A federal district court this month certified a $50 million lawsuit against Los Angeles-based Farmers Insurance Group as a class action representing 626 California hospitals and hospital associations.
Loma Linda (Calif.) University Medical Center and three other health systems filed the suit last year on behalf of all participants in a malpractice self-insurance pool. The hospitals charged that Farmers misappropriated and mismanaged their $830 million trust account.
The U.S. District Court for the Eastern District of California in Sacramento also denied Farmers' motion to dismiss the hospitals' claims.
The hospitals charge that Farmers violated the federal Racketeer Influenced and Corrupt Organizations Act by rendering false accountings to cover up its misappropriation of funds.
Farmers said in a statement that it is "anxious for the opportunity to prove that the.....allegations are without merit."
The hospitals set up a liability program in 1973 in which they pooled risks among themselves up to $100,000. The hospitals made premium advances to Farmers, but their actual premiums were determined retroactively, based on their combined loss experience.
Farmers collected at least $568 million in premium advances. Including interest, the insurer managed almost $830 million in hospital assets.
In September 1984, the hospitals terminated that program and entered into a standard, fixed-premium insurance relationship with Farmers.
Farmers was obligated to return the surplus from the original program's funds over a 10-year period beginning in June 1990.
The hospitals said they have lost at least $50 million in unreturned premiums. They are seeking that amount in compensatory damages as well as unspecified punitive damages.