Rhode Island Supreme Court Invalidates Healthcare Provider’s Right to Self-Insure

In its recent decision in Peloquin v. Haven Health Ctr. of Greenville, 2013 R.I. LEXIS 9 (R.I. Jan. 14, 2013), the Supreme Court of Rhode Island had occasion to consider the validity of a self-insured retention in a healthcare professional liability policy issued to a Rhode Island insured.

Green Haven Health Center (“Health Haven”), a Rhode Island nursing facility, was insured by Columbia Casualty Company (“Columbia”) under a claims made and reported healthcare professional liability policy with limits of liability of $1 million per claim and $3 million in the aggregate.  Columbia’s policy contained a self-insured retention endorsement stating that its policy attached excess of a self-insured retention of $2 million per claim to be paid by the insured.  The endorsement specifically stated that:

[Columbia's] obligation to pay 'damages' and 'claim expenses' as a result of a 'claim' is in excess of the Self-Insured Retention. [Haven Health] [is] required to pay all 'damages' and 'claim expenses' up to the amount of the Self-Insured Retention listed herein. The Limits of Liability set forth on the Declarations Page are in excess of the Self-Insured Retention regardless of [Haven Health's] financial ability or inability to pay the Self-Insured Retention and in no event are we required to make any payments within [Haven Health's] Self-Insured Retention.

Health Haven was named as a defendant in a medical malpractice lawsuit brought on behalf of a patient who died when a Health Haven nurse accidentally administered a fatal dose of morphine.  While the suit was pending, Health Haven filed for bankruptcy.  The underlying suit was later amended to add Columbia as a defendant pursuant to a Rhode Island statute permitting direct actions against insurers when an insured files for bankruptcy.  Plaintiff nevertheless continued to prosecute her claim against Health Haven, and two related entities, and eventually obtained a default judgment against these entities in the amount of $364,421.63.   Plaintiff then moved for summary judgment against Columbia, arguing that the self-insured endorsement was void as against public policy.  Plaintiff argued, therefore, that she was entitled to recovery from Columbia of $100,000 (based on Rhode Island’s statutory minimum required insurance for medical professionals) plus pre- and post-judgment interest of nearly $140,000.  The lower court held in favor of Columbia, reasoning that Columbia’s obligations under its policy were triggered only by a loss in excess of $2 million.

Plaintiff’s arguments regarding the validity of the self-insured retention were relied on Rhode Island statute § 42-14.1-2(a), which governs malpractice insurance requirements for medical and dental professionals.  The statute states that:

(a) The director of business regulation shall promulgate rules and regulations requiring all licensed medical and dental professional and all licensed health care providers to be covered by professional liability insurance insuring the practitioner for claims of bodily injury or death arising out of malpractice, professional error, or mistake. The director of the department of business regulation is hereby authorized to promulgate regulations establishing the minimum insurance coverage limits which shall be required; provided, however, that such limits shall not be less than one hundred thousand dollars ($ 100,000) for claims arising out of the same professional service and three hundred thousand dollars ($ 300,000) in the aggregate. The director of the department of business regulation is further authorized to establish rules and regulations allowing persons or entities with sufficient financial resources to be self-insurers.  (Emphasis supplied.)

Plaintiff argued that Health Haven’s $2 million retained limit was not insurance as required by the statute, and thus did not satisfy the minimum insurance requirement established in § 42-14.1-2(a) of $100,000 per claim and $300,000 in the aggregate.  Plaintiff therefore contended that the self-insured endorsement violated public policy to the extent of the statutorily mandated minimum insurance requirements.  Plaintiff further argued that because the Rhode Island Department of Business Regulation ("DBR") had not yet established “rules and regulations allowing persons or entities with sufficient financial resources to be self-insurers,” Health Haven’s $2 million retained limit was impermissible.

The Rhode Island Supreme Court stated that it need not address plaintiff’s arguments concerning Rhode Island public policy since the absence of DBR promulgated rules or regulations on the issue was determinative.  As the court explained:

… we conclude that before any self-insurance may be incorporated into an insurance policy governed by § 42-14.1-2(a), the DBR first must promulgate a regulatory framework expressly "allowing" for self-insurance. … before a Rhode Island healthcare provider lawfully may self-insure, the DBR is required to take the affirmative step of "allowing" self-insurance and defining the conditions under which "persons or entities" possess "sufficient financial resources to be self-insurers." See § 42-14.1-2(a). Thus, unless and until the DBR promulgates regulations that expressly make provision for self-insurance by healthcare providers, by its plain language, the final sentence of § 42-14.1-2(a) does not permit the SIR Endorsement that appears in the Columbia policy.

In reaching this conclusion, the court agreed with plaintiff’s contention that self-insurance is the antithesis of insurance, since the risk remains with the insured.   As such, explained the court, to satisfy the minimum requirements of § 42-14.1-2(a), and assuming the DBR permits self-insurance, a medical or dental professional would, at the very least, have to demonstrate “the same sorts of underwriting procedures that insurance companies employ” of its financial ability to insure a loss.

Having concluded that the $2 million self-insured retention was impermissible, the Supreme Court resisted drawing a broader conclusion as to the minimum amount of insurance required under the statute.  As the court explained:

We already have determined the SIR Endorsement in the Columbia policy to be invalid, and we hold that plaintiff should receive the $100,000 in damages to which she consistently has argued she is entitled. Thus, we need not determine whether the $100,000 per-claim minimum specified in § 42-14.1-2(a) currently is mandatory (and therefore applicable to all policies insuring Rhode Island healthcare providers), or whether it becomes effective only if and when the DBR exercises its discretion by promulgating regulations setting forth minimum professional liability insurance coverage requirements for healthcare providers.

Thus, the court concluded that plaintiff was entitled to recovery of $100,000, in addition to pre-and post-judgment interest calculated on the $100,000 recoverable under the Columbia policy rather than the $364,000 amount of the underlying default judgment.