We have written before about the risks of insuring with risk retention groups (RRGs). Among the risks is a lack of insolvency protection for policyholders. Since RRGs not licensed in NYS are not eligible for protection by the NYS Property/Casualty Insurance Security Fund, policyholders are not protected by the state’s guaranty fund when such an RRG becomes insolvent.
Unfortunately, physicians in NYS will experience this and others risks, if insured by an RRG that is declared insolvent. As a service to our policyholders, we are providing information that describes what to expect if your RRG is declared insolvent.
In general, when an RRG is declared insolvent, it will be placed into liquidation by the insurance commissioner of its domicile state. Liquidation is a type of receivership and is similar to bankruptcy. The insurance commissioner will be charged with tasks that include taking possession of the assets of the insolvent RRG, conducting its business and winding-up the affairs of the insolvent RRG, all under court supervision for the protection of the policyholders, creditors and the general public.
The effect of liquidation on a policyholder creates a series of problems, distractions and disruptions. Foremost is that existing insurance coverage will, at worst, cease to exist before the policy expiration date or, at best, provide far less financial protection than originally agreed to and purchased. Policyholders will be faced with immediately procuring replacement coverage and the accompanying business disruption. For those policyholders actively engaged in malpractice litigation there will be even more financial uncertainty because they will now be responsible to pay some or all of their defense costs and indemnity payments. Beyond these increased financial obligations, the litigation process will be stayed for an extended period of time, meaning that the lawsuit will remain open for an extended period of time.
In all insolvency events, the outcome is clear: the insolvent RRG will not have sufficient remaining assets to satisfy its obligations to its policyholders, creditors or the general public, and a policyholder will be subject to greater financial exposure coupled with all the attendant distracting professional and business disruption.
MLMIC urges physicians in New York to familiarize themselves with all the risks before opting for coverage from an RRG. In many cases, RRGs fail due to pricing practices that can’t bear the weight of the company’s responsibility to protect its policyholders. Ultimately, what appears to physicians to be a more cost-effective option can lead to additional and even higher costs and greater financial risks.