March 03, 2005

Search for Deep Pockets Widens in Reciprocal of America Case

The 2003 collapse of a Virginia-based professional liability insurer has led to racketeering suits, guilty pleas to insurance fraud charges, and multi-million dollar assessments upon state insurance guaranty funds. Recently, according to Insurance Journal, Berkshire Hathaway has reported that U.S. Attorney in Richmond subpoenaed General Reinsurance for information about Reciprocal of America and its offshore reinsurer, First Virginia Reinsurance, Ltd. General Re Under Scrutiny for Reinsurance Dealings with Failed Virginia Liability Reciprocal (3/2/05). The same article reports that two senior officers of the collapsed Reciprocal of America expect sentencing in a few months.

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The Reciprocal Group (In Liquidation) is a management company for four affiliates: Reciprocal of America, American National Lawyers Insurance Reciprocal, Doctors Insurance Reciprocal, and The Reciprocal Alliance.

In February, former ROA officers Kenneth R. Patterson and Carolyn B. Hudgins pleaded guilty to conspiracy to commit insurance fraud, and Patterson pleaded guilty to two counts of mail fraud. The federal judge in Richmond has scheduled sentencing for June, according to the Richmond Times-Dispatch, "Ex-insurance officers plead guilty" (2/9/05)

Their companies were formed in the 1970's to address a shortage of insurance coverage for health care providers and attorneys in Virginia, and insured some 7,000 professionals when they were declared insolvent and ordered liquidated in June of 2003.

At the time, the Virginia Lawyers Weekly reported (6/30/03) that the various affiliates were all reinsured 100% by ROA and lost the ability to pay their claims when that company collapsed. The company reportedly had a $200 million negative surplus at the time. That report included indications that Gen Re's reinsurance of ROA was replaced by a Bermuda reinsurer managed by some of the same directors as ROA itself, First Virginia Reinsurance. But the Virginia Insurance Department was not informed of that change, according to the VLW article.

Claims against the hospital policyholders were picked up by state guaranty funds, managed by Guaranty Fund Management Services in Boston. The lawyer policyholders were insured by ROA affiliates organized as Risk Retention Groups (RRG) under the federal Liability Risk Retention Act of 1986, 15 USC 3901 et seq. By federal law, risk retention groups are barred from enjoying insurance guaranty fund coverage. The thousands of lawyers affected by that filed legal actions in Virginia, Alabama and Tennessee, according to the 2003 Virginia Lawyers Weekly story.

The Practicing Attorneys Liability Management Society, Ltd. ("PALMS") maintains a webpage with updates and links to reports and materials on the case. ANLIR/Reciprocal of America Status Report.

See also:
Baird Webel, "The Risk Retention Acts : Background and Issues" (Congressional Research Service, December 2003) (Excellent background and introduction. 11 pages plus summary in PDF.)

Nicole Williams Noviak, as reporter of speech by Robert W. Mulcahey, "The Medical Malpractice Crisis: Federal Efforts, States' Roles and Private Responses," 13 Annals of Health Law 607 (2004) identifies recent state mandates that health care providers purchase malpractice liability coverage from authorized insurers. These mandates have led to the termination of more affordable Risk Retention Group coverage by many health care provider programs and legal challenges that these state mandates are pre-empted by the federal law in the Liability Risk Retention Act (LRRA).

Further reading:

Maureen Sanders, "Risk Retention Groups : Who's Sorry Now?" 17 S.Ill.U.L.J. 531 (1993) (piercing the corporate veil following failure of RRG)

Karen Gantt, "Federal Tax Treatment of Medical Malpractice Insurance Alternatives for Nonprofits," 52 Drake L.Rev. 495 (2004). Professor Gantt (of the University of Hartford) addresses tax consequences of various insurance alternatives for nonprofit organizations. Among them are self-insurance, reciprocal insurers, and the Risk Retention Group approach, including captives and "protected cell captives." Prof. Gantt's article cites creation of many RRGs in last two years to deal with "the medical malpractice insurance crisis."
Doug Simpson is LinkedIn

Posted by dougsimpson at March 3, 2005 07:54 PM
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