National Fire and Marine Insurance Company v. Lindemann et al

Filing 140

ORDER GRANTING 123 APPEAL OF MAGISTRATE JUDGE DECISION to District Court by St. Elizabeth's Hospital of the Sisters of the Third Order of St. Francis. The Court REVERSES the magistrate judge's ruling set forth in 122 Order on Motion to Compel. Signed by Judge David R. Herndon on 9/27/2017. (lmp)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
NATIONAL FIRE AND MARINE
INSURANCE COMPANY,
Plaintiff,
v.
LEE LINDEMANN, Special Administrator of the
Estate of Sue Ann Lindeman, and ST.
ELIZABETH’S HOSPITAL OF THE SISTERS
OF THE THIRD ORDER OF ST. FRANCIS,
Defendants;

Case No. 15-cv-910-DRH-DGW

And,
ST. ELIZABETH’S HOSPITAL OF THE
SISTERS OF THE THIRD ORDER OF ST.
FRANCIS,
Cross-Claimant
v.
ERICK FALCONER, MIDWEST EMERGENCY
DEPARTMENT SERVICE, INC., NATIONAL FIRE
AND MARINE INSURANCE COMPANY, and WESTERN
HEALTHCARE, LLC.
Cross-Defendants;
And,
MIDWEST EMERGENCY DEPARTMENT
SERVICE, INC.,
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Cross-Claimant,
MEMORANDUM and ORDER
HERNDON, District Judge:
Pending before the Court is St. Elizabeth's Hospital of the Sisters of the
Third Order of St. Francis’s (“St. Elizabeth's”) appeal of the Magistrate Judge’s
Order (Doc. 123). Specifically, St. Elizabeth's appeals Magistrate Judge
Wilkerson’s ruling memorialized in the Order entered on December 19, 2016,
regarding a discovery dispute between St. Elizabeth’s and National Fire and
Marine Insurance Company (“National Fire”). 1 Plaintiff has responded in
opposition (Doc. 128).

For the reasons stated below, the Court respectfully

disagrees with the Magistrate Judge’s ruling and finds that the claim file and
underwriting file are relevant and discoverable. Accordingly, the Court GRANTS
St. Elizabeth's appeal and REVERSES Magistrate Judge Wilkerson’s Order (Docs.
123).
I.

Background 2

This action arises out of a medical malpractice lawsuit filed in the Circuit
Court of St, Clair County, Illinois. See Lindemann v. DuMontier, et al., No. 12-L538. In the state lawsuit, Lee Lindemann, as special administrator of the Estate of
Sue Ann Lindemann (“Lindemann Estate”), alleged that Sue Ann Lindemann’s

1

Defendant Lee Lindemann, Special Administrator of the Estate of Sue Ann Lindemann, deceased,
also moved to adopt St. Elizabeth’s appeal of the magistrate judge’s December 19, 2016, Order
(Doc.130), which the Court granted (Doc. 139).
2
The Court herein incorporates the facts previously set forth in the magistrate judge’s Order, in
addition to those facts applicable to the pending appeal (Doc. 122).
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death was the result of negligent treatment and care from Dr. Falconer at St.
Elizabeth’s.
During the relevant time period, Dr. Falconer was an independent
contractor who was hired by Western Healthcare, LLC (“Western”), a healthcare
staffing company, who in turn was retained by Midwest Emergency Department
Services (“MEDS”), to staff medical positions at St. Elizabeth’s. A Full Time
Professional Services Agreement (“PSA”) was entered into by the Hospital and
MEDS applicable to Dr. Falconer.
According to the cross-claim filed by the St. Elizabeth's, the PSA required
MEDS to provide malpractice insurance to its employees, principally Dr.
Falconer, in the amount of $1 million “per medical incident” and $3 million “in
the annual aggregate” (Doc. 52). To that end, Dr. Falconer was insured under a
Medical Professional Liability Policy (“malpractice policy”), underwritten by
National Fire, who defended Dr. Falconer and Western in the state court action.
In this Court, National Fire seeks a declaration as to the terms of the
malpractice policy. National Fire alleges that the policy included “eroding” or
“declining” liability coverage where the policy limits are reduced by litigation
costs. The underlying state court action has settled, and the cost of defense was
$400,000. Thus, there is a dispute as to whether the $1 million “per medical
incident” outlined in the malpractice policy is in reality only $600,000 in payable
damages.

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St. Elizabeth’s later filed cross-claims against National Fire, MEDS,
Western, and Dr. Falconer for declaratory relief. In making its allegations, St.
Elizabeth’s seeks a declaratory judgment that National Fire is estopped from
contending that the National Fire Policy is a “declining balance” policy (Doc. 52).
In support of these assertions, St. Elizabeth’s highlights that National Fire, by and
through counsel for Dr. Falconer and Western, repeatedly asserted throughout the
state court action, that the policy limits at issue were $1 million, and they failed to
disclose that the policy was purportedly being reduced by the costs of the state
court defense until the eve of trial (Doc. 123). St. Elizabeth’s further argues that
National Fire is estopped from asserting that the malpractice policy includes
eroding liability coverage, in light of the production of a Certificate of Liability
Insurance, which made no such representation, and those aforementioned
discovery responses in the underlying state court action.
Currently pending is a discovery dispute between St. Elizabeth’s and
National Fire. On May 27, 2016, St. Elizabeth’s filed a motion to compel, in which
it requested that National Fire immediately produce the underwriting file with
respect to the insurance policy at issue, and the claim file pertaining to the state
court action (Doc. 106). National Fire objected to the motion (Doc. 107). The
magistrate judge later denied the motion to compel without prejudice holding that
because no finding had been made declaring that the insurance policy at issue
was ambiguous, “neither the claims file nor the underwriting file appear relevant

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to this contract dispute” (Doc. 122). Thereafter, St. Elizabeth’s appealed the
Order to this Court (Doc. 123). National Fire opposes the appeal (Doc. 128).
II.

Law

A district court may modify or reverse a decision of a magistrate judge on a
nondispositive issue upon a showing that the magistrate judge’s decision is
“clearly erroneous or contrary to law.” 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P.
72(a); SDIL-LR 73.1(a).. Accordingly, the Court will affirm Magistrate Judge
Wilkerson’s decision unless his factual findings are clearly erroneous or his legal
conclusions are contrary to law. Id. A finding is clearly erroneous when “the
reviewing court on the entire evidence is left with the definite and firm conviction
that a mistake has been committed.” Anderson v. City of Bessemer, 470 U.S. 564,
573 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364
395 (1948)); See also Weeks v. Samsung Heavy Industries Co. Ltd., 126 F.3d 926,
943 (7th Cir. 1997) (“The clear error standard means that the district court can
overturn the magistrate judge's ruling only if the district court is left with the
definite and firm conviction that a mistake has been made.”).
III.

Discussion

In its appeal, St. Elizabeth’s argues that the underwriting file and claim file
at issue are directly relevant to its claim for estoppel and to “numerous issues in
this proceeding, including, but not limited to, National Fire’s knowledge of the
state court action, its acknowledgement that its policy pertained to the claim, its
confirmation of coverage and coverage amounts, its decision not to fully and

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timely disclose the nature of the policy issues to its insured, and its
communications with various individuals and entities regarding same, all of which
resulted

in

the

continuing

misrepresentation

throughout

the

Lindemann

proceeding of the purported policy limits.” (Doc. 123, pg. 3). St. Elizabeth’s
argues, more specifically, that the underwriting file and claim file are directly
relevant to the hospital’s request for a declaration that National Fire is estopped
from contending the policy limits at issue are reduced by the state court litigation
costs.
As a federal court sitting in diversity, we apply state law to substantive
issues and federal law to procedural and evidentiary matters. Sewerage Dist. v.

Am. Int'l Specialty Lines Ins. Co., 598 F.3d 311, 316 (7th Cir. 2010) citing Bevolo
v. Carter, 447 F.3d 979, 982 (7th Cir.2006). Thus, St. Elizabeth’s is correct that
Illinois law is controlling with respect to the estoppel issues presented in this
case.
Both St. Elizabeth’s and Lee Lindemann cite Harwell v. Fireman's Fund

Ins. Co. of Ohio, 2016 IL App (1st) 152036, as modified on denial of reh'g, (Aug.
2, 2016), where the Illinois Appellate Court held that the doctrine of estoppel
attaches when an insurance company withholds information from, or misleads,
the insured party, as support for the pending appeal. In Harwell, the plaintiff, a
service technician injured on a jobsite, filed suit against the general contractor of
the site, who was insured by Fireman’s Fund Insurance Co. The insurance policy
included an endorsement requiring the general contractor to obtain certificates of

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insurance and hold harmless agreements from all subcontractors. If he “failed to
do so, then “at the time of an ‘occurrence’ involving a subcontractor,” Fireman's
Fund would pay a maximum of $50,000 for all damages and defense costs due to
any “bodily injury” “arising out of any covered acts” of the subcontractor.” Id., at ¶
4.
Similar to the facts in this case, Fireman's Fund represented to Harwell in
the answer to interrogatories that the general contractor’s insurance policy had a
liability limit of $1 million. Afterwards, Fireman's Fund changed its position on
the liability limit but did not tell Harwell, who was relying on those
representations. In reversing the trial court’s order, the Appellate Court held that
estoppel precluded Fireman’s Fund from asserting the reduction in the policy
limits, based on its failure to disclose that said position in its answers to
interrogatories. The Appellate Court elaborated further finding that:
“Estoppel is a defensive action that will “prevent a party's
disavowal of previous conduct if such repudiation would not be
responsive to the demands of justice and good conscience.” (Internal
quotation marks omitted.) Nationwide Mutual Insurance Co. v. Filos,
285 Ill.App.3d 528, 533, 220 Ill.Dec. 678, 673 N.E.2d 1099 (1996).
More specifically, it “prevents the assertion of a contractual condition
by a party who, through words or conduct, has fostered the
impression that the condition will not be asserted as a legal defense.”
Id. A party claiming the benefit of an estoppel must show reasonable
reliance on the acts of the other party, without “knowledge or
convenient means” of learning the truth. National Ben Franklin
Insurance Co. v. Davidovitch, 123 Ill.App.3d 88, 93, 78 Ill.Dec. 577,
462 N.E.2d 696 (1984). The reliance must have resulted in prejudice
or detriment. Id. Here, Fireman's Fund represented to Harwell in the
answer to interrogatories that Kipling's insurance policy had a
liability limit of $1 million. Afterwards, Fireman's Fund changed its
position on the liability limit but did not tell Harwell, who was relying
on Fireman's Fund's truthful representations while it was handling
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Kipling's defense. Harwell relied on this to his detriment and
Fireman's Fund is now preventing him from collecting his damages.
Typically, this doctrine of estoppel attaches when an insurance
company withholds information from, or misleads, the insured party.
See, e.g., RLI Insurance Co. v. Illinois National Insurance Co., 335
Ill.App.3d 633, 645, 269 Ill.Dec. 524, 781 N.E.2d 321 (2002). Here,
Kipling was the insured and Farmer's Fund informed Kipling early on
about the endorsement's effect on the liability limit. But Kipling went
out of business at some point in the litigation and in any event
seemed to play no role in either suit. It was Harwell who needed to
know about the endorsement and the liability limit to make informed
decisions about the litigation, and Harwell to whom Kipling's
attorneys—the ones paid for by Fireman's Fund—owed a duty to
supplement the interrogatory under supreme court rules. Broad
principles of equity—the desire to prevent fraud and injustice—
dictate that Fireman's Fund should not benefit from its attempted
ruse.”

Harwell, 2016 IL App (1st) 152036, ¶¶ 16&17.
Upon review of the record and applying Harwell to the facts of this case, the
Court finds that an arguable claim of estoppel has been presented, and thus the
underwriting file and claim file are, in fact, relevant to matters currently in
dispute, as alleged by St. Elizabeth’s. Under Fed. R. Civ. P. (26)(b)(1), “parties
may obtain discovery regarding any nonprivileged matter that is relevant to any
party's claim or defense and proportional to the needs of the case.” Specifically,
the underwriting and claim files are relevant to issues in this case, including but
not limited to, National Fire’s knowledge of contractually-imposed coverage
obligations, knowledge of the state court action, its acknowledgement that its
policy pertained to the claim, and its confirmation of coverage and coverage
amounts. Thus, following a review of the facts and applicable law, the Court

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respectfully disagrees with the Magistrate Judge’s ruling and finds that the claim
file and underwriting file are both relevant and discoverable.
IV.

Conclusion

With the understanding that not all discoverable evidence will necessarily
be deemed admissible, see Fed. R. Civ. P. 26(b)(1), the Court GRANTS
petitioner's appeal and REVERSES Magistrate Judge Wilkerson’s ruling (Doc.
122). The Court DIRECTS National Fire to immediately produce the underwriting
file and the claim file that were originally requested in St Elizabeth’s Requests for
Production Nos. 1 and 2.

Digitally signed by
Judge David R.
Herndon
Date: 2017.09.27
12:08:40 -05'00'

IT IS SO ORDERED.

United States District Court Judge

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