Client Services / Health / Health Care Industry Captive Insurance

Health Care Industry Captive Insurance

More than 20 years ago, McDermott Will & Emery created a distinct practice subgroup focusing exclusively on risk funding, captive insurance and professional liability issues in the health care industry.  An adjunct to our extensive health care practice generally and our multi-industry captive insurance practice specifically, this sub-specialty combines the in-depth experience of several partners from different departments and offices.  Our team has the diverse experience required to form and operate a self-insurance program.  Equally adept in handling issues of taxable and tax-exempt health care entities, whether in a single participant or group setting, we have broad experience across the United States in structuring and implementing professional and general liability risk financing programs for hospitals, clinics, physicians, blood banks, assisted living centers, managed care providers and other health care providers.  By applying innovative approaches to familiar problems, we have achieved tax‑efficient and regulatory compliant results in complex insurance environments.  Our relevant experience is best illustrated by a few examples:

  • A Midwestern hospital and associated clinic wished to “channel” the medical malpractice exposures of the institution and the clinic’s employed physician in a single risk retention vehicle.  McDermott designed an offshore captive that took advantage of a statutory exemption from state insurance regulation and taxes.  At the same time the ownership structure preserved the tax-free build-up of investment income and the deductibility of the premium paid by the for-profit clinic.
  • An Ivy League academic medical center wished to include its non-employee full-time faculty in its existing liability trust fund.  McDermott designed a program in which the medical center agreed to indemnify the faculty physicians and then pooled its exposure in an offshore captive together with institutional risk formerly covered by a trust.  During the implementation process, McDermott suggested, drafted and assisted in enacting a targeted amendment to the state insurance code specifically designed to accommodate this structure.
  • An affiliation of U.S. tax-exempt hospital systems previously associated through a group purchasing plan wanted to pool their excess liability risks.  McDermott structured a taxable domestic federal risk retention group to write coverage nationally and an offshore reinsurer owned by the systems to achieve the most tax-effective result.  Several other prominent groups of providers have replicated this distinctive tandem captive structure.
  • A large group of independent blood banks desired to establish a captive to fund a primary layer of liability exposures.  Using a novel structure of an inter-insurance exchange (reciprocal) qualifying as a federal risk retention group, the client was able to write coverage and solicit new business in all states after becoming chartered in only one state.  Moreover, the participants were able to take advantage of their tax-exempt status through special Internal Revenue Code provisions unique to inter-insurance exchanges.  Because key captive domicile states have amended their laws to accommodate this structure, one of the Firm’s largest multi-hospital captive clients re-domiciled from offshore to onshore to enjoy these benefits.

The lawyers practicing in our captive insurance area have, over the past 20 years, provided legal advice on establishing and operating alternative risk financing mechanisms in numerous contexts using various jurisdictions and formats, including deductibles/self-insured retentions (SIRs), trusts, retro programs, offshore and onshore captives, risk retention groups (RRGs) and risk purchasing groups (RPGs).  Our lawyers edited and wrote a significant portion of Alternative Risk Financing Mechanisms for Healthcare Organizations, published by the American Health Lawyers Association (2005).  Drawing on our strong general health care experience, we have emphasized liability coverage for health care providers with particular concentration on joint hospital/physician programs.

We maintain an extensive library of organic documents needed to incorporate single parent and group ownership captive insurers in Bermuda, Cayman Islands, Barbados, Vermont, Hawaii and the newer domiciles.  We also have generated and archived many forms for surplus notes, subordinated debentures, reinsurance trust agreements, letters of credit, parent guarantees, reciprocal attorney-in-fact documents and the like.  Our files include a collection of dozens of risk financing project information (offering) circulars.

We draw on our dedicated securities, insurance regulatory, tax-exempt organization tax, Medicare, managed care, insurance policy, employee benefits and other lawyers to support the growing use of captives to fund a multitude of risks, including hospital and physician professional liability, workers’ compensation, health and post-retirement liabilities.

We regularly draft and interpret hospital professional liability (HPL) and comprehensive general liability (CGL) policy forms and provisions, as well as director and officer (D&O), environmental impairment, employer’s liability and similar insurance policies and endorsements, whether issued by commercial insurers or specially manuscripted for captive use.  Subject to insurance regulatory restraints and reinsurer’s requirements, we often draft policies designed to maximize coverage for the sponsoring institutions and affiliated physicians by employing, where appropriate, more liberal policy provisions.  These documents are customized to achieve internal consistency and for “fit” with excess or reinsurance agreements.

Our lawyers are particularly experienced in manuscripting policy forms for physicians, clinics and academic medical staffs now in use in dozens of health care captives.  Our depth of litigation experience in insurance coverage and interpretation disputes gives us a practical orientation toward anticipation of potential controversies and how best to draft around them.

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McDermott Will & Emery

McDermott Will and Emery