U.S. Court of Appeals Reverses Summary Judgment in Conflict Over Medical-Malpractice Insurance

The United States Court of Appeals for the Seventh Circuit of Chicago held that a prior acts exclusion under an insurance policy issued by a professional liability insurer to a medical-practice insurer excluded coverage. The exclusion was ruled legal only if the medical-malpractice insurer committed an actual wrongful act, not just if it was accused of committing such an act.

MedPro, the insured medical malpractice carrier in this case, was represented by Clyde & Co., LLP of Washington, D.C. The professional liability insurer was American International Specialty Lines Insurance Co. (AISLIC).

MedPro issued medical-malpractice coverage to Dr. Benny Phillips, subject to a $200,000 liability limit.

In 2003, while the coverage was in effect, Phillips was sued along with others in Texas following his treatment of a patient who died of internal bleeding following a hysterectomy. While some of the defendants in the case agreed to settle, the underlying case continued as to Dr. Phillips. During discovery, two policy limits demands – known as “Stowers” demands in Texas – were made upon Dr. Phillips. His lawyer rejected both demands because of the need of further discovery.

In February 2005, the parties attended a mediation. As a result, MedPro ultimately offered its $200,000 policy limit. At that time, the underlying plaintiffs were demanding $2.3 million. MedPro received attorney input that Dr. Phillips was likely to be found liable at a jury trial and that his exposure could be as high as $3 million.

MedPro also sought outside advice concerning its exposure for acting in bad faith. The lawyers’ advice was that MedPro had not acted in bad faith and that the underlying plaintiffs lacked standing to sue MedPro for more than the $200,000 policy limit.

In June 2005, MedPro first obtained coverage from AISLIC for professional bad-faith liability. The policy provided coverage for claims first made against MedPro during the policy period.

In the insurance policy an Exclusion M, however, barred coverage for “any [w]rongful [a]ct occurring prior to the inception date” of the policy if the insured knew or should have known at that time “that such [w]rongful [a]ct could lead to a claim or suit.”

The underlying case went to a trial in August 2005 wherein the jury returned a verdict for $11 million in actual damages and $3 million in punitive damages. The punitive award, however, was reversed by the appellate court. On further appeal, the Texas Supreme Court held that a statutory cap would apply to Dr. Phillips’ personal liability, but that the underlying plaintiffs could pursue MedPro for the excess compensatory verdict.

MedPro paid off Dr. Phillips’ statutory cap liability of $1.7 million. It then, however, faced a lawsuit by the underlying plaintiffs for the balance of the compensatory verdict. It ultimately settled with the underlying plaintiffs for an amount in excess of $5 million.

Prior to doing so, however, MedPro sought coverage from AISLIC under MedPro’s professional liability policy. AISLIC denied coverage; MedPro filed the instant lawsuit in Indiana and the U.S. District Court granted summary judgment for AISLIC. MedPro took this appeal.

In the opinion written by Judge Amy J. St. Eve, the 7th Circuit reversed. The first issue was the application of Exclusion M, which excluded coverage for claims arising out of wrongful acts occurring before June 2005. Since MedPro had rejected the underlying plaintiffs’ two policy limit demands prior to that time and that rejection was part of its basis for seeking the balance of the compensatory verdict, AISLIC contended that no coverage applied.

MedPro argued, however, that for the exclusion to apply, AISLIC had to establish that the claim arose out of a natural wrongful act, not just an alleged one. Justice St. Eve agreed with MedPro. She did so based on the policy language that referred only to “any [w]rongful [a]ct,” not a “possible” or “alleged” act.

The appeals panel rejected AISLIC’s alternative argument that Indiana’s known-loss doctrine barred coverage for MedPro. Under that doctrine, a party cannot obtain insurance for a loss that has already occurred. The doctrine could have no application here because when MedPro contracted with AISLIC the underlying trial had not yet occurred. In addition, it was unclear before June 2005, as it remained thereafter, whether MedPro had engaged in any bad-faith conduct.

Based on the existence of fact issues, the court reversed in favor of MedPro. An exclusion of coverage for “any wrongful act” occurring prior to a specific date excludes coverage only for an actual wrongful act prior to the date, not just an alleged act.

Medical Protective Co. v. American International Specialty Lines Insurance Co., 911 F.3d 438 (7th Cir., Dec. 18, 2018).

Kreisman Law Offices has been handling medical malpractice lawsuits, birth injury cases, cerebral palsy injury lawsuits, misdiagnosis lawsuits, hospital negligence cases and wrongful death cases for individuals, families and loved ones who have been harmed, injured or died as a result of the carelessness or negligence of a medical provider for more than 40 years in and around Chicago, Cook County and its surrounding areas, including Maywood, Rosemont, Park Forest, Forest Park, Park Ridge, River Grove, Arlington Heights, Western Springs, Hillside, Elmhurst, Chicago (Lakeview, Lincoln Bend, Edgewater, Edgebrook, East Garfield Park, DePaul University Area, Libertyville, Hyde Park, Bucktown, Chinatown, Printer’s Row, Humboldt Park, Greek Town, Gold Coast, Garfield Park), Niles, Lemont, Kenilworth, Highland Park, Joliet, Hinsdale and Geneva, Ill.

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