The Office of General Counsel issued the following informal opinion on April 26, 2001, representing the position of the New York State Insurance Department.
Re: Medical Malpractice Self-Insurance
Issue:
1. May an Independent Practice Association (IPA) self-insure its constituent physicians for medical malpractice?
2. May an IPA self-insure its own liability?
Conclusion:
1. No, such an activity would be contrary to the Insurance Law.
2. Yes, such an activity would not be contrary to the Insurance Law.
Facts:
A Professional Service Corporation, incorporated in accordance with Business Corporation Law Article 15 (McKinney 2001), desires to combine with another Professional Service Corporation in the Western New York area to form an Independent Practice Association (IPA). The new entity, which will have in excess of 200 physicians in various medical specialties, will not supplant the constituent Professional Service Corporations, which will retain their status as independent corporations.
The inquirer wants to know whether the new entity may self-insure its risks.
Analysis:
It is assumed that the inquirers reference to the anticipated formation of an IPA, refers to an entity as defined in the Merriam-Webster Medical Dictionary (2001):
An organization providing health care by doctors who maintain their own offices to see their own patients, but agree to treat enrolled members of a organization for a lump sum payment or a fixed payment per member or per service provided.
It is the general rule in New York that an entity may self-insure its potential liability to third parties, unless there is a requirement that the entity maintain insurance. There is no general requirement in either statute or regulation in New York that a physician or medical practice maintain insurance against professional liability, although many hospitals require a physician to maintain a medical malpractice insurance policy as a condition to receiving or maintaining admitting privileges; and a physician who does not maintain such a primary policy is not eligible for the "free" excess insurance provided pursuant to 1986 N.Y. Laws 266 §18, as amended (McKinney 2001).
Where, however, one entity agrees to indemnify another against liability to a third party, such indemnification may constitute the doing of an insurance business, as defined in New York Insurance Law §1101 (McKinney 2001):
In this article: (1) Insurance contract means any agreement or other transaction whereby one party, the insurer, is obligated to confer benefit of pecuniary value upon another party, the insured
or beneficiary, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the
time of such happening, a material interest which will be adversely
affected by the happening of such event.
(2) Fortuitous event means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
New York Insurance Law §1102 prohibits the doing of an insurance business without a license from this Department.
In order to determine whether the new IPA would be doing an insurance business, it is necessary to analyze exactly what the new IPA would be providing.
Most claims for medical malpractice are made against individual physicians who allegedly deviated from good medical practice, and such physicians are the usual defendants in eventual lawsuits. While the partnership or Professional Service Corporation with which a physician who is not in sole practice is affiliated may be sued, the allegations generally are that the entity was negligent in hiring or retaining the physician in question. It is because the employing entitys liability is usually vicarious, that most policies of medical malpractice issued in New York cover the individual physician and may, at the request of the physician, provide coverage to the partnership or Professional Service Corporation as an additional named insured. In addition, some partnerships or Professional Service Corporations may purchase their own policies to indemnify themselves against any potential liability arising out of the medical practices of their employed or member physicians.
It is our understanding that the new IPA would indemnify the individual physicians against liability for malpractice based upon the physicians individual negligent acts. The physicians being indemnified would be employee/shareholders of another entity, one of the Professional Service Corporations. Accordingly, the new IPA would be providing something of pecuniary value, indemnification, to another party, the physician, dependent upon a fortuitous event, either the act of malpractice or a claim by the injured patient and thus, would be issuing an insurance contract without a license, not self-insuring its own liability.
It is, therefore, the position of this Department that the new IPA could not indemnify the constituent physicians against their own liability.
A different issue would be presented if the new IPA were to self-fund only its own vicarious liability. In that case, since no benefit would be provided to a third party, the Insurance Law would not prevent such an activity.
This opinion is limited to interpretation of the Insurance Law and should not be construed as construing any other applicable statute.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.