State lawyers yesterday faced off against attorneys representing dozens of doctors before a judge who must decide by next week who rightfully owns a $110 million surplus from a state-established medical malpractice fund - a fund lawmakers last month voted to seize as part of the state's budget.

A coalition of doctors and hospitals insured through the Joint Underwriting Association call the Legislature's plan an "unconstitutional taking," in the words of attorney Kevin Fitzgerald, and claim the money is rightfully theirs.

They point to the fact that the insurance contracts say the company's profits "shall" be distributed to them and that the accumulated surplus was built up from what doctors paid through premium fees. They question the state's claim of any authority over the pool, noting that if JUA coffers run dry, the state won't pay out any claims.

An attorney for the state countered the doctors' claim, saying that state lawmakers established the fund for the public purpose of widening health care eligibility and has endowed it with special rights, such as exemption from state and federal taxes, while deploying its "police power" - its capability to assess fees of other insurers - to back it up in bad times.

If the doctors insured by the JUA prevail, said state special counsel David Leslie, they would be able to buy insurance at market rates that is not taxed, and in bad times, they'd "get backed up by other insurers."

"We maintain that's neither just nor equitable," said Leslie, an insurance law expert from Boston retained by the state for this case.

Judge Kathleen McGuire has pledged to issue a ruling by the end of this month and has frozen the fund until she reaches a decision. The case is unlikely to end soon; attorneys for both sides have said they will appeal to the state Supreme Court if they lose.

This fight took root last winter, when Gov. John Lynch proposed, and lawmakers readily agreed, to seize $110 million in badly-needed budget revenue from the surplus accumulated at the JUA, which hadn't been used for years. The JUA was created amid turmoil in the insurance markets in the 1970s to ensure that doctors in rural areas and others who had trouble securing malpractice insurance had at least one option. The JUA's current rules went into effect in 1986. The JUA insures about 10 percent of the state's doctors; there are two private insurers currently in the same market.

To Fitzgerald's mind, the JUA contract - and the meaning of the word "shall" - is clear and simple. Doctors signed papers believing that that they would get a share of whatever profits accumulated, he said, and there's only one reason why it's at issue now.

"The conflict is the state of New Hampshire needs $110 million to balance its budget," he said after the hearing.

He noted that the JUA had distributed surpluses to members twice before, in 1999 and 2000. Leslie countered that the JUA board had wanted to issue a third distribution, in 2001. The proposal was turned down by the state's Insurance Commissioner - a fact Leslie pointed to as evidence that the state has authority over the fund.

Associate Attorney General Anne Edwards said it is difficult to estimate how much the JUA has benefited from its tax-exempt status over the years. Officials from the JUA estimated yesterday that the fund would have paid something like $10 million in insurance tax had it been subject to the state tax, but Edwards said the impact of federal tax liability on the fund's operations would be harder to calculate.

As for the question of the state's ownership of the fund, she noted: "It's an entity we've created."

Much hangs in the balance in this case. The $110 million in revenue would be extremely difficult to replace, particularly because $65 million of it was slotted to be used to close the books on the 2009 fiscal year, which ended last month. Meanwhile, the state's Rainy Day fund - typically used as a last-resort savings account - has already been drained from $89 million to $20 million. (next page »)