Insurance Requirements/Risk Management Chapter 14 - Insurance Appendix Professional Liability Insurance Operator Regulatory Agreement – Risk Management

Chapter 14 - Insurance Requirements  Property Insurance Requirements updated to raise the coverage over FHA portfolio and make requirements more consistent with industry standards.  Past insurance requirements left FHA portfolio under- covered.  Worked with partners in insurance industry, lenders, and Fannie Mae beginning in November  Implementation on incoming applications on or after September 1, 2014.

Insurance Requirements Insurance Requirements (continued)  Insurance requirements will be attached as an Exhibit to the Firm Commitment.  Appendix 14.1 – Property and Liability Insurance details Professional Liability Insurance requirements.

Policies Requirements  Per occurrence basis  Cancellation provision requiring the carrier to notify the Lender at least 30 days in advance.  Include a cancellation provision providing for at least 10-day notification.  Contain a mortgagee clause and loss payable clause.

Property Insurance Major change in policy Past: Over-insurance on bricks and mortar with no protection on loss of income. Now: Requiring policy with 90% estimated replacement costs Loss of business income required based on 12 months gross income Dropping previous forms used – and 92447

Insurance Requirements – Additional Changes Examples of updated Property Insurance Requirements:  Property Damage “Special Form” (formerly referred to as “All Risk”) listing exclusions from Special Form  Commercial General Liability  Commercial Auto Liability  Business Income Loss Coverage  Earthquake  Builder’s Risk  Workers’ Compensation  Fidelity Bond/Crime Insurance, Sinkhole/Mine Subsidence  Windstorm Coverage  Flood Coverage

Insurance Requirements Transition  New applications received on or after November 1, 2014 will be required to comply with the new insurance requirements set forth in the handbook.  New applications submitted prior to that date have the option to comply with these requirements.

Professional Liability Insurance (PLI)  All Section 232 projects must have PLI  New projects to HUD must be compliant  Some flexibility for existing FHA-insured pre-2004  Covers the license-holder and/or entity responsible hands-on resident care  Insurer must have an acceptable rating  AM Best: A- or higher Financial Strength Rating  Demotech: A or higher Financial Stability Rating

Acceptable Insurers and Coverage  Commercial Insurance Policy  $1 million per occurrence/$3 million aggregate  $25,000 deductible  Per occurrence or claims-made, tail coverage

Acceptable Insurers and Coverage  Self-Insurance  Fronting entity domiciled in the US  Actuarially determined funding level of escrow or captive  Self-Insured Retention (SIR) maximum $100,000

Other PLI Information  Other Acceptable Insurers  Joint Underwriting Associations (JUA)  Patient Compensation Funds (PCF)

Waivers and Reviews  States with tort reform  Very high-cost states  Supported by 3 bona fide quotes for compliant coverage and low claims history  50+ operator requires review  ORCF Expert PLI Reviewer  Mike Nakagawa

PLI Package ACORD List of facilities with > 25% ownership 3 years financial statements for policyholder/parent 6-year loss history summary $ amounts of claims Total number of insured beds under the policy Obligation for claims prior to transaction date

Risk Management – Guidance for Lenders  Operator Regulatory Agreement Requirement  ORCF has defined 2 levels of risk:  Tier 1 – Baseline  Tier 2 – Elevated Risk  An appropriate risk management program depends on the risk profile the subject facility

Risk Management – Guidance for Lenders Risk Management – Guidance for Lenders (continued) Step 1: Determine if the subject facility is Tier 1 or Tier 2:  Tier 1 – Baseline: For most AL and low-risk SNF, no more than 1 G tag in the past 3 years.  Tier 2 – Elevated Risk: For high-risk SNF, 2+ G tags within the past 3 years or SFF; some AL (if warranted, reviewed on a case-by-case basis).

Risk Management – Guidance for Lenders Risk Management – Guidance for Lenders (continued) Step 2: Determine entity administering risk management program, in-house or 3 rd party.  Tier 1 – Baseline: Operator has the option Administer risk management internally (must be capable of fulfilling all risk management components in Step 3) OR Contract with an experienced 3 rd party risk management provider.  Tier 2 – Elevated Risk: Experienced 3 rd party risk management provider is strongly recommended. Decisions on applications may be adversely impacted if HUD is not assured that facility management is adequately addressing quality of care issues.

Risk Management – Guidance for Lenders Risk Management – Guidance for Lenders (continued) Step 3: Provide information supporting each component of risk management  Real-time incident reporting and tracking that informs senior management  Experience of staff  Training  Continuous improvement

Risk Management – Guidance for Lenders Risk Management – Guidance for Lenders (continued)  CMS website QAPI tools  Reference Chart  Sample Template

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