Tennessee joins class action suit against insurer

posted on:
February 6, 2004

author:
Scott Shepard

category:
Fraud

Tennessee this week joined a class action law suit against a failed malpractice insurance company, Reciprocal of America, and its ownership group which ultimately ties back to billionaire Warren Buffett.

Three class action suits against Reciprocal filed in November were consolidated in Memphis this week in U.S. District Court for Western Tennessee, under Judge Daniel Breen. He will likely spend the next three years sorting out the collapse of Reciprocal, which had operations in at least four states.

Reciprocal sold medical malpractice and liability coverage to hospitals and physicians, as well as professional liability coverage to attorneys. Plaintiffs, led by a law firm in Montgomery, Ala., contend that Reciprocal’s failure did not come about through malpractice claims gone wild, but because of fraud, conspiracy and racketeering.

“The company probably would have been OK if they had properly run the company, but we’ve found out from the investigation that they were hiding the fact that they were not properly funded,” says W. Daniels Miles III, an attorney with the Montgomery firm of Beasley Allen Crow Methvin Portis & Miles. “We haven’t been able to determine if the officers were on the take, but there clearly was mismanagement.”

Attorneys for Reciprocal did not return phone calls.

It’s common practice for carriers to limit their own risk buy buying reinsurance. In the case of Reciprocal, the liability was reinsured through General Reinsurance Corp., which ultimately belongs to Bershire Hathaway, Inc., the company controlled by Buffett. That’s the deep pocket targeted for perhaps $400 million in unpaid claims after the failure of Reciprocal.

Reciprocal had been active in the liability realm since 1992, and like many insurers apparently got very aggressive in the late 1990s when dot-com stocks were driving the markets. The most ambitious insurance companies were selling policies at huge discounts to raise investment cash. Some were eating loss ratios about 120% on insurance, but making it up and then some on investments.

As the dot-com bust approached, malpractice damage awards began escalating, especially in Mississippi. Suddenly pinched for case, carriers raise rates with vigor. Some failed and others withdrew from those lines of business.

“The greatest impact for Baptist centered around Reciprocal going into receivership at the time of our renewal,” says Greg Duckett, senior vice president and corporate counsel for Baptist Memorial Health Care Corp. “We had less than 30 days, which caused us to frantically work with other carriers to find professional liability coverage. We had to go to the market at its hardest point.’

Baptist ended up self-insuring a greater portion of risk and subsidizing coverage for physicians who were left hanging. 30% of providers in the state lost coverage when Reciprocal closed. The only other physician malpractice carrier, Medical Assurance Co. of Mississippi, was blocked by the Legislature from extending coverage, lest it also be sucked down the drain.

In Alabama, 40 hospitals and more than 600 docs were left holding the bag.

As a major subscriber to Reciprocal, Baptist had a seat on the board in Mississippi, filled by Duckett since 1998.

“Unfortunately for Reciprocal, their equity situation started to decrease rather precipitously, based on the increasing verdict coming out of Mississippi,” he says. “Under law they had to maintain their risk ratios.”

As investment income fell and premiums couldn’t keep pace, the company could not maintain ratios and became legally insolvent.

Reciprocal lacked the assets to come out of receivership, Miles says, because of a side agreement that released General Reinsurance from most of its obligations.

A side agreement is common between insurance companies. For contracts that can extend several years, side agreement are often used to amend the contract because of a changing market.

“Side letters are a routine part of the insurance liability,” Miles says.

The side letter in question releases General Reinsurance from 90% of its obligation, Miles says. This was not disclosed publicly, so the only thing a buyer could rely on was the treaty, a public contract filed with the state insurance commission that spells out the terms.

“Clearly the company didn’t have adequate reserves,’ Miles says. “General Reinsurance knew about this and that’s the sinister part. They’ve got all these people banking on the idea that General Reinsurance was the reinsurance carrier. Even worse, they were out there selling policies.”

Suits representing physicians and hospital were filed in Alabama, while one representing lawyers was filed in Memphis. Both sides petitioned to consolidate the cases in one venue and the courts chose Memphis as the most neutral ground.

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