Former employees accuse Crittenden Regional Hospital of misusing money intended for the employee health plan. | (Photo by Mark Friedman)
The nonprofit Crittenden Hospital Association paid its directors and officers’ liability insurance ahead of employee health benefits, and that may have been a smart strategic decision for all concerned.
“It is always a challenge when companies fear they’re heading toward bankruptcy —what bills are they going to pay?” said Kevin LaCroix, executive vice president of insurance mediator RT ProExec, a division of RT Specialty of Chicago, and author of a blog dedicated to D&O insurance.
The D&O insurance is expected to play an important role in lawsuits filed against the bankrupt West Memphis hospital by employees whose medical bills were unpaid.
At issue is whether managers and directors misused money intended for the employee health plan. If the hospital loses the lawsuits, a claim could be made against the D&O insurance, which can protect the hospital’s decision-makers from paying for damages that resulted from their actions.
On Sept. 11, the day before filing for Chapter 7 bankruptcy protection, the Crittenden Hospital Association voted to spend up to $250,000 to extend for six years its $5 million D&O policy, according to board meeting minutes reviewed by Arkansas Business.
LaCroix said companies or nonprofits that buy D&O insurance generally have coverage of at least $1 million, which would typically come with a premium of about $10,000 per year. But hospitals usually attract more lawsuits than other businesses or nonprofits, so most nonprofit hospitals carry substantially more insurance, LaCroix said.
Criminal misconduct or fraud will void most D&O policies, and an insurer will likely try to recoup its expenses if such allegations are found to be true, he said.
So far, there are no such allegations against Crittenden Hospital Association directors or officers.
Former CEO Eugene Cashman wrote in an affidavit filed with the bankruptcy court that the third-party administrator for the hospital’s health plan, Cigna Health & Life Insurance Co., of Bloomfield, Connecticut, refused to cover claims filed by the employees until it was paid $32,000 in past-due administrative fees.
A spokesman for Cigna declined to comment on the hospital’s health plan, citing the pending lawsuits.
Memphis attorney Tim Edwards, who represents former hospital employee Rhonda Michelle Goodfellow, said in an interview that he believes the D&O policy is in “full effect” based on the hospital’s disclosures in bankruptcy court, including several policy declaration pages.
Edwards said that “leads one to conclude” that the hospital made payments on its D&O premiums while failing to cover the costs in the health plan.
Goodfellow sued the hospital Sept. 25, just three weeks after another former employee, Deloris Sumpter, filed a similar complaint. Both plaintiffs are seeking class-action status.
The defendants have until Nov. 26 to respond to Goodfellow’s complaint and Nov. 17 to respond to Sumpter’s.
Edwards said he hopes to collect from the policy and any other insurance the hospital had that could make employees whole.
“We will certainly try to tap into all applicable coverage. Whether there will be sufficient coverage to cover all claims is unknown at this time,” Edwards said later in an e-mail in response to questions sent by Arkansas Business.
Edwards has objected to the hospital’s attorneys being paid by the hospital’s D&O policy, since that would reduce the pot of money available for plaintiffs to collect.
Mark Peters, one of the attorneys for the hospital’s officers and directors, declined through a spokesman to answer questions about the hospital’s D&O insurance.
But Peters had previously denied that money collected from employees to pay for their health insurance was used for anything else.
Jeff Moder, a spokesman for Methodist Le Bonheur Healthcare in Memphis, which was hired in the fall of 2012 to provide consulting for the hospital, said Le Bonheur would not have been involved in the discussions about D&O insurance. He said the hospital’s board would have made the decision on coverage.
(Related: Crittenden Regional Board Extends Liability Coverage, Then Files for Bankruptcy)
Providing Protection Is Key
Elisa White, vice president and general counsel for the Arkansas Hospital Association, said D&O insurance is one of the most important policies for hospitals and that she did not know of one of the state’s 104 hospitals without it.
“I think from a legal risk management perspective, you should always have D&O coverage for your board because you want an active board, you want them to feel comfortable providing good business advice, and you want them to feel some security that if they’re fulfilling their obligations, then they have protection,” she said.
Crittenden County Judge Woody Wheeless said he was not aware of what discussions the board had about D&O insurance. He said the county, which is paying $101,000 a month to maintain the vacant hospital, is focused on trying to find a buyer to move into the facility.
The Crittenden County Quorum Court approved covering the cost of utilities, insurance and maintenance to the facility through December, Wheeless said.
A. Jan Thomas Jr., the U.S. bankruptcy trustee handling the case, said he did not expect the D&O insurance to play a role in the bankruptcy case unless the hospital loses a lawsuit and the judgment amount exceeds the policy’s coverage.
Thomas has issued a notice to begin selling off the hospital’s assets in December.
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