Corrections or additions?
This article by Peter J. Mladineo was prepared for the November
20, 2002 edition of U.S. 1 Newspaper. All rights reserved.
In Search Of NJ’s Malpractice Insurance Cure
The Garden State, once an insurance nightmare for a
driver with a solitary scratch on his driving abstract, is now
a wasteland for doctors, who are considering leaving the state or
reducing the scope of their practices under the strains of a medical
malpractice insurance crisis.
Malpractice insurance costs increased 152 percent in three years,
according to a New Jersey Hospital Association study in April, while
74.5 percent of hospitals have had one or more doctors dropped from
coverage, and 65 percent report doctors who closed their offices
they could not get (or afford) coverage. The Medical Society of New
Jersey also reported that the malpractice dilemma has caused nearly
45 percent of doctors to adjust their practices in negative ways while
an estimated 3,000 physicians may not be able to afford coverage next
"It doesn’t pay to open up a practice when your premium is $45,000
and your total income is $75,000 or $80,000. So you retire early,
leave the state, or you limit your speciality," says Robert
the Medical Society’s president.
In July doctors took it to the streets — rallying in front of
the statehouse in Trenton, raising fists, carrying signs, and chanting
for tort reforms.
James Sheeran and Lena Chang, a couple who made their mark during
the auto insurance fiasco of the 1990s, are making another foray into
another insurance battlefield. This time, Sheeran, the 79-year-old
decorated war veteran-cum-insurance guru, and his wife, insurance
actuary Chang, 63, are targeting the state’s crisis-ridden medical
malpractice insurance arena.
The two have organized New Jersey Physicians for a United Reciprocal
Exchange (NJ PURE). Last month the New Jersey Department of Banking
and Insurance gave NJ PURE, Sheeran and Chang’s third project using
the innovative reciprocal insurance concept, the go-ahead to solicit
NJ PURE will operate out of the couple’s 13 Roszel Road headquarters
of its successful auto insurance reciprocal, New Jersey Citizens for
a United Reciprocal Exchange (NJ CURE), which tackled car insurance
in the 1990s.
Chang and Sheeran are the attorneys-in-fact for NJ PURE,
which operates as a non-profit and will charge rates comparable to
those charged by other malpractice insurers but without commissions
and a highly selective pool of low-risk clients.
The two have become practically synonymous with the reciprocal
setting up companies in several states suffering from insurance crises
in various sectors. In this case they are applying to NJ PURE the
same formula that they used with NJ CURE, in which the insureds pool
their premiums to pay for claims. "(NJ CURE and NJ PURE) are
the same except the animal is different," says Sheeran.
almost like twins."
Chang and Sheeran could have hung their hats on their NJ CURE success.
Created in the midst of the auto insurance crisis of the early ’90s
that erupted after Governor Jim Florio scrapped coverage from the
Joint Underwriters Association for so-called bad drivers, CURE helped
thousands of drivers bypass rising insurance premiums. While still
a minnow among insurers, CURE’s success is sound — it insures
36,000 cars and has accumulated $36 million in assets for its
— and is still purring away while other insurance companies are
heading out of state.
"Our rates have been very stable for the 12 years we’ve been in
business and we are becoming very financially strong while other
are seeking to leave. If you can do auto in New Jersey," says
Chang, "you can do any line of business anywhere. It’s the most
regulated, most rate-controlled line of business in the whole
But medical malpractice should be a tough nut to crack. Jury Verdict
Research, a national database, says that in four years the median
medical malpractice jury award rose 110 percent, from just under
in 1996 to $1 million in 2000. Insurers, like some doctors, are also
packing their boxes. St. Paul Companies abandoned the medical
market in 2001 and giant Zurich tried to leave as well.
The snowballing effect began with the decline of MIIX, the medical
malpractice insurer that once held one-third of New Jersey’s market.
With huge losses in other states and other financial misplays
with its decision to go public in 1999, it is now restructuring [See
sidebar, page 45.] "They changed gold into lead," says
Another New Jersey malpractice insurer, Princeton Insurance Company,
insures more than 8,000 doctors in this state but like many other
companies has decided to cease operations in Pennsylvania.
While other insurers are leaving New Jersey, NJ PURE is flourishing.
Reciprocal companies, the couple explains, pool premiums from the
insured, using the funds to pay claims and eventually refunding unused
premiums with interest — a sort-of dividend. A traditional
in contrast, has stockholders and must pay dividends.
"With our plan of operation every subscriber contributes their
own surplus contribution. Each individual doctor will put in one-third
of their annual premium. If the premium right now is too high, you
know that premium would be returned to you," says Chang. NJ PURE
claims to help its insureds save money by eliminating broker/agent
commissions and maintaining high selectivity about whom it insures.
The company offers discounts as an incentive to clean up shoddy
office management — often an Achilles heel for doctors in
suits. Obstetricians, for example, would pay $75,000 in premium per
year, and would be offered a 15 or 25 percent discount depending on
claims experience, loss control, and risk management.
"We put an emphasis on helping doctors’ office management to avoid
frivolous claims and to help doctors deal with their medical records
so their claims will be more defensible from the get-go. We want them
to dictate all their medical records, and that costs money, and we
give them money to do that," says Chang.
NJ PURE operates on a not-for-profit basis. "This way NJ PURE
will have no outside investors and will be totally focused on the
benefits for their subscribers," says Chang. However, the
(owned by Sheeran and Chang) works on a for-profit basis. It gets
12.5 percent of the premiums to provide senior management (about a
dozen officers and managers), act as attorney-in-fact, and assume
fiduciary responsibilities. "We don’t use agents and brokers who
charge from 7 to 12 percent just for commissions," says Chang.
Sheeran, a U.S. 101st Airborne veteran and the son of
a manager at Prudential, saw action in Normandy and in the Battle
of the Bulge, escaped capture in Germany, and earned a Bronze Star
and two purple hearts. After the war he got a BA and a law degree
from George Washington University, served as mayor of West Orange
— the youngest man to fill the position — and followed that
with his stint as insurance commissioner from 1974 to 1982 under
Brendan Byrne. Sheeran also did post-graduate work on the laws of
China at the East China School of Politics in Shanghai.
During his time as insurance commissioner he encountered his first
medical malpractice crisis and unearthed the reciprocal concept,
in the statutes. "(Sheeran was) the one who started using
which was on the books but no one ever used it before. Because of
what he did, New Jersey didn’t have a (medical malpractice) crisis
for 25 years," says Chang.
As insurance commissioner Sheeran helped set up one of the first
companies, Medical Inter-Insurance Exchange. With one-third of the
New Jersey market, MIIX is the state’s largest medical malpractice
insurer, and its recent financial troubles helped to spur on the
Chang was born in the foothills of the Himalayas in China, the
of the chief engineer for the World War II China-Burma-China road
project under the direction of General Joseph Stillwell, the highest
ranking U.S. official who helped the Chinese fight the Japanese during
the conflict. After coming to the United States at age 16, Chang
a BS in physics and a Ph.D in mathematics from the University of
followed by teaching posts in Taiwan, University of Illinois, and
Trenton State College, as well as a run as assistant dean of the
University business school, before starting out as an independent
actuary in Boston.
Her career got a boost during her time at the Massachusetts Division
of Insurance when she wrote an award-winning article on auto insurance
rating systems in Massachusetts.
That led to a study of the auto insurance rating systems in
which coincidentally was read by New Jersey Insurance Commissioner
Sheeran. A meeting between the two followed. "He read the paper
and came to look for me," says Chang. Between them they have seven
children from previous marriages. They married in 1988, but "we
always forget our wedding anniversary," says Chang.
On the heels of the NJ CURE auto insurance success,
Sheeran and Chang started the Massachusetts Employers Insurance
a workers compensation insurance reciprocal, when a crisis erupted
in that state.
"As we watched NJ CURE grow we moved into the Massachusetts market
because Massachusetts had the worst possible record in workers’
They were looking for help just as New Jersey doctors are looking
for help now," says Sheeran.
The Sheeran-Chang partnership is not limited to either insurance or
to the United States. The couple’s real estate firm, LLB Realties,
owns the 13 Roszel Road building housing their NJ CURE and NJ PURE
offices, and they previously owned the 40,000 square-foot 7 Roszel
Road property, which they sold to SJP Properties, which turned it
into the 300,000-square-foot 7-9 Roszel office buildings, occupied
by Merrill Lynch during the boom years.
In addition, Sheeran and Chang are trying to bring their style of
insuring to China, where they have received 27 approvals from all
levels of the massive Chinese bureaucracy so far. In the meantime
they secured 40-year development rights for a dormant volcano near
Fujianin Fuzhou, on the Chinese mainland on the Strait of Taiwan.
Currently the couple is seeking out a consortium of investors to build
four and five-star resorts there, to be designed by the Boston-based
Thompson Design Group, whose dossier includes Fanueil Hall and South
"It’s 32-square kilometers (14 square miles) — literally
land, volcanic canyons, and waterfalls. Trekking has been developed
in five main areas in that mountainous resort," says Chang.
All fall NJ PURE has been the talk of the medical community —
it has been covered by all the major New Jersey papers and ads have
been buzzing on the airwaves. As part of its New Jersey Department
of Banking and Insurance permit, NJ PURE needs to sign up at least
200 physicians — a task that seems well within its reach. So far
the desks are stacked high with applications and the company expects
to write $15 million in premiums in 2003, its first actual year of
business, covering 500 to 700 doctors.
The Medical Society of New Jersey contends that more is needed in
terms of tort reforms and economic damage caps in malpractice cases.
"Not any one insurance company can solve the problem," says
the Medical Society’s Rigolosi, who supports proposed laws to cap
non-economic (pain and suffering) damages. [See box on this page.].
"The model state in the United States is California, and
in 1975 instituted a non-economic cap of $250,000. They’re the gold
standard for every state in the country."
New Jersey, a state with no caps for non-economic damages, has seen
premiums climb 300 to 400 percent in recent years, he estimates.
A recent survey by the New Jersey Hospital Association
showed that nearly two-thirds of hospitals reporting had some
cease practice because they were dropped from coverage or could not
afford premium increases. Some specialists have reported malpractice
premiums doubling into six figures during one year. The NJHA survey
also said hospital institutional premiums rose from $373,328 in 1999
to $942,539 this year.
What’s driving the premiums up, doctors say, are high jury awards.
"Jury awards are not uncommonly in the millions of dollars and
it drives the cost of the premium up considerably," says Rigolosi.
Robert Cottone, who leads the healthcare insurance practice at Rue
Insurance on Quakerbridge Road, says that there is no single reason
for why malpractice rates are soaring; it does start with problems
with the awards and judgments in the legal systems, but that it also
involves the restrictions and other issues in the managed care
and "the litigiousness of our state and our society." Problems
are exacerbated, he says, by the downturn in the economy, and how
stock market performance affects insurance carriers’ financial
"And the cyclical nature of the insurance industry, which veers
from a hard market to a soft one, creates volatile rate structures.
The blame doesn’t lie in any one place — all the sources have
to be addressed."
Across the aisle, lawyers say devices like damage caps and tort
still won’t lower premiums and that the root of the problem is buried
in the economic slowdown and bad business decisions by the insurance
companies — as well as sloppy doctoring.
"You have insurance companies robbing us blind because of 9/11
and they’re not making these millions of dollars on the stock market
and they’re tripling the premiums and it’s just not appropriate,"
says Douglas Grossbart, an attorney and MD who practices law with
Braff, Harris and Sukoneck, based in Livingston.
Grossbart adds that the medical profession itself is helping raise
premiums because of the ploys it uses to handle the malpractice cases.
"They (doctors) hide everything. They run up litigation costs
so at the end of the day the secrecy is leading to poor medicine.
They need to settle the cases that need to be settled instead of
them out for years, and they need to realistically stop making
Meanwhile, Sheeran and Chang will be stepping into this breach with
confidence. "The doctors who rallied in Trenton really wanted
us to help them create the reciprocal opportunity for physicians.
We never shy away from doing something new as long as it’s the right
thing to do and we always have confidence in what we do. We have a
good track record of operating reciprocals," says Chang.
— Peter J. Mladineo
609-520-9619; fax, 609-951-0091.
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