Can insurance pay a civil monetary penalty from a survey?

Two different things happen after a serious survey finding. There is the proceeding, meaning the informal dispute resolution, the plan of correction, the hearing before an administrative law judge, and the appeal. And there is the sanction, meaning the civil monetary penalty, the denial of payment for new admissions, and in the worst case termination of the provider agreement.

Insurance is far more comfortable with the first than the second. Defending a proceeding is a cost, and costs are insurable. A penalty is a sanction imposed for conduct, and most states treat insuring a punitive sanction as contrary to public policy because it removes the deterrent the sanction exists to create.

A regulatory or administrative defense endorsement pays the legal and consulting cost of responding to a governmental proceeding arising out of professional services. The sublimit is usually stated separately from the professional liability limit and commonly sits in a range from the low tens of thousands to a few hundred thousand dollars per policy period.

Read three things. Whether the trigger is a formal proceeding only or extends back to the survey and the statement of deficiencies, because the earlier trigger is where the useful money is. Whether the sublimit is per proceeding or annual aggregate. And whether it erodes the professional liability limit or sits outside it.

The most common disappointment is a form that triggers only on a formal notice of hearing, by which point the operator has already spent the majority of the total cost responding to the survey and building the plan of correction.

Two narrow routes exist. Some forms cover the penalty portion attributable to a covered occurrence up to a small sublimit where state law permits. And where a penalty arises from the act of a third party you had a contractual indemnity from, such as a staffing agency, the recovery route is contractual rather than insurance.

Neither route is reliable enough to plan around. Treat penalties as a balance sheet item and treat the defense of the proceeding as the insurable part.

Ask what the regulatory defense sublimit is, when it triggers, whether it covers the informal dispute resolution stage, whether counsel is your choice or a panel choice, and whether the sublimit is inside or outside the professional liability limit.

Then check whether your loss of license coverage and your business interruption coverage respond to a denial of payment for new admissions, because the revenue consequence of a sanction is usually larger than the penalty itself.