Ninth Circuit Affirms Dismissal of Negligent Misrepresentation Claim

In its recent decision in MultiCare Health System v. Lexington Ins. Co., 2013 U.S. App. LEXIS 17981 (9th Cir. Aug. 28, 2013), the United States Court of Appeals for the Ninth Circuit, applying Washington law, had occasion to consider whether a party with whom the insured contracted has standing to bring a misrepresentation claim against an insurer and broker for failing to disclose a policy’s self-insured retention in a certificate of liability insurance.

Lexington Insurance Company insured the Medical Staffing Network (“MSN”), a staffing company providing temporary nursing staff to hospitals, under a professional liability policy with limits of liability of $5 million.  MSN entered into a contract with Good Samaritan Hospital (the “GSH”) whereby MSN provided nursing personnel to GSH.  As part of this contract, MSN was required to provide GSH with a Certificate of Liability Insurance.  USI Insurance Services, on behalf of Lexington, subsequently provided MSN with an Acord form certificate describing the Lexington policy, and MSN in turn provided the form to GSH.  While the Acord form accurately described the policy’s limits of liability and the identity of the insurer, it did not identify the fact that the policy was subject to a $1 million self-insured retention.  Notably, the form is a standard pre-printed form that does not contain a space in which to enter information concerning deductibles or retentions.

GSH and MSN were named as defendants in a wrongful death suit alleging that a nurse provided by MSN injured the decedent while at GSH.  GSH’s counsel shared a copy of the Acord form with plaintiff’s counsel, who subsequently agreed to voluntarily dismiss GSH from the suit based on the belief that MSN had sufficient insurance to satisfy any judgment.  The matter proceeded to arbitration resulting in a judgment against MSN in the amount of $785,000 – an amount within the Lexington policy’s retention.  MSN subsequently filed for bankruptcy to avoid paying this amount.  Plaintiff thereafter successfully vacated its dismissal of GSH based on its argument that it would not have dismissed GSH in the first place had the Acord form identified the $1 million self-insured retention.  GSH subsequently sought a defense and indemnification from Lexington and USI based on theories of negligent misrepresentation and bad faith.  While GSH acknowledged that it did not qualify as an insured under the policy, it contended that the defendants had a duty to not misrepresent the terms of an insurance policy and that this duty was breached by failing to disclose the retention on the Acord form.  GHS argued, therefore, that as a result of this misrepresentation, Lexington and USI should be required to defend GSH in the underlying suit and pay for any resulting judgment.

The United States District Court for the Western District of Washington granted defendants’ motion to dismiss on the basis that GSH failed to properly state a cause of action for negligent misrepresentation On appeal, the Ninth Circuit affirmed, finding that the Acord form did not contain any false information that would support a misrepresentation claim.  The court rejected GSH’s assertion that defendants had an affirmative duty to disclose this information to GSH since no fiduciary relationship existed among the parties.  Notable for the court was that the Acord form contained no column for identifying retentions or deductibles, but that it is common knowledge that insurance policies typically impose such requirements on insureds.  As such, the Ninth Circuit concluded that:

We do not believe that the Washington Supreme Court would find a duty to disclose a self-insured retention amount on a certificate that summarizes insurance policies and does not contain a column for retention or deductible amounts. This is especially true in light of the fact that the hospital could have asked Medical Staffing for a copy of its insurance policy.

The Ninth Circuit also held that the lower court properly rejected GSH’s request for leave to amend its complaint to claim that third parties frequently rely on certificates of insurance in transacting business with insureds.  The court concluded that such an assertion would not establish a duty under Washington law for insurers or brokers to disclose a self-insured retention on a form that has no column in which to include such an amount.

Rhode Island Supreme Court Invalidates Healthcare Provider’s Right to Self-Insure

In its recent decision in Peloquin v. Haven Health Ctr. of Greenville, 2013 R.I. LEXIS 9 (R.I. Jan. 14, 2013), the Supreme Court of Rhode Island had occasion to consider the validity of a self-insured retention in a healthcare professional liability policy issued to a Rhode Island insured.

Green Haven Health Center (“Health Haven”), a Rhode Island nursing facility, was insured by Columbia Casualty Company (“Columbia”) under a claims made and reported healthcare professional liability policy with limits of liability of $1 million per claim and $3 million in the aggregate.  Columbia’s policy contained a self-insured retention endorsement stating that its policy attached excess of a self-insured retention of $2 million per claim to be paid by the insured.  The endorsement specifically stated that:

[Columbia's] obligation to pay 'damages' and 'claim expenses' as a result of a 'claim' is in excess of the Self-Insured Retention. [Haven Health] [is] required to pay all 'damages' and 'claim expenses' up to the amount of the Self-Insured Retention listed herein. The Limits of Liability set forth on the Declarations Page are in excess of the Self-Insured Retention regardless of [Haven Health's] financial ability or inability to pay the Self-Insured Retention and in no event are we required to make any payments within [Haven Health's] Self-Insured Retention.

Health Haven was named as a defendant in a medical malpractice lawsuit brought on behalf of a patient who died when a Health Haven nurse accidentally administered a fatal dose of morphine.  While the suit was pending, Health Haven filed for bankruptcy.  The underlying suit was later amended to add Columbia as a defendant pursuant to a Rhode Island statute permitting direct actions against insurers when an insured files for bankruptcy.  Plaintiff nevertheless continued to prosecute her claim against Health Haven, and two related entities, and eventually obtained a default judgment against these entities in the amount of $364,421.63.   Plaintiff then moved for summary judgment against Columbia, arguing that the self-insured endorsement was void as against public policy.  Plaintiff argued, therefore, that she was entitled to recovery from Columbia of $100,000 (based on Rhode Island’s statutory minimum required insurance for medical professionals) plus pre- and post-judgment interest of nearly $140,000.  The lower court held in favor of Columbia, reasoning that Columbia’s obligations under its policy were triggered only by a loss in excess of $2 million.

Plaintiff’s arguments regarding the validity of the self-insured retention were relied on Rhode Island statute § 42-14.1-2(a), which governs malpractice insurance requirements for medical and dental professionals.  The statute states that:

(a) The director of business regulation shall promulgate rules and regulations requiring all licensed medical and dental professional and all licensed health care providers to be covered by professional liability insurance insuring the practitioner for claims of bodily injury or death arising out of malpractice, professional error, or mistake. The director of the department of business regulation is hereby authorized to promulgate regulations establishing the minimum insurance coverage limits which shall be required; provided, however, that such limits shall not be less than one hundred thousand dollars ($ 100,000) for claims arising out of the same professional service and three hundred thousand dollars ($ 300,000) in the aggregate. The director of the department of business regulation is further authorized to establish rules and regulations allowing persons or entities with sufficient financial resources to be self-insurers.  (Emphasis supplied.)

Plaintiff argued that Health Haven’s $2 million retained limit was not insurance as required by the statute, and thus did not satisfy the minimum insurance requirement established in § 42-14.1-2(a) of $100,000 per claim and $300,000 in the aggregate.  Plaintiff therefore contended that the self-insured endorsement violated public policy to the extent of the statutorily mandated minimum insurance requirements.  Plaintiff further argued that because the Rhode Island Department of Business Regulation ("DBR") had not yet established “rules and regulations allowing persons or entities with sufficient financial resources to be self-insurers,” Health Haven’s $2 million retained limit was impermissible.

The Rhode Island Supreme Court stated that it need not address plaintiff’s arguments concerning Rhode Island public policy since the absence of DBR promulgated rules or regulations on the issue was determinative.  As the court explained:

… we conclude that before any self-insurance may be incorporated into an insurance policy governed by § 42-14.1-2(a), the DBR first must promulgate a regulatory framework expressly "allowing" for self-insurance. … before a Rhode Island healthcare provider lawfully may self-insure, the DBR is required to take the affirmative step of "allowing" self-insurance and defining the conditions under which "persons or entities" possess "sufficient financial resources to be self-insurers." See § 42-14.1-2(a). Thus, unless and until the DBR promulgates regulations that expressly make provision for self-insurance by healthcare providers, by its plain language, the final sentence of § 42-14.1-2(a) does not permit the SIR Endorsement that appears in the Columbia policy.

In reaching this conclusion, the court agreed with plaintiff’s contention that self-insurance is the antithesis of insurance, since the risk remains with the insured.   As such, explained the court, to satisfy the minimum requirements of § 42-14.1-2(a), and assuming the DBR permits self-insurance, a medical or dental professional would, at the very least, have to demonstrate “the same sorts of underwriting procedures that insurance companies employ” of its financial ability to insure a loss.

Having concluded that the $2 million self-insured retention was impermissible, the Supreme Court resisted drawing a broader conclusion as to the minimum amount of insurance required under the statute.  As the court explained:

We already have determined the SIR Endorsement in the Columbia policy to be invalid, and we hold that plaintiff should receive the $100,000 in damages to which she consistently has argued she is entitled. Thus, we need not determine whether the $100,000 per-claim minimum specified in § 42-14.1-2(a) currently is mandatory (and therefore applicable to all policies insuring Rhode Island healthcare providers), or whether it becomes effective only if and when the DBR exercises its discretion by promulgating regulations setting forth minimum professional liability insurance coverage requirements for healthcare providers.

Thus, the court concluded that plaintiff was entitled to recovery of $100,000, in addition to pre-and post-judgment interest calculated on the $100,000 recoverable under the Columbia policy rather than the $364,000 amount of the underlying default judgment.

California Court Addresses Payment of Self-Insured Retention

In its recent decision in National Fire Ins. Co. of Hartford v. Federal Ins. Co., 2012 U.S. Dist. LEXIS 641 (N.D. Cal. Jan. 4, 2012), the United States District Court for the Northern District of California had occasion to consider the issue of whether an insured was required to satisfy a self-insured retention with its own funds, or whether the retention could be paid by other insurance.

The insured in National was a restaurant located within a hotel.  The restaurant hosted a graduation party at which a three-year old girl fell to her death from a balcony.  The girl’s family brought a wrongful death suit, initially against the hotel only, which was insured by Federal Insurance Company.  The hotel tendered its defense to National, the primary insurer for the restaurant, on the basis that the hotel qualified as an additional insured under the restaurant’s policy.  While National initially denied coverage to the hotel, it later paid its policy limit to plaintiffs in order to secure a settlement on behalf of the restaurant and the hotel.  National then brought a contribution claim against Federal. 

After finding that the hotel was, in fact, entitled to additional insured coverage under the policy National issued to the restaurant, the court addressed the issue of priority of coverage as between the National and Federal policies, and the related issue of whether payments made by National on behalf of the hotel satisfied the Federal policy’s self-insured retention.  The Federal policy had a $250,000 self-insured retention and the policy provision concerning payment of the retention stated that “[w]e have no obligation or liability under such Coverages unless and until the applicable Self-Insured Retentions … are exhausted by payments you make … You must pay all self-insured retention expenses.”  Thus, from the face of this provision, only the insured could pay the retention.

Citing to the 2010 California state court decision in Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4^th 1466 (Cal. App. 2010), Federal argued that this policy language required the hotel to pay the retention with its own funds, and that the retention could not be insured.  The court rejected this argument, however, noting that in Forecast Homes, the provision concerning payment of the self-insured retention expressly stated that “Payment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.”   By contrast, the Federal policy contained a “Bankruptcy Within the Self-Insured Retention” provision stating that the bankruptcy of any insurer, or any other person, would not relieve the hotel of its obligation to satisfy the retention.  This language, explained the court, implied that the retention could be paid by other insurers, or other persons, and at the very least, did not “clearly require the hotel to satisfy the SIR out of its own pocket.”  In other words, the bankruptcy provision negated the otherwise clear policy provision stating that the retention must be paid by “you.”

This aspect of the National Fire decision adds to the body of California case law dating back to General Star Nat. Ins. Corp. v. World Oil Co., 973 F. Supp. 943 (C.D. Cal. 1997) and Vons Cos. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (Cal. App. 2000), and more recently in cases such as Forecast Homes, Mt. McKinley Ins. Co. v. Swiss Reinsurance Am. Corp., 757 F. Supp. 2d 952 (N.D. Cal. 2010); Travelers Indem. Co. v. Arena Group 2000, L.P., 2007 U.S. Dist. LEXIS 17931 (S.D. Cal. 2007).  These cases establish the general rule that absent express and unambiguous language restricting payment of a retention to the insured, California courts will allow retentions to be satisfied by secondary sources, including other insurance.