Physicians' suits against medical malpractice insurers. An analysis of current issues in professional liability insurance litigation.

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Physicians' suits against medical malpractice insurers William L. Hutton

a

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Third‐year law student , Southern Illinois University School of Law , Lesar Law Building, Carbondale, IL, 62901 Published online: 23 Jul 2009.

To cite this article: William L. Hutton (1990) Physicians' suits against medical malpractice insurers, Journal of Legal Medicine, 11:2, 225-245, DOI: 10.1080/01947649009510826 To link to this article: http://dx.doi.org/10.1080/01947649009510826

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Commentary

The Commentary section in the Journal of Legal Medicine presents, on a regular basis, articles written by students at Southern Illinois University School of Law, Carbondale, Illinois. This feature, initiated in 1981, is designed to allow outstanding law students who have special interests in law and medicine to pursue those interests through scholarly research and publication, thereby providing readers with high-quality and timely legal commentary. The following members of the Board of Editors of Southern Illinois University Law Journal have provided editorial review for this Commentary section: Alice Noble-Allgire Editor in Chief Michelle M. Dillon Student Articles Editor W. Eugene Basanta Thomas B. McAffee Faculty Advisors Vicki Genovese Secretary

The Journal of Legal Medicine, 11:225-245 Copyright © 1990 by Hemisphere Publishing Corporation

PHYSICIANS' SUITS AGAINST MEDICAL MALPRACTICE INSURERS


AN ANALYSIS OF CURRENT ISSUES IN PROFESSIONAL LIABILITY INSURANCE LITIGATION William L. Hutton*

INTRODUCTION For many years, much attention and debate has been focused upon the medical malpractice crisis. Perhaps because the subject of medical malpractice typically creates images of injured patients suing their physicians, litigation between physicians and their medical malpractice liability insurers tends to attract less attention in the media and in professional publications. However, as this area of law has developed in scope and complexity, physicians have turned more frequently to litigation to shift the burden of malpractice judgments toward insurers. Three legal issues commonly arise in suits by physicians against their professional liability insurers.1 First, the insurance industry's shift from providing "occurrence" liability coverage2 toward "claims made" coverage3 has caused extensive litigation to determine when a claim is actually made by the insured physician against the malpractice insurer.4 Much of * Third-year law student at Southern Illinois University School of Law. Address correspondence to Mr. Hutton at Southern Illinois University School of Law, Lesar Law Building, Carbondale, IL 62901. 1 See, e.g., St. Paul Ins. Co. of Ill. v. Armas, 173 Ill. App. 3d 669, 527 N.E.2d 921 (1st Dist. 1988) (physician's professional liability "claims made" policy was ambiguous as to when a claim was made by the insured); Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 854 F.2d 279 (7th Cir. 1988) (physician's assignment to his insurer of claim against coinsurer in medical malpractice action did not violate Illinois public policy); Lund, Oregon OB Wins Suit Against Former Liability Insurer, Am. Med. News, Aug. 21, 1987, at 11 (county jury found liability insurer responsible for having failed to settle a liability claim within physician's policy limits). See infra notes 11-14 and accompanying text. 3 See infra notes 15-18 and accompanying text. See generally Annotation, Event As Occurring Within Period of Coverage of "Occurrence" and "Discovery" or "Claims Made" Liability Policies, 37 A.L.R. 4TH 382, 451-68 (1985 & Supp. 1989) (discussion of cases deciding whether coverage is provided for claims made within or after the policy period, for wrongful acts or omissions occurring either before or during the policy period).

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this litigation has focused on construing the "when is a claim made" provisions in these policies5 and resolving the inevitable ambiguities that occur when new policy provisions are drafted and issued. Another recent conflict is whether a physician may assign a cause of action against a liability insurer to a liability coinsurer. This issue arises when coinsurers attempt to facilitate settlements with plaintiffs in the underlying malpractice action against the physician, but then fail to resolve coverage allocations or responsibilities.6 Finally, physicians are suing their liability insurers when judgments exceed the liability coverage limits on the ground that the insurer failed to settle a liability claim within the policy limits.7 This commentary explores solutions for each of these three issues involving physicians' suits against their medical malpractice liability insurers. Section I discusses the development of "claims made" liability coverage, analyzes the issues and arguments that arise in determining when a claim is made by the physician, and suggests alternative policy provisions to alleviate these problems. Section II describes the background of assigning a claim or cause of action against a liability insurer, discusses liabilities and contribution between coinsurers, and analyzes the consequences of permitting assignments. Finally, Section HI discusses the standards used to evaluate the insurer's duty to settle within the policy limits and presents solutions to minimize the problems encountered in this type of litigation. I. "CLAIMS MADE" PROFESSIONAL LIABILITY POLICIES The "claims made" form of liability insurance is a relatively recent development. "Claims made" coverage has risen in use during the past 10 to 20 years so that it is now the most common form of professional liability insurance.8 Because "claims made" coverage was implemented to correct some of the shortcomings of "occurrence" coverage,9 it is important to understand the characteristics of occurrence coverage before analyzing modern "claims made" policies. Indeed, as one recent decision stated, it is likely "that there are vast numbers of professionals covered by 'claims 5 6

7 8

9

For an example of this type of policy provision, see Armas, 527 N.E.2d at 923. See Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 854 F.2d 279 (7th Cir. 1988). After the plaintiff obtained a $9 million judgment, Argonaut-Midwest denied coverage to the insured physician. Hartford Insurance Co., a coinsurer, then settled with the plaintiff for $8 million. In exchange for the settlement, the physician assigned to Hartford the cause of action against Argonaut-Midwest for wrongful failure to settle. Argonaut-Midwest later conceded that the physician was covered under their policy. Lund, supra note 1. Parker, The Untimely Demise of the "Claims Made" Insurance Form? A Critique of Stine v. Continental Casualty Company, 1983 DET. C. L. REV. 25, 28-29 & n.12, 71-72 & nn.167-68; Kroll, The Professional Liability Policy "Claims Made," 13 FORUM 842, 850 (1978). See infra text accompanying notes 25-32.

LIABILITY INSURANCE LITIGATION

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made' policies who are unaware of the basic distinction between their policies and the traditional 'occurrence' policy."10


A. Background of "Claims Made" Coverage The traditional form of professional liability coverage was the "occurrence" policy.11 An occurrence policy provides indemnity regardless of when the claim is brought, provided the negligent act or omission occurred during the policy period.12 Thus, in an occurrence policy, the peril insured against is the "occurrence" itself.13 Once the negligence occurs, coverage attaches even though the actual claim may not be made until a later date, possibly even after coverage has ended.14 A "claims made" policy provides indemnity regardless of when the negligent act or omission occurred, provided the negligence complained of is discovered15 and the claim is made during the policy period.16 Thus, in the claims made policy, the peril insured against is the actual making of the claim.17 This type of policy consequently provides coverage only for claims made while it is in effect, and it is generally irrelevant whether the negligent act occurred before or after the claims made coverage commenced.18 10

Sparks v. St. Paul Ins. Co., 100 N.J. 325, 339-40, 495 A.2d 406, 415 (1985). The reader is advised that although the primary focus of this commentary is medical malpractice liability coverage, several of the cases cited involve professional liability policies that were issued to architects, attorneys, insurance brokers, escrow companies, and contractors. This factual difference is insignificant because the language of the typical "claims made" policy is similar regardless of the insured's profession. The court opinions cite and discuss policies from other professions without distinguishing them because of the insured's occupation. See, e.g., St. Paul Fire & Marine Ins. Co. v. House, 315 Md. 328, 554 A.2d 404 (1989) (facts concern a physician's professional liability policy, yet the court discusses the Zuckerman case which involved an attorney's professional liability policy); Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395 (1985) (facts concern an attorney's professional liability policy, yet the court discusses cases involving physicians, engineers, and architects professional liability policies). Thus, litigants should not hesitate to analyze all decisions which involve their specific types of policies and use them analogously when appropriate. 12 Stine v. Continental Cas. Co., 419 Mich. 89, 96-98, 349 N.W.2d 127, 130-31 (1984). 13 Kroll, supra note 8, at 843. 11

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15

Id.; 2 R. LONG, THE LAW OF LIABILITY INSURANCE ch. 12, § 12.11, at 12-44

(1989).

"Claims made" policies are also referred to as "discovery" policies because part of the reason for their development was the growing acceptance of the discovery rule in tort actions. The discovery rule provides that the statute of limitations is tolled and does not begin to run until the injury is discovered or reasonably should have been discovered. Trout, Malpractice Insurance: ClaimsMade Policies Pose a New Dilemma, J. LEGAL MED., June 1975, at 33; Comment, "ClaimsMade" Liability Insurance: Closing the Gaps with Retroactive Coverage, 60 TEMP. L.Q. 165, 166 n.7 (1987). Once the cause of action was no longer linked to the occurrence of the negligent act, physicians needed coverage for negligent acts that were committed in previous years but were latent and thus not discovered until sometime later. See, e.g., Stine, 349 N.W.2d at 131. 16 Stine, 349 N.W.2d at 130. 17 Kroll, supra note 8, at 843. 18 Id.


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The differences between these two types of coverage19 is best illustrated by examples. If a physician practiced for only one year, for example 1990, that physician would need only one "occurrence" policy to be fully covered for negligent acts that occurred during 1990. In contrast, several years of "claims made" coverage would be necessary to indemnify that physician from claims arising out of negligent acts that were committed in 1990, but not discovered until several years later.20 Similarly, if a physician has practiced for 19 years and obtains insurance for the 20th year under an "occurrence" policy, the insurer's exposure is limited to negligent acts that occur in year 20 only. On the other hand, if a "claims made" policy were obtained for the 20th year, it would cover any negligent acts that occurred from year one until the end of year 20. Given the apparent differences between the two types of policies, it seems reasonable to assume that the policy provisions would be clearly written so that the type of coverage provided is obvious. However, the critical issue in some cases has been resolving ambiguities in the policy to determine whether "occurrence" or "claims made" coverage was provided. For example, one policy advertised itself as a "claims made" policy, but the policy language resembled "occurrence" coverage because it required the wrongful act to occur during the policy period.22 That such ambiguities exist is not surprising given that "claims made" coverage is a recent development.23 Therefore, until the language in "claims made" policies is further refined, the wording of the policy should not be presumed to represent the actual type of coverage that is provided.24 The transition from "occurrence" to "claims made" policies has been troublesome for the insurance industry. Many commentators supported the Stine contains a thorough discussion of the differences between " o c c u r r e n c e " and "claims m a d e " policies. Stine, 349 N.W.2d at 130-32. The seminal case defining the two types of policies is Samuel N. Zarpas, Inc. v. Morrow, 215 F. Supp. 887, 888 (D.N.J. 1963). For additional discussions of this topic, see also, Brander v. Nabors, 443 F. Supp. 764, 767 (N.D. Miss.), aff'd, 579 F.2d 888 (5th Cir. 1978); Sparks v. St. Paul Ins. C o . , 100 N . J . 325, 329-31, 494 A.2d 406, 408-09 (1985); Kroll, supra note 8, at 843-49; Parker, supra note 8, at 27-32; Comment, supra note 15, at 165-74; Comment, The "Claims Made" Dilemma in Professional Liability Insurance, 22 UCLA L. REV. 9 2 5 , 928-33 (1975) [hereinafter Dilemma]; Annotation, supra note 4 , at 393-95. 20

21 22

23 24

This hypothetical is derived from one cited in St. Paul Fire & Marine Ins. Co. v. Barry, 438 U . S . 5 3 1 , 535 n.3 (1978). This hypothetical is derived from one noted in Dilemma, supra note 19, at 929. Village Escrow C o . , Inc. v. National Union Fire Ins. C o . , 202 Cal. App. 3d 1309, 248 Cal. Rptr. 687, 689-94 n.4 (1988) (the policy language stated that not only must the wrongful act occur during the policy period, but in addition, the claim had to be made and reported during the policy period. The court disapproved of this "triple h u r d l e " policy and held for the insured). See also Stine, 349 N.W.2d at 132-33 (discussing the trial court's concern with determining into which category the policy fit). See supra note 8 and accompanying text. For examples of the wording used in "occurrence," "claims made," and modified "claims m a d e " policies, see Langley v. Mutual Fire, Marine, and Inland Ins. C o . , 512 So. 2d 752, 754 (Ala.



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change to "claims made" coverage.25 The insurance companies' primary complaint with "occurrence" policies was the actuarial difficulties they encountered when trying to predict claims that would occur after the policy had terminated.26 Most of these problems were attributed to the "long tail" effect that resulted from the time lapse between the negligent occurrence and the actual making of the claim.27 In addition to actuarial and premium computation problems, "occurrence" policies also failed to account for the effects of inflation on claims costs and for insurers who were no longer in business when the claim was finally made.28 Other insurance professionals argued that the inherent disadvantages of "claims made" coverage outweighed the advantages it offered. These disadvantages include the extended "claims made" coverage (known as tail coverage) that must be purchased when a physician retires or dies, the coverage gap that exists if the insured converts back to "occurrence" coverage, and the absence of any assurance that "claims made" rates would remain lower than those for "occurrence" policies.29 Despite these disadvantages, "claims made" policies have become the predominant type of professional liability coverage. Thus, the evolution to "claims made" coverage represents the insurance industry's attempt to correlate medical malpractice claims with the insured's policy period. Modern "claims made" policies continue to provide coverage for

1987) ("claims m a d e " policy); Travelers Indem. Co. v. Mutual Ins. Co. of Ariz., 152 Ariz. 267, 268, 731 P.2d 632, 633 (Ariz. Ct. App. 1986) (the Travelers policy was an " o c c u r r e n c e " policy, whereas the MICA policy was a modified "claims m a d e " policy); Sparks v. St. Paul Ins. C o . , 100 N.J. 325, 328, 495 A.2d 406, 408 (1985) (modified "claims m a d e " policy that provided no retroactive coverage during the first year of the policy); Zuckerman v. National Union Fire Inc. Co., 100 N.J. 304, 307-08, 495 A.2d 395, 396-97 (1985) ("claims m a d e " policy); Yancey v. Floyd West & Co., 755 S.W.2d 914, 919-20 (Tex. Ct. App. 1988) ("claims m a d e " policy); 2 R. LONG, supra note 14, ch. 12, § 12.11, at 12-45 (examples of the various provisions in each type of policy); 11 COUCH ON INSURANCE 2d § 44:257 (1982 & Supp. 1989) (annotations of cases interpreting policy provisions). 25 26

27

28 29

See Kroll, supra note 8, at 842; Dilemma, supra note 19, at 927-28. Stine v. Continental Cas. C o . , 419 Mich. 89, 98-100, 349 N.W.2d 127, 131-32 (1984); Zuckerman v. National Union Fire Ins. C o . , 100 N . J . 304, 311-13, 495 A.2d 395, 399-400 (1985); Kroll, supra note 8, at 845; Parker, supra note 8, at 31-32; Comment, supra note 15, at 169-75; Dilemma, supra note 19, at 925-35. " L o n g tail" refers to the lapse of time that exists between the date of the occurrence and the discovery of the claim. For example, a negligent error could occur during a policy that is effective during calendar year 1990, but the negligence might not be discovered by the injured party until several years later. Hence a long tail exists between the date of the error and the time the claim is made. See supra note 26 and accompanying text. See supra note 26 and accompanying text. Trout, supra note 15, at 33-34. A physician who converts back to "occurrence" coverage would incur a lapse in coverage. For example, if a negligent act occurs during the "claims m a d e " policy period, but the claim is not made until the "occurrence" policy is in effect, the "claims made" insurer will deny coverage because the claim was made after that policy expired and the "occurrence" insurer will deny coverage because the negligent act occurred before that policy became effective.

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claims made during the policy period, although the scope of coverage may vary between insurers. Policies may be written so broadly that all claims made within the policy period are covered regardless of when the negligence occurred.30 At the other end of the spectrum, policies may be written so narrowly that either no retroactive coverage31 is provided or the policy language may require the occurrence as well as the making and reporting of the claim to occur during the policy period.32 Physicians and attorneys involved in litigation should carefully analyze the pertinent policy provisions to determine the scope of coverage provided.


B. Determining When a Claim Is Made A major issue in modern "claims made" policies is determining when a claim actually is made.33 The typical policy provides that "a claim is made on the date you first report an incident or injury to us or our agent."34 Some litigants have successfully convinced courts that these clauses are ambiguous because the word "claim" can be interpreted in several ways.35 For example, "claim" could be treated as a formal claim by the patient against the physician, or alternatively, it could mean a report of potential liability by the physician to the insurer.36 In addition to the "claim is made" policy provision, some policies also include a section titled, "What To Do If You Have A Loss." This use of the word "loss" could mean a ruling of liability and entry of judgment by a court, the filing of a complaint against the physician, or a telephone call from a dissatisfied patient who is now threatening to sue.37 Given these ambiguities, a closer examination and analysis of the policy language is necessary. 1. Scope of Coverage In a pure "claims made" policy, the insurer provides unlimited retroactive coverage for negligent occurrences that transpired before the effec30

31 32

33

34 35

36 37

Mutual Fire, Marine, and Inland Ins. C o . v. Vollmer, 306 Md. 2 4 3 , 256, 508 A.2d 130, 136 (1986) (citing the policy involved in Gereboff v. Home Indem. C o . , 119 R.I. 814, 383 A.2d 1024 (1978)). Stine v. Continental Cas. Co., 419 Mich. 89, 9 4 , 349 N.W.2d 127, 129 (1984). Village Escrow C o . , Inc. v. National Union Fire Ins. C o . , 202 Cal. App. 3d 1309, 248 Cal. Rptr. 687, 689-91 (1988). See Sletten v. St. Paul Fire & Marine Ins. C o . , 161 Ariz. 595, 780 P.2d 428, 429-30 (Ct. App. 1989); St. Paul Ins. Co. of Ill. v. Armas, 173 Ill. App. 3d 669, 673-76, 527 N.E.2d 9 2 1 , 923-25 (1988); St. Paul Fire & Marine Ins. Co. v. House, 315 Md. 328, 330-41, 554 A.2d 404, 405-10 (1989). Sletten, 780 P.2d at 429; Armas, 527 N.E.2d at 923; House, 554 A.2d at 405. Armas, 527 N.E.2d at 925-26; House, 554 A.2d at 407. Contra Sletten, 780 P.2d 428 (regardless of the way " c l a i m " is defined, the policy would not provide coverage). See House, 554 A.2d at 407. Contra Sletten, 780 P.2d at 429. Armas, 527 N.E.2d at 923-24.


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tive date of the insured's policy.38 This retroactive coverage also prevents a lapse in coverage when the insured changes from "occurrence" to "claims made" coverage.39 Such retroactive coverage, which is usually provided,40 generally does not present as much controversy as other aspects of the policy. On the other hand, the expiration or termination of a "claims made" policy raises several issues. One concern is prospective coverage,41 or whether a reasonable time period42 should be extended for the insured to notify43 the insurer of any claims not reported before the coverage ends.44 This issue arises when a physician switches to another insurance carrier, 38

See Brander v. Nabors, 443 F. Supp. 764, 767 (N.D. Miss.), aff'd, 579 F.2d 888 (5th Cir. 1978); Zuckerman v. National Union Fire Ins. C o . , 100 N.J. 304, 306-09, 319-20, 495 A.2d 395, 396-97, 403 (1985); Comment, supra note 15, at 165 n . 5 . Contra Stine v. Continental Cas. C o . , 419 Mich. 89, 94-100, 349 N.W.2d 127, 129-31 (1984); Sparks v. St. Paul Ins. C o . , 100 N . J . 325, 328, 495 A.2d 4 0 6 , 408 (1985).

39

Comment, supra note 15, at 173 & n.50 (any claim that is based on a negligent event that occurred prior to the effective date of the "claims m a d e " policy remains covered under the prior "occurr e n c e " policy, which was effective when the event occurred. Therefore, provided the "claims m a d e " coverage commences when the " o c c u r r e n c e " policy terminates, the insured is covered under one of the two policies).

40

For examples of policies that provide either limited or no retroactive coverage at all, see Stine, 349 N.W.2d at 129; Sparks, 495 A.2d at 408-10. The basic form of "claims m a d e " policy provides no coverage after the termination date of the policy. Yancey v. Floyd West & C o . , 755 S.W.2d 914, 921 (Tex. Ct. A p p . 1988). See Brander v. Nabors, 443 F. Supp. 764 ( N . D . Miss.), aff'd, 579 F.2d 888 (5th Cir. 1978) (policy provided coverage for claims made within 36 months following expiration or termination); Stine, 349 N.W.2d at 129 (insured is covered provided claim is made during the policy period and written notice is given within 60 days after the expiration of the policy).

41

42

44

See Brown-Spaulding & Assoc., Inc. v. International Surplus Lines Ins. C o . , 206 Cal. App. 3d 1441, 254 Cal. Rptr. 192, 194-95 (1988) (notice provision in a "claims m a d e " policy requiring the claim to be reported during the policy period is against public policy and unenforceable). The problem with prospective coverage in "claims m a d e " policies is best illustrated in Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512 (Fla. 1983). In Gulf, the insured law firm received a letter from a former client on the last day of the firm's claims made policy requesting the firm to notify its malpractice carrier that a claim would be made due to the firm's alleged gross negligence. The firm contacted Gulf approximately two weeks later. Gulf denied coverage because it had not been notified during the policy period as required in the contract. Although the law firm declined to renew its policy with Gulf, it had contracted with another insurer for "claims m a d e " coverage which became effective on the day following the expiration of the Gulf policy. The new policy provided retroactive coverage for negligent services that occurred prior to the policy's effective date, but it excluded coverage for claims arising out of any occurrence prior to the effective date of the policy if the insured had knowledge of the claim prior to the policy period. Thus, the new carrier also denied coverage because the claim had been known to the firm before the policy became effective. The court held that an unambiguous "claims m a d e " professional liability policy cannot be subjected to a reasonable additional period beyond the termination date of the policy for reporting claims that arise late in the contract term. Gulf Ins. Co., 433 So. 2d at 513-14. The district court of appeals had posed this dilemma in perhaps the worst scenario possible. " A time comes at the end of the policy period when it may well be impossible for the insured to notify the company of a claim. The extreme case would involve the receipt of a claim by the insured minutes before the midnight expiration of the term on the last day thereof." Dolan, Fertig & Curtis v. Gulf Ins. Co., 419 So. 2d 1108, 1110 (Fla. Dist. Ct. App. 1982), remanded, 433 So. 2d 512 (Fla. 1983).

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either by terminating the policy or allowing it to expire without purchasing a renewal or extension.45 A further disadvantage to "claims made" coverage becomes apparent when a physician retires. Because some claims may be latent and not discovered until several years after retirement,46 a retiring physician should obtain extended "claims made" coverage, or tail coverage, to provide protection against such claims.47


2. Insured Receives Notice of Suit After Policy Expires Disputes regarding "claims made" coverage are most likely to occur when the policy is cancelled or expires, and soon thereafter, notice of a malpractice claim is served upon the insured physician by the injured party.48 For example, in St. Paul Fire & Marine Insurance Co. v. House,49 the insured physician had a series of "claims made" policies that provided coverage beginning January 1, 1983, and ending January 1, 1986. The injured patient initiated malpractice proceedings against Dr. House on November 15, 1985, and a statement of claim was served on January 6, 1986. Dr. House forwarded the claim to St. Paul's agent on February 12, 1986. St. Paul subsequently denied coverage to Dr. House, arguing that notice was not received within the policy period and therefore the claim was not a covered risk.50 In the ensuing litigation, the court had to determine when the claim actually was made. The court began by stating that the ordinary meaning of "claim made" is the assertion of a claim by the injured person against the insured.51 The "Basic Coverage Clause" in the policy stated, that for coverage to be provided, "[t]he claim must also first be made while this agreement is in effect."52 The court found the policy provisions ambiguous as to whether a claim is made by the insured's reporting to St. Paul, or whether 45

See St. Paul Ins. C o . of Ill. v. Armas, 173 Ill. A p p . 3d 669, 671-72, 527 N.E.2d 9 2 1 , 922-23 (1st Dist. 1988) (insured was denied coverage because claim was reported after policy's termination date. The court remanded the case because the policy was ambiguous as to when a loss was incurred); St. Paul Fire and Marine Ins. Co. v. House, 315 Md. 328, 330-34, 554 A.2d 404, 40507 (1989) (claim was made by the physician to insurer six weeks after policy expired. Despite policy provision requiring reporting during policy period, the court held the physician was covered by the policy because "claim was m a d e " when patient initiated proceedings against physician, which was before policy expired).

46

See supra note 15 and accompanying text. Kroll, supra note 8, at 852-53; Comment, supra note 15, at 177, 182; Dilemma, supra note 19, at 930-31 n.22. See, e.g., Village Escrow Co. v. National Union Fire Ins. C o . , 202 Cal. App. 3d 1309, 248 Cal. Rptr. 687, 689-91 (1988); Employers Reinsurance Corp. v. Phoenix Ins. C o . , 186 Cal. App. 3d 545, 549, 230 Cal. Rptr. 792, 793 (1986); Armas, 527 N.E.2d at 922; House, 554 A.2d at 406. 315 Md. 328, 554 A.2d 404 (1989). Id. at 406. Id. at 407. Id.

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48

49 50 51 52



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a claim is made when the injured person asserts a claim against the insured.53 The court held that the claim was covered because ambiguities are construed against the insurer who prepared the policy.54 In another recent decision, St. Paul Insurance Co. of Illinois v. Ar55 mas, the insured, in addition to making the argument above, relied on supplemental policy provisions and documents to convince the court that the word "loss" was ambiguous.56 Although the policy implied that a claim must be made when the insured suffered a loss, the word loss was not defined in the policy.57 The court agreed with the insured's interpretation of the various provisions that "loss" could mean anything from a finding of liability and entry of judgment by a court to the filing of a complaint or even a telephone call from a dissatisfied patient who is now threatening to sue.58 Other courts recently have held that "claims made" provisions are satisfied when the injured party files suit against the insured.59 Such a broad interpretation provides a valuable argument to an insured who receives notice of a claim after the policy coverage has ended. Moreover, the Armas court followed a widely accepted maxim of insurance contract interpretation60 by construing all of the policy documents together to resolve the ambiguity.61 Another maxim requires inconsistent clauses to be construed against the insurer and in favor of the insured to provide the greatest coverage.62 Combining these two maxims with the arguments in House and _ _ 54 55 56 57 58 59

60 61

62

Id. at 410. 173 Ill. A p p . 3d 669, 527 N . E . 2 d 921 (1st Dist. 1988). Id. at 923-26. Id. at 923-24. Id. at 924. Village Escrow Co. v. National Union Fire Ins. C o . , 202 Cal. App. 3d 1309, 248 Cal. Rptr. 689 (1988) (claim was made when injured party filed a lawsuit, not when the insured was notified of the injured party's intention to file a suit); Employers Reinsurance Corp. v . Phoenix Ins. C o . , 186 Cal. App. 3d 545, 554-55, 230 Cal. Rptr. 792, 796-97 (1986) ("suit was brought" when professional malpractice claim was filed in court); St. Paul Ins. Co. of Ill. v. Armas, 173 Ill. App. 3d 669, 6737 6 , 527 N . E . 2 d 9 2 1 , 923-25 (1st Dist. 1988) (summary judgment was improper because ambiguity existed as to when a "claim is m a d e " ) . But see Sletten v. St. Paul Fire & Marine Ins. Co., 161 Ariz. 595, 780 P.2d 428, 429-30 (Ct. App. 1989) (policy not ambiguous as to whether it protected against claims made by patients but not reported by insured during the policy period). Armas, 527 N.E.2d at 923-26. See, e.g., id. at 924-26 (where an insurance contract consists of a policy and other documents that either accompany the policy or are incorporated therein by reference, they must be construed together in order to determine the meaning and effect of the insurance contract); J.M. Corbett Co. v. Insurance Co. of N . A m . , 43 Ill. App. 3d 624, 626-27, 357 N.E.2d 125, 127-28 (1976); Hoffman v. Central Sur. & Ins. Corp., 297 Ill. App. 3 7 1 , 374, 17 N.E.2d 619, 621 (1938). Hartford Acc. & Indem. Co. v. Gulf Ins. C o . , 776 F.2d 1380, 1382 (7th Cir. 1985) (all doubts about coverage should be resolved in favor of the insured); Hartford Acc. & Indem. C o . v. Neff, 594 F. Supp. 317, 320 ( N . D . Ill. 1984) (if insurance contract contains inconsistent or conflicting clauses, the clause that provides the greater benefit for the insured will govern); Mutual Fire, Marine, & Inland Ins. C o . v. Vollmer, 306 Md. 243, 2 5 1 , 508 A.2d 130, 134 (1986); Yancey v. Floyd West & C o . , 755 S.W.2d 914, 918 (Tex. Ct. App. 1988).

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Armas provides an incentive to physicians to risk the cost of litigation when confronted with policy ambiguities because the odds are becoming increasingly higher that they will succeed.


3. Written Notice and the Prejudice Rule Many "claims made" policies require the insured to notify the insurer in writing when a claim is made.63 This requirement serves as a good business practice, and strict adherence to it could minimize some of the problems previously discussed. An insured physician should notify the insurer by telephone immediately upon receiving notice from a claimant.64 This initial contact should be followed within one week by a written notice. By reporting immediately, the insured may avoid coverage problems, and if subsequent litigation occurs, the physician's position will be strengthened by a promptly reported claim and written proof of the insured's efforts to comply with the reporting requirement. Some jurisdictions follow the prejudice rule,65 which protects the insured from losing coverage if the insurance company has not been prejudiced in its defense of the claim.66 Professional liability policies generally contain a provision that requires the insured to give notice of the claim to the insurance company "immediately," "promptly," "as soon as practicable," or "within a reasonable [period of] time."67 These provisions attempt to avoid prejudice to the insurer who, because of the insured's delay in giving notice, has lost the opportunity to make a timely investigation of the claim.68 The prejudice rule clarifies the absolute necessity of reporting claims immediately because insurers may begin to use the rule more frequently to prevent their former clients from expanding the language and intent of a "claims made" policy. 63

64

E.g., Zuckerman v. National Union Fire Ins. C o . , 100 N.J. 304, 308, 495 A.2d 395, 397 (1985); Stine v. Continental Cas. C o . , 419 Mich. 89, 94, 349 N.W.2d 127, 129 (1984); Yancey, 755 S.W.2d at 919. See St. Paul Fire & Marine Ins. C o . v. House, 315 Md. 328, 3 3 1 , 554 A.2d 404, 406 (1989) (insured physician received notice of patient's legal action six days after policy expired and then waited five weeks before notifying insurer of the claim).

65

See, e.g., Gulf Ins. C o . v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515 (Fla. 1983); Village Escrow Co. v. National Union Fire Ins. C o . , 202 Cal. App. 3d 1309, 248 Cal. Rptr. 687, 691-94 (1988); House, 554 A.2d at 406; Zuckerman, 495 A.2d at 4 0 5 ; Annotation, Modern Status of Rules Requiring Liability Insurer to Show Prejudice to Escape Liability Because of Insured's Failure or Delay in Giving Notice of Accident or Claim, or in Forwarding Suit Papers, 32 A . L . R . 4 T H 141 (1984 & 1989 Supp.). But see Sletten v. St. Paul Fire & Marine Ins. C o . , 161 Ariz. 595, 780 P.2d 4 2 8 , 430-31 (Ct. App. 1989).

66

Village Escrow Co., Inc., 248 Cal. Rptr. at 692-94. Gulf Ins. C o . v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515 (Fla. 1983). Id.

67 68


235


C. Solutions and Analysis The conflict surrounding the determination of when a claim is made should be resolved by issuing policies that expressly provide a claim is made when the injured patient, or a representative, formally notifies the physician that a claim is being made or files a suit against the physician during the policy period.69 The existing requirement that the claim must be reported during the policy period should be modified because it nullifies the effectiveness of the insured's coverage during the last part of the policy period.70 The reporting requirement should be extended so that coverage is provided in situations where a suit is filed by the injured party during the policy period but the claim is not reported by the physician until coverage has expired.71 The financial aspects of this proposal are resolved by requiring the insurance companies initially to bear the cost of delayed claims but allowing them to spread the cost among all "claims made" policyholders. It would be unreasonable for physicians to expect to receive free coverage for claims made after the policy expires. The physicians simply need a solution to the dilemma of defining when a claim is made in the event they change insurance carriers. The insurer remains in the best position to provide coverage and distribute the costs. Now that liability insurers have succeeded in converting the profession to "claims made" coverage,72 it is surely within their actuarial abilities to provide coverage for those claims that occur so late in the policy period that the insured is unable to contact the insurer before coverage terminates.73 The delayed claims dilemma is most problematic when the insured

69

70

71

73

See Village Escrow Co., 248 Cal. Rptr. at 6 9 1 ; Employers Reinsurance Corp. v. Phoenix Ins. C o . , 186 Cal. A p p . 3d 5 4 5 , 554-55, 230 Cal. Rptr. 7 9 2 , 796-97 (1986). Brown-Spaulding & A s s o c . , Inc. v. International Surplus Lines Ins. C o . , 206 Cal. A p p . 3d 1441, 254 Cal. Rptr. 192, 195-96 (1989); Village Escrow Co., 248 Cal. Rptr. at 6 9 1 ; Gulf Ins. Co., 4 3 3 So. 2d at 515-16; St. Paul Fire & Marine Ins. C o . v. House, 315 M d . 328, 340, 554 A.2d 4 0 4 , 410 (1989). But cf. Zuckerman v. National Union Fire Ins. C o . , 100 N . J . 3 0 4 , 324, 495 A.2d 3 9 5 , 406 (1985) (holding " a n extension of the notice period in a 'claims m a d e ' policy constitutes an unbargained-for expansion of coverage, gratis, resulting in the insurance company's exposure to risk substantially broader than that expressly insured against in the policy."). Based on the typical time lapse in the cases discussed, an extension of six months to one year usually would be adequate to maintain coverage for reporting lapses that are caused by the injured party. One medical malpractice policy provided extended coverage for claims made against the insured for 3 6 months following the termination or expiration of the policy. Brander v. Nabors, 443 F. Supp. 7 6 4 , 766 ( N . D . Miss.), aff'd, 579 F.2d 888 (5th Cir. 1978). See supra text accompanying notes 25-29. See Stine v. Continental Cas. C o . , 419 Mich. 89, 99-100, 349 N.W.2d 127, 131 (1984).


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changes insurance carriers.74 If insurers are permitted to deny coverage for delayed claims, they are unfairly inhibiting the insured physician's freedom to contract by providing a disincentive to change insurance carriers.75 A physician who maintains constant coverage with the same insurance carrier should not be in a different position, either in terms of policy coverage or cost, than the physician who changes carriers. If the reporting requirement is strictly followed, the physician who changes carriers is placed in a worse position unless the new carrier agrees to provide coverage for delayed claims that were initiated during the previous policy period.76 Extending the reporting requirement to provide coverage for delayed claims would place a physician who changes carriers in the same position as a physician who stays with the same insurer. In addition, future liability policies should include an expressly stated requirement that the physician must contact the insurer in writing77 within 10 days of receiving a complaint, summons, service of process, or other formal notice that an injured patient is making a claim or otherwise taking legal action. Physicians will not be overly burdened by promptly notifying their former liability insurer when a claim is made against them, and this requirement will protect physicians from insurers' claims of prejudice due to late notification.78 These suggestions should eliminate much of the litigation79 surrounding this controversy and put the parties in the financial position for which they originally bargained. II. ASSIGNING A CAUSE OF ACTION AGAINST A LIABILITY INSURER TO A COINSURER The legality of permitting insureds to assign legal claims against insurers has been a frequently litigated controversy during the past 20 See supra text accompanying note 4 5 . The proposed extension of coverage would be most applicable to physicians who switch insurance carriers. As for physicians who retire, this extension still would apply provided the suit was filed during the policy period. Retiring physicians still would need to purchase an extension to be fully protected from claims filed after the policy terminated. See Comment, supra note 15, at 182; Dilemma, supra note 19, at 930-31. 75 76

77 78

See Comment, supra note 15, at 182 & nn.113-14. See Comment, supra note 15, at 182 & n.113 ("claims m a d e " policy may lock buyers into a single insurer, because "claims m a d e " policies often cover only those past events that occurred during policy periods with the same insurer). In the absence of policy provisions limiting the scope of coverage, a pure "claims m a d e " policy would provide coverage for delayed claims. By definition, a delayed claim would be " m a d e " during the new policy period. See supra note 38 and accompanying text. However, many insurers have attempted to limit retroactive coverage. For a complete discussion of the retroactive aspect of "claims m a d e " coverage, see Comment, supra note 15, at 182-87. See supra text accompanying note 6 3 . See supra text accompanying notes 64-67. Eliminating the expense of litigating these issues would greatly reduce both parties' costs because the insurer's cost savings should be passed on to the policyholders in the form of reduced premi-

ums.


237

years.80 In many assignment cases, the insured's cause of action against the insurer is for failure to acknowledge coverage or for wrongful failure to settle a claim against the insured.81 The insured traditionally assigned the claim to the plaintiff who won a judgment in the underlying medical malpractice action. However, recent cases have decided whether the insured may assign a cause of action for wrongful failure to settle to a coinsurer.82


A. History of Assignments The common law permitted assignments of a cause of action based on contract, but courts were more reluctant to permit assignments of actions based on tort.83 This was during an era when courts were generally hesitant to approve any type of assignment, so the tort/contract distinction provided an opportunity to deny the validity of the assignment if the court so chose. However, the law has developed during the past several years so that today, assignments are generally permitted regardless of whether they are based on a tort or a contract.84 Thus, the modern trend is to permit assignment of claims the insured has against the insurer provided the assignment does not violate public policy.85 This issue usually arises when the insured assigns the cause of action to a successful plaintiff in exchange for a release of any claims the plaintiff has against the insured. Often the assignee was an injured plaintiff who accepted an assignment from a judgment-proof defendant in the hope of recovering from the defendant's insurer.86 However, assignments also have been used in cases where the insurer refuses to defend the insured on grounds that the claim was not within the insured's coverage. Under these circumstances, the injured party obtains a judgment against the insured yet the insurer did not participate in the litigation. The end result is litigation 80

See Annotation, Assignability of Insured's Right to Recover Over Against Liability Insurer for Rejection of Settlement Offer, 12 A.L.R.3D 1158 (1967 & Supp. 1989). 81 Hartford Cas. Ins. C o . v . Argonaut-Midwest Ins. C o . , 854 F.2d 279 (7th Cir. 1988); St. Paul Fire & Marine Ins. C o . v. Allstate Ins. C o . , 25 Ariz. App. 3 0 9 , 543 P.2d 147 (1975); Communale v. Traders & General Ins. C o . , 50 Cal. 2d 654, 328 P.2d 198 (1958); Critz v . Farmers Ins. C o . , 230 Cal. App. 2d 788, 4 1 Cal. Rptr. 4 0 1 (1964); Brown v. Guarantee Ins. C o . , 155 Cal. App. 2d 679, 319 P.2d 69 (1957). See Annotation, supra note 80, at 1159-65. 82 Coinsurer, as used herein, means a liability insurance carrier who shares liability for the claim being asserted against the insured with another insurance carrier. From the insured's perspective, the insurers have issued concurrent liability insurance policies. 83 See, e.g., Grundy v . Manchester Ins. & Indem. C o . , 4 2 5 S.W.2d 735, 7 3 6 (Ky. Ct. App. 1968); Annotation, supra note 80, at 1159-60 & n . 1 . 84 See Smith v . Transit Cas. C o . , 281 F. Supp. 6 6 1 , 668-69 ( E . D . Tex. 1968); Communale v . Traders & General Ins. C o . , 5 0 Cal. 2d 654, 328 P.2d 198, 202-03 (1958); Brown v . Guarantee Ins. C o . , 155 Cal. App. 2d 679, 319 P.2d 6 9 , 79 (1957); Annotation, supra note 80, at 1161-63. 85 Critz v. Farmers Ins. C o . , 230 Cal. App. 2d 788, 41 Cal. Rptr. 4 0 1 , 4 0 7 (1964). 86 See Gray v. Grain Dealers Mut. Ins. C o . , 871 F.2d 1128, 1129 (D.C. Cir. 1989); Gray v . Nationwide Mut. Ins. C o . , 422 Pa. 500, 5 0 7 , 223 A.2d 8, 11 (1966); Grundy, 425 S.W.2d at 736-37.

238

HUTTON

between the plaintiff who won the medical malpractice action and the insurer who argues that the insured's policy does not provide coverage against the plaintiffs claim.87


B. Liabilities and Contribution Between Coinsurers The issues in cases involving duplicate or overlapping insurance coverage can be some of the most difficult to resolve in the field of insurance law.88 For example, when there are two or more insurers who could be liable for the claim being asserted against the insured, and one insurer denies liability in the litigation, the other insurer may elect to pay more than its share of the settlement or judgment. The settling insurer then will accept an assignment of the insured's cause of action against the other insurer for wrongful failure to settle the claim against the insured.89 It is well settled that an equitable action for contribution lies when one insurer pays a debt shared by other insurers.90 However, an action for contribution assumes that each parties' liability has been established. If one insurer denies liability on the grounds that the claim was not within the insured's coverage, the settling insurer may recover through an assignment of the insured's cause of action. Although the right of an insurer to recover from a coinsurer has been established, controversies still exist as to how the cost of the settlement or judgment should be allocated.91 The courts have experienced difficulty when trying to calculate a fair allocation of a judgment, which indicates how complicated litigation between insurance companies can become. In the context of physicians' professional liability insurance, litigation 87

88

See Communale, 50 Cal. 2d 654, 328 P.2d at 202-03; Maneikis v. St. Paul Ins. Co. of Ill., 655 F.2d 818, 821-22 (7th Cir. 1981). Home Ins. Co. v. Certain Underwriters At Lloyd's London, 729 F.2d 1132, 1133 (7th Cir. 1984). See also 8A APPLEMAN, INSURANCE LAW AND PRACTICE § 4906 (1981).

89

90

91

See Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 854 F.2d 279, 280 (7th Cir. 1988); St. Paul Fire & Marine Ins. Co. v. Allstate Ins. Co., 25 Ariz. App. 309, 310, 543 P.2d 147, 148 (1975); Daugherty v. Blaase, 191 Ill. App. 3d 496, 548 N.E.2d 130 (1989). Certain Underwriters At Lloyd's London, 729 F.2d at 1134; Forum Ins. Co. v. Ranger Ins. Co., 711 F. Supp. 909, 914 (N.D. Ill. 1989); Royal Globe Ins. Co. v. Aetna Ins. Co., 82 Ill. App. 3d 1003, 1005, 403 N.E.2d 680, 682 (1980). Cf. Pekin Ins. Co. v. Cincinnati Ins. Co., 157 Ill. App. 3d 404, 406-07, 510 N.E.2d 524, 526 (4th Dist. 1987) (although contribution between coinsurers is permitted, Pekin's complaint indicated that it was not requesting contribution but indemnity. The court held that these types of "direct action" suits against insurance companies prior to obtaining a judgment against the insured are against public policy and must be dismissed). Compare Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 664 F. Supp. 373 (N.D. Ill. 1987), rev'd, 854 F.2d 279 (7th Cir. 1988) (equitable contribution ratio calculated by distinguishing between primary and secondary coverage and then allocating liability according to the amount of each insurer's primary coverage) with Hartford Cas. Ins. Co. v. Argonaut-Midwest Ins. Co., 854 F.2d 279 (7th Cir. 1988) (allocation could be determined by asking how liability would be apportioned in the absence of insurance or by determining the position the insureds would have occupied if the jury had allocated liability by determining contribution among joint tortfeasors).



239

involving assignments is quite prevalent because coverage often is provided by more than one liability insurer. For example, in Hartford Casualty Insurance Co. v. Argonaut-Midwest Insurance Co. ,92 a hospital patient sued the hospital and two physicians for medical malpractice. ArgonautMidwest, the hospital's insurer, refused to defend or settle on behalf of one of the physicians on the grounds that he was not an employee of the hospital.93 Hartford, the physician's professional liability insurer, agreed to defend him and ultimately settled on his behalf in exchange for an assignment of his claim against Argonaut-Midwest.94 Argonaut-Midwest later conceded that the physician was an employee of the hospital and therefore was covered by the hospital's policy.95 However, when Hartford attempted to collect, the district court granted Argonaut-Midwest's motion for summary judgment on the ground that the physician's assignment of his cause of action to Hartford was against Illinois public policy.96 The Seventh Circuit reversed, holding that the assignment did not violate public policy because the physician had a valid claim against Argonaut-Midwest, and Hartford's actions had facilitated a settlement with the injured patient.97 Moreover, the court rejected the defendant's argument that allowing insurance companies to accept such assignments will pit insurance companies against each other and consequently make cases harder to settle when the defendant has insurance coverage from more than one liability insurance carrier.98 As Hartford"39 and other cases100 illustrate, an assignment to a coinsurer may facilitate settlements and lower costs to the insurance companies. Assigning the cause of action not only benefits the injured party and the insured physician, but it also puts the burden of litigating the allocation of judgment and settlement costs on the insurance companies.101 Given that it is the insurers, not the plaintiff or physician, who are unable to agree on the appropriate allocation of costs, it is appropriate that the insurers should bear the cost of further litigation to resolve these issues. The courts are correct in permitting the insured to assign the cause of action and thereafter 92

854 F.2d 279 (7th Cir. 1988). Id. at 279-80. 94 Id. 95 Id. 96 Id. 97 Id. at 281-84. 98 Id. at 2 8 1 . 99 See supra notes 92-98 and accompanying text. 100 St. Paul Fire & Marine Ins. C o . v. Allstate Ins. C o . , 25 Ariz. A p p . 3 0 9 , 3 1 2 , 543 P.2d 147, 150 (1975); Daugherty v . Blaase, 191 Ill. App. 3d 496, 548 N . E . 2 d 130 (1989). 101 See Allstate Ins. Co., 5 4 3 P.2d at 150 (St. Paul Ins. C o . paid the insured for the full loss and accepted an assignment of the insured's claim against Allstate. The court permitted St. Paul to recover from Allstate because Allstate wrongfully failed to acknowledge coverage). 93

240

HUTTON

let the insurance companies argue the proper allocation of the settlement or judgment costs.


C. The Judgment and Payment Rules and Public Policy Considerations In several cases102 the defendant insurers have argued that the assignment should not be allowed until a judgment has been entered against the insured. The "judgment rule" states that an entry of judgment in excess of the policy limits constitutes sufficient loss to the insured to permit an assignment.103 The "payment rule" states that the insured must prove that payment of the judgment could be made notwithstanding the assignment.104 The courts recently have favored permitting assignments before or after the entry of judgment, regardless of the insured's ability to pay the judgment in the absence of an assignment.105 The courts deciding assignment issues have been careful to evaluate public policy considerations such as collusion between the insured and the assignee, and potential unfairness to the defendant coinsurer.106 Assignments generally are upheld if they are made for valid economic or legal reasons.107 As many of the opinions assert, the law favors settlements,108 and the courts appear willing to support any new approaches or theories furthering this policy.109 D. Analysis In its simplest terms, allowing assignments will streamline the former procedure requiring the insured to undergo the time and expense of suing the nonparticipating liability coinsurer in order to pay the coinsurer that settled on the insured's behalf.110 Allowing the insured to assign the cause 102 103 104 103

See, e.g., Gray v. Grain Dealers Mut. Ins. C o . , 871 F.2d 1128, 1131-32 (D.C. Cir. 1989). Id. Gray v. Nationwide Mut. Ins. C o . , 422 Pa. 5 0 0 , 504-06, 223 A . 2 d 8, 10 (1966). Grain Dealers Mut. Ins. Co., 871 F.2d at 1131-32. See also 1A R. L O N G , supra note 14, ch. 5 A ,

§ 5A.20, at 5A-114 (1989). 106

107

108 109

110

Grain Dealers Mut. Ins. Co., 871 F.2d at 1133; Critz v . Farmers Ins. C o . , 2 3 0 Cal. A p p . 2d 7 8 8 , 4 1 C a l . Rptr. 4 0 1 , 4 0 9 (1964); Nationwide Mut. Ins. Co., 2 2 3 A . 2 d at 12-13. Grain Dealers Mut. Ins. Co., 871 F.2d at 1133; Critz, 41 Cal. Rptr. at 409; Nationwide Mut. Ins. Co., 223 A . 2 d at 12-13. See also Hartford Cas. Ins. C o . v. Argonaut-Midwest Ins. C o . , 854 F.2d 279, 283 (7th Cir. 1988) (assignment reduced the cost of the settlement and averted postjudgment proceedings). E.g., Critz, 4 1 Cal. Rptr. at 4 0 8 . See Hartford C a s . Ins. C o . v. Argonaut-Midwest Ins. C o . , 854 F.2d at 279 (court held that insured's assignment to Hartford of cause of action against Argonaut-Midwest did not violate public policy and facilitated settlement with the injured party). See also St. Paul Fire & Marine Ins. C o . v. Allstate Ins. C o . , 2 5 Ariz. A p p . 309, 543 P.2d 147 (1975); Daugherty v . Blaase, 191 Ill. A p p . 3d 4 9 6 , 5 4 8 N . E . 2 d 130 (1989). See Gray v . Nationwide Mut. Ins. C o . , 422 Pa. 5 0 0 , 511 n . 7 , 223 A . 2 d 8, 13 n.7 (1966).



241

of action will permit the coinsurers to sue directly. Now that several courts have approved this type of assignment, the trend likely will continue as more liability insurers seek to settle with the plaintiff and resolve arguments among themselves in separate proceedings.111 The liability insurers should resolve these controversies because they are the parties that will benefit most from settlements with plaintiffs and the inherent reduction in litigation and claims costs.112 In addition, insurers are certain to continue their efforts to improve profitability by reducing the cost of claims. This will cause increasing numbers of insurers to deny coverage in borderline cases which then will force the insured and coinsurer to litigate issues of contribution or indemnity. From each parties' perspective, the benefits derived from allowing the insured to assign a cause of action greatly outweigh the costs. m . INSURERS' LIABILITY FOR FAILURE TO SETTLE A CLAIM Part of the insurer's responsibility in a liability policy is to provide a legal defense for the insured if a claim is made. This defense generally is provided by attorneys hired by the insurance company. Because the insurance company contracts to indemnify the insured if an adverse judgment is incurred, the insurer has a financial stake in the outcome of the litigation and therefore assumes responsibility for the defense. This arrangement works well unless the judgment exceeds the insured's coverage limit. When this occurs, a controversy develops regarding the manner in which the insurer conducted the defense113 and the insurer's duty to settle within the policy limits.114 The insurer's conduct is questioned most often when the plaintiff offers to settle within the policy limits, the insurer declines the offer, and a judgment is entered that exceeds the policy limits.115 An insurer may be held liable for a judgment in excess of the policy limits when it unreasonably refuses to accept a settlement offer within the policy limits.116 The issue is more difficult, however, when the plaintiff does not make a settle111

See Hartford Cas. Ins. Co., 854 F.2d at 279; Allstate Ins. Co., 543 P.2d at 147; Dougherty, 548 N.E.2d at 130. 112 See supra notes 99-101 and accompanying text. 113 See Annotation, Insurer's Bad Defense-liability, 34 A.L.R.3D 533 (1970 & Supp. 1989). 114

See 1A R. LONG, supra note 14, ch. 5A, at § 5A.01; 2 LOUISELL & WILLIAMS, MEDICAL MALPRAC-

TICE ch. XX, ¶ 20.06 (1989); Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2D 168 (1955 & Supp. 1989). 115 See Gray v. Grain Dealers Mut. Ins. Co., 871 F.2d 1128, 1129 (D.C. Cir. 1989); Torrez v. State Farm Mut. Auto. Ins. Co., 705 F.2d 1192, 1194 (10th Cir. 1982). 116 Torrez, 705 F.2d at 1195.

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HUTTON

ment offer."7 The insured then might argue that the insurer should have attempted to settle within the policy limits rather than risk a judgment that exceeded the coverage limits. Resolving this controversy requires an examination of the contractual relationship between the parties, particularly the insurer's duty to the insured.


A. The Insurer's Duty In the typical insurance contract, the insured agrees that the insurer has the right to conduct the litigation defense and settlement negotiations.118 Because the nature of the contractual relationship between the parties requires the insured to give up these defense rights, the law imposes a duty on the insurer to give the interests of the insured equal consideration and to deal fairly with the insured, particularly when the judgment could exceed the policy limits."9 Although the insurer does not have an absolute duty to settle,120 it does have a duty to act in good faith to settle a claim against the insured.121 Deciding whether this duty has been breached is a question of fact for the jury.122 The arguments in failure to settle cases focus on whether the insurer breached its duty to the insured.123 In the past, some jurisdictions recognized a duty to exercise ordinary or due care.124 However, the majority of jurisdictions today follow a good faith standard.125 Good faith has been defined to mean the insurer cannot be partial to its own interests and therefore must give its interests and those of the insured equal consideration.126 Some cases refer to the insurer's bad faith in dealing with the insured, 117

118

119 120

121

122

123

124 125

126

See Lund, supra note 1 (jury awarded plaintiff $3 million; although plaintiffs did not make a settlement offer, their attorney stated after the trial that they would have settled for the $1 million policy limit prior to the jury's verdict). Wolfberg v . Prudence Mut. C a s . C o . of Chicago, 9 8 Ill. A p p . 2 d 190, 195, 2 4 0 N . E . 2 d 176, 179 (1968). Id. LaRocca v . State F a r m Mut. Auto. Ins. C o . , 3 2 9 F. Supp. 163, 168 (W.D. Pa. 1971), aff'd, 4 7 4 F.2d 1338 (3d Cir. 1973); Annotation, supra note 114. 1A R. LONG, supra note 14, ch. 5 A , at § 5 A . 0 1 ; 2 LOUISELL & WILLIAMS, supra note 114, at ¶ 20.06. Waters v . American Cas. C o . , 261 Ala. 2 5 2 , 73 So. 2d 524, 529 (1953); Thomas v . Lumbermens Mut. C a s . C o . , 4 2 4 So. 2d 3 6 , 38 (Fla. Dist. Ct. A p p . 1982). See Gibson v . Western Fire I n s . C o . , 2 1 0 Mont. 2 6 7 , 682 P.2d 725 (1984) (court analyzes six factors to be considered in determining whether an insurer's failure to settle a claim w a s in bad faith). See also Waters, 73 S o . 2d at 529 (the issue in these types of cases is whether, considering all the circumstances, the insurer failed t o exercise ordinary care on the o n e hand or good faith on the other). Waters, 73 So. 2d at 529; 2 LOUISELL & WILLIAMS, supra note 114, at ¶ 20.06. 1A R . LONG, supra note 14, c h . 5 A , at §§ 5 A . 0 1 , 5 A . 0 6 ; 2 LOUISELL & WILLIAMS, supra note 114, at ¶ 20.06; Annotation, supra note 114. Torrez v. State Farm Mut. Auto. Ins. C o . , 705 F.2d 1192, 1195 (10th Cir. 1982). See also State F a r m Mut. Auto. I n s . C o . v . Floyd, 2 3 5 Va. 136, 3 6 6 S.E.2d 9 3 , 9 7 (1988).



243

which simply means an absence of good faith in its relations with the insured.127 In a few cases, the insurer obviously has failed to conduct the defense in a competent manner128 and consequently may be held liable for the excess judgment. In other cases, however, the insurer appears to have exercised good judgment throughout the entire litigation and yet the judgment still exceeds the policy limits.129 When the insurer acts in good faith and conducts the litigation competently, the insurer should not be held liable for the excess judgment merely because it failed to predict the result of the litigation.130 Insureds who seek to recover the excess judgment should be required to prove that the insurer did not have sufficient reason to believe that the potential liability would be less than the policy limits. In addition, the insured should prove that it would have been possible to settle the case within the policy limits. This is particularly applicable when the insured's conduct may have somehow contributed to the excess judgment.131 An insured who could be partly at fault should not be permitted to use the excess judgment to the insurer's disadvantage.132 B. Solutions and Analysis Several preventive measures would minimize the problems discussed above. First, increased communication at an earlier stage of the litigation would improve each parties' understanding of the litigation strategy. Just as the parties should discuss the strengths and weaknesses of the plaintiffs case and what the potential settlement or judgment could be, they should also develop a contingency plan to follow when it appears that the case could exceed the policy limits. Most of the burden for initiating these discussions should be placed upon insurance counsel because of their obvious advantage in legal expertise over physicians and because the insurer is 127

Torrez, 7 9 5 F.2d at 1195. See also Floyd, 366 S.E.2d at 9 7 . See, e.g., Critz v. Farmers Ins. C o . , 2 3 0 Cal. App. 2d 788, 4 1 Cal. Rptr. 4 0 1 , 4 0 3 (1964) (insurer overlooked insured's assignment of cause of action and offered no evidence at trial to exonerate insured as the party at fault). See generally Annotation, supra note 113, at 547-57 (discussion of insurer's breach of duty in particular circumstances). Contra Thomas v . Lumbermens Mut. C a s . C o . , 4 2 4 S o . 2 d 3 6 (Fla. Dist. Ct. App. 1982). 129 See Lund, supra note 1. 130 Bollinger v . Nuss, 2 0 2 Kan. 326, 4 4 9 P.2d 502, 5 1 4 (1969). 131 See Lund, supra note 1 (insured physician refused insurer's attempts to settle on t w o occasions because he felt the case w a s defensible. Jury returned verdict against insured that was three times the policy coverage). 132 In several cases, an insured has attempted to recover for intentional or negligent infliction of emotional distress as a result of the insurer's failure to settle. See Beckham v. Safeco Ins. C o . of A m . , 691 F.2d 898, 904 (1982). See also 1A R. L O N G , supra note 14, c h . 5 A , § 5A.06, at 5A-49 (if the breach of the duty of good faith is in tort, it opens the door to tort remedies such as emotional distress). In one case, the insured successfully recovered for personal injury. See Lund, supra note 1. 128


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likely to bear the cost of an excessive judgment.133 The insured should not assume, however, that all of the burden is on the insurer because the insured must participate and assist in the defense and ultimately could lose a subsequent suit against the insurer for the excess judgment. Second, the insured physician should give serious consideration to hiring an attorney to represent the physician's interests if it appears that the judgment could exceed the coverage limits. Although this involves extra costs that the physician will have to bear, it would be cost effective, considering that an excess judgment puts the physician's personal assets at risk. Because the physician's attorney would work as a consultant, relatively less time and expense would be required than for the defense attorneys conducting the actual litigation. Retaining an attorney would help ensure that the physician's interests were protected and would offset the insurer's greater legal expertise because both potential defendants would have independent counsel representing their interests. Moreover, by evaluating the case and perhaps even monitoring the insurance counsel's method of conducting the litigation, the physician's attorney could provide an alternate viewpoint as to potential litigation risks and would be an excellent witness if the physician were to sue the insurer for failing to settle within the policy limits. CONCLUSION Three legal issues commonly arise in suits by physicians against their medical malpractice insurers. The primary issue in many cases has been determining when a claim is actually made within a "claims made" professional liability policy. Another issue is whether a physician may assign a cause of action against a liability insurer to a liability coinsurer. Finally, physicians are suing their liability insurers when judgments exceed the liability coverage limits on the ground that the insurer failed to settle a malpractice claim within the policy limits. The conflict surrounding the determination of when a claim is made should be resolved by issuing policies that expressly provide that a claim is made when a suit is filed or other formal action taken against the physician during the policy period. The existing requirement that the claim must be reported during the policy period should be modified because it nullifies the effectiveness of the insured's coverage during the last part of the policy 133

Gibson v. Western Fire Ins. Co., 210 Mont. 267, 682 P.2d 725 (1984) (physician recovered compensatory and punitive damages because of insurer's bad faith refusal to settle a malpractice claim within the policy limits); Lund, supra note 1. Contra Florida Physicians Ins. Reciprocal v. Avila, 473 So. 2d 756 (Fla. Dist. Ct. App. 1985) (insured physician did not have a cause of action against medical malpractice insurer for failure to offer policy limits to settle plaintiffs claim); Thomas v. Lumbermens Mut. Cas. Co., 424 So. 2d 36 (Fla. Dist. Ct. App. 1982); State Farm Mut. Auto. Ins. Co. v. Floyd, 235 Va. 136, 366 S.E.2d 93 (1988).



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period. Because it is unreasonable to expect insurers to bear the cost of delayed claims, the liability insurer should spread the cost among all policyholders for the few claims that occur so late in the policy period that the insured is unable to contact the insurer before coverage terminates. In addition, future liability policies should include a requirement that a physician must contact the insurer in writing within 10 days of receiving a complaint, service of process, or other formal notice that an allegedly injured patient is taking legal action. This requirement will protect physicians from insurers' claims of prejudice due to late notification. Allowing a physician to assign a cause of action against an insurer will streamline litigation because the coinsurers will be able to sue one another directly. This policy should be encouraged because it facilitates settlements with injured plaintiffs and places the burden of allocating coverage responsibilities on the insurers who will benefit most from the reduction in litigation and claims costs. The problems encountered when judgments exceed policy limits could be minimized by increasing communications between the parties in the early stages of the litigation. Physicians who believe a suit could exceed the limits of their policy should retain an attorney to represent their interests rather than relying on the insurance company's counsel. This will ensure that the physician's interests are protected and will provide the physician with an alternate viewpoint as to potential litigation risks.

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