Notwithstanding any other provision of this chapter or of this code, any reciprocal or interinsurance exchange which meets all of the conditions of this section shall be exempted from all reserve requirements of this code to which it would otherwise be subject:

(a) The subscribers are comprised of a local hospital district formed pursuant to Division 23 (commencing with Section 32000) of the Health and Safety Code and the individual participating members of its attending medical staff, or any hospital (as defined in § 1250 of the Health and Safety Code) and the individual participating members of its attending medical staff. As used in this section, “attending medical staff” refers to licensed physicians and surgeons, podiatrists, and dentists who have hospital privileges at any hospital and not to interns or residents who are employees of such hospital.

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(b) The physicians and surgeons on the attending medical staff are independent contractors, whether individually, through professional corporations, or through partnership or clinic arrangements, and the creation of the reciprocal or interinsurance exchange will not affect the prerogatives of such physicians and surgeons in accepting patients, charging fees, or similar issues in the management of a medical practice. This subdivision shall not be construed to limit the authority of a peer review committee to impose such restrictions on the staff privileges of a participating member of the attending medical staff as deemed warranted by the peer review procedure and medical audit methods provided by subdivision (h).

(c) The initial capitalization for the reciprocal or interinsurance exchange specified in subdivisions (d), (e), and (f) shall be equivalent to the total professional and comprehensive general patient liability losses paid by the hospital and its participating medical staff members during the 10 calendar years immediately preceding the year in which the application for the organizational permit is filed. For the medical staff, “total professional and comprehensive general patient liability losses” shall include all losses paid by the participating medical staff members, whether based on their practice in the hospital or outside the hospital. Such combined total shall be funded or secured by equal contributions from the hospital and, collectively, the individual participating members of its attending medical staff. Such funds shall be used to pay for the losses incurred for awards, settlements, and legal fees relating to alleged acts of medical malpractice committed by the hospital or any or all of its participating medical staff members, whether committed in or out of the hospital, and for the operational costs of the reciprocal or interinsurance exchange. Upon determination of the aggregate paid professional and comprehensive general patient liability claims of the preceding 10 years by a survey, such paid claims shall be categorized as provided by subdivisions (d) and (e). In the case of a hospital which has been in existence for less than 10 years, or which has substantially expanded its facilities over the preceding 10 years, or which has paid for no professional liability losses during the preceding 10 years, the commissioner may establish such capitalization requirements as he deems necessary and proper as compared to the amounts specified in subdivisions (d) and (e).

(d) A primary medical liability risk fund shall be maintained in an amount at least equivalent to the aggregate dollar amount of paid incident claims of one hundred thousand dollars ($100,000) or less per each incident for both the hospital and the participating members of the attending medical staff as provided by subdivision (c).

(e) A catastrophic medical liability risk fund shall be maintained in an amount at least equivalent to the aggregate dollar amount of paid incident claims in excess of one hundred thousand dollars ($100,000) per incident for both the hospital and the participating members of the attending medical staff as provided in subdivision (c). These funds shall be either (1) deposited as cash or secured by letters of credit, certificates of deposit or promissory notes, or (2) be obtained through an executed and delivered loan commitment with a duration of at least one year by a banking institution qualified to do business in California or other forms of credit or assets readily convertible to cash to meet liabilities of the reciprocal or interinsurance exchange organized pursuant to this section.

(f) All funds or assets collected by a reciprocal or interinsurance exchange established under this section and maintained in a form as set forth in subdivisions (d) and (e) shall be admitted assets valued at face value and be held in accordance with § 1370 of the Insurance Code, except that a credit commitment shall not be considered an admitted asset for the purpose of regulating investment of assets.

(g) The reciprocal or interinsurance exchange may seek from a licensed insurer, or secure in accordance with Chapter 6 (commencing with Section 1760) of Part 2 of Division 1, excess risk coverage for amounts above the self-retention limit of subdivisions (c), (d), and (e). The hospital and the individual members of the attending medical staff shall have unlimited several liability pursuant to Section 1395 to contribute to any liability not covered by such excess risk coverage insurance. Such liability shall be based upon each subscriber’s share of the total liability of the reciprocal or interinsurance exchange as determined by a formula adopted by its board of directors. In the event that a subscriber fails to pay any portion of an assessment, then, without releasing the defaulting subscriber from any obligation to the reciprocal or interinsurance exchange, the remaining subscribers shall be charged with the unpaid assessment in accordance with the adopted formula.

(h) The amounts specified in subdivisions (d), and (e) shall be available in the aggregate to meet the professional and comprehensive general patient liabilities of the hospital and the participating members of the attending medical staff, and shall be replenished annually, or more frequently, if necessary, to an amount equivalent to that specified in subdivision (c) or (q), whichever is greater. Such total shall be maintained by a ratio of contributions annually determined by the governing board of the reciprocal or interinsurance exchange as fair, just and reasonable between the hospital and the participating members of the attending medical staff. Assessments may be required as determined to be necessary by the governing board and shall be due within 60 days of notice thereof. Failure to pay such assessments when due shall constitute grounds for termination of policy benefits or coverage.

(i) Any member of the attending medical staff participating in the program shall, as a condition of such participation, be subject to an extensive peer review procedure and a medical audit method of documenting the quality of medical care.

(j) Any system of rating or assessing individual participating members of the attending medical staff on the basis of their respective risk exposure shall be fair, just and reasonable.

(k) A promissory note, for the purposes of subdivision (e), shall be secured, and such security shall be perfected, by real or personal property having a market value one and one-half times the face value of the note.

(l) “Hospital,” as used in this section, shall also include any two or more hospitals when either of the following conditions is met:

(i) They are governed by the same hospital district; or

(ii) Where there is a medical staff subject to a unified medical audit and peer review procedure.

(m) Any reciprocal or interinsurance exchange which meets all of the conditions of this section shall be exempt from the California Insurance Guarantee Association established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1.

(n) For the purposes of Section 985, minimum capitalization shall be either the initial capitalization as provided in subdivision (c) or the minimum capitalization required by subdivision (q), whichever is greater.

(o) In the event that the reciprocal or interinsurance exchange has reasonable cause to believe that its minimum capitalization may be impaired by current liabilities, including reported claims, it shall issue within 30 days to its subscribers notices of assessments in amounts sufficient to cure the impairment. Within 30 days of such notice the subscribers shall pay the assessment or present forms of indebtedness as provided by subdivision (e), except that with regard to a promissory note issued by a person or entity other than a banking institution qualified to do business in California, such note shall be secured by assets sufficient to assure payment of the debt should a default occur.

(p) Any notice of assessment issued pursuant to this section shall be considered an admitted asset at face value and reported as such for the purpose of determining solvency under Section 985.

(q) Minimum capitalization of a reciprocal or interinsurance exchange organized and conducted pursuant to this section shall be determined annually. For the first year following issuance of a certificate of authority, the minimum capitalization shall be that specified in subdivision (c). Each year thereafter, the reciprocal or interinsurance exchange shall conduct a new survey of its subscribers to reestablish their total professional and comprehensive patient liability loss history as provided by subdivision (r). If such recalculation of such history discloses total losses exceeding the existing minimum capitalization by 20 percent, the minimum capitalization shall be increased to the amount of such new loss history within six months. Nothing in this subdivision shall be construed to preclude the reciprocal or interinsurance exchange from capitalizing at a level exceeding the minimum capitalization required by this section.

(r) The survey of subscribers which establishes total and comprehensive general patient loss liability history shall be annually recalculated to reflect the following:

(1) All such losses paid by, or on behalf of, the hospital for the immediately preceding 10 years;

(2) All such losses paid by, or on behalf of, participating individual members for the immediately preceding 10-calendar-year period during which they held staff privileges at the subscriber hospital; and

(3) All such losses paid by, or on behalf of, participating individual members of the attending medical staff during any portion of the immediately preceding five-calendar-year period in which they were not members of the subscriber hospital staff.

(Amended by Stats. 1977, Ch. 904.)