Under the changed regulations that HUD published on Jan. 6, more stringent insurance and financial reporting guidelines would be created for long term care providers wishing to qualify for government-insured mortgages through the “Professional Liability Insurance for Sec. 232 Programs.” Section 232 of the Housing Act provides Federal Housing Administration insurance for private construction mortgage loans to finance new or rehabilitated nursing homes and other types of care facilities.

According to HUD, the professional liability insurance it requires would need to be obtained through a carrier with an “A” rating or better from A.M. Best Company. If the guidelines are adopted, the minimum required coverage would be $1 million per occurrence, $3 million aggregate, and a per-occurrence deductible not to exceed $25,000.

The issue was spotlighted last week in Scottsdale, Ariz., at the Captive Insurance Companies Association annual conference by Chris Kramer, senior vice president with Neace Lukens Management Services, a captive management firm in Beachwood, Ohio.

William P. White, captive director for Washington, D.C., told National Underwriter that with the new requirements, “you have now hamstrung the very organizations that are trying to get insurance in a very difficult market.”

Mr. White said that many of the long term care providers, such as nursing homes, have found a way to deal with “a terrible situation in the current hard [insurance] market through a risk retention group or other alternative market mechanism,” and now “their captive is being required to be rated and have an A-rating.” He said the situation would present two problems:

The first is that many of the captives and RRGs have been recently established.

“We have been stringent in our requirements and make sure they are strategically focused and do have the right underpinning,” he said. “But they aren't rated, and many of them aren't old enough even if they wanted to be rated.”

The second, he said, is that limiting the deductible to $25,000 per occurrence imposes limitations for captives or RRGs trying to negotiate coverage. “They need flexibility in order to make their programs work,” he said.

Mr. White added that HUD, while trying to satisfy its constituency, “may be creating problems for a different constituency.” He said he has identified who should be addressed at HUD and hopes to schedule a meeting as soon as possible.

He added that HUD needs to “reevaluate the situation so that these nursing homes aren't put in a very, very bad situation.”

According to Lancaster Pollard Mortgage Company in Columbus, Ohio, about half of all long term care professional liability risks are insured by some form of alternative risk-transfer mechanism, most of which are not rated by A.M. Best.

Scott Moore, president of Lancaster Pollard, said in a statement that the new HUD guidelines could limit financing options for long term care facilities. He said that providers should learn more about the impact of the notice and direct comments to HUD and state associations.

Alternative market associations, including CICA and the National Risk Retention Association, have been notifying members to write their concerns to Michael McCullough, director, office of multifamily housing development, 451 7th St. SW, Room 6138, Washington, D.C. 20410-5000; or by e-mail at [email protected] .

HUD could not be reached for comment.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 25, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.