Psychiatrists PG

April 28, 2003

 

Psychiatrists Purchasing Group (PPG), a Delaware-domiciled PC formed over a decade ago to provide professional liability coverage to members of the American Psychiatric Association (APA), has filed a petition with the Commonwealth Court of Pennsylvania to intervene in the rehabilitation proceedings relating to Legion Insurance Company, a Pennsylvania-domiciled insurer that was placed in rehabilitation on April 1, 2002. PPG's application to intervene, renewed on February 12, 2003, followed the rehabilitator's petition to place Legion in liquidation, which PPG has asked the court to deny.

 

Legion, which was rated A by A.M. Best and admitted in all states prior to its financial problems and placement in rehabilitation last year, acted as a fronting carrier for PPG as well as for hundreds of other insurance programs. Under these fronted programs, Legion, which received a fee and typically retained little underwriting risk, issued policies to insureds, then ceded risk to reinsurers. Transatlantic Reinsurance Company (TRC) served as the reinsurer for PPG's fronted Legion program and continues to serve as PPG's reinsurer, with two AIG companies having replaced Legion.

 

The crux of PPG's argument is that PPG, and its program administrator, Professional Risk Management Services, Inc. (PRMS), have "historically" interacted with TRC, "bypassing Legion, on virtually every aspect of the Program." Moreover, PPG contends that, "The evidence in this case is clear that PPG's members were indeed the intended beneficiaries of the TRC reinsurance" which was procured for the benefit of PPG members, not Legion. PPG states, "Prior to the rehabilitation order TRC paid all claims within its contracts directly, through PRMS, not through Legion." If the court allows Legion to be placed in liquidation, the TRC reinsurance proceeds "would not flow to those policy holders for which its was intended, i.e. PPG's members." PPG also submits that "TRC should not gain a windfall as a result of Legion's cash flow problems," which PPG concludes would "occur if Legion is placed in liquidation."

 

According to Terence P. Cummings, a partner in the New York-based law firm of Ohrenstein & Brown, LLP, who is representing PPG, PPG would like the court to lift the stay that was placed on all TRC payments following placement of Legion in rehabilitation, allowing PPG to once again deal directly with TRC, which was paying all PPG claims prior to the stay order. Another way to accomplish this would be for the court to allow "a cut through arrangement as part of a plan of rehabilitation (which) would ensure that the benefit of TRC reinsurance proceeds would flow to" PPG policyholders. The dollar amount of premium paid by the more than 7,000 members of the PG totals approximately $30 million.

 

Since Legion was an admitted insurer, if it is declared insolvent, state guaranty funds would be triggered to pay claimants and policyholders. However, PPG contends that, if this were to happen, "such an or der would nevertheless ultimately lead to a great number of policyholders and claimants being left with out recourse to such insolvency funds, including PPG's members." The reasons for this, states PPG, is that "bar dates" in the liquidation order as well as in individual state insolvency funds "would prevent claims filed" after those dates from being covered. In addition, even if the state insolvency funds did respond, they "may not be adequate to cover claims in full because in most cases claims in excess of $300,000 ($100,000 in some states) are excluded."

 

PPG seeks to have the court fashion a plan of rehabilitation that "ensures fair and appropriate treatment of all policyholders, including "the authority to modify certain contractual agreements," to permit assignment of rights to others (so called "cut through" rights), as well as the power of the Court to supervise reinsurance disputes that are in arbitration proceedings." The reference to the "reinsurance disputes" relates to one of the primary causes of Legion's cash-flow problems, which led to its placement in rehabilitation, when many reinsurers ceased performing under their contracts, withholding monies owed, until disputed matters were resolved in lengthy arbitration proceedings. PPG argues that the court has authority to bring these reinsurers before it and resolve the matters.

 

Cummings, who has had a long-time involvement with other PCs and risk retention groups formed under the Liability Risk Retention Act, observes that were it not for the purchasing group, the psychiatrists would have no effective representation, either having to bring suits individually or attempting to file a costly class action suit. Cummings writes in his brief, "Intervention by PPG will give a voice to thousands of insureds that otherwise would not have been adequately represented."

 

In addition to PPG, other insureds who had Legion fronted programs also have sought to intervene in the proceedings, including Pulte Homes, Inc. and American Airlines. Coincidentally, those seeking intervention, as well as the judge hearing the matter, have intimate involvement with LRRA. American Airlines is one of the leading proponents of Equitime (A Reciprocal RRG), which was licensed provisionally by Vermont but has not yet become operational pending finalization of reinsurance arrangements (see RRR, Mar.'02). Pulte Homes, Inc., one of the nation's largest homebuilders, recently established an RRG for subcontractors who are engaged in building Pulte homes (see RRR, Mar. '03).

 

Hannah Leavitt, who is the presiding judge in the matter, formerly with the Harrisburg, Pennsylvania law firm of Bucbana Ingersoll, served as the lead counsel in the case of National Warranty RRG vs. Mike Greenfield, Director, Department of Consumer and Business Services of the State of Oregon in which she successfully argued before the United States District Court and the Ninth Circuit Court of Appeals that an Oregon financial responsibility law which discriminated against RRGs violated the Liability Risk Retention Act (see RRR, Jan. '01). After another successful battle, this time with breast cancer, Leavitt was elected a state court judge in Pennsylvania, assigned to preside over the Legion matter.