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Products & Services | Self-Insured & Captive Insurance
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Self-insurance is a system whereby a firm sets aside an amount of its monies to provide for any losses that occur – losses that could ordinarily be covered under an insurance program. The monies that would normally be used for premium payments are added to this special fund for payment of losses incurred. Self-insurance is a means of capturing the cash flow benefits of unpaid loss reserves and also offers the possibility of reducing expenses typically incorporated within a traditional insurance program. It involves a formal decision to retain risk rather than insure it and is distinguished from non-insurance or retention of risks through deductibles, by a formalized plan or system to pay losses as they occur.
Self-insured Retention (SIR) is a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss. SIRs typically apply to both the amount of the loss and related costs, e.g., defense costs, but some apply only to amounts payable in damages, e.g., settlements, awards, and judgments. An SIR differs from a true deductible in at least two important ways. Most importantly, a liability policy's limit stacks on top of an SIR while the amount of a liability insurance deductible is subtracted from the policy's limit. As contrasted with its responsibility under a deductible, the insurer is not obligated to pay the SIR amount and then seek reimbursement from the insured; the insured pays the SIR directly to the claimant. While these are the theoretical differences between SIRs and deductibles, they are not well understood, and the actual policy provisions should be reviewed to ascertain the actual operation of specific provisions.
A Captive is an insurance company that has as its primary purpose the financing of the risks of its owners or participants. Typically licensed under special purpose insurer laws and operated under a different regulatory system than commercial insurers. The captive provides insurance to sophisticated insureds that require less policyholder protection than the general public.
The physician/group's captive insurance company (CIC) may be used to insure all, or portions of, the medical practice's significant risks, such as malpractice or high liability non-malpractice risks like wrongful termination sexual harassment, or loss of electronic medical records. Alternatively, the CIC might be used to insure relatively low liability risks like the loss of licensure. Regardless of the type of risk, like most insurance, the CIC will transfer most of its risk to another re-insurer. Thus, the CIC can be structured to have as much or as little economic risk as the physician chooses, while allowing the significant tax benefits.
The CIC has a number of asset protection advantages. First, physicians can use the CIC to supplement (or in some, cases, even replace) their existing malpractice policy. Such supplemental malpractice protection may allow the physician to (1) have a larger deductible from their traditional carrier or (2) lower limits from their traditional carrier. Either strategy will save the doctor significantly in out of pocket premium costs each year.
Further, the physician could use the CIC to provide additional coverage beyond the traditional limits. As physicians see more and more outstanding jury awards in medical malpractice cases, this protection can be significant.
Also, using one's own CIC gives the physician flexibility in using customized policies which one would not get using large third party insurers. For example, many physicians would like a malpractice policy that would pay the doctor's legal fees (and allow full choice of attorney), but would not be available to pay creditors or claimants (what we call "Shallow Pockets" policies). This prevents the physician from appearing as a "Deep Pocket" – a necessary asset protection strategy today.
Finally, the physician's CIC has the flexibility to add coverage for liabilities ignored by traditional malpractice policies, such as wrongful hiring/firing, economic losses from the practice, or even HCFA or HIPAA violations. Given that the awards in these areas can be over $1 million per case, physicians would be well-advised to use the CIC for this alone.
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