2018 Vermont Report

Captives and Liability

The flexibility of captives is well-suited to serve the rapidly changing risks health care organizations face.
By: | April 9, 2018 • 6 min read

The U.S. health care system is fraught with risks. From traditional risks such as medical malpractice, professional liability and workers’ compensation to the emerging threat of cyber and new technologies like telehealth and telemedicine, the next big lawsuit may be lurking just around the corner.


Last year’s spate of WannaCry attacks shut down entire hospital and health care systems across the world, with hackers demanding millions in ransom payments to unlock files.

Meanwhile, health care organizations and hospitals are continuing to grapple with health care reform, with 30 million more people entering the system under the Affordable Care Act. Add to that the shift from fee-for-service to outcome-based compensation and an aging population.

“There’s no way you can actively predict risk in the health care sector, because it keeps changing so rapidly,” said Bridget Zaremba, AVP, health care claims lead, QBE North America.

“The big increase in M&A activity has resulted in a much larger risk pool that runs to cyber liability and class action lawsuits around biometrics and experimental procedures, antitrust claims and the emergence of alternative care methods, such as telemedicine.”

Bridget Zaremba, AVP, health care claims lead, QBE North America

As health care risks continue to rise, so do the costs involved. U.S. health care spending topped $3.3 trillion in 2016, making it one of the country’s largest industries by value at 18 percent of gross domestic product.

Given the range and complexity of these new risks, captives can be a viable solution, enabling organizations to tailor their own specific coverage. By pooling together, health care providers can also spread the risk between themselves and leverage the data and analytics available to them.

Leading the way on this front is Vermont, with 100 health care captives on its books, a testament to its risk transfer expertise and regulatory infrastructure and reputation. That number is only expected to grow given the multitude of risks facing the health care industry.

Batch Claim Concerns

While medical professional liability, general liability and workers’ compensation remain the most common lines written in a health care captive, according to Aon’s latest captive benchmarking report, a host of new risks have emerged.

Jeremy Brigham, director, Willis Towers Watson

One of the biggest is batch claims, where one incident or a group of related incidents such as a rogue nurse or an infected surgical tool can result in multiple lawsuits.

The number of reported claims is on the rise annually, according to Aon/ASHRM’s 2017 Hospital and Physician Professional Liability Benchmark Analysis. Driven by plaintiff counsels seeking to maximize recovery, they are hard to contain and can often result in multimillion dollar claims.

“Batch claims are the equivalent of class action lawsuits in medical malpractice, representing an opportunity for plaintiff firms to have carte blanche,” said Jeremy Brigham, director, Willis Towers Watson. “If they can find a case and sign up multiple claimants, they will pursue it relentlessly.”

Kevin Gabhart, senior managing director, Beecher Carlson, said finding the appropriate coverage for batch claims in the commercial market can be difficult at the best of times. That’s because of the almost limitless outcomes possible, he said.

“Finding the right language and wording for batch claims that’s agreeable to both the insured and the underwriter can be problematic,” Gabhart said. “That’s because there’s no silver bullet for every potential scenario that may arise.”

In recent times, hospitals and health care systems have also become a prime target for hackers, who are increasingly sophisticated in their methods for gaining access to electronic medical records, including the use of ransomware.


Put in context, the average cost of a health care data breach topped $7.35 million in 2017, according to a report by the Ponemon Institute, sponsored by IBM Security.

The cyber threat has been exacerbated by the use of third parties, as well as handheld electronic devices in hospitals and health care systems, the large amount of patient and employee data held on the system, and multiple access points.

Then there is the crossover between cyber and product liability in the form of defective medical devices.

“We have had clients who were hacked and their whole system was in lockdown,” said Jason Flaxbeard, executive managing director, Beecher Carlson.

“As a result, they lost access to records and had to turn patients away, and the hackers demanded a ransom to release the files, which although costly is not as burdensome as losing all of your data.”

Remote Care

Another emerging risk is telemedicine, with the use of video consultations expected to increase 700 percent by 2020, according to industry experts.

Fueled by advancements in technology, health care providers are increasingly turning to video conferencing, digital photography and instant messaging to reach patients in even the remotest of places.

Its growth has been boosted by regulations such as the Medicare Telehealth Parity Act of 2015, which expanded telehealth coverage to Medicare beneficiaries and has streamlined the payment system.

While it can save time and money, as well as enable patients to do simple tasks such as give their heart rate and blood pressure reading at the click of a button, it’s not without risk.

“Billions are being invested in new digital telehealth technology, and health care executives are embracing it.” – Kevin Poole, client services director, Artex Risk Solutions

The main liabilities include standard of care and data breach as well as incorrect diagnosis, prescription or treatment. Fraud and abuse are also concerns, not to mention a host of legal and regulatory issues including cross-border licensure and credentialing.

Kevin Gabhart, senior managing director, Beecher Carlson

“Billions are being invested in new digital telehealth technology, and health care executives are embracing it,” said Kevin Poole, client services director, Artex Risk Solutions.

“The key to success is patient acceptance. However, liability issues such as jurisdiction, standard of care by venue, statute of limitations, credentialing of telemedicine providers, equipment malfunction and lack of informed consent remain.”

Captive Use

Captives have emerged as a viable solution to these emerging risks. The main reason for this, said Bill Boone, senior VP, alternative solutions within Marsh’s National Health Care Practice, is their flexibility.

“Traditionally, captives have been used to fund risks, like professional liability and workers’ compensation, for big health care providers. But now they are being used to cover high-severity, low-frequency risks such as cyber, D&O, E&O and anti-trust as well,” he said.

“They also provide direct access to the worldwide reinsurance market where rates are often more competitive than the traditional insurance market.”

Heather McClure, chief risk officer, OU Medicine, and executive director, OU-OUMI Risk Management, said health care captives are increasingly being used to cover lines typically written by commercial carriers. This also extends to benefits and workers’ compensation to better control loss and premiums, she said.


“In my own system, we recently added coverage for the teaching hospitals to our physicians’ captive,” she said. “This allows for centralized risk and claims management, efficiencies for patients and the promotion of safety improvements with one unified vision.”

Patti Pallito, director, Aon Insurance Managers, Vermont, added that given the increase in M&A activity, captives are being used to cover the legacy risk of newly acquired businesses. Risk retention groups are also being employed to standardize the terms and conditions of liability coverage for those entities, she said.

“A captive is a very effective mechanism to monitor and manage legacy risk,” Pallito said. “Meanwhile, risk retention groups can give the health care organizations better control of the oversight and defense of claims.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.


In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.


Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”


How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.


One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]