Virginia Lawyers Weekly

The Virginia state fund that steps up for insolvent insurance carriers can recover from a local hospital authority workers’ comp payments that should have been made by Reciprocal of America.

In an Aug. 25 decision, a Chesapeake Circuit Court said the Chesapeake Hospital Authority is a “person” under Virginia law, and the Virginia Property and Casualty Insurance Guaranty Association can ask the Authority to repay the covered claims.

The case is Virginia Property & Casualty Ins. Guar. Ass’n v. Chesapeake Hospital Authority (VLW 008-8-188).

The Association, or Guaranty Fund, was set up by the General Assembly to pay claims when an insurer becomes insolvent. All property and casualty insurance companies contribute annual fees to the Fund, which in turn can recover for those payments when the insured entity has a net worth of more than $50 million.

This “net worth” exception has come into play for the Fund with hospitals, because Reciprocal of America insured so many hospitals, according to Richmond lawyer Edward H. Starr Jr., who has represented the Fund.

Formed in 1976 when Virginia hospitals and doctors had trouble getting medical malpractice insurance, ROA continued to provide liability and workers’ compensation coverage for healthcare facilities until it was placed in receivership in 2003.

The Chesapeake Hospital Authority contested its liability under the net worth exception in Virginia Code § 38.2-1609, arguing that the statute authorized recovery of insurance payments only from “persons,” and as a municipal corporation, it was not a “person.”

A 1932 Virginia Supreme Court case said the general term “any person” did not apply to municipal corporations and political subdivisions of the state.

But Chesapeake Circuit Judge Designate Frederick H. Creekmore said that statement did not control that case, and a 1996 case, City of Virginia Beach v. Flippen, 251 Va. 358 (1996), said municipal corporations have a dual identity, “existing both as a body politic and a body corporate.”

The Act establishing the Guaranty Fund makes protection of claimants a priority. To that end, Creekmore wrote, the Fund is allowed to recoup funds paid out from “a narrow group of insured persons.”

Because the general definitions section in Code § 38.2-100 defines a “person” to include any corporation, and the Guaranty Fund Act is to be liberally construed to effect the Act’s purpose, the judge said “the definition of ‘person’ as contemplated in the Act does include municipal corporations,” and “sovereign immunity does not apply.”

Creekmore said the Fund was entitled to prejudgment interest, and said the parties had indicated they likely could settle on the monetary amount of the claim, which is about $300,000, according to Virginia Beach lawyer M. Scott Hart, who represented the Fund.

Norfolk lawyer Jason R. Davis, who represented the Authority, could not be reached for comment.

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