Policy Ambiguous – Court Orders Discovery of Extrinsic Evidence

A Tennessee chancery court, applying Tennessee law, held that the policyholders’ interpretation of “Medical Incident” was reasonable and, therefore, the court ordered discovery of extrinsic evidence relevant to policy interpretation.   In reaching its conclusion, the court refused to find as a matter of law that the 114 underlying lawsuits each constituted a separate single “Medical Incident,” with each “Medical Incident” subject to a $5 million self-insured retention (“SIR”).

The policyholders consist of hospitals, medical centers, and a parent company (“Policyholders”) that are all named insureds under a Steadfast Insurance Company (“Steadfast”) Healthcare Umbrella Liability policy.  The coverage issues stem from lawsuits filed against the Policyholders due to allegedly unnecessary cardiac procedures performed on 114 patients by two different doctors, one practicing in Alabama and one in West Virginia.  The Policyholders provided notice of the underlying lawsuits to Steadfast.   Steadfast issued a coverage position letter acknowledging potential coverage “subject to the policy’s $5 million retention, per Medical Incident, and subject to any exclusions and defenses.”   In the position letter, Steadfast notified the Policyholders that each patient’s claim (including any loss of consortium claims) constituted a separate “Medical Incident” per the policy and was subject to a separate $5 million SIR.

The Policyholders filed the instant coverage action alleging that all of the lawsuits stemming from the unnecessary procedures in Alabama constituted one “Medical Incident” subject to a single $5 million SIR and that all of the West Virginia lawsuits constituted a separate “Medical Incident” subject to a second single $5 million SIR.   Steadfast filed a motion for summary judgment.  According to Steadfast, “Medical Incident” is clearly defined by the policy and is ascertainable as a matter of law from the policy that each lawsuit constitutes a separate Medical Incident subject to a separate SIR.  The Policyholders argued that their alternative interpretation was reasonable and, therefore, summary judgment must be denied and discovery should proceed on extrinsic evidence related to the policy text.

According to the court, the Policyholders’ interpretation of the definition of “Medical Incident” was reasonable.   The policy defined “Medical Incident,” in relevant part,  as “(1) An actual or alleged act, error or omission in furnishing or failing to furnish professional medical services, or a series of related actual or alleged acts, errors or omissions in furnishing or failing to furnish professional medical services to a patient; (2) A single actual or alleged act, error or omission resulting in a series of related injuries from furnishing or failing to furnish professional medical services to more than one patient.”  The court concluded that “the use of the disjunctive word ‘or’ preceded by a comma; the modifier ‘to a patient’ not followed by a comma placed at the end of the second clause; and that ‘professional medical services’ is repeated in both clauses of subparagraph 1”, all established a reasonable basis for the Policyholders’ interpretation.   Thus, the court held that the Policyholders’  are entitled to discovery on extrinsic facts to interpret the policy, stating: “This ruling is based upon the Court’s conclusion that [the Policyholders’] application of grammatical rules, and meaning derived from word choice and placement does not lead to an absurd or strained construction, and that the plaintiffs have demonstrated a reasonable construction of the Policy different from [Steadfast’s] construction, thereby establishing an ambiguity.”

The court did grant Steadfast’s motion for summary judgment regarding anticipatory repudiation: “Neither the allegations of the Complaint nor the summary judgment record demonstrated the essential element of an anticipatory breach: a total and unqualified refusal to pay.”  Vaughn Regional Medical Center, LLC v. Steadfast Insurance Company, No. 16-238-BC (Chancery Ct. Davidson County, Tenn. Apr. 25, 2017).