Liability Insurance Carriers are not created Equal

Policy forms and premium are important when selecting a Professional Liability Insurance policy. But Attorneys or Accountants should be concerned about selecting a strong malpractice insurance carrier. Insurance carrier AM Best Ratings only tell part of the story. The structure and backing of insurance carriers are not always equal. Congress in the 80’s created the ability for consumers to purchase liability insurance through non-insurance company structures that look like insurance companies but are not. These structures add more risk to the insured but may offer a lower price. Here are the differ insurance structures:

1.       Mutual and Admitted Stock Companies—Mutual and Stock companies have been around for over 150 years. While how they raise money and account for income differs, they are regulated by state insurance departments, must file rates and forms, and participate in the state guarantee funds.

2.       Non-admitted (Surplus Lines) Stock companies—There are fine non-admitted malpractice insurance carriers but place more importance on the financial strength and the track-record of a non-admitted carrier. Your state insurance department is of little help if you have a dispute with a non-admitted insurance carrier. There is no insurance guarantee fund for a distressed non-admitted insurance carrier.

3.       Risk Purchasing Group—Risk Purchasing Groups (RPG) allow like-risks to purchase liability insurance on a group basis. In 1981 Congress enacted the Products Liability Risk Retention Act responding to the liability insurance crisis of the 1980’s. This act attempted to resolve the availability and pricing problems. Prior to the act liability insurance consumers could not purchase insurance at an affordable price or may not be able to purchase it at all. The 1981 Act allowed the formation of groups to purchase liability insurance on a group basis through either admitted or non-admitted insurance carriers. This federal law superseded state insurance laws that prohibited the formation of specialized exclusive groups to purchase insurance. The law only applies to casualty or liability insurance not property insurance. The advantage of an RPG is that the carrier that issues the policy is usually an admitted or non-admitted insurance primary insurance carrier. RPGs are allowed to charge a membership fee to join the group.

4.       Risk Retention Group—Risk Retention Groups (RRG) were formed under the same act. An RRG is a misunderstood entity for insurance consumers. Insureds may wrongly assume that an RRG is just another insurance company. An RRG is only as good as the reinsurance that backs the program. For the purposes of state insurance guarantee funds RRGs are treated like a Surplus Lines carrier, there is no state guaranteed fund. If an RRG loses its reinsurers, the program can disappear in a heartbeat. This has happened in the past. When an RRG cannot replace its reinsurance, it suddenly leaves firms with no malpractice insurance coverage with little to no notice. Your state insurance department is of little help in these situations. RRGs are also allowed to charge a fee to participate in these groups.

 GET A ACCOUNTANT OR ATTORNEY MALPRACTICE QUOTE

    Managing Director, CEO
   

     (616) 940-1101 Ext. 7080