Risk-Retention Groups: An Alternate Way to Secure Insurance

The courtroom provides no solace, either, as plaintiffs’ attorneys cunningly use the nation’s shortage of caregivers and low Medicaid payments as a launching pad for claims of outrageously deficient care. Indeed, lawsuits against nursing homes have risen at a disturbingly exponential rate, with many law firms dedicating entire practices to this new gold mine of riches. While some cases do indeed deserve retribution through the court system, the majority of suits have little merit; however, insurance companies often settle the cases to avoid the potential for an explosive verdict by jurors who simply may be sympathetic and award damages without reference to who is at fault (or whether there is fault). It is often quite difficult to appeal these sorts of decisions, no matter how thinly based their verdict is. It is these unjustified lawsuits that abuse the elderly; the lawsuits are used as “lottery tickets” to secure unjustified compensation for relatives (no matter how distant).

Attorneys take advantage of jurors’ difficulty in separating the case at hand from their feelings of concern for their own parents. They capitalize on the guilt jurors might expect to feel if they do not award damages to any elderly resident who makes a claim and shows an ugly picture of a sore, bruise, or other adverse condition. Regardless of the resident’s actual condition or the real “cause” of the alleged injury, attorneys are masters at using guilt for maximum effect.

Facilities, coping with staff shortages, the effects of agency staff on the continuity of care, and the health realities of severely compromised patients, feel defenseless against contorted claims of understaffing and neglect. Plaintiffs’ attorneys portray the companies that own long-term care facilities as “always placing profits above people.” Riding this wave of emotionalism, these attorneys succeed in securing large awards or exorbitant settlements.

Lawsuits without merit are quite common in the long-term care industry. Consider the case of a 102-year-old woman whose 84-year-old daughter sued a facility on her behalf for millions of dollars-despite the fact that her death, which occurred several years after she had left the facility, was determined to be from natural causes. Or consider the case of a mother who filed suit against a facility for the wrongful death of her daughter. The girl, who was afflicted with an advanced form of cerebral palsy at the time of her residence, died nearly three years after leaving the facility from complications arising from the disease. Defending frivolous cases like these requires the outlay of large sums of money or the payment of large deductibles. Unfortunately, such cases sometimes motivate companies to settle for inappropriate sums of money, regardless of whether there ever was any fault.

A Crisis Situation
Many insurance companies, sucked into this web of hysteria and lacking a national litigation plan, have simply withdrawn from the marketplace. And some long-term care companies have filed bankruptcy or sold facilities, further harming the entire market and eroding society’s ability to provide the best care for its elders. Reeling from the costs associated with defending cases and high insurance premiums, many of the facilities that remain can barely afford to provide care, and most have extreme difficulty finding affordable insurance. Although legislators are now starting to respond to these problems, they often don’t understand the issues of long-term care well enough to pass laws that would help ensure the survival of facilities. The sad fact is that some of the lawyers who profess to be “protecting or vindicating elders’ rights” and “ensuring that facilities don’t get away with murder” are, in reality, the ones prostituting elders’ situation for personal gain.

In this climate, litigation in the long-term care arena surges on, especially in the “open floodgate” liability states of Florida, Texas, and California. Mississippi, Oklahoma, Arkansas, Alabama, Virginia, and Pennsylvania are also breeding grounds for increased litigation; and Arizona, New Mexico, Nevada, and Missouri are not far behind. Many of these states do not require (as Florida does) a preliminary hearing before a punitive damages claim can be made; thus, long-term care companies (and often their parent companies) are subject to extraordinary discovery of financial records and deposition of “apex” executive officials, regardless of the true merit of the claims. This abuse often goes unchecked, as the best a defendant can do is to eventually secure a verdict or get dismissed, after the unreasonable stress of the case has taken its toll. The ability to secure insurance, in many of these jurisdictions, has become either impossible or financially unreasonable. However, companies that need a vehicle to “cap” their exposure do have alternatives.

When it is difficult to secure insurance but there is still a need for protection, what can long-term care organizations do to protect themselves against frivolous lawsuits and exorbitant claims? One solution is to join risk-retention groups (RRGs). These organizations essentially allow groups of companies or individuals to create their own insurance company-to create a vehicle in which all pay a lesser amount of money into a central fund and share in the risks (and the payment of any settlements or awards). While the success of RRGs will largely turn on effective risk management, they do provide a potential alternative to not having insurance at all.

Risk-Retention Groups
The Liability Risk Retention Act (LRRA) is a federal law that Congress passed in 1986 to provide a vehicle through which all types of third-party liability-insurance coverage-including malpractice insurance for providers of professional services, such as medicine and law-can be obtained. This type of insurance coverage had become either unaffordable or unavailable because of the “liability crisis” in the United States.

LRRA permitted the establishment of RRGs, which provide an alternative method of securing affordable insurance. An RRG is a liability insurance company that is owned by its members, who in this case would be owners of long-term care companies and must be domiciled in a particular state. Some of the key advantages offered by RRGs relate to the control over their liability programs their members obtain. This control translates into lower rates, broader coverage, effective loss control, and development of risk-management programs, which are of great benefit to long-term care facilities in the effective defense of frivolous claims. Additionally, RRGs facilitate participation by the group members to minimize risk and to operate more effectively (so as to reduce the possibility of claims or to minimize the volatility of claims). Oftentimes, RRGs may permit the group as a whole to secure access to reinsurance markets and provide overall stability of coverage, notwithstanding cycles in the insurance market.

In Florida, for example, the main RRG limits the risk potential for members by offering $250,000 of coverage per incident and $500,000 aggregate policies, essentially capping the risk. Unless the group gets hit with a bad-faith claim for failing to pay the insurance limits (i.e., when the insurer should settle for the policy limit but unreasonably fails to do so, and the plaintiff goes on to secure a judgment in excess of that limit), the RRG is fairly safe. However, if facilities in the group are successfully sued (with substantial verdicts being awarded or large settlements paid), then the viability of the group is at risk.

Facilities should appreciate that RRGs are just that-groups that share risk. Given that, it is critical that the RRG have exceptional underwriting and continued education for those it insures, minimizing the risk of the entire group’s failing because of large jury awards, settlements, or the high cost of litigation. Avoiding such financial stress in those three areas plays a key role in the success of the RRG and requires an exceptional litigation defense strategy, utilizing experienced trial attorneys and a unified, interactive approach among all the group’s defense attorneys. Ultimately, this is the single most important item for the group, which will otherwise be faced with the absurd damage awards that have plagued the industry.

RRGs exist in a number of states and have been created within several different business areas, including property development, transportation and trucking, and general contracting. An RRG in Florida, the first of its kind to be organized with state funding approved by the legislature, was established to offer insurance options to long-term care facilities. In fact, it is in healthcare that the most RRGs have been created, accounting for 47 of the 58 RRGs formed in 2003. By the end of 2003, 141 RRGs and 670 purchasing groups were operating in the United States, according to the Risk Retention Reporter. Premium collection reached nearly $2 million in 2003, demonstrating the need (and market) for these kinds of alternatives to conventional insurance providers.

Moving Forward
To help the public understand the plight of long-term care facilities and the realities of long-term care, facilities and insurance companies alike need to engage in a comprehensive public-education program. Legislators need to support reasonable caps on damages in certain cases, to guard against runaway juries and to encourage insurance companies to reenter the long-term care marketplace. And, for their part, judges must show courage by disallowing broad-stroked claims against parent companies, restricting unreasonable financial discovery, and urging that the least restrictive measures be undertaken when seeking discovery from senior executives.

All these occurrences, along with the establishment of effective RRGs, will go a long way toward closing the floodgates on the frivolous claims crippling the long-term care industry. Furthermore, facility owners and administrators must supplement this “call to action” with a determined public-relations effort to make society aware of all the positive things the long-term care industry does to help America’s rapidly increasing elderly population age safely and comfortably.