Monday, July 21, 2009
JUA trustees tell Belknap judge state’s taking
of $110M ‘surplus’ puts their solvency at risk
by Michael Kitch
LACONIA — Policyholders, including
LRGHealthcare,challenging the state’s effort to
drain $110-million from the New Hampshire
Medical Malpractice Joint Underwriting
Association (JUA), to balance its budget, got some
support from the association itself at a hearing in
Belkap County Superior Court yesterday.
For the first time since the litigation began, the
JUA, which earlier declared its neutrality, entered
the fray. Attorney Michael Aylward of Morrison
Mahoney of Boston, counsel to the association, said
that the association took no position on the claims
of the state and the policyholders. However, he
stressed that taking $110-million from the JUA
could put its future operations and solvency at risk.
House Bill 2, the so-called companion bill to the
state budget, stipulates that the funds must be
transferred not later than July 31 to ensure that $65-
million can be applied against a projected deficit in
the fiscal year that ended on June 30 this year and
the balance divided evenly between the next two
fiscal years. Just days before the Legislature
adopted bill, nearly a third of the 900 policyholders
of the JUA brought suit. They claim they are
entitled to any funds in excess of monies required to
defray pending and projected claims and to pay
operating expenses. HB-2, they charge, represents
an unlawful and unconstitutional violation of their
vested contractual rights.
Judge Kathleen McGuire opened the hearing by
saying that the only question before the court was
whether HB-2 was constitutional. If the state
prevails, she noted, the money would be transferred
to the state treasurer as the bill specifies. On the
other hand, she said that if she rules for the
policyholders, she will not order the funds to be
distributed, implying that the management of the
funds would be left to the board and management of
the JUA.
McGuire assured the parties that she would issue
her order by July 31. Kevin Fitzgerald of
NixonPeabody, representing the policyholders, and
Associate Attorney General Anne Edwards both
said they would appeal an order made against them
to the New Hampshire Supreme Court.
The JUA was established in 1975 under a statute
(RSA 404-C) authorizing the insurance
commissioner to create so-called “mandatory risk
sharing plans” to provide any form of liability
insurance for which there is no private or voluntary
market. It is managed by a board of directors
according to rules written by the Insurance
Department and approved by the Joint Legislative
Committee on Administrative Rules. About half of
the approximately 900 policy holders are
physicians. LRGHealthcare, is the lone hospital
group insured by the JUA while other policy
holders include more than 20 nursing homes, home
health agencies and individual nurses, physicians’
assistants, podiatrists, chiropractors and
optometrists.
Altogether the policyholders represent less than
10-percent of the 11,000 health care providers in the
state and pay $8.8-million in annual premiums, or
more than 20-percent of the $40-million in total
malpractice premiums.
The JUA meets its losses and pays its expenses
from the premiums paid by policyholders. The state
neither funds nor guarantees its liabilities or
expenses. But, all insurance underwriters doing
business in the state are “members” of the
association and in the event it suffers a deficiency
can be assessed to overcome the shortfall.
On the other hand, if there is a surplus, that is if
premiums “exceed the amount necessary to pay
losses and expenses,” the rules provide either that
assessments will be refunded to members or that
“the board shall . . . distribute such excess to those
health care providers covered by the association, in
such a manner as is just and equitable.” Since there
has been no assessment of members since 1986,
when the JUA was restructured, the policyholders
claim they are entitled to the surplus.
The rule is mirrored in the so-called “assessable
and participating” policies between the JUA and its
policyholders. The policies provide that if the JUA
is in deficit, it can assess the policyholder for
additional premiums while if it posts earnings “the
named insured shall participate in the earnings of
the company, to such extent and upon such
conditions as shall be determined by the board of
directors in accordance with law.” Fitzgerald,
representing the policyholders, told the court that
their claim to a share of the surplus rested on the
plain language of the rules and their policies as well
as the past practice of the JUA, which in 1999 and
2000 distributed dividends to them. In denying the
policyholders rights, he said, the state takes “shall”
to mean “may” or “never,” doing violence to the
contract.
In response, attorney David Leslie of Rackermann,
Sawyer and Brewster of Boston, acting as special
counsel for the New Hampshire Attorney General,
insisted that neither the operating rules nor the
insurance policies grant the policyholders any
contractual rights. Instead, they insist that the JUA
was created and organized by the state to serve a
public purpose, namely to provide malpractice
insurance in the absence of a competitive private
market, which in turn limited access to health care.
Therefore, they conclude that the state can
legitimately apply the surplus to a similar public
purpose, including “programs that promote access
to needed health care for underserved persons” as
the budget prescribes.
When McGuire asked Leslie “who owns the
surplus,” without hesitation he answered “the state.”
Asked to explain, he said that the state created the
JUA to serve a public purpose and through its
power to require assessments and to grant it tax
exempt status ensures it has sufficient capital to
operate. He said that “a windfall” to the
policyholders would be incompatible with original
purpose of the JUA. Earlier, McGuire asked
Fitzgerald if the JUA had vested rights to the funds,
“but is not stepping up to the plate.” He replied
“yes, exactly, it is absolutely plain that the JUA has
rights to the fund.” He said that if the court found
HB-2 to be an unconstitutional taking, the JUA
would be bound to fulfill its duty under its rules of
operation and contracts with policyholders.
In a memorandum filed with the court, Aylward
said that “it is in fact far from clear that a surplus
does exist, much less one as large as the $110-
million declared by House Bill 2.” He explained
that malpractice losses may not appear for 20 years
and the JUA was only now closing its books on
policies written between 1986 and 1989. Moreover,
the later the losses appear, such as those of minor
with brain damage who is not required to file suit
until reaching the age of majority, the larger they
tend to be.
With uncertain liabilities, he said that the JUA
feared the $100-million claimed by the state would
jeopardize its future operations.
Aylward told the court that an actuarial study
commissioned by the Insurance Department
concluded that the JUA should retain $48-million of
its $142-million surplus against future losses. He
noted that at the time Insurance Commissioner
Roger Sevigny, who in a widely published op-ed
piece upheld the state’s claim to the $100-million,
went a step further to suggest the JUA should keep
$55-million of its surplus.
Aylward pointed out that if the JUA could not pay
future claims, it would have no choice but to assess
all the liability carriers in the state and possibly all
health care providers as well as surcharge its
policyholders, “a burden ultimately to be borne by
New Hampshire citizens. The JUA, Aylward said,
should be entitled to perform an independent
assessment to determine if there is a surplus “to
avoid endangering the interests of its policyholders
and causing injury to the general public or unjust
and unwarranted future assessments of innocent
parties.”
“It would be a cruel irony,” Aylward continued, “if
$110 million was transferred from the JUA for the
stated purpose of improving health care services
only to result in a shortfall that had to be made up
by the various individuals and entities that deliver
health care services.” The JUA, he said, “only asks
that it be left with sufficient funds to fulfill its
contractual responsibilities to its policyholders and
its mission as determined by the state at its
inception.”