Fact Question Regarding Malpractice Insurer’s Failure to Settle Within Limits

The Seventh Circuit, applying Indiana law, reversed the district court and held that a question of fact existed as to whether the plaintiff malpractice insurance company committed a “Wrongful Act” by rejecting two settlement offers for policy limits in an underlying case. 

The underlying case stemmed from the death of Vicki Bramlett from complications following a routine laparoscopic hysterectomy surgery.  Mrs. Bramlett’s family sued Dr. Benny Phillips, her treating physician.  Dr. Phillip’s malpractice insurer, the Medical Protective Company of Fort Wayne, Indiana (“MedPro”) twice refused to settle the case against Dr. Phillips for the policy limit of $200,000. MedPro asserted settlement was premature given that discovery was not complete.  After a court ordered mediation, a MedPro claims specialist advised that an adverse verdict was likely and that it could be for as much as $3m.  He also noted that MedPro’s responses to the Bramlett’s policy limit settlement offers had been inadequate and had not given sufficient reasoning for declining to settle the case.  MedPro sought advice from outside counsel and was advised that MedPro had not acted in bad faith by declining to accept the offers.

The case proceeded to trial and a jury awarded a $14m verdict ($11m in actual and $3m in punitives) against Dr. Phillips and other defendants.  The Supreme Court of Texas later capped Dr. Phillip’s liability.  MedPro agreed to indemnify Dr. Phillips for the capped verdict.  Dr. Phillips settled with the Bramletts.  The Supreme Court of Texas held that the Bramletts could pursue a direct bad faith claim against MedPro for the amount of the verdict in excess of the cap.  The Bramletts sued MedPro, and MedPro eventually settled with the family. 

MedPro was insured by American International Specialty Lines Insurance Company (“AISLIC”).  AISLIC denied coverage of MedPro’s settlement with the Bramletts.  MedPro’s AISLIC policy became effective on June 30, 2005, about a year and a half after the Bramletts’ first 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 AISLIC policy excluded coverage for “any claim arising out of any Wrongful Act” which occurred prior to June 30, 2005, if prior to that date MedPro “knew or could have reasonably foreseen that such a Wrongful Act could lead to a claim or suit.”  MedPro sued AISLIC, and the parties filed cross motions for summary judgment.  The district court granted summary judgment in favor of AISLIC, concluding that coverage was excluded under the AISLIC policy because MedPro should have foreseen that its failure to settle with the Bramletts could have led to a claim or suit.  MedPro appealed.

According to the Seventh Circuit, to apply the exclusion two questions had to be answered: (1) was there a “Wrongful Act”; and (2) could MedPro have foreseen prior to June 30, 2005 that the “Wrongful Act” could lead to a claim or suit?  The policy defines a “Wrongful Act” as “any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted.”  The Seventh Circuit agreed with MedPro that to exclude coverage, AISLIC must establish that a claim arose out of an actual “Wrongful Act,” not merely an alleged “Wrongful Act.”  Therefore, summary judgment was inappropriate because there was a genuine issue of material fact as to whether MedPro committed a “Wrongful Act.”

As to the issue of foreseeability, the Seventh Circuit ruled as a matter of law that a reasonable insurer would have foreseen prior to June 30, 2015 the Bramletts’ claim for any excess verdict.  The Seventh Circuit also addressed AISLIC’s argument that the claim was barred according to the known loss doctrine. The Seventh Circuit stated that it could not find that MedPro was facing a “virtually inevitable” loss prior to contracting with AISLIC, because the underlying trial had not yet occurred, no adverse or excess verdict had been rendered, and it was unclear whether MedPro committed a “Wrongful Act.”  Thus, the known loss doctrine did not apply.  The Medical Protective Co. of Fort Wayne, Indiana v. Am. Int’l Specialty Lines Ins. Co., No. 18-1737 (7th Cir. Dec. 18, 2018).