Court: Subrogation Waived And Selective Tender Proper
January 20, 2010
The 1st District Appellate Court recently held that, by seeking a remedy inconsistent with equitable subrogation, a risk-pooling trust waived its right to seek subrogation, and that a selective tender of defense to the trust was effective even though another insurer remained available to provide "standby coverage." Chicago Hospital Risk Pooling Program v. Illinois State Medical Inter-Insurance Exchange, 2009 WL 4981046 (1st Dist. Dec. 22, 2009).
The risk-pooling trust, CHRPP, was represented by Michael M. Marick and Rebecca R. Haller of Meckler, Bulger, Tilson, Marick, & Pearson LLP. Robert L. Reifenberg, Edward M. Kay, and William P. Pistorius of Clausen, Miller P.C. represented ISMIE.
CHRPP, which administers a risk-pooling trust on behalf of certain Chicago-area hospitals, provided medical malpractice coverage to the Norwegian American Hospital (Hospital), the employer of Dr. Carlos Baldoceda. The primary coverage was subject to limits of $1 million per occurrence and $3 million aggregate, and, in addition, CHRPP provided coverage through an "excess trust" of $10 million per occurrence. ISMIE provided Baldoceda with coverage subject to a $1 million per-person limit and a $3 million aggregate limit.
In 1994, the Hospital, Baldoceda and another physician were sued for medical malpractice in connection with injuries caused to twins during their delivery at the Hospital. The Hospital's alleged liability was both direct and vicarious based on the alleged conduct of Baldoceda and hospital nurses. CHRPP agreed to defend the Hospital without a reservation of rights. ISMIE agreed to defend Baldoceda without a reservation of rights.
CHRPP later informed Baldoceda that it did not provide him primary coverage in light of ISMIE's duty to defend. It did not file a declaratory judgment action to resolve its coverage position with Baldoceda.
In 1996, Baldoceda attempted to selectively tender his defense to CHRPP by advising that he would be looking to CHRPP to provide him primary coverage. At the same time, however, ISMIE counsel appointed for Baldoceda informed CHRPP that Baldoceda was not abandoning his right to coverage under the ISMIE policy but simply was seeking to "prioritize" his two lines of coverage.
In response, CHRPP maintained that its trust was "secondary" and that it was reserving its rights as to whether the trust even provided Baldoceda coverage. Baldoceda then filed a declaratory judgment action contending that CHRPP had an obligation to defend and indemnify him and further that CHRPP had breached its duty to defend.
In early 1998, CHRPP settled the underlying litigation for $3 million on behalf the Hospital, Baldoceda and the other physician that had been sued, allocating $1 million in settlement to each. Shortly thereafter Baldoceda dismissed his declaratory judgment action against CHRPP.
CHRPP then filed the instant action against ISMIE seeking contribution for $500,000, which represented one half of the $1 million it paid on behalf of Baldoceda. ISMIE filed a counterclaim in which it sought to recover defense costs from CHRPP.
The lawsuit resulted in an earlier appeal (see 325 Ill. App. 3d 970 (2001)), in which the appellate court responded to certified questions by holding, among other things, that (a) notwithstanding that it technically was not an insurance company, CHRPP could be the subject of a selective tender, (b) CHRPP's status as a risk-pooling trust did not bar it from seeking equitable contribution from ISMIE, and (c) fact questions existed whether CHRPP had a duty to defend and whether the selective tender to CHRPP had been perfected.
Upon remand, CHRPP filed an amended complaint which both maintained CHRPP's equitable contribution claim and also added a new equitable subrogation theory in which CHRPP claimed, for the first time, that a portion of Baldoceda's settlement had been paid out of the excess trust and that CHRPP was entitled to recover the excess coverage portion of the settlement from ISMIE.
Following further litigation and cross summary judgment motions, the trial court rejected CHRPP's equitable contribution claim, but agreed with CHRPP that it was entitled to subrogation from ISMIE with respect that that portion of Baldoceda's settlement paid out of the excess trust, in the amount of $666,666, plus interest. That amount appears to have assumed that one third of each doctor/entity's settlement payment (i.e., $1 million each for the Hospital and two doctors) was paid out of the primary trust and two thirds came from the excess trust.
On ISMIE's counterclaim, the trial court awarded ISMIE half its claimed attorneys fees, in the amount of $21,800. ISMIE appealed with respect to subrogation and attorneys fees, and CHRPP cross-appealed as to fees.
In an opinion by Justice Mary Jane Theis, the appellate court reversed. She first addressed equitable subrogation. She noted, among other things, that at the time of the underlying settlement in 1998, CHRPP allocated the settlement proceeds of $1 million each to the Hospital and the two physicians, but that there was no indication at that time as to what portion, if any, was to be paid out of the excess trust.
She further noted that it would have been possible for CHRPP to structure the settlement in such a way that no portion of Baldoceda's settlement payment would come from the excess trust. It was possible, for example, that the injuries to the twins could be construed as multiple occurrences, so that more than the $1 million primary occurrence limit was available for settlement purposes. CHRPP had the burden to establish the number of occurrences, said Theis, yet it never filed a declaratory judgment action for that purpose.
She further observed that, within weeks of the underlying settlement, CHRPP filed a complaint seeking only equitable contribution. In such action it claimed concurrent primary coverage, seeking $500,000 from ISMIE, which implicitly conceding that it owed the other $500,000 of Baldoceda's settlement and that CHRPP's excess trust was not implicated. It maintained that position for four years of litigation, including throughout the earlier appeal.
Upon remand of the previous appeal, CHRPP added the count for equitable subrogation, but its earlier conduct, said Theis, was inconsistent with the new theory. Moreover, while a party is entitled to make inconsistent statements of fact in a pleading where the party is in doubt as to which is true, here all the facts necessary for CHRPP to seek reimbursement from ISMIE were within CHRPP's control. Its attempt to plead in the alternative therefore was improper.
Theis relied heavily on Home Insurance Co. v. Cincinnati Insurance Co., 213 Ill. 2d 307 (2004), for the proposition that a party may waive a coverage position, and in particular an equitable subrogation position, when it undertakes conduct inconsistent with that position and fails to advise another insurer of its position. Under Home, Theis found that CHRPP waived its right to subrogation based on a payment out of the excess trust.
With respect to ISMIE's counterclaim for fees, CHRPP's initial argument was that it had no contractual duty to defend Baldoceda because its defense obligation ran solely to "the Hospital" under the trust agreement, and Baldoceda was not defined as the Hospital. Theis, however, took the position that any suit against the Hospital based on vicarious liability necessarily involved an action against the employees of the Hospital, of which Baldoceda was one.
Thus, according to Theis, since CHRPP and Baldoceda are "unified tortfeasors," and CHRPP had a contractual obligation to defend the Hospital, it had a duty to defend Baldoceda as well.
CHRPP's second argument was that the selective tender to CHRPP was not valid because Baldoceda had not effectively renounced his ISMIE coverage and, in fact, informed CHRPP that he wished it to remain secondary. According to Theis, however, a targeted tender is not negated merely by an expressed desire to keep the deactivated insurer on standby in the event that the selected insurer refuses the tender.
Although Theis acknowledged that Baldoceda's selective tender would not be effective as to CHRPP's excess coverage, CHRPP nevertheless had the sole responsibility to defend under its primary coverage, and CHRPP wrongfully refused the tender. The trial court therefore erred in awarding ISMIE only half its expenses.
Accordingly, the court reversed and found in favor of ISMIE.
