could pay 50 cents on the dollar (a purely hypothetical scenario). The guaranty fund would pay $300,000. The plaintiff obtains a separate judgment against the defendant individually for $700,000. The defendant makes a claim on the receivership, and is paid the 50 percent — $350,000. The guaranty fund likewise makes a claim on ROA and is paid $150,000 (half the $300,000).

“Alternatively, instead of funding the unpaid portion of the settlement ($700,000), the insured can assign to the [plaintiff] the recovery from ROA, in which case the $350,000 would go to the [plaintiff],” Stolte wrote in an e-mail response to questions.

“It is also possible that the insured and the claimant will both have a claim against ROA if the insured pays a portion (after the [guaranty fund] payment), but not the full balance owed the [plaintiff]. In that case, each would get the same percentage of his or her unpaid claim.”

Stolte added, “Bear in mind too that, at least for six months, suing the ROA insured may be prevented by the … stay of Sect. 38.2-1616.”

* How much is ROA likely to pay on the dollar? Receivership officials said that hasn’t been determined yet. Late last month, however, Virginia Insurance Commissioner Alfred W. Gross said he continues to believe that ROA’s assets will be sufficient to pay at least some of the money owed to general creditors, who are at the bottom in the ranks of who gets paid first under Virginia’s liquidation statutes.

Because direct policyholders have a higher priority than general creditors, Gross’ comment leaves room for optimism that ROA claims will be paid.

But plaintiffs’ attorneys are not optimistic. “Practically speaking, I don’t think many people are viewing their cases as collecting off the Reciprocal,” Silverman said.

* Where do defense lawyers stand in the line of creditors?

Let’s start with the lawyer hired by ROA before the receivership, who is still owed money. Generally, that lawyer holds a policyholder claim, and is on the same footing with the hospital client for reimbursement — at whatever ROA’s liquidation percentage would pay, Stolte wrote.

If the lawyer was hired by ROA after the company was put into receivership, that lawyer generally ranks even higher in the food chain. His or her bill generally would be paid as an administrative expense, which gets first priority.

Lawyers retained by the guaranty fund will be paid based on their agreement with the fund.

In no event would ROA-hired attorneys be paid for work done after May 9, which was the date all counsel were verbally notified that defense costs no longer will be paid by ROA, Stolte wrote.

* From a plaintiff’s attorney’s perspective, how does the ROA situation affect selection and strategy of cases? Silverman said he would be “ambivalent” about taking a complex case where ROA was the insurer.

“The plaintiff’s attorney has to be a lot more careful about whether the case is worth pursuing,” he said. A careful analysis of the strengths of the case and the assets of the defendant would be called for, he said.

* While everyone’s waiting to see what happens with the liquidation request, what should be done about cases that have been in limbo?

“Keep getting stays,” Wellman advised. “I’ve tried getting stays of 120 days or more, and most [plaintiffs'] lawyers were in agreement with that.”

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