When the jury in the Marin Schools Insurance Authority v. ESIS Inc.
trial came back with its multimillion-dollar award in February, the case gave the property/casualty business a peek into the sometimes tenuous relationship between third-party administrators and their clients.
In particular, the case put the klieg lights on the TPA relationship with public risk pools. The pools sprung up in the late 1970s as governmental immunity from litigation began to erode nationwide, forcing public entities--especially those with limited tax bases and other economic issues--to pool their resources to protect themselves as insurance premiums from carriers began to rise.
Of course, choosing to self-insure (some states classify public risk pools as self-insurance, others do not) meant that public entities had to outsource much of the insurance administration process, notably claims and TPAs were there to fill the gap.
The TPAs signed contracts with public risk pools to manage the insurance administration, most notably the claims handling process in workers' compensation, property and other casualty exposures. For hundreds of pools around the country, TPAs process claims with few glitches.
So, does the Marin Schools Insurance Authority case represent a break from that apparent calm or is this simply an isolated incident?
From a historical perspective, the public risk pools are somewhat analogous of the relationship between TPAs and their smaller, less sophisticated private sector clients, saysJohn Rosenquest III, a partner at New York City-based Edwards Angell Palmer & Dodge, which has a noted specialty insurance/reinsurance practice,
"The very thing that drives them into the pooling arrangement is the high cost of straight coverage from a carrier. But when something goes wrong, a private sector client sometimes must take their TPA to task for it, through litigation," says Rosenquest, an expert on insurance and reinsurance arbitration.
"But in the somewhat unique market of public risk pools, I would guess there are a number of reasons why that may not have been the case."
For one, Rosenquest says, public entities may be more prone to contracts that include arbitration, which means they are less comfortable airing their dirty laundry should the relationship sour. "If you think about it from the normal perspective, when you source out your workers' comp claims to a TPA, it typically is a way to access a market you can't otherwise access," he says.
"When you have public risk pools, they are not just conduits through which public entities can buy insurance, they are in fact risk-sharing arrangements among several players. And that's a very serious situation to manage, compared to just purchasing coverage."
As with any TPA arrangement, problems can arise when the TPA mishandles its responsibilities, as Marin alleged in its case against ESIS. But the risk pool either isn't aware of the problems until they get out of control, or even if they finally find out about the poor management or worse, they don't want the negative publicity litigation can bring. And that may be why public risk pools suing their TPAs have not been a frequent occurrence.
Joe Donley, a partner with Thorp Reed & Armstrong LLP in Philadelphia, says the prime reason one doesn't see much litigation involving public risk pools and TPAs is that, at least on the P/C side, most of the agreements between the two have binding arbitration clauses.
"These types of cases are rare," he says. But that doesn't mean more might be on the horizon, particularly in this soft economic climate.
"With today's very shaky economic climate, there is potential for more suspect workers' comp claims, for example, which in turn could mean more emphasis on claims control," he says.
"When that happens, public risk pools and risk managers might look closer at TPAs, so there could be an increase," he adds. "I can't tell you there will be more cases like this one. For most of these types of situations, the contract between the parties contains compulsory arbitration, which is binding with no appeal."
In the Marin case, an independent audit way back in 2004 uncovered "sloppy" claims handling on the part of ESIS' Fremont, Calif., claims office.A jury in February awarded the school district $4.66 million, an amount later trimmed to $2.9 million. ESIS declined to comment on the case.
Monte Giddings a property/casualty public sector practice leader at CBIZ Inc., a professional services outsourcing firm, says he doubts that these types of lawsuits will ever become widespread.
"When you think about it, everyone has a certain amount of slide in their claims handling jobs, but most companies have strict standards on all the elements of a workers' compensation claim," says Giddings, a former vice president of workers' compensation at Memphis, Tenn.-based Sedgwick Claims Management Services. "Even when you go out and do sales as part of a TPA, you have to be very specific on how claims will be handled."
In fact, reviewing the Marin case, Giddings says he was surprised at how long the less-than-stellar claims handling occurred, considering that most TPA-client contracts have very strict standards written into them when it comes to workers' compensation claims in particular.
What Giddings found especially interesting is how in this specific case, which unfolded over "decades" according to news reports, one would think there would be some culpability on the risk pool manager's part. "You would think there would have been some evidence along the way of these types of situations," he says.
The Marin case represents something much bigger than just self-funded risk pools, because the TPA relationship affects any self-funding situation, including the bulk of America's healthcare insurance, according to Rhonda Orin, a managing partner in the Washington, D.C., office Anderson Kill & Olick.
"I can say that I have never seen as blatant errors as I've seen performed by TPAs, who then are arrogant about mistakes and unaccustomed to being called on it," says Orin, who represented a self-insured corporation that was sued by a TPA for a debt based on a fraudulent document the TPA created to bolster its case.
"And when they created that document, they charged the company $125 for it," says Orin, who mainly represents employers who self-fund their employee health insurance.
In fact, Orin says, TPAs have a historical arrogance and a true lack of familiarity at being caught in the act of less than stellar performance for clients. So, it's no surprise to her that the Marin County case resulted in a verdict against ESIS.
"Entities hire TPAs to be their agents in a business often only TPAs understand," she says. "So the entity, public or private, doesn't really know where to look to find problems."
Orin says she is not trying to create the impression of conspiracy by the TPA industry, because TPAs often are huge organizations with a lot of staffers doing bits and pieces of jobs, so one mistake can get magnified. But if a public risk pool is using a TPA and has a feeling that something isn't right, that the answers in specific claims don't make sense, it's almost a lock that something isn't right, she says.
In these economic times, if there is an uptick of these types of lawsuits, it may be an indication of how well the public risk pools overall are managing their TPA relationship, says Rosenquest.
"This may be a gross generalization, but it's worth noting that the way public finance is conducted is not even close to normal reserving principles," he says. "In a world of tight budgets, the likelihood that someone in a small municipality or educational entity has the same sophistication as the risk manager at a large manufacturer located in that municipality is pretty dim."
As a result, Rosenquest suspects there is really very little magic in the Marin suit, in that public sector entities and other less sophisticated consumers have a mistaken impression of how closely they have to pay attention to a business process being run by the TPA, which really doesn't bear any risk.
"They have to know who is really minding the store," he says. "After all, it's their store."
TOM STARNER lives in Philadelphia.
June 1, 2008
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