RISK SOLUTIONS

A recent verdict highlights the need for strong risk management for financial sponsors

Liability risks are present in any healthcare setting and represent a substantial driver of higher medical costs and financial pressure among organizations.

Senior care facilities present a particular liability risk given the close regulatory scrutiny they face and the complex care needs of residents. Residents or their families often sue senior care facility operators, and those facilities deal with the risks and potential financial damages of such cases.

Recent examples include an Illinois jury that awarded a family $12.2 million after a resident died from untreated pressure wounds that led to infections and then her death. The death of a 96-year-old woman in a California skilled nursing facility led to a $15 million verdict earlier this year.

And while senior care facilities are frequently owned or invested in by private equity firms, asset managers, or real estate investment trusts, these financial sponsors rarely face the liability risks borne by their portfolio companies.

But a recent landmark lawsuit resulted in substantial damages against the financial sponsors of a senior care facility. This verdict is causing financial sponsors to rethink their approach and involvement in the senior care facilities they own.

Significant punitive damages

A jury in March returned a $110 million verdict against a senior care facility in California and its two financial sponsors — a REIT and a private equity firm — after a 100-year-old resident with Alzheimer’s walked outside a self-locking door of the facility and died of hypothermia.

Of the $110 million judgment, $100 million represented punitive damages against the facility’s financial sponsors. Plaintiffs argued that the financial sponsors knew the senior care facility was poorly run and posed a threat to patient safety but did nothing to fix it.

Plaintiffs’ attorneys have pursued the deep pockets of financial sponsors in healthcare and senior care lawsuits in the past, but judges usually dismissed such claims. Judges frequently ruled that the financial sponsors and portfolio companies were separate legal entities, and financial sponsors were usually not the parties involved in the alleged harm.

This case1, and the magnitude of the verdict, will likely catch the attention of the plaintiffs’ bar and encourage similar claims against financial sponsors in other alleged instances of harm by their healthcare portfolio companies. And if one judge allowed the financial sponsors to face trial, others could follow, too.

How financial sponsors should adjust

Financial sponsors don’t just own or invest in senior care but also buy hospitals, outpatient clinics, specialty practices, and surgery centers.

The case will mean financial sponsors now walk a fine line with their portfolio healthcare companies. Financial sponsors cannot take an entirely hands-off approach with portfolio company operations. However, if they are found to direct portfolio companies to cut costs that a plaintiff’s attorney can connect to harm suffered by a patient or resident, financial sponsors could face exposure.

At the same time, financial sponsors should proactively take steps to mitigate the risk arising from the Hernandez case rather than assume courts will continue to favor the historical legal precedent relative to insulation from liability for alleged negligence of portfolio companies.

Financial sponsors should work with an experienced insurance broker and outside counsel to mitigate risks in these areas:

GOVERNANCE

Financial sponsors may guide high-level financial and operational parameters but should leave specific operational and clinical decisions to their portfolio companies.

CORPORATE HYGIENE

Financial sponsors and portfolio healthcare companies should avoid having the same officers and directors. Both should be adequately capitalized to avoid commingling funds, and record-keeping should be kept separate.

INSURANCE

Sponsors should ensure their insurance tower responds at the sponsor level, not just at the operating entity. Sponsors should ensure their program addresses claims arising from portfolio company operations, without unexpected gaps due to key exclusions. Excess limits should be benchmarked against today’s verdict environment along with historical loss experience. Finally, sponsor and portfolio company programs, along with the indemnification and additional-insured provisions between them, should be reviewed together to confirm that coverage and risk transfer function as intended when both entities are named in the same suit.

1Ludlow et. al. v. FC Ranger OPS Greenhaven Estates (CA) LLC dba Greenhaven Estates et. al.