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.

Definition of "Accident" Under the SABS

How far can the definition of "accident" under the SABS be stretched?

In Dominion of Canada v. Prest, 2013 ONSC 92 (S.C.J.), the insured was washing his car and tripped over a curb sticking out from the wall of his parking garage.  He claimed that his right hand was touching the car as he fell, and therefore he was entitled to accident benefits.  Dominion sought a determination as to whether the incident met the definition of an "accident" within s. 3(1) of the SABS, which defines "accident" as "an incident in which the use or operation of an automobile directly causes an impairment."

Justice McNamara held that the incident was not an "accident".  He used the two part test set out by the Court of Appeal in Chisholm v. Liberty Mutual (2002), O.R. (3d) 776 (C.A.) and Greenhalgh v. ING (2004), CanLii 21045 (C.A.):

(a)  Did the incident arise out of the use or operation of an automobile (the “purpose test”); and

(b)  Did such use or operation of an automobile directly cause the impairment (the “causation test”).

Justice McNamara held that the vehicle was not being used or operated at the time of the incident and was not a direct cause of the impairment.  The use of the car had ended without injury being suffered and tripping over the curb was a new intervening act. The insured was not entitled to accident benefits, showing that there is indeed a limit to how far the definition can be stretched.

Kentucky Court Holds Pollution Exclusion Applicable to Release of Diesel Fuel

In its recent decision in Hardy Oil Co. v. Nationwide Agribusiness Ins. Co., 2013 U.S. Dist. LEXIS 4760 (E.D. Ky. Jan. 11, 2013), the United States District Court for the Eastern District of Kentucky had occasion to consider the application of the pollution exclusion and under what circumstances it will be deemed ambiguous under Kentucky law.

Hardy Oil Company sought coverage under a general liability policy issued by Nationwide for a release of diesel fuel on its premises. Nationwide denied coverage on the basis of the lack of an occurrence and lack of third-party property damage.  Nationwide also denied coverage on the basis of its policy’s pollution exclusion, applicable to:

f. Pollution

(1) "Bodily Injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(a) At or from any premises, site, or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

                                [...]

(2)       Any loss, cost or expense arising out of any:

(a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, "pollutants"; [...]

By endorsement, the term “pollutants was defined as:

(a) Any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

(b) Gasoline, diesel fuel and all other petroleum products.

The court acknowledged that while the pollution exclusion was unambiguous on its face, Kentucky courts have nevertheless deemed the exclusion ambiguous as applied in certain contexts.  For instance, in Motorists Mut. Ins. Co. v. RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to carbon monoxide fumes emanating from a dry cleaner to two neighboring businesses.  Likewise, in Certain Underwriter's at Lloyd's, London v. Abundance Coal, Inc., 352 S.W.3d 594 (Ky. App. 2011), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to allegations of “negligent trespass” of coal dust from the insured’s property to the plaintiff’s property.  In both cases, explained the Hardy court, the Kentucky Court of Appeals, looking to the historical use and understanding of the exclusion, concluded the exclusion was ambiguous in the context of “accidental, small-scale scenarios.”  The court distinguished these scenarios from that involving Hardy:

In contrast to these cases, Hardy Oil's claim involves a classic environmental catastrophe that led to a government-ordered cleanup. As Kentucky courts have recognized, these are exactly the type of situations that the pollution exclusion historically sought to exclude from coverage. … Therefore, the pollution exclusion is not ambiguous as applied to the factual circumstances of this case, and Hardy Oil cannot claim coverage under the Liability Policy.

The court further concluded that even if the exclusion was ambiguous under the circumstances, the lack of any third-party property damage further precluded coverage under the policy.

Loss Transfer - Cost of Assessments

Early this year, we blogged on a decision by Justice Greer holding that the costs of insurer generated assessments under s. 42 of the SABS are not recoverable under the loss transfer provisions (Wawanesa v. Axa).  The matter was appealed to the Court of Appeal.

The Court of Appeal decision is found at 2012 ONCA 592.  The Court dismissed the appeal.  Section 275(1) of the Insurance Act provides:

The insurer responsible under subsection 268(2) for the payment of statutory accident benefits to such classes of persons as may be named in the regulations is entitled, subject to such terms, conditions, provisions, exclusions and limits as may be prescribed, to indemnification in relation to such benefits paid by it from the insurers of such class or classes of automobiles as may be named in the regulations involved in the incident from which responsibility to pay the statutory accident benefits arose.

Justice Weiler held that the words "in relation to" convey a connection between two related subject matters.  A "connection" must be between statutory benefits paid and the cost of the assessment, and only exists if the ABs were actually paid.  If the assessment only saved some benefits from being paid unnecessarily there would be full indemnification, but no indemnification if no benefits were paid.  The legislature could not have intended such an anomalous result. In addition, the connection should be between insurer generated assessments and ABs paid to the insured, whereas the cost of the assessment is paid to the doctor who conducts the assessment.

Justice Blair wrote a dissenting opinion, preferring a wide scope to the words "in relation to" that would include the cost of assessments.

Giving the dissenting opinion, perhaps this matter will be headed to the Supreme Court for final clarification, especially given the rising costs of assessments.

7th Circuit Holds Insured’s Voluntary Payments Barred Coverage

In its recent decision in West Bend Mut. Ins. Co. v. Arbor Homes LLC, 2013 U.S. App. LEXIS 428 (7^th Cir. Jan. 8, 2013), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, addressed whether an insured’s settlement of a claim, prior to giving notice to its insurer, precluded its right to coverage under a general liability policy.

The underlying claim in Arbor Homes arose out of the negligent construction of a new home in Indiana. Arbor Homes, the developer of the home, hired a plumbing contractor that failed to connect the drainage pipes in the claimants’ home to the sewer system.  As a consequence, when the home was occupied and put to use, raw sewage was discharged directly into the home’s crawlspace.  This resulted in noxious odors that ultimately caused the homeowners to become ill.  Upon receiving a complaint from the homeowners, Arbor took immediate action.  Within a week, it had the sewer connection fixed, and it undertook comprehensive efforts to decontaminate the home at a cost in excess of $65,000.  The homeowners, however, were not satisfied with these efforts and demanded a new home.   Arbor consulted with the plumbing contractor and proposed a settlement whereby the two would repurchase the home, build a new home for the claimants, and pay for all costs associated with moving the claimants into the new home. 

After outlining the settlement plan, Arbor sent a letter to the contractor memorializing the settlement.  The letter specifically advised the contractor to place its general liability carrier, West Bend, on notice of the proposed settlement and to inquire as to whether West Bend required any further information regarding the settlement.  Not hearing any immediate objections from West Bend, or from the contractor, Arbor agreed to the settlement with the underlying claimants. Arbor later brought suit against the plumbing contractor, and sent a courtesy copy of the complaint to West Bend, claiming that as an additional insured under the contractor’s policy, it was entitled to payment of the amount it sought in its suit.  West Bend denied coverage, and later commenced a declaratory judgment action against both Arbor and its own insured.  West Bend contended, among other things, that it did not become aware of its own insured’s agreement to fund a portion of the settlement, and in fact, did not learn of the terms of the settlement until long after it had been consummated.  Thus, West Bend sought a declaration that its insured and Arbor violated the policy’s voluntary payments provision which stated that “[n]o insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

The Seventh Circuit commended Arbor for its admirable conduct in responding to the complaint in a diligent and comprehensive fashion.  The court nevertheless concluded that Arbor’s actions did, in fact, violate the policy’s voluntary payment provision, which it noted serves a vital function to insurers.  As the court explained, “West Bend must have the opportunity to protect itself and its insured by investigating any incident that may lead to a claim under the policy, and by participating in any resulting litigation or settlement discussions.”  Arbor’s conduct, observed the court, deprived West Bend of these protections and therefore negated its right to coverage.   In so concluding, the court rejected Arbor’s argument that its non-compliance should be excused under the circumstances since it relied on the contractor to communicate the settlement with West Bend, and it presumed West Bend’s silence to be consent.  In fact, the contractor failed to communicate this information to West Bend.  Under the circumstances, explained the court, Arbor acted at its own peril by relying on a third-party and by acting without West Bend’s express authorization to enter into the settlement.

The court also rejected Arbor’s argument that the voluntary payment provision was the functional equivalent of a notice provision, and that as such, West Bend should be required to demonstrate that Arbor’s conduct resulted in prejudice.  The court observed that the voluntary payments provision was not a notice provision per se, but instead a consent provision, and thus subject to different considerations that did not include prejudice.  As the court explained:

The voluntary payment provision relieves West Bend of the obligation to pay not because the insured provided late notice but because West Bend did not consent to any voluntary payments or obligations assumed by Arbor or [the contractor] … Although Arbor's quick and decisive aid to the Lorches was laudable, the failure of Arbor … to obtain West Bend's consent to the settlement relieves the insurer of any obligation to pay for the damages caused by the plumber's negligence.

11th Circuit Addresses Late Notice and Related Claims

In its recent decision in Sharp Realty & Mgmt. v. Capitol Specialty Ins. Corp., 2013 U.S. App. LEXIS 243 (11^thCir. Jan. 4, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, considered whether an insured’s untimely notice of suit under a professional liability policy vitiated its right to coverage, regardless of prejudiced.  Additionally, the court addressed the concepts of related claims.

The insured, Sharp Realty & Management (“SRM”), was insured under a professional liability policy issued by Allied World Assurance Company (“AWAC”) during the period November 2007 through November 2009, and later under a professional liability policy issued by Capitol Specialty Insurance Corp. (“Capitol”) for the period November 2009 through 2010.   In July 2009, SRM was sued by several parties for its alleged mismanagement of a property.   SRM, however, did not give notice of the suit to AWAC until March 2010 – some eight months later.  SRM also gave notice of the underlying suit to Capitol.  AWAC agreed to provide SRM with a defense under a reservation of rights on several grounds, including SRM’s failure to comply with its policy’s notice provision.  Capitol denied coverage to SRM on the basis that the claim was first made prior to the inception date of its policy.  SRM later brought a declaratory judgment action against AWAC and Capitol in an Alabama federal district court.  Both insurers were successful on motion for summary judgment.

On appeal, the Eleventh Circuit considered first whether SRM’s non-compliance with the notice provision in the AWAC policy precluded its right to coverage.  In considering this issue, the court noted that under Alabama law, the only relevant considerations concerning an insured’s compliance with a notice provision are length of delay and reason for delay.  Under Alabama law, prejudice is not a consideration unless the policy fails to contain a provision making timely notice a condition precedent to coverage.  See, Travelers Indem. Co. of Connecticut v. Miller, 86 So. 3d 338, 342 (Ala. 2011); American Fire & Cas. Co. v. Tankersley, 116 So. 2d 579, 581 (Ala. 1959).   The notice provision in the AWAC policy stated:

B. WHAT TO DO IF AN INSURED HAS A CLAIM

If there is a Claim, or a circumstance or incident likely to result in a Claim, the Insured must promptly do the following:

1.   Notify the Company in writing . . .

2.   Send the Company copies of all . . . legal papers received in connection with the Claim or potential Claim; . . .

C. LEGAL ACTION AGAINST THE COMPANY . . .

2.   No action may be brought against the Company unless the Insured has fully complied with all terms and conditions of this Policy.

SRM argued that this notice provision did not constitute a condition precedent to coverage because it did not contain that phrase, and as such, AWAC need be prejudiced in order to disclaim coverage.  The court disagreed, explaining that the notice provisions “make it clear that SRM was required to promptly notify [AWAC] of any claim before it could bring an action against it.”  As such, the court concluded that the only relevant considerations were the length of SRM’s delay and the reason for its delay.

With respect to the first factor, the court held as a matter of law that SRM’s eight-month delay in giving notice to AWAC was late, observing that in Nationwide Mut. Fire. Ins. Co. v. Estate of Files, 10 So. 3d 533, 536 (Ala. 2008), the Alabama Supreme Court had held that a shorter delay of five months was late as a matter of law.  The court also concluded that SRM could offer no reasonable excuse for its eight-month delay.  While SRM pointed out that it immediately gave a copy of the lawsuit to its attorney, and that its attorney failed to send a copy of the suit to AWAC, the court nevertheless held that the failure of SRM’s attorney was still a delay on SRM’s part and thus not a reasonable excuse for its non-compliance with the policy’s notice provision.  Thus, finding that the length of SRM’s delay in giving notice of suit was too long, and that there was no reasonable excuse for this delay, the court affirmed the lower court’s ruling of summary judgment in AWAC’s favor.

Turning to coverage under Capitol’s policy, the court agreed that the claim was first made in July 2009, prior to the inception date of Capitol policy, and thus did not trigger that policy’s coverage that was limited to claims first made and reported during the policy period.  SRM argued that because the underlying suit was amended during the policy period to include new claims regarding information first learned by plaintiffs during discovery, the amended complaint should be considered a cnew laim first made after the policy’s November 2009 inception date.  The Capitol policy, however, contained a multiple claims provision stating that all claims arising out of the same “erroneous act” would be considered first made on the date the first claim was made against the insured.    Additionally, the Capitol policy contained a related acts provision stating that all erroneous acts that are “logically or causally connected by common facts, circumstances, transactions, events and/or decision” would be considered a single erroneous act.  The court agreed that the new erroneous acts alleged in the amended complaint related to those initially pled, explaining:

All of the claims in the underlying action are based on related Erroneous Acts. The same claimant sued the same defendant for the same type of wrongdoing (failure to collect rent and maintenance fees) at the same location over an overlapping period of time. Both audits examined whether SRM was collecting rent and fees from the same tenants in accordance with the same leases. Thus, while there may be separate occurrences, those occurrences are clearly related because they are "logically or causally connected by common facts, circumstances, transactions, events and/or decisions.

As such, the court agreed that all claims arising out of the alleged erroneous act would be deemed first made in July 2009, and thus prior to the inception date of the Capitol policy.

Alabama Supreme Court Holds PRP Letter Triggers Duty to Defend

In its recent decision in Travelers Cas. & Sur. Co. v. Ala. Gas Corp., 2012 Ala. LEXIS 174 (Ala. Dec. 28, 2012), the Supreme Court of Alabama addressed for the first time whether a PRP letter from the EPA qualifies as a “suit” for the purpose of triggering a duty to defend under a general liability policy.

The issue was certified by the United States District Court for the Northern District of Alabama, which presented the Supreme Court of Alabama with the following question:

Under Alabama law, is a 'Potentially Responsible Party' ('PRP') letter from the Environmental Protection Agency ('EPA'), in accordance with the Comprehensive Environmental Response Compensation and Liability Act ('CERCLA') provisions, sufficient to satisfy the 'suit' requirement under a liability policy of insurance?

The insured sought coverage under some forty years of general liability coverage issued during the 1940s through the 1980s.  The policies required the insurers to defend any suit alleging “injury, death, damage, or destruction and seeking damages on account thereof, even if such suit is groundless, false, or fraudulent.”  In October 2008, the insured received an informational request from the EPA.  The insurers took the position that the request for information did not rise to the level of a claim or suit triggering coverage under the policies.  In June 2009, after having informally identified the insured as the primary PRP, the EPA issued a formal PRP letter to the insured along with a draft Administrative Order on Consent.  The insured demanded a defense in connection with the PRP letter, which was denied on the basis that the letter did not qualify as a suit that would trigger a defense obligation.

Observing that the term “suit” was not defined in the policies, the court reasoned that the term must be defined “according to the meaning a person of ordinary intelligence reasonably would afford it in regard to the insurance contract at issue and the statutory and regulatory scheme that exists for the enforcement of applicable environmental laws, including the imposition of liability under those laws.”   Looking to case law throughout the country as well as expert commentary, the court sided with what it viewed to be the majority rule that a PRP letter does constitute a suit, citing to decisions such as those by highest courts of Michigan, Massachusetts and Nebraska in Millers Mutual Insurance Co. v. Bronson Plating Co., 519 N.W.2d 864 (1994); Hazen Paper Co. v. United States Fidelity & Guaranty Co., 555 N.E.2d 576 (1990) and Dutton-Lainson Co. v. Continental Ins. Co., 778 N.W.2d 433 (2010).

Central to the court’s holding was that in light of the EPA’s broad enforcement powers and “[g]iven the severe penalties for failure to cooperate and other enforcement tools available to the EPA, a decision by the EPA to designate an insured as a PRP cannot on any practical level be understood as anything less that the initiation of a ‘legal action’ constituting a ‘suit’ within the contemplation of the insurance contract at issue.”  Thus, reasoned the court, the term “suit” should not be limited only to matters that proceed in court, but instead should encompass broader legal actions and proceedings, such as regulatory proceedings under CERCLA.