State regulators have taken over a Virginia medical malpractice insurer which says it was forced into receivership after a Bermuda-based reinsurer failed to "honour its claims".

The Norfolk Virginian-Pilot reported yesterday that Reciprocal of America had been scrambling to raise $70 million of additional capital from its member hospitals by today after warning in December that it might be taken over by state regulators if it failed to raise the capital and resolve other problems threatening its financial stability.

The Richmond Circuit Court, which appointed Virginia's State Corporation Commission as receiver for the insurer, said the action was necessary because future transactions would have been hazardous to policyholders, creditors and the public.

The SCC blamed the insurer's financial difficulties on its claims-related losses and the inability of First Virginia Reinsurance Ltd., a reinsurer based in Bermuda, to honour its obligations to Reciprocal of America.

Insurers often spread their risks by sharing them with reinsurers, who take the risks in exchange for a share of the premiums paid by customers.

Reciprocal of America, based in the Richmond suburb of Glen Allen, provided medical malpractice and workers' compensation insurance to several dozen hospitals in Virginia, Tennessee, Kentucky, Alabama and Mississippi.

After the state takeover, many of Reciprocal of America's members might have to shop for malpractice coverage at a time when the cost is climbing and the availability is shrinking.

The SCC, the parent of Virginia's Bureau of Insurance, installed Alfred W. Gross, insurance commissioner, to oversee the management of Reciprocal of America.

The bureau was already conducting a lengthy examination of the insurer's books and late last year ordered the company to raise the added capital by January 31.

The SCC said Reciprocal of America will continue to pay all claims arising from its policies. However, a moratorium has been imposed on payments of all other claims until the Bureau of Insurance completes its evaluation of the insurer's condition, the SCC said. Reciprocal of America will not issue any new policies or renew policies, the SCC said.

It wasn't clear on Wednesday how long the receivership could last, the Virginian Pilot reported.