I recently came across a new (to me) type of reinsurance product that covers certain types of medical professional liability systemic events. What's a systemic event? That, my friends, is the question of the day.
To understand this reinsurance coverage, we need to start at the beginning.
Doctors, nurses, hospitals, ambulatory facilities, and a host of others in the medical and healthcare professions are typically insured under various forms of medical professional liability insurance policies. Medical professional liability insurance is a form of professional liability insurance, or more broadly, errors and omissions insurance, which protects professionals and their institutions against claims of professional negligence or malpractice.
Coverage can be simply for a single doctor or for an entire hospital system and all its employees. Typically, professional liability insurance is written on a claims-made policy form. This means that insurance coverage is provided only for claims made against the insured and typically reported to the insurance company within the policy period (or any retroactive date) or any agreed-upon reporting period.
Medical professional liability policies typically have per occurrence and aggregate policy limits. If a doctor is sued by a single patient for a bad outcome in surgery, the doctor's medical professional liability policy will respond to that single occurrence up to the per-occurrence policy limit. Many healthcare professionals and institutions also purchase medical professional liability excess coverage, which sits over the primary coverage but also typically has per-occurrence and aggregate policy limits.
Direct writers of medical professional liability insurance, like most insurance companies, will purchase reinsurance to mitigate their exposure to losses arising from the primary and excess policies they issued to medical professionals and organizations. Different companies purchase different types of reinsurance, depending on their needs. Some may purchase traditional quota share reinsurance where both the insurance company and the reinsurer share proportionately in each loss from the ground up. Some companies will purchase a form of excess-of-loss reinsurance, which provides reinsurance protection for losses over a specific attachment point (e.g., $1 million excess of $250,000).
These reinsurance products work well for single losses. But when multiple losses arise, things get more complicated. For example, if a patient sues a doctor, a nurse, and a hospital all arising out of the same medical procedure, and all three defendants are insured under the same medical professional liability policy, the insurance company's traditional reinsurance may not provide sufficient reinsurance protection.
If the insurance company in this example purchased excess-of-loss reinsurance that provides coverage for $1 million in excess of $250,000 per occurrence and the claim against the 3 defendants results in a $3 million judgment, the insurance company will only recover $1 million from the excess-of-loss reinsurer and will be stuck with its $250,000 retention along with the additional $1.75 million of the judgment. Some insurance companies will have no issue with absorbing a $2 million net loss, but others may mitigate this risk by purchasing another form of reinsurance called clash cover.
Clash cover is a type of excess reinsurance protection that steps in where two or more insureds are sued for the same claim. A typical clash coverage clause reads like the following.
Whenever two or more Insureds or Policies are involved in the same Occurrence, the Reinsurer shall be liable for the amount of Ultimate Net Loss in excess of the Company's retention, subject to a limit of liability to the Reinsurer of $____ each Occurrence.
What clash cover offers is additional reinsurance protection if multiple insureds or multiple policies are involved in the same medical malpractice claim. IRMI's Insurance Glossary defines clash cover as the following.
Clash Cover—a form of reinsurance that covers the cedent's exposure to multiple retentions that may occur when two or more of its insureds suffer a loss from the same occurrence. This reinsurance covers the additional retentions.
Clash cover is a form of contingent reinsurance, with the contingency being loss exposure to multiple insureds or policies arising from the same claim and in an amount that exceeds the retention of the clash cover. Typically, the insurance company's retention under a clash cover reinsurance contract is equal to two or three of the companies' retention on its traditional excess-of-loss reinsurance contract. Using the example above, where the insurance company's retention is $250,000, the retention under that insurance company's clash reinsurance contract will likely be $500,000 or $750,000, depending on where the insurance company wants the clash protection to come in and how much of a loss it is willing to retain net.
So, this is all well and good, but what happens if multiple claimants sue a doctor for completely separate claims but arising out of a similar pattern or practice of malpractice? That's where systemic event reinsurance comes into play.
Every once in a while, we hear in the news of a medical professional who is sued by dozens of patients for separate claims of malpractice but arising out of a similar act. For example, a doctor prescribes the wrong drug dose to dozens of patients who all suffer harm because of the overdose. Another example is where a hospital's sterilizer fails, and dozens of patients suffer injuries as a result of staph infections. Many of these claims are catastrophic, resulting in substantial jury verdicts or settlements.
Systemic event reinsurance coverage protects against claims arising out of widespread infectious or communicable diseases caused by the same pathogen; medical equipment failure; improper dispensing of medicine; "angel of death," meaning a medical professional who decides to play God; and common business practices that result in multiple individual losses. Other losses may fall within coverage depending on the definitions employed.
From an insurance perspective, the insurance company that issued the medical professional liability policy to the doctor that prescribed the wrong drug dosage will find that its traditional reinsurance likely will not cover more than a few of these individual claims. If the insurance company purchased clash cover, the company likely will find that the terms of the clash cover do not fit this loss scenario because each claim is a separate claim and they do not arise out of the same individual loss occurrence.
This gap in reinsurance protection is what prompted a segment of the reinsurance market to develop a product that would provide reinsurance protection for this type of catastrophic medical professional loss. It is also a contingent form of reinsurance that was meant to address a catastrophic event that results in multiple individual losses arising from a common underlying cause or event.
Systemic event reinsurance has been around since at least 2006, but it is not particularly common. Like all reinsurance products, the scope and protection provided depend on the definitions and other terms and conditions of the reinsurance contract. Systemic event reinsurance is a highly customizable product, which continues to change over time.
Some iterations of the product use the term "Common Loss Occurrence" to define the parameters of the systemic coverage instead of trying to define "systemic risk." For example, Common Loss Occurrence may be defined as the following.
… an incident, error, omission, business practice or negligent act, or a series of similar or related incidents, errors, omissions, business practices or negligent acts involving not fewer than three persons or patients without regard to the number of interests insured or number of Policies involved arising out of, or caused by, a single originating cause which is unexpected from the standpoint of the Reinsured.
This definition makes it clear that only losses from acts involving at least three persons or patients (claimants) arising out of a single originating cause will be covered under this reinsurance. The three-plaintiff warranty focuses the coverage on the type of events that involve multiple claimants bringing separate claims against an insured for individual incidents that have a common origin.
A broader definition of common loss occurrence, which can lead to confusion about the scope of coverage, looks like the following.
'Common Loss Occurrence' as used herein shall mean each error, omission, business practice, accident, occurrence, medical incident, negligent act or series of errors, omissions, business practices, accidents, occurrences, medical incidents, or negligent acts arising out of an originating cause, whether involving at least two Claims or at least two of the Company's Policies or Insureds. Within a reasonable interpretation of this Contract, the Company shall be the sole judge as to what constitutes an 'originating cause.' A similar proximate cause does not in and of itself constitute a Common Loss Occurrence under this Contract.
Under this definition, there appears to be no requirement that there be more than one claimant as long as at least two of the insurance company's policies or insureds are involved in at least two claims arising out of an originating cause.
One drafting solution to avoid potential confusion is to define "systemic event." The following is an example.
'Systemic Event' means a 'Common Loss Occurrence' involving at least two or more unrelated injured parties caused by or related to (a) an outbreak of an infectious or communicable disease; (b) a medical equipment failure; (c) improper dispensing of medicine; (d) related actions by a single physician, employee, insured person or entity; (e) a common business practice, specific procedure, product or business policy used by a single physician, employee, insured person or entity; and (f) or any other similar loss event that injures multiple parties as a result of the loss event.
This definition limits the reinsurance coverage to truly systemic events as defined—those catastrophic multiple claimant losses arising out of the same originating clause, such as an outbreak of disease caused by equipment failure.
The reinsurance industry is very good at identifying gaps in coverage and providing solutions to protect the balance sheets of insurance companies that buy reinsurance. Systemic event reinsurance is one example of innovative coverage that provides a solution in the highly specialized world of medical professional insurance. Like all insurance and reinsurance contracts, it is important that the key terms have clear and unambiguous definitions to avoid disputes about the scope of coverage.
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