St. Paul And Other Exiting Insurers – Mismanagement And Fraud To Blame, Not Juries

Why have St. Paul Co. and smaller companies exited the medical malpractice insurance market?  In 2001, one of the country’s largest medical malpractice insurance companies, St. Paul, pulled out of the medical malpractice insurance market, creating significant supply and demand problems in many states.

According to a June 24, 2002, Wall Street Journal front-page investigative article, St. Paul, with 20% share of the national market, pulled out after mismanaging their underwriting and reserves.[61]  In the 1980s, the company set aside too much money for malpractice claims.  So, using a tricky accounting method, in the 1990s the company “released” $1.1 billion in reserves, which flowed through its income statements and appeared like big profits. Seeing these profits, many new, smaller carriers came into the market. Everyone started slashing prices to attract customers.  From 1995 to 2000, rates fell so low that they became inadequate to cover malpractice claims.  Many companies collapsed as a result. St. Paul eventually pulled out, creating huge supply and demand problems for doctors in many states.[62]

St. Paul – Years of Mismanagement and Other Problems

Even after getting out of the medical malpractice business, St. Paul’s problems continued to demonstrate that poor business practices, not medical malpractice insurance, have really been at the heart of the company’s downfall. In May 2002, the company was placed on credit watch with negative implications and in July 2002, St. Paul had its ratings lowered again by Standard and Poor’s due to its handling of asbestos and other environmental claims.

Nevada.  In May 2002, the Nevada Attorney General’s office filed an administrative complaint against St. Paul in connection with its decision to pull out of the medical malpractice market. The complaint cites St. Paul for alleged unlawful business practices, unauthorized policy modifications, payment of commissions to unlicensed agents, unlawful policy cancellations and nonrenewals and failure to return unearned premium payments.63]

West Virginia.  A group of Charleston surgeons have sued St. Paul for “grossly poor management” that led St. Paul to drop malpractice coverage.[64]

Other Fraud.

Reliance.  In June 2002, the Pennsylvania Insurance Commissioner filed suit against directors of the defunct Reliance Insurance Co., alleging breach of fiduciary duty and negligence. From 1998 through the first half of 2000, the company’s directors allowed more than half a billion dollars in dividend and other payments to be paid to holding companies of which Reliance directors were major shareholders.

Phico.  In 2001, Pennsylvania regulators filed a civil fraud suit against the Pennsylvania Hospital Insurance Co., or Phico, which filed for bankruptcy in December. The company’s board was allegedly misled on the adequacy of Phico’s premium rates and funds set aside to pay claims.  “On the way to becoming the nation’s seventh-largest malpractice insurer, the company had suffered mounting losses on policies for medical offices and nursing homes as far away as Miami.”[65]

How can insurers continue to blame lawsuits and juries for the lack of affordable medical malpractice insurance in some states, when the evidence suggests that mismanagement and fraud are to blame for so many medical malpractice insurers leaving the market?

These factors have caused the dramatic increases in physician’s premiums.  They have nothing to do with the tort system!

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