The private correctional marketplace is difficult to quantify accurately using SIC, NAICS or other statistical methods because the premiums are included within the federal, state and local government classifications. It is known that privatization continues to be a driving force in efforts to control costs. Just as outsourcing has been the watchword of cost containment in the private industry, privatization is one of the methods used by governmental authorities.

As long as incarceration is needed and government cost-cutting efforts are encouraged, privatization in the correctional system will continue to be a growth industry. The charts illustrate that federal, state and municipal spending will continue to increase as the number of prisoners continues to increase. The Department of Justice projects a prison population of 1,722,477 by 2011.

[All data are from the Bureau of Justice Statistics]

Privatization is when a governmental authority turns over its responsibility for a previously provided government service to a private industry through a written contract or agreement. The governmental authority retains oversight and ultimate responsibility for the service while relinquishing the actual operations to another entity. The written contract establishes the terms of the services provided. When the contract has a private entity providing the actual services normally provided by the governmental authority, the private entity is said to operate in the color of law. An important liability question for any insurance company providing coverage on such an operation is whether the private entity also has the protection of the sovereign immunity enjoyed by federal and state governmental units.

A recent Supreme Court case illustrates some of the issues faced by this industry.

John Malesko was incarcerated in a federal prison operated by Correctional Services Corporation (CSC), a private services provider. He had a serious heart condition and needed some extra considerations in addition to his regular medication. One of these was taking the elevator from the first floor to his fifth floor cell instead of taking the stairs. Jorge Urena, an employee of CSC, refused to allow Mr. Malesko to take the elevator. While climbing the stairs, Mr. Malesko had a heart attack and suffered bruising and pain as a result of the fall. Ten days before this incident, Mr. Malesko informed CSC staff that he needed additional medication, but CSC did not supply it.

The court ruled that the immunity granted to federally operated facilities also extended to a privately run facility operating under “color of federal law.” It determined that to rule otherwise would place burdens on the privately operated facility not found in traditionally run federal prisons. (Correctional Services Corporation v. John E. Malesko 534 U.S. 61 (2001))

This case was decided on a 5 to 4 vote. One of the dissenting justices argued that a corporate entity that operates as an agent of the government does not replace the governmental unit. It only takes the place of an agent of the governmental unit. Previous case law has allowed agents or employees of the governmental unit to be prosecuted if they violated a prisoner’s 4th Amendment rights while the governmental unit still retained sovereign immunity.

State laws may or may not respond in the same manner, depending on the state constitution, pertinent legislation and the composition of the justices on their supreme courts.

The insurance marketplace for correctional facilities varies by region because of local attitudes toward privatization. Florida was one of the first states to permit complete privatization. According to Michael Davis of US Risk, it joins Pennsylvania and Texas in actively supporting such privatization initiatives. Twenty-six states and the federal government have outsourced at least some of their prison operations to private service providers. Every state has one or more functions within its department of corrections being performed by outside organizations. One area long handled by outside groups is the last 10% of an inmate’s sentence as he or she prepares to re-enter society. These halfway houses have long been run by both for-profit and not-for-profit entities.

Another frequently outsourced service, according to Rob Jurgel, Product Line Officer at AIG Health Care is the on-premises clinic. A correctional facility often will stay within a governmental entity while the medical clinic is outsourced to a private company. A small medical clinic operator can grow quickly as many of the contracts are countywide and involve multiple facilities. Mr. Jurgel notes that some carriers are willing to write the professional coverage on the medical clinic and the health care professionals in the clinic but will not cover the individual physicians who work with the incarcerated population. However, limited numbers of markets are willing to write these physicians on a stand-alone basis.

A recent addition to the services provided by private entities is non-incarceration monitoring programs. According to Mr. Davis, these programs provide both electronic monitoring for drug and alcohol abusers and Global Positioning Satellite (GPS) monitoring of sexual predators and habitual parole violators.

Jim Martin, USI Southwest, says that the private correction industry consists of two types of clients. One group consists of a few very large businesses. The other is comprised of a number of relatively small independent operators and, right now, “consolidation is rampant.” The ability to obtain insurance is one reason for the change. According to Mr. Martin: “The smaller, independent operators can’t afford the insurance coverages, limits and performance bonds required for new accounts. The workers compensation market is similarly divided with larger risks having the ability to accept large retentions and smaller operators most often finding coverage in state funds.” Mr. Martin further states, “Given the range of exposures and the lack of markets, insurance companies are requiring large se lf-insured retentions, which only larger accounts can afford on their balance sheets.”

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