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 self-insured retentions, which only larger accounts can afford on their balance sheets.”

Coverage is on a claims-made basis, which can be particularly difficult when juvenile offenders are involved. According to Mr. Davis: “Juveniles in most jurisdictions have until the age of majority plus up to three additional years in which to bring suit against an insured for an incident occurring during their incarceration. This means that adequate protection for a juvenile facility should be at least a 12-year tail but the longest tails currently available are between three and five years.” Mr. Jurgel observes that in juvenile facilities civil rights exposure is secondary to the exposure for sexual and physical abuse.

This brings us to the serious coverage gap for civil rights violations. A facility may be subject to such actions if it does not meet religious dietary requirements or shows indifference to a known medical condition. According to Mr. Davis, smaller facilities may choose to release prisoners rather than bear the extra cost of meeting these needs and requirements.

Mr. Jurgel points out that exposures differ based on the type of facility. There is a greater medical professional exposure in a prison as opposed to a jail because the inmates are in the facility for longer periods of time. The longer time period creates a greater chance that previously untreated medical conditions will worsen during the period of incarceration. This means that jails may have a frequency exposure while prisons have the severity exposure due to failure to treat pain and suffering, along with civil rights violations.

Commercial general liability (CGL) coverage forms exclude losses resulting from expected or intended injury. This can create a serious coverage gap for prisons because guards may have to use reasonable force at times to restrain a prisoner. The CGL also excludes losses resulting from abuse and molestation and this gap in coverage could render a correctional facility uninsured if charges are brought against it. However, according to Mr. Davis, coverage for these losses can be arranged by purchasing a policy custom tailored for correctional facilities where these exclusions are removed.

As with most professional exposures, it is often difficult to determine when a given loss is of a professional or general liability nature. For this reason, it is important that the same insurer provide both coverages, preferably in the same policy. In addition to police professional liability, an important professional exposure that should be included is the vicarious liability for medical malpractice of any contracted health care professionals.

Mr. Martin further explains that coverage must be negotiated based on the exposures at a particular facility. Important coverages to consider include civil rights violations, medical malpractice (including incidental exposures), reimbursement to civil authorities for costs to recover escapees and property damage coverage for personal effects of inmates in the care, custody and control of the facility.

Although prisoners' civil rights violations are a major concern, Mr. Martin suggests another possible loss scenario. At what point does a facility's liability end? For example, who is responsible if a prisoner escapes and causes injury? The escapee has no resources; the public entity that owns the facility is usually strapped for cash and governmental immunity may or may not extend to the facility in some states. Will the privately operated correction entities be expected to provide the deep pockets?