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The collapse of Phico Insurance Co. has left a mess for the New Jersey physicians it covered and 600 malpractice plaintiffs suing them. The Mechanicsburg, Pa., carrier’s demise also is costing lawyers on both sides a lot of money. Since February, when Pennsylvania regulators ordered liquidation, coverage of claims against New Jersey policyholders has been taken over by the New Jersey Property-Liability Guaranty Association. Executive Director Joseph DellaFera says the association set aside $40 million in loss reserves to cover potential awards and settlements — funds put up by the insurance industry. That’s good news for the taxpayers. However, the association’s statutory limit on claims payments is $300,000, which leaves plaintiffs with a few options — none of them good — according to lawyers in Phico cases. Plaintiffs’ lawyers who have valued their cases in the $300,000 to $700,000 range are advising clients to accept settlement offers for the PLIGA limit. They figure there’s no sense spending money for litigation and risking a no-cause when the potential upside is only $300,000, lawyers in Phico cases say. Among those who appear to have taken that route are former patients of Phico-insured Lance Gooberman, a Merchantville, N.J., addiction doctor sued by patients or estates claiming that his rapid detoxification treatments caused injuries and deaths. Three plaintiffs’ lawyers who were prosecuting claims vigorously before the carrier’s demise settled after PLIGA took over. Citing confidentiality agreements, the plaintiffs declined to divulge terms. Settling for $300,000 also can have an impact on cases in which other carriers cover co-defendants, as a recent outcome in Atlantic County, N.J., Superior Court illustrates. Before a three-week trial that ended on Sept. 19, a plaintiff suing three medical professionals for alleged failure to make a prenatal diagnosis of Tay-Sachs disease settled with the lone Phico-covered defendant for $300,000. The jury no-caused claims against two other defendants, however. One doctor did pay $75,000, plus $85,000 interest, under a high-low agreement, according to a Sept. 26 account in The Press of Atlantic City. Still, in an era of million-dollar verdicts, the total recovery seems low, given the damages: The plaintiff’s 4-year-old daughter, Alyssa Gold of Margate, N.J., suffered for four years and then died. Under the rules governing insurance company liquidations, plaintiffs who win awards above the $300,000 limit can try to collect more by becoming general creditors of the insolvent insurance company, DellaFera says. That means, for example, that a plaintiff’s lawyer could theoretically go to trial and win a $1 million verdict and make a third-party claim on the liquidator for the $700,000 portion above the $300,000 PLIGA payment. But plaintiffs’ lawyers who ask that they not be identified say that would be a long and potentially fruitless exercise, akin to trying to collect a judgment from a pauper. Statements on file with the Pennsylvania Department of Insurance show how little is likely to be left when regulators liquidate Phico. The carrier, which was eligible to write policies in 50 states, had a scant surplus of $6.8 million before its demise and had substantially understated estimates of how much it would need to pay claims, the department said. The analysis showed a loss reserve deficiency of more than $250 million as of June 30, 2001. A question that seems to have no definitive answer for the time being is whether a doctor found liable has no coverage for judgments above $300,000 and can be required to pay awards above that sum. Rosanne Placey, public affairs officer for the Pennsylvania Insurance Department, says the answer is no, and that the doctor is responsible solely for the sums beyond the coverage provided by the original policy. That’s also the understanding of Robert Conroy, who represents the Medical Society of New Jersey, and Abbott Brown, a plaintiffs’ lawyer and a leader in the Association of Trial Lawyers of America-New Jersey. Conroy, however, says he knows of no court decision that answers the question definitively and that it’s the type of issue that could arise if a plaintiff’s lawyer pushed it. Conroy, of Bridgewater, N.J.’s Kern, Augustine, Conroy & Schoppmann, has an additional concern about awards beyond the $300,000 payment: The rules already prevent doctors from appealing high verdicts. Under state court rules R. 2:9-5 and 6, appellants in cases in which the verdict exceeds coverage limits are required to post supersedeas bonds to stay judgment proceedings during the appeal. Each policy spells out the terms under which such bonds are paid. Conroy says an appeal of a verdict far beyond the $300,000 policy limit could require a doctor to fund such a bond at 10 percent of the judgment. He is instructing doctors not to do so, effectively ending the appeals. Defense lawyers, meanwhile, are also taking a beating from Phico’s demise. PLIGA is paying outside counsel about 20 percent less per hour than Phico did, bringing hourly rates down to about $110, according to a couple of defense lawyers who do not want to be identified. For now, there’s enough volume to keep firms interested in doing the work, but a drop of another $10 would end that interest, one lawyer says. Guaranty associations in most states have the right to pick counsel of their choice, and when an insurer is taken over, its outside counsel are often replaced with lawyers on an approved list. Political connections help. A defense lawyer says that when Phico went under, many lawyers representing Pennsylvania insureds were replaced. “They took away files and brought in their own people,” this lawyer says. “That didn’t happen in New Jersey.” DellaFera says most of the lawyers working on Phico matters before the collapse are continuing to work for the association and many who were replaced dropped out voluntarily because of the lower rates.

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