Beware the PHICO "Gap"

Ever since 1998 when the PIC, PIE and AHERF insolvencies occurred, most medical malpractice lawyers have become familiar with the various nuances presented in dealing with PIGA and their relationship to the CAT Fund. However, the PHICO insolvency, which occurred in August of 2001, has brought to the forefront a new and significant issue not previously encountered with those earlier bankruptcies. In a nutshell, there is a potential “gap” in coverage of $100,000 to $200,000 per PHICO provider. Not surprisingly, this “gap” can have a significant impact on the net dollars which a plaintiff receives in a settlement or verdict with a PHICO insured. Let’s review how the gap comes about and what are its practical implications.

Under the controlling statute, the most that PIGA will pay on any individual claim is $300,000, or the amount of the underlying policy of the insolvent carrier, whichever amount is less. Thus, for example, if a carrier who wrote a $200,000 policy goes bankrupt, the most that PIGA will pay on that claim is $200,000. On the other hand, if the insolvent carrier wrote a $500,000 policy, the most that PIGA will pay is their statutory cap of $300,000.

As most practitioners are aware, the mandated level of primary coverage in Pennsylvania was $200,000 for several years and then it jumped to $300,000 as of 1997. Thus, when PIC, PIE and AHERF became insolvent in 1998, all of the policies that were out in the market had limits of either $200,000 or $300,000. In either event, those limits, coincidentally, did not exceed the PIGA statutory cap of $300,000.

However, mandatory primary limits in Pennsylvania were again increased in 1999 to $400,000 and, finally, to a level of $500,000 for policies written in 2001. Thus, as of the time of the PHICO bankruptcy, there were a number of policies in the market which had primary limits of $400,000 or $500,000. Since those limits are above the PIGA cap of $300,000.00, and since the most PIGA will pay is the lesser of its statutory cap or the amount of the underlying primary policy limit, there is a potential “gap” of $100,000 or $200,000, depending upon the year in which the PHICO policy at issue was written.

For example, if a plaintiff receives a settlement or verdict in the amount of $750,000 on a claim under a 1999 PHICO policy, consider what the plaintiff will receive. Even though that 1999 policy had a $400,000 primary limit, the plaintiff will only receive $300,000 from PIGA. (even less if there are set-offs for medical payments.) Since CAT Fund coverage as of 1999 “kicks in” at the $400,000 level, the plaintiff would receive a total of $350,000 from the CAT Fund, the amount between $400,000 and $750,000.

However, who is going to pay the amount between $300,000 and $400,000? The answer is probably “Nobody.” The CAT Fund takes the position that it cannot “drop down” and assume coverage below their statutorily mandated floor of $400,000, nor will PIGA pay the amount because they are prohibited from paying anything above $300,000. Thus, there is a “gap” in coverage between $300,000 and $400,000. As a result of the “gap” the plaintiff ends up with only $650,000 on a $750,000 case.

Worse yet, if the claim was covered by a policy written in 2001, a year in which primary limits were $500,000, the “gap” would be even greater at $200,000, i.e., PIGA would pay up to $300,000 and then the CAT Fund would pay amounts above $500,000. In that event, the plaintiff would end up with only a total of $550,000 on a $750,000 case.

As noted above, this is a new issue which plaintiffs lawyers never had to confront with the PIC, PIE and AHERF insolvencies, but it is now an issue which must be prominently in the minds of counsel as they evaluate and negotiate any PHICO cases. One question which will no doubt arise is whether the doctor or hospital can be individually liable for the “gap” amount. Defense counsel believe that since the medical providers cannot be personally liable for PIGA set-off amounts under the well-known Bell v. Slezak case, likewise they should be immune for the “gap amount.” Plaintiffs, on the other hand, can make a credible argument that the gap situation is distinguishable. The set-off scenario arises by application of PIGA’s non-duplication of recovery provision and, ultimately, it is designed to prevent “double dipping” on things such as medical expenses covered by first party insurance. Conversely, the “gap” does not involve any “double dipping” at all and, therefore, the plaintiff has a better argument under a “make whole” analysis, i.e., the plaintiff is not seeking to recover twice for an item of loss, but instead the plaintiff has made no recovery at all for the gap amount and is merely trying to be “made whole.” The defendant no doubt will counter that regardless of whether one is talking about a set-off or a gap scenario, the doctor or hospital had an expectation of insurance coverage for the disputed amount and the insolvency of its carrier should not defeat that expectation.

While this and other questions unique to the PHICO situation will be answered by our appellate courts in the future, the best advice for now is “Beware the PHICO gap.”