------Inwald Consulting Services, Inc.------

Health Care and Insurance Product Development, Strategic Relationships, & Expert Reviews

Joseph M. Inwald

Chartered Property & Casualty Underwriter

Member of Michigan and Florida Bars

President

Mr. C______September __, 201_
Vice President, Underwriting via Email
Captive Insurance Management .
______, ______

RE: Findings Report, Captive Policies

Dear Mr. ______:

The opportunity to review your 201_/201_ Excess and Umbrella Policies (“Captive Polices”) is appreciated. This Report will begin with an Executive Summary, followed by a brief Methodology Section. The third section addresses identified areas for potential improvement. The fourth addresses specific provisions of the Other Policies where differences warrant comment.

Executive Summary

The Captive Policies are in general well drafted and provide a scope of coverage that is similar to that provided by Commercial Insurers participating in the Excess and Umbrella Market for tertiary hospitals in the US. It should be noted that the Zurich Form and many of the AIG/Chartis forms reviewed have relatively broader Exclusions and other significant restrictions not found in your or most other Policies. Opportunities to better address how the Captive Policies will respond in the event of Insured or Underlying Insurer insolvency or misconduct have been identified. A number of arguably ambiguous provisions have also been identified and potential ameliorative language has been suggested. There are also a number of provisions in the Other Policies that are likely to restrict the scope of coverage or more clearly define the limits of Insurer obligations. In some circumstances it might be advisable to use similar terms in your Policies. In others, you might want to inform participants (and potential participants) of your superiority e.g. CNA reserves the right to unilaterally settle claims within the Underlying Limits.

It should be noted that your reinsurers or excess carriers may have an issue with some of the proposed changes. They may, in fact, have mandated some of them in the first place. While Section Three references some common State Law provisions, this engagement and these Findings should not be construed as a Legal Opinion Letter.

Methodology

In the course of the author’s consulting and insurance brokerage experience more than 100 HPL Primary, Excess, and Umbrella Policies, defining coverage obligations not dissimilar to those included in the Captive Policies have been drafted or closely reviewed since 1987. Initially, the Captive Policies (______610 & ____610) were carefully read. Then the Other Policies (CNA G-144104-Ac Ed. 07/04 & GSL 7220xx [2-09], ACE PF-12829& 12830 [both 09/02], IronShore HPL.040 [6.08 ed.], Zurich/Steadfast U-HCU-700-B CW [07/03] &U-HCU-703-A CW [04/03])were read or skimmed.This Engagement did not include specific conversations with HPL brokers or hospital risk managers to verify that forms reviewed reflect actual Policies inclusive of Endorsement expansions or contractions. Some of the Policies secured did include Endorsements which were incorporated in these findings.

For ease of oral discussion the most of following sections have separately numbered sections. Since they are to be understood in the context of earlier, or latter, written discussion please do not distribute them without a full copy of this Report. Also they are, for the most part, ordered based on Policy sequence rather than relative import. The comments below reference the Excess Form-almost all of these comments also apply to the Umbrella Form.

Potential Improvement for Captive Policies

Given this consultant’s perspective, the possibility of Underlying Insurer or Insured Insolvency or misconduct during the period where the Captive Policies will govern can not be assumed away. A number of the following recommendations are premised on this and the likelihood that judicial treatment in the absence of the clearest possible language will not be consistent with current intent. If, for instance, in the context of an insolvent Underlying Insurer and Insured (inclusive of a depleted Trust) and a clearly deserving Plaintiff with a perfected Judgment the odds would seem to favor judicial imposition of the SIR and Underlying Limits onto an Insurer in the position of Captive. If Captive wanted to argue that the Insured, perhaps 20 years ago, violated a condition precedent for Coverage by not including an activity in its Application to the Underlying Insurer and Captive then it would want to rely on clearest possible Policy Language incorporating the Application into the Policy. See 7, below. Even without the insolvency factor, given the complexity inherent in deciphering claims made v. occurrence triggers in certain situations many Jurists (or most Juries) might be amenable to an argument made by a sympathetic claimant that the coverage was Occurrence rather than Claims Made if there is even a de-minims basis for it-see # 2 below.

  1. Initially, it is commonly viewed as good practice to use a Notice Provision on the Declarations Page for RRG’s or RPG’s that comport with state Surplus Lines notification requirements. I would also suggest putting the State specific notice language on the body of the Policy and on each Endorsement. It is not clear from my sample Captive Policy that this is being done in practice.
  2. I am troubled by the use of the term “Occurrence” in your Declarations Page, Schedule of Underlying Insurance (Endorsement [“E”] 1 in your Excess Policy for instance), and in the Policy. I have drafted other forms that use the term “Event” in lieu of “Occurrence” to avoid a latter strained judicial outcome. You might also want to look at the language used by IronShore that better addresses the fact that the typical CGL Underlying Insurance Policy may be written on an Occurrence basis.
  3. There also seems to be use of the term “Deductible” when the intent appears to be to impose a SIR. For example, in the context of an Insured Insolvency, this could prove costly.See your Endorsement (“E”) 8.
  4. If I understand the intent of E 3 regarding Cross Liability, it appears that the exception from the general exclusion should be narrowed. I’m concerned that there is no value in providing coverage when one subsidiary sues another-possible both in the context of insolvency and when the Named Insured may no longer control the entity. I’d suggest that the first line of the second paragraph be changed to read “In the event of a bona fide claim or claims being made by individuals”…
  5. In E5 the phrase “from a hostile fire” should be placed after “damage” to avoid an interpretation that the hostile fire requirement only applies to “fumes.”
  6. The last 12 words in the body of E 6 are a bit unclear. I’d suggest ending the sentence after “Underlying Insurance” and inserting something like the following as a second sentence- “The scope of coverage provided by this Policy shall not be broader (i.e. cover any claim not covered by) than that afforded by the Underlying Policy. See also the IronShore language used in this context.
  7. As discussed above, the statement on page 1 of the Policy- before the Insuring Agreement(“IA”)- should include the “Applications (including any additional information provided to the Company prior to, during, or subsequent to the Policy Period by or on behalf of the Insured) and” before the term “Declarations.”
  8. An example of how the term “occurrence” could be interpreted to provide an unlimited reporting period can be found on the 11th line of the IA (1A).
  9. In reading the “2. Defense” section on page 2, the issue of how the Policy would treat the circumstance where the Insured or Underlying Insurer can not, or chooses not to, defend a claim that Captive views as likely to trigger its payment obligation arises. I’d propose language, perhaps placed elsewhere, that indicates that if Captive has to defend because no other party is doing so then it would be entitled to reimbursement of its expenses and or that such costs would reduce the Limits of Liability otherwise available (perhaps by 300%?). See also Conditions J & K on page 19. See also Observation 6.
  10. The first paragraph 3 B. of the Limits of Liability Section is a bit unclear to me. Is it referring to Aggregate Limits? Also, why would a sublimit for Anti Trust and IP claims be “hidden” in this section as an additional paragraph without a heading-easy to imagine a Judge voiding it as deceptive or ambiguous. It is addressed on page 8 as a part of Exclusion T.
  11. Provision 4 on page 3, identifying and defining Insureds, could be clarified. Most forms require that the Named Insured has to both report new subsidiaries and pay any additional premiumassessed. A2 does not specify that the subsidiary ever has to be scheduled or that Captive could impose additional Exclusions or conditions applicable to it. Also is there a need for paragraph 4 C 1-providing for individuals as possible Named Insureds? See also Condition E on page 16.
  12. 4 C 3, last sentence, could include the word “written” before “acknowledgement.”
  13. The second paragraph of Exclusion B 3 raises a couple of issues. Initially, do you or might you have any Insureds that use commercial insurance that would cover patient loading or unloading. Next, do you currently get a copy of the Insured Trust Document for their SIR’s? Do you monitor their performance in the context of sufficient funding and claims management? While, in my experience, most excess insurance Policy Forms do not do so it might be something that Captive should undertake.
  14. The paragraph immediately after Exclusion D 4 on page 5 appears to be missing a clause. Also, would you want to include “significant other” after “spouse?” It might be worthwhile to check with an employment attorney regarding whether broader language to include “anyone or any entity harmed as a consequence of the alleged wrong impacting the employee or candidate.” The following sentence may address the last issue-it does not refer to an entity and it is not clear whether it modifies the preceding sentence or “D”in its entirety.
  15. Regarding Exclusion O on page 7, wouldn’t it be equally effective and more streamlined to include Asbestosis within the definition of a Pollutant (definition Q page 13)?
  16. Exclusion X on page 9 seems inconsistent with the sublimit referenced in item 10 above. Also, shouldn’t the exception at the end refer to the Insureds work or Professional Health Care Services?
  17. The definition of Defense Expenses provision 6, page 10, uses a $100 day limit for actual loss of earnings for Company requested attendance. I’d suggest raising it or eliminating it. Provision 6 provides for “costs taxed against the insured in the suit;” I’d propose a sublimit similar to the one used in F 3 above.
  18. The definition of “Medical Incident” at page 12 could be tightened. Initially, “professional health care services” could be better defined-your language is not atypical but does not seem to have any limit (other than those that are included in the definition of professional incident).
  19. Would it make sense to include peer review liability within a D & O coverage part? Do you provide excess over D & O now? Perhaps by specifying that your coverage is specifically excess over any D & O, even if not part of the Scheduled Underlying Insurance, you might be more likely to secure contribution. Another approach is to exclude to the extent it is covered by (collectible) D & O or other Indemnity or Insurance.
  20. The definition of Professional Services, T p. 14, might be broadened by inserting after Services “customarily rendered by licensed or specially trained individuals”
  21. The definition of Ultimate Net Loss, on pages 14 & 15, might include the word “mandatory” before “civil” and “final” before adjudication.
  22. The 3rd full paragraph on page 19 of Condition H is troubling. It provides that any non-compliance voids 100% of the applicable coverage for the claim. It is easy to anticipate a finding of “substantial compliance” obviating this clause. While I have not researched it, would there be a better chance for enforcement if a high coinsurance cost (90-95%) was imposed if there was material non-compliance. Also the final paragraph specifies a 10 year period for certain record retention. In the event of pediatric claims this period might prove problematic.
  23. Condition L,on page 19, might specify, as do most of the Other Policies, that the Company’s right to Inspection and Audit lasts until the last claim is resolved.
  24. As discussed above, Condition P should indicate that the Representations also apply to Applications-is there a typo at P1 using the term “Declarations” rather than “Application?” Also in the event that the Representations are later shown to be false I’d suggest that the Company have the right to assess additional premium, impose additional exclusions or coinsurance, or make the Policy voidable at the Company’s option.
  25. It is not clear why the Nuclear Exclusion is placed within the Condition Section at page 21. Also have you considered a short form of this Exclusion?

Observations from the Other Policies

  1. The CNA Policy appears to be an updated version of St. Paul’s and is a bit easier to read both due to formatting and the minimization of customary insurance jargon.
  2. I would direct attention to p. 13 of CNA’s Umbrella Form (G-144104, 07/04) definition of Insured d. which addresses limits for additional insureds. It specifies that limits under the umbrella are capped at the lower of the levels offered in the document that established the additional insured status or normal Policy Limits. Captive’s definition of who is insured, 4 B at page 3, does not include this. I’d suggest either adding it or promoting that you provide full Policy Limits for Additional Insureds.
  3. CNA requires that newly acquired or formed organizations be scheduled within 90 days. The Captive Policies do not have this requirement. Please see item 11 in the previous section of this Report.
  4. The CNA Form, for instance, provides greater clarity that the First Named Insured is authorized to act on behalf of all Insureds-see “Sole Agent” Condition p. 19. It also specifies joint and several liability of all Named Insureds for Premium payments. Does your Members or Subscribers Power of Attorney Agreement already provide for this? You might want to consider putting it in the Policy anyways so you have a Policy based right to set off.
  5. The CNA Policy does provide for an automatic 60 day ERP, apparently without charge as long as the Policy is not replaced. Other Policies provide for the Insured’s right to purchase an ERP-with or without a set price. It could be argued that your lack of this feature is a detriment. On the other hand, except for non-payment of premium the Policy suggests that the Insured is guaranteed renewal unless there is the 2/3rds vote of members to exclude the Insured.
  6. Other policies, including CNA’s at page 24-5, provides for the Excess Insurer’s right to Settle any claim or take over the defense even if the applicable Underlying Limit has not been exhausted. It could be argued that this right could be applied in contravention of the Insureds normal business expectation. This could be most acute in the context of an Insured that has its own underlying captive or has intentionally purchased a Policy with a consent to settle provision.
  7. CNA’s Excess Form (GSL 7220XX [2/09]-VII) provides for a rather harsh automatictermination in the event that any of the underlying insurance policies are cancelled. Condition 10 of their Umbrella Form is similar to what you have in both the Excess and the Umbrella.
  8. The Zurich Umbrella Form, at I J p. 2, appears to go further in indemnifying for (punitive?) damages that it can not pay on behalf of than yours does. Although there is a punitive damages exclusion “penalties imposed by law (V I p.5)” I would interpret I J as an advantage for the Insured in this context.
  9. The Zurich Form, III D p. 2, specifies that Defense Expenses and post judgment interest are paid in addition to the limits.
  10. The Zurich Form has a nasty hammer clause, IV A p. 3, that gives the Insurer the right to void excess coverage, on a claim by claim basis, to the extent that it insists that the Underlying Settle within its limits. This could put the Insured in a catch 22 if the Underlying Insurer refuses to settle at an amount that the excess (Zurich) views as reasonable. I have not seen a primary HPL form that gives the Hospital a corresponding right to mandate settlement.
  11. The Zurich Form has an excessively broad Dishonest, Fraudulent, Criminal or Malicious Act Exclusion (V C, p. 3) that applies if any Insured committed it or if the act was done intentionally. One could argue that the run of the mill lack of informed consent claim is an intentional and a criminal act! The Assistance and Cooperation Clause, VI A 2. p. 6 also requires all Insureds to cooperate with underlying insurers and with each underlying Policy provision.
  12. While the Zurich form has the customary protections for the Excess/Umbrella carrier that preserves its attachment and limits in the event of a change in the Underlying Insurance, it goes further than others in giving it the right to rescind, non-renew, modify or increase premiums in the event of any change(VI C 2, 6-7).It also requires a full notice when the reserve or demand exceeds 25% of the underlying limit. This appears to be both onerous and a potential trap (D p.7).
  13. I’d direct your attention to Zurich’s VI Rights and Duties of the Insureds E, F, & H at p. 8. With the exception E 2, which gives the Company the unilateral right to adjust premium if any Policy Provisions are changed, the other provisions clearly spell out the role of the First Named Insured and specify what happens if the Representations prove to be false. It does specify, at VII E,that record audits can be conducted at any time.
  14. The Cancellation clause (IX, p. 11) in the Zurich Form allows for company cancellation without cause with only 30 days notice. It should be noted that SIRs or Underlying Amounts are not reduced so that any premium already paid for Aggregate Coverage has proportionately less value (B).
  15. The Zurich Umbrella Form (703, 04/03) Who Is Insured Clause excludes employed externs, interns, and fellows as well as Podiatrists, Chiropractors, Dentists, Nurse Midwives and CRNA’s. If you do not require scheduling that fact could be a significant factor for many of your prospective members.
  16. The Zurich Form’s Prior Known Act Exclusion G (p. 3), applies if any employee knew or should have known of the Medical Incident. This could be a substantial basis for the exclusion of many potential claims that are not immediately brought to the attention of Risk Management.
  17. Zurich’s mandated notice provisions are significantly broader than yours-please also see Observation 12 above as well.
  18. Zurich’s Additional Exclusions are quite broad. Its fungus or bacteria exclusion could be read to apply to a Legionnaires or a MERSA outbreak.
  19. The IronShore Forms are relatively clean (less repetitive language) and clear. It provides better substantive terms in many areas than the Zurich Form and on balance (without seeing their Declarations Page, Schedules, or Endorsements) provides a similar scope of coverage as the Captive Policies.

I look forward to addressing either the Methodology used or the specific Findings. This Report is subject to the terms contained in our Consulting Services Agreement executed earlier this month.