Va. Med-Mal Insurer’s Collapse Has Patients and Doctors Scrambling

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Like many pediatricians, Dr. Raymond Jones has enjoyed watching his “kids” graduate from infancy to college. But his smiles often masked his anxiety that he was about to be ruined.

The 2002 collapse of his malpractice insurer, Richmond, Virginia-based Reciprocal of America, came as he was battling a $1 million lawsuit filed by the family of a boy who died after heart surgery. Jones was blamed for not recognizing signs of a complication when the child visited his office.

For about two years, the Fredericksburg doctor lived with the fear that he could lose everything he had built.

“It’s like having a black cloud following you. It removes all the pleasure you get out of life,” said Jones, who prevailed in the first trial and, after an appeal, a second trial that ended in June.

Tens of thousands

Tens of thousands of doctors, lawyers and hospitals in the South and Midwest were insured by Reciprocal. Its implosion led to a federal investigation that has ensnared several executives and continues to shed light on troubling industry practices.

Virginia and Tennessee regulators have accused the company and its business partners, including Berkshire Hathaway Inc.’s General Re insurance unit, of hiding Reciprocal’s deteriorating finances through complex and sham transactions. Their fraud cases are before a federal court in Tennessee, where Reciprocal’s three affiliates were based.

Lawyers in the cases say they don’t know how many policyholders may be liable as a result of Reciprocal’s failure. But there are more than $700 million in outstanding claims against Reciprocal and its units-and little money available to pay for them.

“Those problems trickle down,” said Joseph H. Aughtman, an attorney representing Tennessee’s insurance commissioner in the fraud lawsuit. “I’m sure there are thousands and thousands of stories out there.”

Checks cut off

In Wilson, N.C., Melissa Gaylord Battles, a hospital technician who stopped working after a serious back injury, said she received no warning before her biweekly workers’ compensation checks of $750 were cut off in the summer of 2003. Reciprocal, she learned, had purchased the insurer that paid her medical claims and disability benefits. It also handled her painkiller prescriptions-which were next to disappear.

For the next two months, the 39-year-old Battles relied on the charity of neighbors, relatives and nonprofits. Her electricity was turned off and on. She ran out of money for her children’s meals. When she couldn’t get sample painkillers from her doctor, her body was wracked with pain.

“I was having to ask people, ‘Will you feed my children tonight?’ ‘Can you help me have my lights?’ I was asking churches and the Salvation Army for help,” Battles said. “I was humiliated.”

Battles had never heard of Reciprocal before her problems started. But she wants its former executives to know about her. “I would like to ask them to look in themselves and ask how it would feel to have children and not know how you’re going to feed them,” she said.

Her attorney, Travis Payne, says she got stuck between her former employer and North Carolina’s insurance fund, which were battling over who would pay claims abandoned by Reciprocal. (After Payne stepped in, Battles received back payments, and the fund is now cutting the checks pending a final resolution.)

Many doctors and patients have been waiting for years to find out whether there will be more money available to pay malpractice claims. Jerry Light is one of them. In the dark morning hours of Dec. 4, 2001, Light was crossing the street to a commuter train station in Fredericksburg when he was struck by a car. He was rushed to a hospital, where he claims he was examined and pronounced fit to return home.

Light stood and collapsed, according to a multimillion-dollar lawsuit he has filed against the emergency room physician and a radiologist. Today, he is a paraplegic.

Reciprocal’s demise delayed the trial to 2007. For Light, this mean the 58-year-old economist cannot alter his home to help him become more mobile and must continue to rely on two brothers and a sister who take turns caring for him. “There are no winners in this,” Light said.

Dr. Pam Holman, the radiologist, said regulators and the public need to know how doctors and their patients have been affected. Holman says the malpractice case haunts her. “There is no way that with every holding I have, I could cover the cost of the financial burden of this case,” said Holman, who disputes Light’s claims. “I would be at risk of losing my house and all my assets.”

Resorts and reinsurance

Several doctors were angry after learning how Reciprocal executives spent money. According to a court filing, expenses included “business trips” to island resorts and meetings aboard the “Scottish Lass,” a yacht purchased with money borrowed from the company.

The filing is part of state regulators’ fraud lawsuit that names General Re and auditor PricewaterhouseCoopers, as well as former and current executives of General Re and Reciprocal. Regulators allege that General Re helped Reciprocal evade regulatory scrutiny through loans disguised as reinsurance-which is used by the industry to spread risk. They are still trying to track a $1 million check that General Re executives gave to former Reciprocal president Kenneth R. Patterson.

“I don’t believe in witchcraft, so the money went somewhere,” said Patrick H. Cantilo, an attorney helping Virginia liquidate Reciprocal.

General Re has denied any wrongdoing, and it has asked a federal judge in Memphis, Tenn., to dismiss the company from the case.

In June, a federal judge in Richmond sentenced Patterson to 12 1/2 years for conspiracy and fraud. Carolyn Hudgins, Reciprocal’s former executive vice president, got five years.

As Reciprocal unraveled, it was difficult for outsiders to get a clear picture of the insurer’s finances. Marcus Kuhn, chief executive of Twin County Regional Hospital in Galax, says he and several other hospital officials were asking questions in the six months before the collapse. They wanted details on the company’s financial condition and they wanted to know why they were being asked to bail out a Reciprocal affiliate.

Kuhn, whose hospital took a hit of more than $1 million after the Reciprocal crash, said he and other hospital officials received nothing but nebulous answers from the insurance executives.

“We were all blindsided.”