New York State does not require hospitals to insure medical malpractice claims, either through the purchase of commercial medical malpractice insurance or the establishment of an adequately funded self-insurance program. New York has never required such insurance. There are many hospitals which did not insure medical malpractice claims in the past, and a number that currently do not.
Historically, the lack of insurance was often a matter of choice. A number of community hospitals in the New York City area did not insure medical practice claims because they believed they would always be able to pay claims out of operations. Others chose not to insure because they believed the lack of insurance improved their negotiating position with medical malpractice plaintiffs. The hospitals would warn plaintiffs to settle their claims for what the hospitals considered reasonable amounts. If they did not, the hospitals would tell them that they would not be able to pay their claims and might have to resort to chapter 11 bankruptcy, where their malpractice claims would be general unsecured claims and receive pennies on the dollar.
Attending physicians typically have malpractice insurance that covers claims against them individually for services they perform at the hospitals where they practice. But physicians who are full-time employees of hospitals often do not have any individual malpractice insurance coverage; rather, they are dependent on their employers for it.
Some hospitals, after “going bare” for a period of time and experiencing a large number of malpractice claims, are unable to purchase commercial medical malpractice insurance. It is unclear whether they could have taken advantage of state programs established to enable them to purchase insurance for themselves and/or their physicians. Although some of these hospitals set up self-insured programs, the programs were often inadequately funded. When the hospitals experienced financial difficulties, the self-insurance reserves would often be used, in whole or in substantial part, to fund operating expenses.
The lack of medical malpractice insurance or adequate self-insurance, needless to say, can be tragic for patients. Patients may well be uninformed when admitted to a hospital that it is without medical malpractice insurance coverage or a sufficiently funded self-insurance program to fully compensate them if they are negligently injured during treatment or surgery. Narratives of serious injuries caused by medical malpractice make for difficult reading, and an even worse ending if they cannot recover the damages to which they are entitled.
Lack of malpractice insurance further raises issues for trade creditors, service providers and other unsecured creditors of the hospitals if the hospitals experience financial difficulties and file chapter 11. Serious uninsured medical malpractice claims and large numbers of such claims, when added to the claims of other creditors, can greatly reduce the recovery of both malpractice claimants and business creditors in the chapter 11 cases of these hospitals.
For more information, please contact Marty Bunin at 646-329-1982 or MBunin@FarrellFritz.com