iProtean—Mergers and D&O Insurance

Since the passage of health reform, hospitals have increasingly been focused on antitrust liability coverage.  Most, if not all, hospitals have had concerns about regulatory oversight even before health reform, but those concerns have heightened in response to “ambiguity on how the regulators will address antitrust exposures . . . more and more risk managers and executives of healthcare systems have concerns about the coverage that’s in place.  There is more thought going into the purchase of D&O coverage,” noted an executive at the nonprofit management liability group at ACE USA.


Directors and Officers (D&O) insurance provides board members coverage against “wrongful acts” that include actual or alleged errors, omissions and neglect or breach of duty on the part of the board of directors.  This includes antitrust allegations—increasingly seen as essential to organizations involved in mergers, joint ventures and other activities designed to reduce costs in today’s post-reform environment.


Hospital/health system boards of directors have unlimited personal liability for their actions, and also inaction.  Liability arises from three common law duties:  the duty of obedience, the duty of care/diligence and the duty of loyalty.  Although board members have “corporate indemnification” protection, the organization could have difficulty meeting its obligation either through financial constraints or public policy restrictions.  Voluntary immunity statutes provide no protection for “recklessness” or acting in “bad faith.”


As a result, hospitals/health systems typically secure D&O insurance to transfer liability risk to the insurer.  D&O insurance can either “pay of behalf” of board members directly to damaged third parties or indemnify the organization for payments it makes under its agreement with its board members.  This insurance usually covers the cost of legal counsel, out-of-court settlements and other court-ordered compensation payments.


Any time the words “antitrust” or “unfair competition” appear in a lawsuit filed against a hospital/health system, D&O liability coverage generally comes into play to provide a defense and, in some cases, to pay settlement costs.  Antitrust coverage under a D&O policy also could be accessed in certain acquisition situations.


Some predict antitrust litigation will increase as hospitals and other medical providers collaborate to form accountable care organizations.  The Justice Department and the Federal Trade Commission have signaled their intention to intervene in mergers and collaborations that appear to have a dampening effect on competition in a given market.


“Once your board has determined to do a merger or affiliation with another organization, you need to look at what the potential material stumbling blocks might be from a regulatory perspective.  Increasingly, boards are concerned about the potential of a challenge either from the federal government or from state governments on an antitrust challenge. That is to say, the combination of your hospital with another hospital or system will result in too much market share, too much market power, and therefore has the potential to be challenged, materially delayed, or even derailed. It is correct to say that in the last few years, the Federal Trade Commission has been more active at closely scrutinizing potential hospital mergers.”  (Monte Dube, Proskauer, discussing the regulatory implications of affiliations/mergers in the upcoming advanced Mission & Strategy course Affiliation & Consolidation Strategies)


While the majority of claims against nonprofit hospitals/health systems have involved employment practice issues, the cost of settling such disputes is considerably less than that of resolving a D&O antitrust violation.  “An antitrust claim could be a limit loss,” meaning it could erode all of a hospital/system’s D&O coverage.


When entering into mergers or collaborations with other hospitals/systems, boards and executives should be aware that these arrangements have high risk/reward ratios, and therefore increase exposure to D&O suits.  Consider the following questions:


  • What if we chose the wrong partner?


  • What if the collaboration suffers from poor management and clinical errors are made?


  • What if the partnership leads to financial losses to either organization or to an affected third party?


D&O insurance premiums can vary broadly, depending not only on the coverage sought by the organization, but also by the organization’s rating.  The organization’s rating depends on several factors: its total consolidated assets, the number of employees, financial solvency, claims history, board turnover, business activity (i.e., mergers, acquisitions) and corporate governance.


Of note to iProtean subscribers:  major D&O insurance carries have been attracted to iProtean’s board certification program. The carriers believe educated and informed boards represent a better risk class, which translates into lower premiums for D&O liability insurance.  Where iProtean’s program makes a difference is that it quantifies board member knowledge to a degree that carriers have not previously seen.


Interested iProtean subscribers may want to explore the possibility of reducing their D&O insurance premiums as a result of completing iProtean’s certification program.



The iProtean advanced courses Affiliation & Consolidation Strategies Part 1 and 2, scheduled for publication in March and April, feature experts Monte Dube, Lisa Goldstein, Marian Jennings and Dan Grauman.  In addition to regulatory implications, the experts discuss factors driving consolidation, timing, the continuum of options and emerging models, when mergers go bad and the ratings impact of consolidation.




For a complete list of iProtean courses, click here.


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