Go Ahead…Exclude COVID-19

Since about July 1, we have participated, as consultants, in dozens of meetings with excess insurers and reinsurers, which have also involved our acute care facility clients and their brokers, as those clients have faced upcoming HPL renewals.

During these meetings (all of them, of course, virtual meetings) there was a large and ominous silent specter in the room…to exclude or not to exclude COVID claims at renewal. Sometimes the conversation came up; sometimes it didn’t until much later.

Some underwriters spent these meetings tap dancing. Others were quickly affirmative about a COVID exclusion at renewal…others were affirmative that there would not be one at all.

All of our clients have a captive insurance company. All of our clients take a significant amount of net per claim and aggregate risk on that captive’s balance sheet. In some cases that net retained risk is actually greater, on a per claim basis, than the un-reinsured per claim risk of the underwriters offering them excess insurance or reinsurance support. All of our acute care facility clients with captives are highly skilled in the management of incidents and claims, and they have the litigation management track record to prove it.

But now we come to COVID-19. Some people think that COVID is an underwriting game-changer.

My position on this subject is clear. Underwriters who are uncomfortable about the potentiality of this exposure should feel okay about walking away from it at renewal through the use of exclusionary language.

I’m not prevaricating. I’m really okay with that decision. In fairness to underwriters in the marketplace, who expected there to be a COVID pandemic? The thing is only seven months old. We don’t know what we don’t know. There’s no way to rate properly, through the use of bed equivalent exposures or any actuarial simulation technique, the probability of COVID loss on an aggregate basis, based on, for example, a predictive model using ICU admissions and local populations. The data doesn’t exist. It’s not going to exist for a long time. Meanwhile, we are cruising toward 350,000 deaths by Christmas at the rate we’re going. And from my perspective it’s okay for underwriters to simply state that they can’t handle it at renewal.

But let’s be clear about what the underwriting data reveals about this crisis…at least as of right now.

First, I defy anyone, as I write this, to gather up a hundred legitimate existing pleadings involving acute care facilities (not the senior care business) and show me what these pleadings reveal about the alleged causes of loss. Nobody can do this yet, because these one hundred pleadings don’t exist. I have a strong opinion that they will eventually exist…but let’s be clear: they don’t exist now. So if the market is walking away from COVID, it’s not walking away as the result of a thorough analysis of existing pleadings.

Okay, let’s look at another possible scenario. Let’s say that the market is walking away because it believes one of two things: that existing civil immunity executive orders will not be continued by chief executives or won’t be legislatively mandated to continue…or because they expect acute care facilities to crash and burn when they face their first lawsuits alleging gross negligence because they can’t substantiate and assert that the standard of care with respect to these patients was observed scrupulously. If you as an underwriter are worried about either or both of these possibilities…again, it’s okay by me if you walk away at renewal.

However, I get the walking away on the first issue, but I don’t really get the walking away on the second. I know of no professional acute care risk manager who is not prepared to defend the medicine rendered at his or her facility in terms of the standard of care provided during the first seven months of this crisis. My acute care facility clients with captives moved quickly and efficiently in March to obtain as much PPE as they could, and to create “command centers” manned by infectious disease experts vigorously following the Infectious Disease Society of America’s guidelines on infection prevention, diagnostics, and serology. None of my clients did not follow rapidly published and evolving CDC guidelines; none of them ignored local DPH regulations; and they did all of this while saving lives and managing the presence of U.S. Army battalions in their parking lots setting up field hospitals.

When an underwriter excludes something from coverage in a standard multi-tower PL/GL/umbrella excess policy form, or in a reinsurance certificate, they do it for only four reasons: what’s being excluded is contrary to law or public policy; the thing they are excluding is covered somewhere else; it was never their intention to cover the excluded thing; or they’re just nervous and don’t want to deal with it. Underwriters are good at quantifying risk based on statistical evidence. That’s what they excel at. The problem is that no one can show me yet the statistical evidence of successful tort loss stemming directly or even indirectly from the COVID-19 crisis.

If underwriters are excluding an allegation of a breach in the standard of care directly or even proximately related to COVID-19, since no data exists to substantiate wholesale breaches in the standard of care, then they are doing it because they are just afraid.

Again, I’m okay with underwriters making tactical decisions about the deployment of their capital.  It doesn’t bother me at all. Insurers frequently play “market timer” with their investment portfolios, subtlely shifting asset allocation and duration to take advantage of yield opportunities. Why can’t they play market timer with their underwriting position in the marketplace? Of course they can. They can choose to do that, and when they do it, I applaud them for it…as long as they admit that sometimes they’re doing it in the absence of data. No underwriting data exists suggesting that they should be doing it with COVID-19. No one can show me that data with respect to the acute care facility underwriting business, and it’s going to be a very long time before anyone can.

So, again…forget about the senior care underwriting business (because I’m predicting an eventual catastrophic meltdown there)…and let’s talk about the acute care claim business. We need to remember that there are still plenty of underwriters out there who believe that acute care facilities that own captive insurance companies and manage their own risk, inclusive of internalized claims management processes, never should have done so to begin with.  I sort of gave up talking to those folks about 25 years ago, so let’s dismiss those concerns out of hand…as we would with folks who still believe that the Earth is flat.

When we get our first one hundred acute care COVID-19 pleadings in the same place, so we can assess them as an industry, I’m willing to bet that they will fall into these general categories:

1) Grandma presents at an acute care facility with a spiking temperature, shortness of breath, and a loss of taste and smell. She’s COVID-19 positive. She’s admitted. She’s ventilated. She dies.

Allegation: Standard of care breached through inadequacy of care/equipment/training.

2) Grandma falls and breaks a hip and is taken by ambulance to a local ER, where she’s treated and admitted for four days before being released to a convalescent facility. In the convalescent facility she’s diagnosed as COVID-19 positive, and within 14 days she’s dead.

Allegation:  She acquired COVID at the acute care facility through inadequate screening and inadequate infection control policies in place, and she transported a nosocomial COVID-19 infection into rehab with her.

3) Grandma is driven to the ER because she’s having a dizzy spell. It’s a busy day in the ER. And while she’s triaged almost immediately upon arrival, because of the crazy day they’re having she’s not seen by an ER physician for almost four hours. She’s treated and released and goes home. A week later her adult son is diagnosed as COVID positive and later succumbs to the disease.

Allegation: Grandma acquired COVID-19 in the ER, brought it home, and infected the family. The family sues.

I’m trying hard to think of more variations on these general themes, and I’m not coming up with any. It’s all about “you acquired it onsite because we failed to keep the place clean and safe” or “you came in with COVID-19 and we couldn’t save you because of inadequate training/equipment/care.”

I know of no acute care facility risk manager who will not defend these allegations with vigor. They will cite their conformance with CDC and IDSA and local DPH guidelines. They will challenge the notion that the infection was nosocomial in nature. They will require plaintiff’s bar to provide a contact-tracing map as part of the plaintiff’s evidence. They will pile on expert witnesses as to the standard of care. I know all of this like I know the back of my own hand. No hospital risk manager will cave on this point. No one will want to be the first, and they will spend a fortune defending the medicine from the get-go.

So if underwriters are excluding COVID-19 matters, I’ll state it again…that’s your option. But if you are excluding COVID-19 because you expect there to be a rash of claims in the acute care world, where the medicine cannot and will not be supported, I think you are wrong.

Again, it’s perfectly okay for underwriters to simply be nervous and to play market timer with the deployment of their underwriting capital in the same way that they play market timer with the deployment of their investment capital.

I’m all for the concept.

But if you’re excluding COVID-19 claims because you think that a hospital facility-owned captive risk management program doesn’t know how to manage risk and claims…you’re dead wrong. If you’re excluding COVID-19 because there is a body of substantiated pleadings that you’re not prepared to address if they hit you…it’s just too early, because nobody’s got that body of pleadings yet. Those underwriters who are heading for the exits are heading there in the absence of data.

As we head into a second and intensely dramatic surge of this dreadful pandemic, there isn’t a single shred of dispositive evidence that yet supports the exclusion of COVID-19 in acute care risks that maintain, through their captives, significant penalty of loss and therefore big-time skin in the game. Some day there may be, I think, but it’s just not now.