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

Filing 152

AMENDED OPINION AND ORDER: For the reasons stated herein, the Court concludes that, as a matter of law, a claim was not first asserted against MedPro for its failure to settle for policy limits before the Policy incepted on July 1, 2006. MedPro's breach of contract claim is, therefore, not based on an assertion of coverage for a claim first made against it prior to the inception of the Policy. Signed by Judge Holly A Brady on 1/22/20. (ksp)

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.
AMENDED 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 professional liability policy AISLIC issued to MedPro (the Policy). 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 claim against MedPro arising out of its
handling of a medical malpractice claim against MedPro’s insured, Dr. Benny Phillips.
This matter is set for a four-day jury trial to begin on January 28, 2020. The
outstanding issue upon which the breach of contract claim will depend is whether
Exclusion (m) of the Policy applies.
The Court previously issued an Opinion that was intended to resolve a matter of
contract interpretation related to coverage. The Court, on December 10, 2019, issued an

Opinion [ECF No. 125] concluding that, based on the undisputed facts, the claim
underlying this breach of contract action was not “first made against the Insured” before
the Policy incepted. In response to another of this Court’s orders, on January 15, 2020,
AISLIC submitted an Offer of Proof [ECF No. 145], setting forth the evidence and
testimony that it would introduce at trial on the issue of whether a claim was first made
against MedPro for its failure to settle prior to July 1, 2006. On January 16, 2020, the Court
also heard the argument of counsel for both parties as it pertained to the offer of proof
and the claims “first made” issue. Additionally, on January 20, 2020, MedPro filed its
Response to Defendant’s “Offer of Proof” [ECF No. 149].
The Court’s previous ruling on when a claim was first made was an interlocutory
order. As such, the Court has discretion to reconsider or to make a different
determination. For the sake of clarity, this Amended Opinion and Order is the controlling
decision on that issue.
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. Phillips, the
physician who performed the surgery, and the hospital and nurses who provided postsurgery care. MedPro insured Dr. Phillips for medical malpractice. MedPro twice
declined to settle the Bramlett’s case for the insurance policy limit, $200,000.
The first demand for settlement was made on December 17, 2003. A second
demand was made on March 23, 2004. The Bramletts’ demand for the policy limit was
based on a seminal Texas Supreme Court case, G.A. Stowers Furniture Co. v. American
2

Indemnity Co., 15 S.W.2d 544 (Tex. 1929), under which an insurer is liable to its insured
for any amounts 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.
In late August 2005, a jury awarded a $14 million verdict in favor of the Bramletts.
In October 2005, the trial court entered a judgment in excess of the statutory cap. While
the case was on appeal, MedPro reported to AISLIC that there was a potential claim
against it based on Texas law. That was in June 2007, just before the Policy was set to
expire. 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 ruled that a statutory cap on liability
damages applied to limit Dr. Phillips’ exposure. The Texas Supreme Court, for the first
time, also reconciled the statutory Stowers exception to the cap by holding that the Stowers
exception was similar to a right to equitable subrogation. Phillips v. Bramlett, 288 S.W.3d
876, 882 (Tex. 2009). In other words, it put “the injured third party in the shoes of the
insured to the extent the cap eliminates the insured’s incentive to enforce the insurer’s
duty to settle with reasonable care.” Id.1
As a result, 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

This Stowers Exception claim cannot function like an equitable subrogation claim because
there will be instances in which there is no claim for the injured third party and the insured
physician to “share.” For example, Dr. Phillips could only pursue a traditional Stowers claim up
to the cap. Any recovery by a third party for damages above the cap must come as a result of a
direct action. See id. (“When insurance coverage is above the cap, . . . the physician is fully
protected, and only the injured third party has incentive to pursue the statutory Stowers
exception.”).
1

3

Supreme Court decision, Mrs. Bramlett’s family sued MedPro for the excess verdict (the
Bramlett Direct Action). 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 the Bramletts, leading MedPro
to sue AISLIC for breach of contract.
ANALYSIS
“Insurance contracts are governed by the same rules of construction as other
contracts, and the proper interpretation of an insurance policy, even if it is ambiguous, is
generally a question of law appropriate for summary judgment.” Wellpoint, Inc. v. Nat’l
Union Fire Ins. Co., 952 N.E.2d 254, 258 (Ind. Ct. App. 2011); see also Bar Plan Mut. Ins. Co.
v. Likes Law Office, LLC, 44 N.E.3d 1279, 1285 (Ind. Ct. App. 2015) (stating that
interpretation and construction of contract provisions are questions of law). When the
facts of the case are not in dispute, what constitutes proper notice under a claims-made
policy is a question of law for the court to decide. Id.; see also Imperial Cas. & Indem. Co. v.
Chi. Hous. Auth., 987 F.2d 459, 461 (7th Cir. 1993) (“If the facts surrounding notice are not
disputed, a question of law is presented that may be answered on summary judgment.”).
Courts “review the contract as a whole, attempting to ascertain the parties’ intent
and making every attempt to construe the contract’s language so as not to render any
words, phrases, or terms ineffective or meaningless.” Bar Plan Mut., 44 N.E.3d at 1285
(internal quotation marks omitted). When terms are clear and unambiguous, the court
applies the plain and ordinary meaning of the terms and enforces the contract according
to its terms. Id.
4

“Under Indiana law, an insurance policy is ambiguous if reasonable persons may
honestly differ as to the meaning of the policy language.” Eli Lilly & Co. v. Home Ins. Co.,
482 N.E.2d 467, 470 (Ind. 1985). If there is an ambiguity in the contract, its terms should
be interpreted most favorably to the insured and “to further the policy’s basic purpose of
indemnity.” Id.
A.

Relevant Policy Language
MedPro’s Policy with AISLIC stated, 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 and occurs solely in the
rendering of or failure to render Professional Services.

(Policy, ECF No. 148-1 at 4.) With respect to any Wrongful Act insured according to the
Professional Liability provision, AISLIC would “have the right but not the duty to
assume the defense of any claim or suit against the Insured.” (Id.)

5

The Special Provisions section of the Policy included a provision, titled Loss
Provisions, that required MedPro, “as a condition precedent to the availability of the
rights provided under this policy” to “give written notice to the company as soon as
practicable during the Policy Period . . . of any claim made against the Insured.” (ECF No.
148-1 at 8.) However, a Special Reporting Clause, amended by Endorsement No. 16
provided:
If during the Policy Period . . . . , the CFO, General Counsel or CEO shall
become aware of any occurrence which may reasonably be expected to give
rise to a claim against the Insured for a Wrongful Act which first occurs
during or prior to the Policy Period, and provided the Insured gives written
notice to the Company during the Policy Period . . . of the nature of the
occurrence and specifics of the possible Wrongful Act, any claim which is
subsequently made against the Insured arising out of such Wrongful Act
shall be treated as a claim made during the Policy Period.
ALL OTHER TERMS, CONDITIONS, AND EXCLUSIONS SHALL
REMAIN THE SAME.
(ECF No. 148-1 at 28.)
The Policy contained an exclusion (Exclusion (m)), which stated that the Policy did
not apply:
to any claim arising out of any Wrongful Act occurring prior to the
inception date of the first Insurance Company’s Professional Liability
Insurance policy . . . , if on such first inception date any Insured knew or
could have reasonably foreseen that such Wrongful Act could lead to a
claim or suit.
(ECF No. 148-1 at 6). Wrongful Act was defined as “any breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done or wrongfully
attempted.” (ECF No. 148-1 at 5.)

6

B.

Timing of MedPro’s Claim
Neither party disputes that the Bramlett Direct Action satisfies the definition of a

claim or that the Wrongful Act at issue is the rejection of the two Stowers settlement
demands. AISLIC, however, argues that there is no coverage for this extra-contractual
damages claim because it was not “first made” during the Policy period, July 1, 2006, to
July 1, 2007. Rather, AISLIC argues, the Bramlett Direct Action relates back to claims first
made against MedPro prior to inception of the 2006 AISLIC Policy.
Claim is not defined in the Policy. That does not mean that the term is ambiguous,
as “[t]he term claim is one of the commonest terms in the law.” Ins. Co. of Am. v. Dillon,
Hardamon & Cohen, 725 F. Supp. 1461, 1468 (N.D. Ind. 1988). In a “claims made” policy,
coverage is linked to the claim and notice rather than to the date of the tort injury. Paint
Shuttle, Inc. v. Cont’l Cas. Co., 733 N.E.2d 513, 522 (Ind. Ct. App. 2000). In a claims-made
insurance policy, the term “claim” is universally understood to mean a “demand for
money or property or some specific remedy.” Dillon, 725 F. Supp. at 1469; see also 3 Jeffrey
E. Thomas, New Appleman on Insurance Law Library Edition § 16.07[5][b] (2014)
(explaining that where the term “claim” is undefined in a claims-made policy, it “has
generally been defined as a demand for money or services” and that a “frequently-quoted
definition of ‘claim’” is “an assertion of a legal right”) (internal quotation marks omitted).
AISLIC has identified several developments in Dr. Phillips’ medical malpractice
case that, it contends, qualify as a claim. It first identifies a December 2004 letter from Dr.
Phillips’ personal counsel, Neville Manning, demanding that MedPro engage in
settlement negotiations with the Bramletts and settle the underlying medical malpractice
7

action on behalf of its insured for amounts in excess of the policy limits and, thus,
eliminate the need for trial. Manning stated his position that MedPro was liable for any
amounts that a jury found in excess of the policy.
AISLIC also identifies a claim from the Bramletts’ attorney, Alex Klein, during
mediation in February 2005. Klein argued that MedPro was liable for extra-contractual
damages above Dr. Phillips’ policy limits because it wrongfully rejected the two previous
Stowers demands. Klein rejected MedPro’s $200,000 policy limits settlement offer and
demanded $2.3 million.
After this mediation, Manning demanded that MedPro settle the malpractice claim
for $2.3 million, the Bramletts’ lowest present settlement demand. He accused MedPro of
exposing Dr. Phillips to certain financial disaster and noted that MedPro had, in essence,
become the excess insurer. Manning concluded that MedPro’s conduct was in bad faith.
His letter was “an additional demand upon Medical Protective to negotiate in good faith
with [the Bramletts] regarding their demands for settlement in excess of the policy
limits.” (ECF No. 145-2 at 3.)
In September 2005, after a jury returned an excess verdict, a different attorney for
Dr. Phillips, John Simpson, accused MedPro of breaching a duty to its insured in rejecting
the Stowers demands. He explained that the judgment was likely to exceed the limits of
Dr. Phillips’ policy, putting his assets at risk. He also explained that if Dr. Phillips
pursued a Stowers case, he would be entitled to common law damages, which would
exceed the amount of any judgment. Simpson demanded that MedPro protect Dr. Phillips

8

from liability. In doing so, it would avoid a Stowers suit. If MedPro chose not to indemnify
or protect Dr. Phillips, he would explore the option of assigning any claims he may have.
Around this same time, Klein demanded $6.9 million, noting that the judgment on
the jury verdict provided that the statutory cap on damages would not apply to limit
MedPro’s Stowers liability.
The problem with defining any of the above demands as a claim under the Policy
is that they do not implicate AISLIC’s Policy with MedPro. The demands described above
were for damages based upon Dr. Phillips’ alleged malpractice, not for MedPro’s
wrongdoing. Any sums that would have been paid in response to what Dr. Phillips did,
and demands made of Dr. Phillips (and by extension his medical malpractice insurer),
are not risks covered by the AISLIC Policy. The Professional Liability coverage provision
of the Policy only granted MedPro coverage for “sums which [MedPro] shall become
legally obligated to pay as damages resulting from any claim or claims . . . for any
Wrongful Act of [MedPro].” The Court finds that under the plain wording of the Policy,
considered as a whole, “a claim that a wrongful act has occurred is not the same thing as
a claim for payment on account of a wrongful act.” MGIC Indem. Corp. v. Home State Sav.
Ass’n, 797 F.2d 285, 288 (6th Cir. 1986). (“The existence of claims ‘of’ wrongful acts does
not of itself mean that claims were made against the officials ‘for’ the wrongful acts.”)
The agreement, as we read it, is speaking not of a claim that wrongdoing
occurred, but a claim for some discrete amount of money owed to the
claimant on account of the alleged wrongdoing. In context, it seems to us,
the only kind of “claim or claims” that could trigger the insurer’s obligation
to pay would be a demand for payment of some amount of money.
Id.
9

This distinction, although subtle on paper, has drastically different consequences
for insurance coverage. AISLIC does not insure Dr. Phillips. Any discrete amounts
requested of Dr. Phillips and in settlement of his wrongdoing, even if agreed to by
MedPro out of concern of future potential liability arising out of a claim for its
wrongdoing in the handling of the medical malpractice litigation, are not claims alleging
damages payable under the Policy. That MedPro’s actions gave Dr. Phillips and the
Bramletts leverage to argue that it was in MedPro’s best interest to settle the claims being
made against Dr. Phillips did not convert those settlement demands into claims “for a
Wrongful Act” against MedPro. It is not surprising that Dr. Phillips or the Bramletts
would use this threat of future action to attempt to obtain a more favorable result in their
current litigation, without the need to file legal action later down the road.2 Nothing in
the Policy suggests that AISLIC would have had a right to take over and defend against
the demands being made by Dr. Phillips and the Bramletts that MedPro settle the medical
malpractice claim for more than Dr. Phillips’ policy limits.
The post-verdict, pre-judgment, letter from Attorney Simpson, dated September
20, 2005, posed two options to MedPro: (1) protect Dr. Phillips from any excess judgment

AISLIC’s Offer of Proof includes testimony that witnesses would offer on the “claims
first made issue.” Much of that testimony explains how MedPro could become responsible for
payment of the excess verdict. Other testimony challenges the wisdom of MedPro’s actions in its
representation of Dr. Phillips throughout the medical malpractice claim. The wisdom of MedPro’s
actions are, of course, not indicative of when a claim was asserted against it. That MedPro’s own
actions during the handling of the litigation on behalf of its insured permitted the Bramletts, after
a change in the law, to sue MedPro to recover the amount of the verdict that exceeded the cap
does not alter the timing of that claim.
2

10

and continue to defend Dr. Phillips through appeal, or (2) refuse to defend and indemnify
Dr. Phillips and risk an assignment of rights to the Bramletts so they could sue MedPro
for the excess verdict. MedPro chose the first option. Accordingly, Dr. Phillips did not
pursue any other contractual or extra-contractual remedies against MedPro.
This letter is not a claim for purposes of the Policy. It highlights how a claim might
arise if MedPro refused to defend and indemnify Dr. Phillips, and judgment was entered
against him. MedPro’s response to indemnify Dr. Phillips eliminated the potential that
he could make such a claim or assign his rights to the Bramletts. No matter how much
MedPro’s actions or the circumstances that developed in the medical malpractice claim
against Dr. Phillips set up a scenario that could lead to a claim against MedPro for its
failure to settle within policy limits when it had the opportunity, it did not convert the
settlement demands in that action into claims against MedPro under its professional
liability policy. Neither did it convert any subsequent payments in settlement of the
judgment against Dr. Phillips into a claim against MedPro.
In the end, the Bramletts had no ability to pursue a direct action against MedPro
for damages arising out of its failure to settle within policy limits until 2009, when the
Texas Supreme Court created the right. Any expectations that the Bramletts had during
the pendency of the wrongful death malpractice suit against Dr. Phillips were
expectations of a future claim.
MedPro was only required to give AISLIC notice of claims made against it. A
separate provision, Exclusion (m), would bar coverage if the claim was one that arose out
of a Wrongful Act that MedPro “knew or could have reasonably foreseen . . . could lead
11

to a claim or suit” when it first obtained the Policy. (Policy, Exclusion (m), ECF No. 1481 at 6.)
C.

Special Provision 1, Limits of Liability
AISLIC argues that its interpretation of a claim is supported by Special Provision

1, titled “Limits of Liability.” That provision provides:
The limit of liability stated in the Declarations as applicable to “Each
Wrongful Act or series of continuous, repeated or interrelated Wrongful
Acts” is the limit of the Company’s liability for all amounts payable
hereunder in settlement or satisfaction of claims, judgments or awards and
Defense Costs, Charges, and Expenses arising out of the same Wrongful Act
or series of continuous, repeated or interrelated Wrongful Acts, without
regard to the number of Insureds, claims demands, suits or proceedings or
claimants. If additional claims are subsequently made which arise out of
the same Wrongful Act or series of continuous, repeated or interrelated
Wrongful Acts as claims already made and reported to the Company, all
such claims, whenever made, shall be considered first made within the
Policy Period . . . in which the earliest claims arising out of such Wrongful
Act or series of continuous, repeated or interrelated Wrongful Acts was first
made and reported to the Company, and all such claims shall be subject to
one such limit of liability.
(ECF No. 148-1 at 7.) MedPro argues that this is merely an anti-stacking provision, which
has no bearing on whether separate claims are considered a “single claim.”
A plain reading of the Limits of Liability provision reveals that its purpose is to
limit coverage to $5 million for each Wrongful Act or series of continuous, repeated or
interrelated Wrongful Acts, no matter how many claims arise out of that Wrongful Act.
The provision has no implication on whether the demands for settlement or
indemnification in Dr. Phillips medical malpractice litigation were “claims” against
MedPro for which the Policy would afford insurance coverage. Rather, the provision’s
inclusion of language on timing is intended to determine which policy applies if multiple
12

claims arising out of one Wrongful Act or series of continuous, repeated or interrelated
Wrongful Acts span more than one policy period. “[A]dditional claims” made
subsequent to earlier claims that were “already made and reported” are treated as if they
were made in the same reporting period as the earliest claims.
CONCLUSION
For the reasons stated above, the Court concludes that, as a matter of law, a claim
was not first asserted against MedPro for its failure to settle for policy limits before the
Policy incepted on July 1, 2006. MedPro’s breach of contract claim is, therefore, not based
on an assertion of coverage for a claim first made against it prior to the inception of the
Policy.
SO ORDERED on January 22, 2020.
s/ Holly A. Brady
JUDGE HOLLY A. BRADY
UNITED STATES DISTRICT COURT

13