Allegation of a “Wrongful Act” Triggers Coverage

The United States Court of Appeals for the Seventh Circuit, in an opinion written by Judge Kanne, applying Indiana law, affirmed the decision of the District Court that The Medical Protective Company of Fort Wayne (“MedPro”) was covered under a $5 million Insurance Company’s Professional Liability Insurance policy with American International Specialty Lines Insurance Co., now known as AIG Specialty Insurance (“AISLIC”).

The instant case follows from two prior disputes: first, a medical malpractice suit against a doctor for whom MedPro was the insurer, and second, a dispute between MedPro and AISLIC as to whether an exclusion in the AISLIC policy applied. In the first, MedPro defended a doctor in a wrongful death suit in Texas state court. During that litigation, MedPro twice refused offers to settle the claims within the liability limit of the insurance policy between the doctor and MedPro before a jury awarded a $14 million verdict against the doctor. The Supreme Court of Texas capped the doctor’s liability at $1.6 million due to a statutory cap but allowed the plaintiffs to sue MedPro directly for the remainder, a claim ultimately resolved by settlement. MedPro agreed to indemnify the doctor and asked its insurer, AISLIC, to cover the settlement, which AISLIC refused to do, leading to the current litigation.

The AISLIC policy became effective on June 30, 2005, about a year and a half after the plaintiffs’ first settlement demand and nearly two months before the trial in the underlying case. AISLIC issued a renewal policy to MedPro that became effective July 1, 2006, while the appeal of the underlying case was pending.  The policy generally provided that MedPro could invoke coverage for “claims first made against [MedPro] and reported in writing to [AISLIC] during the Policy Period for any Wrongful Act of the Insured.”  The policy also extended coverage to “claims[s] … subsequently made against [MedPro] arising out of [a] Wrongful Act” so long as MedPro “[g]ave written notice to [AISLIC] during the Policy Period” of “any occurrence which may reasonably be expected to give rise to a claim against [MedPro ] for a Wrongful Act which First occur[ed] during or prior to the Policy Period.”   There is no dispute that MedPro provided written notice to AISLIC about the potential claim. Additionally, there is no dispute that the possible “Wrongful Act”, MedPro’s rejection of the plaintiffs’ demands, “first occur[red] … prior to the Policy Period.”

In the first phase of this litigation, AISLIC argued that coverage under its policy was barred by “Exclusion M,” which excluded coverage for “any claim arising out of any Wrongful Act” that occurred before the policy began if “any Insured knew or could have reasonably foreseen that such Wrongful Act could lead to a claim or suit.” At that time, the District Court agreed with AISLIC that MedPro’s settlement refusals in the prior litigation were “Wrongful Acts” which occurred and were known about before the policy began triggering Exclusion M, but the Seventh Circuit reversed and remanded, stating that only actual “Wrongful Acts” precluded coverage and that a jury should decide whether MedPro’s settlement refusals were actual “Wrongful Acts” before determining whether the exclusion applied.

On remand, the District Court examined whether MedPro’s initial settlement in the medical malpractice suit was covered under the AISLIC policy at all, and, upon determining that in the affirmative, sent the exclusion question to a jury, which determined that MedPro did not commit a “Wrongful Act[.]”

AISLIC now appealed the two district court decisions that allowed the case to go to trial at all.   According to AISLIC, the Seventh Circuit’s earlier decision required the court to hold that MedPro never committed a “Wrongful Act” necessary to invoke coverage in the first place.   Further, AISLIC contends that MedPro cannot invoke coverage because the claim it settled was brought before the AISLIC policy period began.

The issue now before the Seventh Circuit was whether the claim against MedPro for a Wrongful Act—rather than the existence of a factually proven Wrongful Act—was sufficient to invoke coverage under the policy. AISLIC argued that because a jury found that no “Wrongful Act” occurred, MedPro could not submit a claim for it.

The Seventh Circuit rejected this argument, distinguishing between its prior interpretation of Exclusion M and the coverage provision here by emphasizing the inclusion of the language “claim… for.” The Seventh Circuit determined that the proven factual existence of a “Wrongful Act” was not necessary to submit a claim for coverage; instead, only a claim for a “Wrongful Act” was required. To interpret otherwise would require MedPro to “prove its own malfeasance before seeking coverage—a bizarre scenario to say the least.” Additionally, such an interpretation would render the terms “claim… for” in the coverage provision meaningless.

Additionally, the Seventh Circuit determined that communications between MedPro and the parties of the medical malpractice claims did not constitute claims such that this current claim would be precluded as being prior to the policy period. Ultimately, the Seventh Circuit affirmed the District Court’s decisions that MedPro’s claims were covered by the AISLIC policy and that a jury could determine whether a “Wrongful Act” occurred, and, thus, the final judgment stands. Med. Protective Co. v. Am. Int’l Specialty Lines Ins. Co., 990 F.3d 1003 (7th Cir. Mar. 9, 2021).