Medical Malpractice in the Age of Bankruptcy

For both plaintiff and defense lawyers, this is the dawning of a whole new era in medical malpractice litigation. Two large insurance companies and one large self-insured entity entered bankruptcy court in 1998, and that development has had a significant impact across the board in thousands of medical malpractice cases in Pennsylvania.

According to John P. Gismondi, Chair of PaTLA’s Medical Malpractice Section, these are unprecedented times for medical malpractice litigators.

“We went along for almost twenty years in Pennsylvania without any significant bankruptcy filing by a medical malpractice carrier, and then in the first half of 1998 we had not one, but three major entities go bankrupt. I do not think anyone would have ever anticipated something like that happening in Pennsylvania.”

The two private insurance carries involved are the Physician Insurance Company (PIC) and the Physicians Insurance Exchange (PIE). The private medical institution involved is Allegheny Health, Education and Research Foundation (AHERF). The AHERF bankruptcy proceeding involves several Philadelphia hospitals owned by the Foundation. While AHERF operates hospitals in the Pittsburgh area, at least at the present time none of those hospitals are directly involved in the bankruptcy proceedings.

The number of cases affected by these bankruptcy filings is huge. At the time PIC entered insolvency in January 1998, there were believed to be in excess of 3,000 claims state­wide already in suit involving their insureds. The number of PIE and AHERF cases affected is also believed to be in the thousands.

According to Gismondi, that number will only grow in the future. “You have to remember that most of these medical malpractice policies are believed to be ‘occurrence’ policies rather than ‘claims made’ policies. That means if a doctor gets sued tomorrow for a tort which occurred in 1997, the policy that covered the doctor in 1997 is on the hook for the claim. In other words, even though PIC and PIE are no longer in business, their can be future claims filed that still are affected by the bankruptcy.”

When any insurance company goes bankrupt in Pennsylvania, be it a medical malpractice carrier or an automobile carrier, the Pennsylvania Insurance Guarantee Association (PIGA) steps in and provides coverage up to $300,000 or the policy limit on the defunct policy, whichever is lower. In the case of PIC or PIE, the underlying policy limits were historically $200,000 until state law mandated that those limits be increased to $300,000 for all policies issued after January 1, 1997. Thus, depending on when the tort occurred, the coverage available at PIGA could be either $200,000 or $300,000.

For claims which have a value above the PIGA limit, each doctor or hospital in Pennsylvania, even those insured by PIC, PIE or AHERF, still have their regular layer of CAT Fund coverage in place. That coverage is $1,000,000 for claims arising prior to January 1, 1997 and $900,000 thereafter.

Gismondi says that the biggest impact of bankruptcies is not the amount of coverage available, but the amount that injury victims will actually be able to recover.

“The PIGA statute essentially abolishes the collateral source rule, and it basically says that PIGA gets a set-off for any amounts the plaintiff has received from virtually any kind of insurance.”

An example Gismondi gave was as follows. If a plaintiff has $150,000 in medical bills that were paid by Blue Cross/Blue Shield, the most that PIGA would have to pay the plaintiff is $50,000, assuming the tort occurred in a year for which the PIGA cap is $200,000.

“The impact of the set off,” says Gismondi, “is that the value of your claim immediately goes down by the amount that you received from a collateral source.” Gismondi anticipates much litigation in the future about exactly what collateral sources will qualify for PIGA set-offs.

“The statute has rather all-encompassing language, but it does not specify each and every type of collateral source imaginable. I know that PIGA is going to take the position that the set-off not only applies to private health insurance, but also to life insurance and private disability payments.”

There has already been one lower court decision, McCarthy v. Bainbridge, which has held that life insurance is not subject to a PIGA set-off. That case has been appealed to the Superior Court.

Gismondi noted that several other disputes are anticipated on issues apart from the set-off question.

“I think one of the biggest issues is going to be whether the doctor or hospital is personally responsible for amounts subject to a set­off. I expect that plaintiffs’ lawyers are going to argue that, if it were not for the bankruptcy, the common law would certainly permit them to put the amount of the medical bills ‘on the board.’ On the other hand, the defense lawyers are going to argue that their clients should not be left ‘holding the bag’ just because the carrier went bankrupt.”

So far, there has been no appellate decision on this issue, and the common pleas cases have gone both ways.

Another subject that has generated confusion is the so-called “bar date,” the deadline by which claims must be filed in order to assure PIGA coverage. Gismondi says that this issue has caused a great deal of uncertainty with lawyers.

“A lot of lawyers have been wondering whether or not they have to go out and file claims immediately, even before they have completed their investigation, based on the possibility that the doctor is a PIC or PIE insured.”