Doctor Can Pursue Claim Despite No-Action Clause
November 03, 2009
The 2d District Appellate Court recently held that an insured doctor who settled a medical malpractice lawsuit was not barred from seeking partial reimbursement from an insurer that refused to contribute to the settlement, in part on a breach-of-good-faith-duty-to-settle theory, despite a no-action clause in the policy that purported to bar actions against the insurer in the absence of a judgment against the insured. SwedishAmerican Hospital Association of Rockford v. Illinois State Medical Inter-insurance Exchange, 2009 WL 3048427 (Sept. 18).
The SwedishAmerican Hospital, its captive excess insurer SARI, and the insured doctor, Bruce Hecht, who assigned his rights to the Hospital and SARI, were represented by Rebecca R. Haller of Meckler, Bulger, Tilson, Marick & Pearson LLP. ISMIE was represented by James J. Stamos of Stamos & Trucco.
A medical malpractice action was brought against Hecht, and against the hospital vicariously, in 1995. The doctor's defense was tendered to ISMIE, which accepted and defended without a reservation of rights. The hospital was defended by separate counsel. ISMIE provided $1 million in primary coverage to the doctor. In addition, the hospital, through its self-insured retention (SIR), provided $1.5 million in primary coverage to the doctor, and through SARI provided $25 million of excess coverage.
After extensive discovery the hospital in 2003 settled the case for $5 million, through its SIR and SARI. The hospital's decision to settle was based in part on a "focus group" or mock jury study in which the participants recommended damages averaging $20 million against Hecht. Internal ISMIE documentation also reflected that Hecht's chances of prevailing before a lay jury were "50/50 at best." ISMIE nevertheless refused to participate in the settlement or to pay any amount of its $1 million policy limit, claiming that it wanted to take the case to trial.
The hospital and SARI subsequently brought this coverage action against ISMIE seeking to recover, among other things, the $1 million limit under the ISMIE policy. Following cross motions for summary judgment, the trial court found in favor of ISMIE based principally upon the "no-action" clause in the ISMIE policy. That clause forbade lawsuits against ISMIE until the insured's obligation to pay was determined "either by judgment against the insured after actual trial or by written agreement" with ISMIE. The hospital and SARI appealed.
In an opinion by Justice John J. Bowman, the 2d District affirmed in part and reversed in part. He initially addressed the count of the complaint (Count III) seeking equitable contribution on behalf of the hospital. The hospital argued that the ISMIE policy was intended to cover the first $1 million of the $1.5 million primary SIR coverage. Bowman found, however, that neither the ISMIE policy nor the SIR contained a provision so indicating.
Given the size of the settlement, moreover, the SIR $1.5 million limit would have been paid out in any event, and Bowman determined that the hospital therefore was not injured by ISMIE's refusal to participate in the settlement.
Bowman then observed that breach of a good-faith duty to settle typically gives rise to a tort claim, and that the plaintiffs here had not pleaded a separate count based in tort. He indicated, however, that such a breach may also be raised as part of contract-based claims, such as equitable subrogation. Consequently, the plaintiffs' various contract-based counts could properly raise the issue of whether ISMIE had breached its duty to settle.
With respect to the no-action clause relied on by ISMIE and the trial court, Bowman said that it should not apply where the insurer has breached its duty to settle. Because there was no Illinois case specifically on point, Bowman relied on several out-of-state cases in concluding that it would be unfair to enforce the provision where a breach by ISMIE would expose the doctor to liability exceeding the policy limits. He found that the duty to settle in good faith is an extension of the duty to defend.
Bowman further observed that the duty to settle arises when there is a reasonable probability of recovery in excess of policy limits and there is a reasonable likelihood of finding of liability against the insured. ISMIE here argued that there could be no recovery for failure to settle because Hecht suffered no personal damages from the settlement. One of the counts of the coverage complaint (Count I), however, alleged that Hecht had in fact been injured because he was frustrated in his right to select ISMIE coverage.
Bowman agreed with the plaintiffs that the doctor need not have paid any portion of the settlement out of his own pocket in order to recover the ISMIE policy limit. Nevertheless, said Bowman, the plaintiffs must establish that the duty to settle arose and that ISMIE breached its duty. As to those issues, ISMIE argued that the plaintiffs needed to prove that Hecht was negligent in the underlying action. Bowman disagreed, indicating that the plaintiffs need only show that the doctor settled in reasonable anticipation of liability.
With respect to reasonable anticipation of liability, Bowman observed that the record contained evidence that an adverse finding against Hecht was high and that a potential jury award would be in the multimillion-dollar range. Still, the record also contained contrary evidence. In light of the inconsistent evidence, Bowman found that it was error for the trial court to have granted summary judgment in favor of ISMIE on the count addressing the doctor's right to choose coverage.
A similar analysis applied to the count of the complaint raising Hecht's right to select coverage by subrogee (Count II), as to which Bowman also said that summary judgment for ISMIE should not have been granted.
In a further coverage count (Count IV), SARI, as excess carrier, claimed that ISMIE owed its $1 million policy limit under the doctrine of horizontal exhaustion, which requires that primary coverage (such as ISMIE's) be exhausted prior to the application of excess coverage. SARI's right to payment by ISMIE, however, once again depended on whether ISMIE breached its good-faith duty to settle. Since that issue gave rise to fact questions, Bowman found that ISMIE was not entitled to summary judgment on this count.
In other rulings, Bowman rejected ISMIE's reliance on a policy provision stating that the decision of its physician review committee - not to settle - was controlling on the subject of settlement. Even if the provision had been triggered, as to which Bowman found a fact issue, he held that the provision did not relieve ISMIE of its good-faith duty to settle, which had to be decided by a court and not a panel of physicians.
Bowman also said that, if ISMIE were found on remand to owe money, the plaintiffs would be entitled to prejudgment interest, and, depending on the facts, may also be entitled to sanctions under 215 ILCS 5/155(1) for an unreasonable or vexatious delay in settling a claim.
The 2d District therefore affirmed in part and reversed in part.
