Contrary to last year’s predictions, the industry that protects HME businesses against liability claims has yet to emerge from tough times. That means dealers and providers can expect to pay more for liability coverage in the months ahead. In part, the problems still besetting insurers are a reflection of the continuing weakness of the stock market, insurers report.

Wall Street investments are a primary mechanism by which insurance companies earn the revenues necessary to offset sums paid out to policyholders—money collected in the form of premiums alone is insufficient for that purpose. Although stocks are trading higher lately, the market has yet to rebound fully in the wake of its precipitous post-9/11 retreat, much to the chagrin of insurers.

Even more, however, the insurance industry’s continuing woes are the result of ominous trends on the legal front. Insurers report that more and more damage claims are being filed against all kinds of clients, and having to defend against these suits can nickel-and-dime insurers into a fiscally troubled state.

Signs of Life
“The market is still very tight,” says Dennis Santoli, JD, CRM, chief executive officer of The Campania Management Company Inc, a Vienna, Va-based full-service provider of specialty insurance for the subacute sector of the health care industry and one of the few remaining companies still writing liability policies for HME enterprises. “The existing players are either at or getting close to reaching their limit as to the number of new clients they can take on. And I don’t see any new players coming in.”

Adds John Spragle, president of VGM Insurance in Waterloo, Iowa, “The end of this hard-market cycle is still 12 to18 months away. The whole industry is struggling.”

More optimistic is Bill Thompson, CIC, senior vice president and partner of Smith Bell & Thompson, an insurance company in Burlington, Vt, that manages a national insurance program writing coverage for home health care companies, including HME, infusion therapy, and visiting nurses.

“I think that we’ve just about peaked with the hard market and that the rate increase percentages on many accounts are less dramatic than a year ago and are starting to work their way down a bit,” he says. “We’re just now starting to see signs that things are beginning to get more competitive in certain pockets of insurance, mainly property insurance lines. There is nothing yet indicating improvement in the home care sector, though. But we are seeing signs that the renewed competitiveness developing in those other areas may spread across the board.”

Thompson partially credits the homeland security legislation for providing the necessary spark.

“The law gives relief to the commercial insurance market in the event terrorist activities cause major property damage,” he explains. “We’re also seeing more capacity entering the market—there are some new competitors getting into the overall insurance liability market, which should at some point start having a favorable impact on home health care lines.”

Still, Thompson is cautionary and warns that the swing back toward a soft market will most likely be less sizable than some expect. “The investment markets probably won’t come back strong enough to support the last soft cycle’s strategy of writing policies at a loss with the expectation that improvements in bond and treasury yields and security returns will make up the difference. So don’t look for the industry to get back to the same pricing levels of the previous soft cycle. Those pricing levels were unrealistically below what was needed to keep insurance companies operating soundly.”

Litigation Jackpot Fever
Perhaps the biggest headache at present for insurers is litigation fever, which seems to be only growing worse.

“I see a lot more litigation right now, and it’s being driven by people looking to hit the lottery jackpot,” Spragle says. “So much so that now about 80% of the claims are unwarranted.”

The problem here is that all claims—no matter how frivolous—are costly for insurers because the mere threat of a lawsuit sets in motion a process that compels them to spend money on defense attorney fees.

“We can easily win our case and the plaintiff will get nothing, but we’re still out so many thousands of dollars because we had to pay an attorney to represent us,” Spragle says.

In fact, few claims against HME dealers and providers actually go all the way to a courtroom trial because most states mandate court-supervised mediation first, and it makes economic sense to settle since this is usually less expensive than letting the case go to trial.

Unfortunately, the willingness of insurers to settle has encouraged the filing of greater numbers of frivolous claims. As Spragle points out, plaintiffs with a hustler’s instincts understand that the settlement mentality of insurers assures them of receiving at least a few thousand dollars for their trouble, no matter what.

For example, Spragle has seen plaintiffs naming as defendants companies and individuals bearing no legitimate connection to the cause of injury. “In just this last year, we’ve had three claims against clients of ours—and the clients had no idea who these plaintiffs were,” he says. “They hadn’t even sold them anything. In one of the cases, there were at least 60 companies named as defendants. We believe the plaintiff just picked up the phone book and wrote down the name of every DME company in town because he supposedly couldn’t remember where he bought the item that he claimed had injured him. It cost $5,700 to get our client’s name released from the suit.”

According to Santoli, the average amount now being spent by insurers to defend their policyholders is between $25,000 and $30,000 per claim, and with sums like that flying out the window, it is small wonder insurance lobbies are pushing for passage of tort reform at the state and federal levels.

Tort reform would serve as a shot in the arm for the insurance industry, insurers say. In addition to probably lowering payouts on claims, tort reform might help discourage the filing of frivolous lawsuits.

And that could lower the cost of liability insurance for all businesses.

Rich Smith is a contributing writer for Dealer/Provider.