Medical Protective Company of Fort Wayne Indiana The v. American International Specialty Lines Insurance Company

Filing 111

OPINION AND ORDER: Having considered the Seventh Circuit's opinion and having considered the remaining issues in the parties' summary judgment submissions, the Court concludes that this matter should proceed to trial on MedPro's Complaint, AISLIC's Amended Answer, and any Affirmative Defenses AISLIC intends to pursue, save the Eighth (Known Loss Doctrine) and Ninth (Recission) Affirmative Defenses. Signed by Judge Holly A Brady on 07/29/2019. (jat)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
THE MEDICAL PROTECTIVE
COMPANY OF FORT WAYNE
INDIANA,
Plaintiff,
v.

CAUSE NO.: 1:13-CV-357-HAB

AMERICAN INTERNATIONAL
SPECIALTY LINES INSURANCE
COMPANY,
Defendant.
OPINION AND ORDER
In this litigation, Plaintiff Medical Protective Company of Fort Wayne, Indiana
(MedPro), has sued Defendant American International Specialty Insurance Company
(AISLIC), now known as AIG Specialty Insurance Company, for breach of the terms of a
2006 policy AISLIC issued to MedPro. MedPro alleges that AISLIC breached the policy
when it refused to cover MedPro’s extra-contractual liability and eventual settlement of
a third party’s bad faith claim against MedPro.
Both parties moved for summary judgment [ECF Nos. 68 & 69]. MedPro sought
partial summary judgment on three of AISLIC’s affirmative defenses: prior known
wrongful acts exclusion, known loss doctrine, and rescission. AISLIC moved for
judgment as a matter of law on the merits of MedPro’s claim. Specifically, AISLIC sought
a declaration that: (1) there is no coverage for the extra-contractual damages claim

because the claim was not first made during the 2006 AISLIC policy period; and (2)
coverage is precluded under exclusion M of the policy.
In March 2018, the district court granted summary judgment in favor of AISLIC,
and the Clerk entered judgment. The court found that Exclusion M barred coverage of
the extra-contractual liability claim. MedPro filed an appeal and was successful, leading
to a remand of the case back to this Court.1 The purpose of this Opinion and Order is to
resolve any outstanding issues related to the previous summary judgment motions
before proceeding further in this cause. To put the case in context, the Court will briefly
recite some of the pertinent background facts, understanding that a more comprehensive
version of the facts can be found in the district court’s March 2018 opinion [ECF No. 85],
and the Seventh Circuit’s December 18, 2018, decision, Med. Protective Co. of Fort Wayne ,
Ind. v. Am. Int’l Specialty Lines Ins. Co., 911 F.3d 438 (7th Cir. 2018).
BACKGROUND
In 2002, thirty-six-year-old Vicki Bramlett died from complications following
routine surgery she underwent in Texas. Mrs. Bramlett’s family sued Dr. Benny Phillips,
the physician who performed the surgery, and the hospital and nurses who provide postsurgery care. MedPro was Dr. Phillips’s malpractice insurer. MedPro twice declined to
settle the case for $200,000, Dr. Phillips’s insurance policy limit. The Bramletts’ demand
was based on a seminal Texas Supreme Court case, G.A. Stowers Furniture Co. v. American
Indemnity Co., 15 S.W.2d 544 (Tex. 1929), under which an insurer is liable for any amounts

This case was reassigned to the undersigned on May 1, 2019, for all further proceedings
[ECF No. 104].
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in excess of policy limits if it wrongfully rejects a plaintiff’s demand within the policy
limit that an ordinarily prudent insurer would have accepted. At the time the Bramletts
made the Stowers demands, the hospital and its nurses had already settled with the
Bramletts for $2.3 million.
At trial, a jury awarded a $14 million verdict against Dr. Phillips. While the case
was on appeal, MedPro reported to AISLIC that there was a potential claim against it
based on Texas law. AISLIC responded to the report, stating that no bad faith claim had
yet been made against MedPro, and that it was reserving its rights. Later, in 2009, the
Supreme Court of Texas capped Dr. Phillips’s liability. The court, for the first time, also
held that the Bramletts could pursue a direct claim against MedPro for the difference
between the jury verdict and the statutory cap. Three days after the Texas Supreme Court
decision, Mrs. Bramlett’s family sued MedPro for the excess verdict. MedPro settled the
claim. MedPro also settled with Dr. Phillips pursuant to a previous agreement to
indemnify him.
AISLIC declined to cover MedPro’s settlement with Mrs. Bramlett’s family,
leading MedPro to sue AISLIC for breach of contract.
ANALYSIS
A.

Timing of the Claim
One of the arguments that AISLIC advanced in support of summary judgment was

that the 2006 AISLIC policy did not cover the extra-contractual damages claim against
MedPro because the claim was first made against MedPro before the policy incepted on
July 1, 2006. The district court declined to address this argument because it found that
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Exclusion M barred coverage of the Bramletts’ extra-contractual liability claim, and
granted summary judgment in favor of AISLIC on that ground. When MedPro filed an
appeal, AISLIC again advanced the timing argument, as well as others.
The argument is as follows: in December 2004, MedPro’s insured, Dr. Phillips,
through his counsel: (1) accused MedPro of wrongfully rejecting two Stowers demands to
settle the wrongful death lawsuit for Dr. Phillips’s $200,000 policy limits; (2) argued that
MedPro’s handling of the matter made it liable for extra-contractual damages; and (3)
demanded that MedPro settle the lawsuit, even if that meant paying more than Dr.
Phillips’s policy limits. This claim was asserted against MedPro thereafter on multiple
occasions by counsel for both Dr. Phillips as well as the Bramletts.
AISLIC argued that, under these facts, a reasonable juror could reach only one
conclusion: that the demand for extra-contractual damages against MedPro was a claim
first made against MedPro prior to inception of the 2006 AISLIC policy, and therefore
was not a claim “first” made against MedPro between July 1, 2006, and July 1, 2007.2 It

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The policy provided, in relevant part:

NOTICE: THIS IS A CLAIMS MADE FORM. EXCEPT TO SUCH EXTENT AS MAY
OTHERWISE BE PROVIDED HEREIN, THE COVERAGE OF THIS POLICY IS
LIMITED GENERALLY TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE
FIRST MADE AGAINST THE INSURED AND REPORTED IN WRITING TO THE
COMPANY WHILE THE POLICY IS IN FORCE . . . .
****
INSURING AGREEMENTS
1.

PROFESSIONAL LIABILITY

To pay on behalf of the Insured all sums which the Insured shall become legally obligated
to pay as damages resulting from any claim or claims first made against the Insured and
reported in writing to the Company during the Policy Period for any Wrongful Act of the
Insured or of any other person for whose actions the Insured is legally responsible, but
only if such Wrongful Act occurs prior to the end of the Policy Period . . . .

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argued that these same facts established that coverage is excluded under Exclusion M,
which bars coverage for a claim for a Wrongful Act if any Insured, prior to purchasing
insurance, knew or could have foreseen that such wrongful act could result in a claim or
suit. AISLIC also asserted that Indiana’s known loss doctrine precluded coverage.
The Court of Appeals, interpreting Exclusion M, agreed that the Bramletts’ claim
was foreseeable to MedPro. However, the question of foreseeability would only be
reached if the trier of fact first found that MedPro committed a “Wrongful Act” by failing
to settle with the Bramletts. On that issue, the Court of Appeals disagreed with the district
court’s ruling and determined that a genuine issue of fact existed. Med. Protective Co., 911
F.3d at 447 (“MedPro argues that it handled the Bramletts’ Stowers demands
appropriately and that its rejection of the demands was not a Wrongful Act. A reasonable
factfinder could agree.”). The Court also rejected AISLIC’s alternative argument under
Indiana’s known loss doctrine.
When MedPro first contracted with AISLIC, the Bramlett-Phillips trial had
not yet occurred, and no adverse or excess verdict had been rendered.
Additionally, as we have discussed, it was unclear prior to June 30, 2005, as
it remains today, whether MedPro is liable under Stowers. For these reasons,
we cannot say that MedPro was facing a “virtually inevitable” loss prior to
contracting with AISLIC, and therefore, the known loss doctrine does not
apply.
Id. at 449.
This Court concludes that the Seventh Circuit’s decision leaves no room for the
conclusion that a reasonable juror would be required to conclude that MedPro submitted
a claim before the policy was incepted on July 1, 2006. AISLIC’s arguments on this matter
were squarely before the Court of Appeals, yet the court proceeded directly to a
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discussion of the Exclusion. AISLIC itself recognizes that whether a policy’s insuring
agreement generally provides coverage for a claim is a threshold issue that must be
determined before exclusions are considered. The Court of Appeals would have surely
recognized the same, thus giving its silence on the issue the same force as a rejection of
it.
Additionally, an appellate court can affirm a district court’s decision on any basis
that appears in the record, Marcus & Millichap Inv. Servs. of Chi. v. Sekulovski, 639 F.3d 301,
312 (7th Cir. 2011), yet the Seventh Circuit remanded this case “for further proceedings
consistent with this opinion,” MedPro, 911 F.3d at 449. Had AISLIC’s argument been
meritorious, there would have been no basis to remand to this Court for the litigation to
proceed.
Additionally, this Court’s own consideration of the argument and the summary
judgment record leads it to conclude that AISLIC is not entitled to summary judgment.
The Court has no qualms with AISLIC’s statement that, in a claims-made insurance
policy, the term “claim” is universally understood to mean a “demand for money or
property or some specific remedy.” Ins. Co. of Am. v. Dillon, Hardamon & Cohen, 725 F.
Supp. 1461, 1469 (N.D. Ind. 1988). However, the Court cannot agree that assertions by
MedPro’s insured, Dr. Phillips, plainly constituted a claim for which MedPro is seeking
coverage under the policy. Nor were the oral settlement demands from the Bramletts’
attorney arising out of their suit against Dr. Phillips claims for which MedPro sought
policy coverage.

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As this Court previously concluded, and the Court of Appeals affirmed, actions
prior to June 30, 2005, should have alerted MedPro to the fact that a claim could be
coming. However, the evidence does not establish that these actions constituted the
claim. The Court is mindful that the coverage MedPro seeks under AISLIC’s policy
stems—not from any purported claim made by Dr. Phillips but—from the damages
MedPro incurred when it settled the Bramletts’ claim against MedPro in 2013.
The record contains sufficient evidence from which a finder of fact could conclude
that MedPro’s claim for breach of the policy is not based on a coverage request that is
related to a “claim” first lodged against MedPro before the policy was incepted on July
1, 2006.
B.

Rescission
An insured’s material misrepresentation or omission of fact in the procurement of

insurance can render the insured’s coverage “voidable at the insurance company’s
option” because there can be no “meeting of the minds” as to the insured risk. Foster v.
Auto-Owners Ins., Co., 703 N.E.2d 657, 659 (Ind. 1998); see also Colonial Penn Ins. Co. v.
Guzorek, 690 N.E.2d 664, 672 (Ind. 1997). MedPro contends that AISLIC has no evidence
to support its affirmative defense of rescission.
AISLIC’s defense is based on the assertion that, during the underwriting process,
MedPro provided AISLIC with a five-year loss history that did not disclose the extracontractual damages claim previously made. The reference to an extra-contractual
damages claim is a reference to the same demands from Dr. Phillips and the Bramletts
that AISLIC cited as proof that the claim against MedPro was first made before the 2006
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policy incepted. But the Court has already found that AISLIC has not established that
these were claims.
Further, the evidence is that AISLIC struck questions related to potential claims,
allegations, or circumstances during the 2006 renewal process because they were not
relevant. See Med. Protective Co., 911 F.3d at 444, 449 n7. Nothing in the underwriting file
reveals a discrepancy in MedPro’s applications, or that it failed to answer questions posed
to it that touched on these matters. An insurance company issuing a claims-made policy
to a new insured incurs the risk of covering potential claims “absent protective language
in the policy application.” Nat’l Union Fire Ins. Co. v. Cont’l Ill. Corp., 673 F. Supp. 300, 304
(N.D. Ill. 1987).
Summary judgment is the moment in litigation where the non-moving party is
required to marshal and present the court with evidence on which a reasonable jury could
rely to find in his favor. Goodman v. Nat’l Sec. Agency, Inc., 621 F.3d 651, 654 (7th Cir. 2010).
“A district court should deny a motion for summary judgment only when the nonmoving party presents admissible evidence that creates a genuine issue of material fact.”
Luster v. Ill. Dep’t of Corrs., 652 F.3d 726, 731 (7th Cir. 2011) (first citing United States v.
5443 Suffield Terrace, 607 F.3d 504, 510 (7th Cir. 2010); then citing Swearnigen–El v. Cook
Cty. Sheriff’s Dep’t, 602 F.3d 852, 859 (7th Cir. 2010)). Material facts are those that are
outcome determinative under the applicable law. Smith v. Severn, 129 F.3d 419, 427 (7th
Cir. 1997). AISLIC has not presented evidence from which a reasonable finder of fact
could rely to find that it has a right to rescind the policy. Additionally, AISLIC has not
followed the basic rule that a party seeking rescission must “first make a tender of the
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full amount of premiums paid under the policy.” Am. Std. Ins. Co. v. Durham, 403 N.E.2d
879, 881 (Ind. Ct. App. 1980); see also Short v. N. Pointe Ins. Co., No. 1:11-cv-00545-SEBMJD, 2013 WL 1828024, at *7–8 (Apr. 29, 2013).
CONCLUSION
Having considered the Seventh Circuit’s opinion and having considered the
remaining issues in the parties’ summary judgment submissions, the Court concludes
that this matter should proceed to trial on MedPro’s Complaint, AISLIC’s Amended
Answer, and any Affirmative Defenses AISLIC intends to pursue, save the Eighth
(Known Loss Doctrine) and Ninth (Rescission) Affirmative Defenses.
SO ORDERED on July 29, 2019.
s/ Holly A. Brady
JUDGE HOLLY A. BRADY
UNITED STATES DISTRICT COURT

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