Robertson v. Medical Assurance Company Inc The

Filing 41

OPINION AND ORDER: Court TAKES UNDER ADVISEMENT 26 Motion to Dismiss, as to Count I, and DENIES 26 Motion to Dismiss, as to Count II. The Court CERTIFIES the question as stated in the Opinion and Order to the Indiana Supreme Court. Signed by Judge Jon E DeGuilio on 6/5/2014. cc: Indiana Supreme Court with documents (tc)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
STEPHEN W. ROBERTSON,
COMMISSIONER OF THE INDIANA
DEPARTMENT OF INSURANCE AND
ADMINISTRATOR OF THE
PATIENT’S COMPENSATION FUND,
Plaintiff,
v.
THE MEDICAL ASSURANCE
COMPANY, INC. n/k/a
PROASSURANCE INDEMNITY
COMPANY, INC.,
Defendant.

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Case No. 2:13-CV-107 JD

OPINION AND ORDER
This is an insurance dispute between Indiana’s Patient’s Compensation Fund, through its
administrator, Stephen W. Robertson, (the “Fund”), and the Medical Assurance Company, Inc.,
(“Medical Assurance”), which previously insured a physician whose medical malpractice
spawned over 350 malpractice claims. Those malpractice claims have been litigated extensively
in the Indiana state courts for nearly ten years, and the interested parties have litigated for nearly
as long in federal court over who is responsible for the resulting damages. In this most recent
chapter in the dispute, the Fund has filed a two-count complaint against Medical Assurance. The
first count asserts that Medical Assurance breached its duty of good faith to its insureds in
handling and defending the medical malpractice claims. The Fund argues that it is equitably
subrogated to the insureds’ common law bad faith claim against Medical Assurance because it
paid those settlements on his behalf. The second count arises out of Medical Assurance’s alleged
failure to pay its share of judgments entered in favor of certain of the malpractice claimants

against Weinberger. Pursuant to the Indiana Medical Malpractice Act, the Fund paid those
amounts to the claimants, and is therefore subrogated to the claimants’ rights to collect against
Medical Assurance. Ind. Code § 34-18-15-4.
Though it had answered the initial complaint, which only raised the bad faith claim,
Medical Assurance has now moved to dismiss both the bad faith and statutory subrogation
counts of the Fund’s First Amended Complaint. [DE 26]. That motion has been fully briefed,
accompanied by extensive supplemental submissions. [DE 27–34, 39, 40]. In an April 3, 2014
order, the Court directed the parties to file briefs stating their position as to whether the Court
should certify certain questions to the Indiana Supreme Court, given the lack of applicable
Indiana authority on those issues, [DE 35], and the parties have filed those submissions as well.
[DE 36, 37]. For the reasons that follow, Medical Assurance’s motion to dismiss is denied as to
Count II. The Court takes the motion under advisement as to Count I, and certifies a question to
the Indiana Supreme Court.
I. FACTUAL BACKGROUND
Mark S. Weinberger, M.D., was an otolaryngologist—an ear, nose, and throat doctor—
who practiced in Merrillville, Indiana until September 2004. [DE 25 ¶ 5]. He was the principal
owner of Mark Weinberger, M.D., P.C.; the Merrillville Center for Advanced Surgery, LLC; and
the Nose and Sinus Center, LLC. [Id.]. Weinberger and each of those entities were insured by
Medical Assurance, now known as ProAssurance Indemnity Company, Inc. [Id. ¶ 19]. The
policies carried coverage in the amounts required to establish financial responsibility under the
Indiana Medical Malpractice Act, which were $100,000 per occurrence and $300,000 in the
annual aggregate until July 1, 1999, after which they were $250,000 per occurrence and
$750,000 in the annual aggregate. [Id.]. Medical Assurance in turn submitted certificates of
insurance and applicable surcharges to the Fund in order to bring the insureds within the
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protections of the Indiana Medical Malpractice Act, Ind. [Id. ¶ 20]. Those protections include a
cap on liability to the health care providers of $250,000 per occurrence, with the Fund paying
amounts in excess of that cap, up to its own statutory limit. [Id. ¶¶ 2, 20 n.1].
Unfortunately for all parties involved, Weinberger’s practice was rife with malpractice,
resulting in over 350 malpractice claims being filed against him. [Id. ¶ 21]. Weinberger
ultimately fled to Europe in September 2004, and his whereabouts remained unknown for over
five years until he was apprehended and returned to the United States to face prosecution. [Id.
¶¶ 25, 27]. Medical Assurance undertook Weinberger’s defense in the malpractice actions,
pursuant to its policies. [Id. ¶ 23]. The Fund alleges, however, that although potential coverage
issues should have been clear to Medical Assurance from the very beginning, and certainly upon
Weinberger’s departure, Medical Assurance failed to set up a screen between personnel
managing the claims defense and personnel managing the coverage issues. [Id. ¶ 29]. Instead,
those personnel shared attorney–client information and work product through at least February
2011. [Id.]. When Weinberger returned to the United States in February 2010, Medical
Assurance purported to erect a screen between claims and coverage personnel, but it assigned
one of the individuals who had worked on the defense side for five years to the coverage side,
where he had no restrictions on his access to claims information, and he continued to
communicate with claims personnel about work product and attorney–client information
associated with the defense of the claims through at least February 2011. [Id. ¶ 31].
The Fund further alleges that Medical Assurance failed to reserve its rights under the
policies within a reasonable time, did not send reservation of rights letters in some cases until
July 2010, and did not send them at all in some cases. [Id. ¶ 40]. It also failed to advise the
insureds of coverage issues, failed to advise them of a conflict of interest among the insureds

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who were represented by common counsel, failed to warn the insureds that their failure to
cooperate in their defense could lead to a loss of coverage, and waited almost four years to file
its declaratory judgment action relative to its coverage. [Id.]. The Fund also alleges various bad
faith conduct relative to the defense of the claims itself, including that Medical Assurance took
Weinberger’s deposition while criminal charges were still pending against him, knowing that he
would plead the Fifth Amendment, that it failed to adequately investigate the claims and attempt
to settle them, that it failed to seek copies of relevant records or access to former employees of
Weinberger, and that it never informed or failed to timely inform the insureds that policy limits
were demanded in some of the malpractice claims. [Id.].
At least six of the malpractice claims proceeded to trial by jury, and all resulted in
judgments against Weinberger and his entities. [Id. ¶ 35]. Two of those judgments exceeded
Medical Assurance’s policy limits, as one was for $390,000, and the other was for $1,250,000
plus $9,000,000 in punitive damages. [Id.]. Weinberger and the Fund then proceeded to settle
their respective liability to all of the claimants, some individually and some in large groups. [Id.
¶¶ 42–53]. Medical Assurance only joined in one of the group settlements, however, and
declined to pay its alleged share of the remaining judgments and settlements. [Id. ¶¶ 37, 38, 48,
52, 53]. Thus, pursuant to its obligation under the Medical Malpractice Act, the Fund paid all of
the amounts allegedly owed by Medical Assurance, which forms the basis for its statutory
subrogation claim in Count II. [Id. ¶¶ 38, 49].
The Fund filed its Complaint in this matter on March 22, 2013, and subsequently filed its
First Amended Complaint on September 25, 2013. [DE 1, 25]. As previously indicated, the First
Amended Complaint contains two counts. Count I asserts that Medical Assurance violated its
duty of good faith to its insureds in a variety of ways, leading to an increase in the amount by

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which the judgments and settlements exceeded its coverage limits. Though Medical Assurance
owed this duty of good faith to its insureds, the Fund claims the right to assert this action under
the doctrine of equitable subrogation, since it has paid all of those amounts to the claimants on
the insureds’ behalf. Count II is limited to the amounts that the Fund contends Medical
Assurance owed to the claimants under its policies but failed to pay. Because the Fund paid those
amounts upon Medical Assurance’s failure to do so, it is statutorily subrogated to the claimants’
rights against Medical Assurance.
II. STANDARD OF REVIEW
Rule 12(b)(6) authorizes dismissal of a complaint when it fails to set forth a claim upon
which relief can be granted. Generally speaking, when considering a Rule 12(b)(6) motion to
dismiss, courts must inquire whether the complaint satisfies the “notice-pleading” standard.
Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 934 (7th Cir. 2012). The noticepleading standard requires that a complaint provide a “short and plain statement of the claim
showing that the pleader is entitled to relief,” which is sufficient to provide “fair notice” of the
claim and its basis. Id. (citing Fed. R. Civ. P. 8(a)(2)); Maddox v. Love, 655 F.3d 709, 718 (7th
Cir. 2011) (citations omitted); see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting
Fed. R. Civ. P. 8(a)(2)). In determining the sufficiency of a claim, the court construes the
complaint in the light most favorable to the nonmoving party, accepts all well-pleaded facts as
true, and draws all inferences in the nonmoving party’s favor. Reynolds v. CB Sports Bar, Inc.,
623 F.3d 1143, 1146 (7th Cir. 2010) (citation omitted).
The Supreme Court has adopted a two-pronged approach when considering a Rule
12(b)(6) motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009) (citing Twombly).
First, pleadings consisting of no more than mere conclusions are not entitled to the assumption of
truth. Id. This includes legal conclusions couched as factual allegations, as well as “[t]hreadbare
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recitals of the elements of a cause of action, supported by mere conclusory statements.” See
Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555). Second, if there are well-pleaded
factual allegations, courts should “assume their veracity and then determine whether they
plausibly give rise to an entitlement to relief.” Id. at 679.
“A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
McCauley v. City of Chi., 671 F.3d 611, 615 (7th Cir. 2011) (citing Iqbal and Twombly). The
complaint “must actually suggest that the plaintiff has a right to relief, by providing allegations
that raise a right to relief above the speculative level.” Maddox, 655 F.3d at 718 (citations
omitted). However, a plaintiff’s claim need only be plausible, not probable. Indep. Trust Corp.,
665 F.3d at 935 (quoting Twombly, 550 U.S. at 556). “[A] well-pleaded complaint may proceed
even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery
is very remote and unlikely.” Id. In order to satisfy the plausibility standard, a plaintiff’s
complaint must “supply enough fact to raise a reasonable expectation that discovery will yield
evidence supporting the plaintiff’s allegations.” Id. Determining whether a complaint states a
plausible claim for relief is “a context-specific task that requires the reviewing court to draw on
its judicial experience and common sense,” see Iqbal, 556 U.S. at 679 (citation omitted), and the
Court will assess the Plaintiff’s claims accordingly.
III. DISCUSSION
Medical Assurance has moved to dismiss both counts of the Fund’s First Amended
Complaint. The Court finds that Indiana law is uncertain as to a dispositive question underlying
Count I, and respectfully certifies that question to the Indiana Supreme Court. Medical
Assurance’s motion is therefore taken under advisement as to Count I, and is denied as to Count
II.
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A.

Breach of the Duty of Good Faith
Count I alleges that Medical Assurance breached its duty to its insureds, including

Weinberger and his entities, in its handling of the medical malpractice claims, and that the Fund
has been equitably subrogated to the insureds’ interest in those claims. As noted in this Court’s
prior order, Medical Assurance has raised four separate grounds for dismissal: (1) that Indiana
law does not allow equitable subrogation of an insured’s bad faith claim against its insurer; (2)
that even if it did, the Fund, as a statutory entity, does not have the authority to bring such a
claim; (3) that the claim is time-barred; and, (4) that the complaint does not adequately plead bad
faith by Medical Assurance. Indiana law governs the resolution of these issues, so this Court
must attempt to resolve them as would the Indiana Supreme Court. Stephan v. Rocky Mountain
Chocolate Factory, Inc., 129 F.3d 414, 416–17 (7th Cir. 1997).
The Court addressed the first two grounds in its prior order, and found that Indiana law
was uncertain on these questions. [DE 35]. As to the first issue—whether an insured’s claim
against its insurer for bad faith can be assigned through the doctrine of equitable subrogation—
no Indiana appellate court has addressed this question.1 See Querrey & Harrow, Ltd. v.
Transcontinental Ins. Co., 861 N.E.2d 719, 724 n.3 (Ind. App. Ct. 2007) (noting that this issue
“has not been decided by an Indiana appellate court”) aff’d 885 N.E.2d 1235 (Ind. 2008).
Nevertheless, without citing a single case from any court holding that bad faith claims cannot be
assigned through equitable subrogation, Medical Assurance insists that Indiana law is settled in
its favor on this point. In so arguing, Medical Assurance relies heavily on State Farm Mut. Auto.
Ins. Co. v. Estep, 873 N.E.2d 1021 (Ind. 2007), which this Court addressed in its previous order.
1

Federal courts have confronted this question on two occasions, and predicted in both instances
that Indiana law would recognize the equitable subrogation of such actions. Certain
Underwriters of Lloyd’s v. Gen. Accident Ins. Co. of Am., 909 F.2d 228 (7th Cir. 1990); PHICO
Ins. Co. v. Aetna Cas. & Sur. Co. of Am., 93 F. Supp. 2d 982 (S.D. Ind. 2000) (Tinder, J.).
7

In Estep, the Indiana Supreme Court held that a judgment creditor could not force an insured
judgment debtor to involuntarily assign any bad faith action it may have against its insurer.
However, while this holding could theoretically be extended to the present circumstance, it is not
directly on point and does not control the outcome of this issue. Further, based on a number of
distinguishing features between Estep and the present case, it is not at all clear that the Indiana
Supreme Court would extend Estep’s logic to the issue at hand.
In particular, an insured’s relationship with a third-party judgment creditor, as in Estep, is
fundamentally different than its relationship with its excess insurer. The judgmentcreditor/judgment-debtor relationship is inherently involuntary on the part of the judgmentdebtor, and the decision to assign the claim from the debtor to the creditor to satisfy a judgment
was involuntary in Estep as well. 873 N.E.2d at 1027. Where the third party is an excess insurer,
however, the insured’s relationship with the third party is the product of a voluntary arms-length
agreement. The decision to enter that relationship in the first place is voluntary, and an insured
could contractually prohibit or limit its excess insurer’s right to the equitable subrogation of its
bad faith claims if it so desires, which an insured could not do with a third-party judgment
creditor.2 In addition, an excess insurer has an incentive to maintain its relationship with its
insured, so it is less likely to press a nuisance suit against a primary insurer against the insured’s
will than would be a judgment creditor, whose only incentive is to maximize its recovery from
(or through) the insured.3 Given these distinguishing features, the Court cannot conclude that
Estep dictates the outcome of this issue.

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The Court recognizes that the Fund’s relationship with the insureds is not entirely equivalent to
that of an excess insurer, but while the terms and cost of its excess coverage may not be
negotiable, participation in the Fund is still voluntary.
3
It is also voluntary for an insured to submit a claim to and accept payment from its excess
insurer, which is the triggering event for an equitable subrogation claim. However, foregoing
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In addition, Medical Assurance cites several appellate cases that it says stand for the
proposition that “[t]here is no ‘subrogated’ bad faith action under Indiana law; bad faith actions
are personal to the insured.” [DE 27 p. 7 (citing Menefee v. Schurr, 751 N.E.2d 757 (Ind. Ct.
App. 2001), Dimitroff v. State Farm Mut. Auto. Ins. Co., 647 N.E.2d 339 (Ind. Ct. App. 1995),
and Winchell v. Aetna Life & Cas. Ins. Co., 394 N.E.2d 1114 (Ind. Ct. App. 1979))]. That
conclusion simply does not follow from those cases, however, as they merely hold that an
insurer’s duty of good faith runs only to its insured, not to third parties to the insurance
agreement. The Fund’s claim here is based on a breach of Medical Assurance’s duty to its
insureds, which those cases expressly recognize, not on any duty Medical Assurance may owe to
the Fund, so those cases are inapplicable. Medical Assurance also cites these cases in support of
its assertion that “Indiana has long rejected ‘bad faith’ claims asserted by any party other than an
insured, absent an assignment.” [DE 27 (emphasis added)]. However, equitable subrogation is a
form of assignment,4 and the question here is whether that form of assignment is cognizable for a
bad faith action against an insurer. Therefore, despite Medical Assurance’s arguments to the
contrary, the Court concludes that there is no clear controlling Indiana precedent on this issue.
There is a similar lack of controlling authority as to the second question, which is
whether the Fund has the authority to assert this cause of action, assuming it is available in the
first place. Medical Assurance notes that the Fund is a statutory creation that has “no common
law or inherent powers, but only such authority as is conferred upon them by statutory
enactment.” Vehslage v. Rose Acre Farms, Inc., 474 N.E.2d 1029, 1033 (Ind. Ct. App. 1985).
Because the Medical Malpractice Act does not expressly provide for the subrogation of insureds’

contracted-for excess insurance coverage could be quite a steep price to pay for retaining control
over a bad faith claim.
4
As Medical Assurance quotes in its own brief, “Subrogation is, in essence, an equitable
assignment.” [DE 32 p.5 (quoting Bennett v. Slater, 289 N.E.2d 144, 148 (Ind. Ct. App. 1972))].
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bad faith claims against their primary insurers, as it does for claimants’ rights against an insurer
that fails to pay a judgment or settlement, Ind. Code § 34-18-15-4, Medical Assurance argues
that the Fund does not have the authority to assert this common law cause of action. Conversely,
the Fund notes that “[i]t is well settled that agencies have implicit power and authority as is
necessary to fulfill the broad grant of authority given that agency by the legislature.” Martin v.
Carraway, 712 N.E.2d 1055, 1059 (Ind. Ct. App. 1999). Because the Fund has the statutory
authority to provide excess insurance to health care providers, the Fund argues it has the implied
right to bring the same action as could a private excess insurer.
Besides these general principles of administrative agency law, however, neither party has
provided, nor has the Court located, any Indiana authority addressing an analogous situation.
While many Indiana cases address the scope of agencies’ authority to regulate or adjudicate,
none address their authority to assert civil causes of action arising out of their de facto
participation in the marketplace. Therefore, the Court again concludes that there is no clear
controlling Indiana precedent on this question.5
The Court believes that these issues are appropriate for certification to the Indiana
Supreme Court. Rule 64 of the Indiana Rules of Appellate Procedure provides:
The United States Supreme Court, any federal circuit court of appeals, or any
federal district court may certify a question of Indiana law to the Supreme Court
when it appears to the federal court that a proceeding presents an issue of state
law that is determinative of the case and on which there is no clear controlling
Indiana precedent.
Ind. R. App. P. 64(a). Although certification should be approached “with circumspection,” it
may be appropriate where “‘the case concerns a matter of vital public concern, where the issue
5

Medical Assurance’s argument that this action is barred because the Medical Malpractice Act
does not create any causes of action is off point. The action here exists, if at all, under Indiana
common law, and the Fund does not cite the Medical Malpractice Act as the source of its cause
of action.
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will likely recur in other cases, where resolution of the question to be certified is outcome
determinative of the case, and where the state supreme court has yet to have an opportunity to
[decide] . . . the issue.’” Rain v. Rolls-Royce Corp., 626 F.3d 372, 378 (7th Cir. 2010)
(alterations in original) (quoting State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 672 (7th
Cir. 2001)).
The questions here are a matter of vital public concern, as they are important to the
functioning of the Fund and of the Medical Malpractice Act, and may also have a wider impact
relative to excess insurers in general. The equitable subrogation issue is also likely to recur in
other cases, as it has previously arisen in several federal cases, and the Indiana Court of Appeals
and a Justice of the Indiana Supreme Court have each noted the lack of Indiana authority on the
issue. Querrey & Harrow, Ltd. v. Transcontinental Ins. Co., 885 N.E.2d 1235, 1238 (Ind. 2008)
(Sullivan, J., dissenting); Querrey & Harrow, 861 N.E.2d at 724 n.3 (Ind. App. Ct. 2007).
Resolution of these questions could thus be “of interest to the state supreme court in its
development of state law.” Craig v. FedEx Ground Package Sys., Inc., 686 F.3d 423, 430 (7th
Cir. 2012). In addition, the questions here are outcome determinative as to Count I, as an answer
in Medical Assurance’s favor would require dismissal of that count with prejudice. The Court
acknowledges that the questions are not dispositive of the case as a whole, as the Fund has also
asserted a statutory subrogation claim in Count II. However, that is an independent claim and
does not provide an alternative basis for obtaining the relief the Fund seeks in Count I, so the
Court thus does not interpret the joinder of these claims as a bar to certification.6 Finally, as

6

Of course, the Indiana Supreme Court “has full discretion to dictate which questions from the
federal courts it will answer,” so it is free to decline to accept this certification if it interprets its
rule differently, or for any reason at all. Brown v. Argosy Gaming Co., L.P., 384 F.3d 413, 416
n.2 (7th Cir. 2004)
11

discussed at length, the Indiana Supreme Court has yet to address these issues, and there is no
clear controlling Indiana precedent.
For these reasons, the Court believes that certification is proper and would “further the
interests of cooperative federalism.” Craig, 686 F.3d at 431. To formulate the question, the Court
notes, as did the Fund, that although the parties have addressed the issues separately, both issues
essentially pertain to one central question—whether the Fund can pursue a claim for an insurer’s
breach of its duty of good faith to its insured. Therefore, the Court respectfully certifies the
following consolidated question to the Indiana Supreme Court:
Does Indiana law allow the Patient’s Compensation Fund to pursue a claim
against an insurer for the insurer’s breach of its duty of good faith to its insured,
through the doctrine of equitable subrogation?
Should the Indiana Supreme Court accept the certification of this question, it of course has the
discretion to reformulate the question as it sees fit, and nothing in this opinion is meant to limit
the scope of the inquiry undertaken by the Indiana Supreme Court. Craig, 686 F.3d at 432.
The latter two arguments Medical Assurance raises in support of dismissal are more
easily disposed of. Medical Assurance argues that this claim is barred by the statute of
limitations, which is an affirmative defense. Fed. R. Civ. P. 8(c)(1). While complaints “need not
anticipate defenses and attempt to defeat them,” Richards v. Mitcheff, 696 F.3d 635, 637 (7th
Cir. 2012), “dismissal is appropriate when the plaintiff pleads himself out of court by alleging
facts sufficient to establish the complaint’s tardiness,” Cancer Found., Inc. v. Cerberus Capital
Mgmt., LP, 559 F.3d 671, 674–75 (7th Cir. 2009).
The statute of limitations applicable to this claim is two years, and that period begins to
run when a plaintiff learns that “an injury had been sustained as a result of the tortious act of
another.” Wehling v. Citizens Nat’l Bank, 586 N.E.2d 840, 843 (Ind. 1992); Ind. Code § 34-11-24(a)(2). “For an action to accrue, it is not necessary that the full extent of the damage be known
12

or even ascertainable, but only that some ascertainable damage has occurred.” Cooper Indus.,
LLC v. City of S. Bend, 899 N.E.2d 1274, 1280 (Ind. 2009). In this context, that occurs when an
insurer’s bad faith results in the entry of an excess judgment against its insured. Reed v. Aetna
Cas. & Sur. Co., No. 92-cv-328, 1995 U.S. Dist. LEXIS 9154, at *15–16 (N.D. Ind. Mar. 29,
1995) (“When the jury returned a verdict in excess of the policy limits, Churchwell either knew
or should have known that she had been damaged by Aetna’s failure to settle her claim. . . .
Therefore, Churchwell’s claim against Aetna accrued on April 26, 1989 when the jury returned a
verdict in excess of policy limits.”).
Here, the First Amended Complaint alleges that the various settlement agreements upon
which the Fund’s damages are based took place in 2012, well within the 2-year statute of
limitations, given that the complaint was filed on March 22, 2013. The complaint does not
expressly allege the dates of the judgments against the insureds, though the judgments attached
as exhibits to the complaint indicate they were entered beginning in December 2011, also well
within the statute of limitations. Medical Assurance argues for the first time in its reply brief that
the first judgment was actually entered in August 2010. [DE 29 p. 14]. However, besides being
waived for not being raised earlier, this argument is not proper in this context, as it depends on
facts outside of the pleadings. The Court therefore concludes that the statute of limitations does
not justify dismissal of this count.
Medical Assurance finally argues that the complaint should be dismissed because it does
not adequately plead bad faith. “Indiana law has long recognized that there is a legal duty
implied in all insurance contracts that the insurer deal in good faith with its insured.” Erie Ins.
Co. v. Hickman by Smith, 622 N.E.2d 515, 518 (Ind. 1993). Indiana also recognizes “a cause of
action for the tortious breach of an insurer’s duty to deal with its insured in good faith.” Id. at

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519. The duty of good faith includes, without limitation, “the obligation to refrain from (1)
making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making
payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an
insured into a settlement of his claim.” Id. In order to properly plead a claim for bad faith, a
plaintiff must plead the existence of a duty of good faith, conduct that violates that duty, and
resulting damages. See id.
The Fund has sufficiently pled such an action here. The complaint expressly alleges the
existence of the duty of good faith, and attaches the insurance policies to demonstrate the
insurer–insured relationship that gives rise to that duty. [DE 25 ¶ 54, exs. A–E]. The complaint
also alleges multiple ways in which Medical Assurance violated its duty, including by failing to
reserve its rights in within a reasonable time; to advise the insureds of coverage issues; to timely
file its coverage case; to notify its insureds of a conflict of interest; to implement an ethical
screen between the claims/defense and coverage personnel; to adequately investigate and/or
attempt to settle the claims; to warn the insureds that their failure to cooperate could result in a
loss of coverage; to timely inform the insureds of policy-limit settlement demands; to maintain
the confidentiality of privileged communications; to seek copies of relevant records; and to make
settlement payments on behalf of its insureds. [DE 25 ¶ 40–41]. These allegations are more than
sufficient to put Medical Assurance on notice of the claims against it and the ways in which the
Fund asserts it breached its duty of good faith.
Medical Assurance argues that in order to plead bad faith, the Fund “must establish, with
clear and convincing evidence, that the insurer had knowledge that there was no legitimate basis
for denying liability,” and that the complaint should be dismissed because it is “bereft of any
allegations to establish knowledge on the part of Medical Assurance of a complete lack of a

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rational basis for Medical Assurance’s actions and a bad faith motive.” [DE 27 pp. 9–10]. This
argument fails for several reasons. First, and most obviously, the Fund does not need to “prove”
anything at this stage, by clear and convincing evidence or otherwise. Rather, the complaint must
simply contain “a short and plain statement of the claim showing that the pleader is entitled to
relief.” Fed. R. Civ. P. 8(a)(2). In addition, “[m]alice, intent, knowledge, and other conditions of
a person’s mind may be alleged generally,” Fed. R. Civ. P. 9(b), so the Fund need not allege
specific facts to establish Medical Assurance’s knowledge or its bad faith motive at this point. If
Medical Assurance can ultimately establish a good-faith basis for each of its actions, it will
defeat the Fund’s claim, but those arguments are suited for summary judgment or trial, not a
motion to dismiss. Skinner v. Metro. Life Ins. Co., 829 F. Supp. 2d 669, 678 (N.D. Ind. 2010)
(holding that “bad faith does not need to be pled with particularity” and that the insurer’s
“arguments for dismissing this claim would be better taken at a later stage in the litigation”).
On a more substantive level, this argument interprets the Fund’s claim too narrowly, as
relating only to Medical Assurance’s denial of a claim or of coverage. While some of the Fund’s
allegations relate to Medical Assurance’s handling of its claims, the focus of its bad faith claim
relates to Medical Assurance’s conduct as to the defense of the claims, including its conflict of
interest, of which it did not notify its insureds, its improper sharing of information between
claims/defense and coverage personnel, its failure to investigate and attempt to settle the claims,
its disclosure of confidential and privileged communications, and its failure to seek copies of
relevant records or access to former employees from the receiver. [DE 25 ¶ 41]. If true, these
allegations could support a claim for bad faith even if Medical Assurance ultimately
demonstrates that it did not owe coverage for these claims. Phico, 93 F. Supp. 2d at 990 (holding
that an insurer’s duty of good faith “encompasses the defense and handling of the claim,” and

15

that a primary insurer’s “bad faith or negligent defense of a claim against the insured” is
actionable under Indiana law). Given that this action does not depend solely on Medical
Assurance’s obligation to pay the claims, its argument that the Fund must “plead facts which
show Weinberger’s compliance with conditions precedent to coverage” and “timely notice” of
the claims is misplaced. [DE 29 p. 11]. Therefore, the Court finds that the Amended Complaint
adequately states a claim for Medical Assurance’s breach of its duty of good faith under Indiana
law, and declines to dismiss the count on that basis.
B.

Statutory Subrogation
Count II asserts a statutory subrogation claim under Indiana Code § 34-18-15-4. In this

count, the Fund asserts that Medical Assurance failed to pay certain judgments and settlements it
was obligated to pay. Pursuant to the Act, the Fund has paid the claimants those amounts, and the
Fund is subrogated to the claimants’ actions against Medical Assurance to collect those
payments. Ind. Code § 34-18-15-4. Medical Assurance first argues that this count should be
dismissed essentially because the Fund has failed to plead the absence of facts that would justify
Medical Assurance in denying coverage.
However, regardless of any basis Medical Assurance may have had to deny coverage, the
Fund has pled sufficient facts to overcome those defenses on the grounds of waiver or estoppel.
Under Indiana law, even where an insurer may have a meritorious defense to coverage, it can be
estopped from raising that defense when it “assumes the defense of an action on behalf of its
insured without a reservation of rights but with knowledge of facts which would have permitted
it to deny coverage.” Founders Ins. Co. v. Olivares, 894 N.E.2d 586, 592 (Ind. Ct. App. 2008);
Transcontinental Ins. Co. v. J.L. Manta, Inc., 714 N.E.2d 1277, 1281–82 (Ind. Ct. App. 1999);
see also Ashby v. Bar Plan Mut. Ins. Co., 949 N.E.2d 307, 312–13 (Ind. 2011) (holding that
summary judgment could not be granted even though the insured failed to comply with the
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policy’s notice provision, based on disputed facts as to whether the insured was estopped from
raising that defense). Here, the Fund pled that Medical Assurance undertook the defense of the
malpractice actions, that it failed to reserve its rights within a reasonable time and failed to
advise the insureds of coverage issues, and that it knew about these coverage issues but
continued representing the insureds while under a conflict of interest. [DE 25 ¶¶ 23, 29, 31, 40].
These facts meet the elements of an estoppel claim, and suffice to permit the Fund to proceed
past the pleading stage. See Manta, 714 N.E.2d at 1282.
Medical Assurance’s final argument, that the malpractice claimants have no right of
action against it in the first place, so the subrogation of their claims to the Fund is meaningless, is
frivolous. In Indiana, “an injured third party may not bring a direct action against a wrongdoer’s
liability insurer until he first obtains a judgment against the insured.” Wolverine Mut. Ins. V.
Vance ex rel. Tinsley, 325 F.3d 939, 944 (7th Cir. 2003) (emphasis added); see also Donald v.
Liberty Mut. Ins. Co., 18 F.3d 474, 480 (7th Cir. 1994) (holding that an injured person “cannot
sue the tortfeasor’s insurance company directly—at least before obtaining a judgment against the
insured”); Cromer v. Sefton, 471 N.E.2d 700, 703 (Ind. App. Ct. 1984) (“Nevertheless, a
successful personal injury plaintiff can bring an action against the liability carrier if it refuses to
honor its contract.”); cf. Cain v. Griffin, 849 N.E.2d 507, 515 (Ind. 2006) (holding that an injured
party could sue an insurer directly even without securing a judgment against the insured where
the policy applied regardless of fault and the injured party constituted a third-party beneficiary).
Here, all of the amounts for which the Fund seeks recovery were owed to the claimants based on
judgments or court-approved settlements. Thus, those claimants have actions against Medical
Assurance for its non-payment, and the Fund is subrogated to those claims pursuant to § 34-18-

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15-4 due to its payments to the claimants on Medical Assurance’s behalf. Medical Assurance’s
motion to dismiss is therefore denied as to Count II.
IV. CONCLUSION
Medical Assurance’s motion to dismiss [DE 26] is taken under advisement as to Count I,
and DENIED as to Count II. The Court respectfully CERTIFIES the following question to the
Indiana Supreme Court:
Does Indiana law allow the Patient’s Compensation Fund to pursue a claim
against an insurer for the insurer’s breach of its duty of good faith to its insured,
through the doctrine of equitable subrogation?
Consistent with Indiana Rule of Appellate Procedure 64(B), the Clerk of the Court is
DIRECTED to forward the following to the Clerk of the Indiana Supreme Court: (1) a copy of
this order; (2) a copy of the case docket, including the names of the parties and their counsel; and
(3) the First Amended Complaint [DE 25], the motion to dismiss and related briefing [DE 26–
29], and this Court’s April 3, 2014 order [DE 35].
SO ORDERED.
ENTERED: June 5, 2014

/s/ JON E. DEGUILIO
Judge
United States District Court

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