Failure To Disclose Source Of Settlement Payment Waives Right To Contribution And Target Tender Perfected Despite Deactivated Insurer's Involvement
February, 2010
Introduction
Clausen Miller partner Robert L. Reifenberg prevailed before the Illinois Appellate Court in defending the Illinois State Medical Inter-Insurance Exchange ("ISMIE") against an equitable contribution/subrogation case brought by the Chicago Hospital Risk Pooling Program ("CHRPP"). The Illinois Appellate Court, First District held that a risk pooling trust waived any potential right to seek subrogation from another insurer by acting inconsistent with equitable subrogation principles, and that an insured effectively executed a target tender of defense, despite keeping a deactivated insurer on notice as secondary coverage. Chicago Hospital Risk Pooling Program v. Illinois State Medical Inter-Insurance Exchange, 2009 WL 4981046 (1st Dist. Dec 22, 2009).
Facts
In 1993, Luz Riviera filed a medical malpractice claim against the Norwegian American Hospital ("the Hospital") and Dr. Carlos Baldoceda, amongst several others, alleging negligence during the delivery of her twin babies at the Hospital. ISMIE agreed to undertake the defense of Dr. Baldoceda without a reservation of rights, pursuant to a professional liability policy ISMIE had provided to Dr. Baldoceda. Dr. Baldoceda was an employee of the Hospital at the time of the accident, and therefore was also covered under the Hospital's agreement with CHRPP. CHRPP initially agreed to defend both the Hospital and Baldoceda, along with other Hospital employees. Later, however, CHRPP advised Baldoceda that it would not provide him primary insurance in light of ISMIE's obligation to defend and indemnify Baldoceda in connection with the lawsuit. However, CHRPP did not file a declaratory judgment to resolve its coverage position.
In 1996, Dr. Baldoceda attempted to target tender his defense to CHRPP by advising the relevant parties that he would be looking to CHRPP to provide him with both primary and excess malpractice coverage for the Riviera occurrence. However, ISMIE's retained counsel for Dr. Baldoceda made clear that Baldoceda had no intention of abandoning his coverage rights under his ISMIE policy, but rather intended only to prioritize the two lines of coverage. In turn, CHRPP sent a letter to ISMIE reiterating its earlier coverage position that CHRPP's policy was secondary. Despite its coverage position, in 1998 CHRPP agreed to settle on behalf of the Hospital, Dr. Baldoceda, and another physician for a total of $3 million, dividing liability equally amongst the three. Directly following the settlement, CHRPP filed the instant action seeking $500,000 in contribution from ISMIE, i.e. half of the $1 million of the settlement agreement attributed to Dr. Baldoceda.
Four years later, after an unsuccessful interlocutory appeal, CHRPP filed a Second Amended Complaint amending its initial claim for equitable contribution from ISMIE, and adding a new claim for equitable subrogation. This alternative theory of recovery was based on the theory that two-thirds of the settlement funds paid out for Dr. Baldoceda were paid out of CHRPP's Excess Trust. This allegedly made ISMIE responsible for $666,666.67 of the settlement on behalf of Dr. Baldoceda, plus interest. In 2007, the trial court entered a judgment in favor of ISMIE on CHRPP's equitable contribution claim, but in favor of CHRPP on its equitable subrogation claim, awarding $666,666.67 of the settlement paid by CHRPP and $310,122.72 in interest. It also granted part of ISMIE's motion for summary judgment to recover defense costs it incurred while defending Dr. Baldoceda.
Analysis
CHRPP waived subrogation claim
On appeal, ISMIE contended that CHRPP waived its right to reimbursement under its Excess Trust, because for the first four years of the litigation CHRPP affirmatively represented that the settlement payment was made from its Primary Trust. It was only after its unsuccessful early appeal that CHRPP changed its facts and legal theory to seek subrogation in an attempt to avoid Dr. Baldoceda's valid target tender. The Illinois Appellate Court agreed.
In her opinion, Justice Mary Jane Theis noted that at the time of the underlying settlement proceedings, CHRPP never indicated what portion of the $1 million paid on behalf of Dr. Baldoceda, if any, was paid out of the Excess Trust. She observed, however, that CHRPP's initial Complaint seeking only equitable contribution for half of Dr. Baldoceda's settlement implicitly conceded that CHRPP was responsible for the other half, meaning that the Excess Trust was never implicated. As the court pointed out: equitable contribution is not applicable as between primary and excess insurers. Accordingly, CHRPP was relying on reimbursement pursuant to its concurrent primary coverage with ISMIE. It was only after recovery under equitable contribution principles seemed unlikely that CHRPP initiated its equitable subrogation claim aimed at recovery of amounts paid out by the Excess Trust. Accordingly, Justice Theis found this latter position wholly inconsistent with CHRPP's initial theory of recovery, and found it to be waived.
The court further opined that while its holding was based solely on equitable principles of waiver, it's worth noting that alternative fact pleading principles are inapplicable here. While a party may make inconsistent statements of fact when in doubt as to the truth, when the pleading party is in possession of all facts necessary to truthfully determine an issue, inconsistent pleading is improper. Here, CHRPP was in a position of control regarding the allocation of primary and excess funds and therefore was aware of how the funds were allocated. Therefore, to the extent that CHRPP attempted to plead its recovery theories in the alternative, it was improper.
Target tender was proper
Lastly, the court decided whether Dr. Baldoceda's attempted target tender to CHRPP was valid. The target tender rule gives an insured covered by multiple concurrent policies the right to decide which insurer will defend and indemnify it regarding a specific claim. This right allows the insured to deactivate previous coverage with respect to one insurer then initiate exclusive coverage with another insurer, thereby shifting the duty to defend and indemnify from one insurer to another. The chosen insurer then has the sole responsibility to defend and indemnify the insured up to the limits of its liability and is disallowed from seeking equitable contribution from the other undesignated or deactivated insurers.
CHRPP argued that while an insured may deactivate coverage, Dr. Baldoceda did not correctly renounce his coverage with ISMIE, and therefore his target tender to CHRPP was ineffective. It argued that by keeping ISMIE on notice as secondary coverage, Dr. Baldoceda was merely reprioritizing his coverage and not effectuating a target tender with respect to CHRPP's coverage. The court disagreed. Justice Theis stated definitively that target tender is not negated simply by keeping a deactivated insurer on notice as standby coverage in case the selected primary coverage is exhausted or the selected insurer refuses to defend the insured. On the contrary, once Dr. Baldoceda sought coverage from CHRPP, CHRPP was responsible for defending and indemnifying him. For these reasons, Justice Theis found that Dr. Baldoceda's target tender was proper, and that the trial court erred in only awarding ISMIE half of its expenses paid out in the defense of Dr. Baldoceda.
Learning Points
Illinois courts will disallow an insurer from attempting equitable recovery from a concurrent insurer under two inconsistent theories when that pleading insurer is in possession of all facts necessary to determine which theory of recovery is proper. Rather, an insurer that waits until one theory of recovery has been discarded by the court before pleading another inconsistent theory will be deemed to have waived the second, nonconforming theory.
Under the target tender rule, an insurer need not completely renounce or abandon coverage by a deactivated insurer. Instead, the insurer may manifest its intent to forego assistance from the deactivated insurer, thereby creating in the targeted insurer the sole responsibility to defend and indemnify.
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