Policy premium and forms are very important when selecting a Professional Liability Insurance policy. But there is much more that an Attorney or Accountant should be concerned about when selecting a malpractice insurance carrier. Thinking that that you are asking all the right questions when asking what the AM Best rating is for insurance carriers? Don’t ignore the company structure. Not all insurance carriers are created equal. This is especially true with malpractice liability insurance as Congress in the 80’s created the ability for consumers to purchase this insurance through non-insurance company structures that look like insurance companies but are not. These structures add more risk to the insured.
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 may differ they are normally regulated by your state insurance department, must file rates and forms, and participate in the state guarantee funds.
2. Non-admitted Stock companies—There are many very fine non-admitted malpractice insurance carriers, yet be aware of the financial strength and track record of a non-admitted carrier. An experienced agent should know about issues that a carrier may be having that are not always directly reflected in the current financial ratings, be it underwriting or claims service. Remember that 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 non-admitted insurance carrier.
3. Risk Purchasing Group—A Risk Purchasing Group (RPG) allows like risks to purchase liability insurance on a group basis. In 1981 Congress enacted the Products Liability Risk Retention Act that 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 This federal law superseded many state insurance laws that prohibited the formation of specialized exclusive groups to purchase insurance.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. This was in response to the insurance crisis on the 1980’s where there was a problem with the availability of certain types of liability insurance at an affordable price or not be able to purchase it at all. The advantage of an RPG is that the carrier that issues the policy is usually an admitted or non-admitted insurance primary insurance carrier.
4. Risk Retention Group—An Risk Retention Group (RRG) was also formed under the same act. An RRG is a most misunderstood entity for most insurance consumers. Many insureds assume, wrongly, 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 they 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. An RRG loses its reinsurance, cannot replace it leaving firms suddenly with no malpractice insurance coverage with no notice. Your state insurance department is of little help in these situations. Many agencies that sell RRG policies underplay this risk.