Legal Definitions - reciprocal insurance

Reciprocal insurance, also known as a reciprocal exchange or interinsurance exchange, is a unique type of insurance arrangement where a group of individuals or organizations agree to insure each other's risks. Instead of purchasing insurance from a conventional insurance company, each member of the exchange acts as both an insurer (contributing to a shared fund to cover others' losses) and an insured (receiving coverage from that fund for their own losses).

This collective self-insurance model is typically managed by an "attorney-in-fact," which is an entity appointed by the members to handle the day-to-day operations, including underwriting, claims processing, and financial management. The primary goal of reciprocal insurance is often to provide specialized coverage, reduce costs, or address risks that traditional insurers may find too niche or expensive to cover.

• Example 1: Independent Trucking Companies

  A consortium of independent long-haul trucking companies, facing high premiums for cargo liability insurance from traditional providers, decides to form a reciprocal insurance exchange. Each trucking company contributes a set amount to a shared fund. If one company experiences a cargo loss, the claim is paid from this collective fund. In this setup, every participating trucking company is simultaneously insuring the cargo of the other members and being insured by the collective contributions of the group.

• Example 2: Medical Malpractice Coverage

  A group of orthopedic surgeons in a particular state establishes a reciprocal insurance exchange to cover their professional medical malpractice risks. Each surgeon pays into a common pool, and an appointed attorney-in-fact manages the fund and processes any malpractice claims filed against the participating surgeons. Here, each surgeon is both a policyholder receiving coverage and a contributor to the fund that covers the other surgeons' potential liabilities, demonstrating the reciprocal nature of the arrangement.

• Example 3: Specialized Property Owners

  Owners of a chain of historic boutique hotels, struggling to find affordable and comprehensive property insurance for their unique, often antique, assets, create a reciprocal insurance exchange. They pool their resources to cover risks such as specialized restoration costs, unique structural damage, or business interruption specific to historic properties. Each hotel owner contributes to the fund and, in turn, receives coverage from the shared pool, effectively insuring each other against these specific property-related risks.