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

United States District Court, N.D. Indiana, Fort Wayne Division

July 29, 2019

THE MEDICAL PROTECTIVE COMPANY OF FORT WAYNE INDIANA, Plaintiff,
v.
AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, Defendant.

          OPINION AND ORDER

          HOLLY A. BRADY JUDGE

         In this litigation, Plaintiff Medical Protective Company of Fort Wayne, Indiana (MedPro), has sued Defendant American International Specialty Insurance Company (AISLIC), now known as AIG Specialty Insurance Company, for breach of the terms of a 2006 policy AISLIC issued to MedPro. MedPro alleges that AISLIC breached the policy when it refused to cover MedPro's extra-contractual liability and eventual settlement of a third party's bad faith claim against MedPro.

         Both parties moved for summary judgment [ECF Nos. 68 & 69]. MedPro sought partial summary judgment on three of AISLIC's affirmative defenses: prior known wrongful acts exclusion, known loss doctrine, and rescission. AISLIC moved for judgment as a matter of law on the merits of MedPro's claim. Specifically, AISLIC sought a declaration that: (1) there is no coverage for the extra-contractual damages claim because the claim was not first made during the 2006 AISLIC policy period; and (2) coverage is precluded under exclusion M of the policy.

         In March 2018, the district court granted summary judgment in favor of AISLIC, and the Clerk entered judgment. The court found that Exclusion M barred coverage of the extra-contractual liability claim. MedPro filed an appeal and was successful, leading to a remand of the case back to this Court.[1] The purpose of this Opinion and Order is to resolve any outstanding issues related to the previous summary judgment motions before proceeding further in this cause. To put the case in context, the Court will briefly recite some of the pertinent background facts, understanding that a more comprehensive version of the facts can be found in the district court's March 2018 opinion [ECF No. 85], and the Seventh Circuit's December 18, 2018, decision, Med. Protective Co. of Fort Wayne, Ind. v. Am. Int'l Specialty Lines Ins. Co., 911 F.3d 438 (7th Cir. 2018).

         BACKGROUND

         In 2002, thirty-six-year-old Vicki Bramlett died from complications following routine surgery she underwent in Texas. Mrs. Bramlett's family sued Dr. Benny Phillips, the physician who performed the surgery, and the hospital and nurses who provide post-surgery care. MedPro was Dr. Phillips's malpractice insurer. MedPro twice declined to settle the case for $200, 000, Dr. Phillips's insurance policy limit. The Bramletts' demand was based on a seminal Texas Supreme Court case, G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. 1929), under which an insurer is liable for any amounts in excess of policy limits if it wrongfully rejects a plaintiff's demand within the policy limit that an ordinarily prudent insurer would have accepted. At the time the Bramletts made the Stowers demands, the hospital and its nurses had already settled with the Bramletts for $2.3 million.

         At trial, a jury awarded a $14 million verdict against Dr. Phillips. While the case was on appeal, MedPro reported to AISLIC that there was a potential claim against it based on Texas law. AISLIC responded to the report, stating that no bad faith claim had yet been made against MedPro, and that it was reserving its rights. Later, in 2009, the Supreme Court of Texas capped Dr. Phillips's liability. The court, for the first time, also held that the Bramletts could pursue a direct claim against MedPro for the difference between the jury verdict and the statutory cap. Three days after the Texas Supreme Court decision, Mrs. Bramlett's family sued MedPro for the excess verdict. MedPro settled the claim. MedPro also settled with Dr. Phillips pursuant to a previous agreement to indemnify him.

         AISLIC declined to cover MedPro's settlement with Mrs. Bramlett's family, leading MedPro to sue AISLIC for breach of contract.

         ANALYSIS

         A. Timing of the Claim

         One of the arguments that AISLIC advanced in support of summary judgment was that the 2006 AISLIC policy did not cover the extra-contractual damages claim against MedPro because the claim was first made against MedPro before the policy incepted on July 1, 2006. The district court declined to address this argument because it found that Exclusion M barred coverage of the Bramletts' extra-contractual liability claim, and granted summary judgment in favor of AISLIC on that ground. When MedPro filed an appeal, AISLIC again advanced the timing argument, as well as others.

         The argument is as follows: in December 2004, MedPro's insured, Dr. Phillips, through his counsel: (1) accused MedPro of wrongfully rejecting two Stowers demands to settle the wrongful death lawsuit for Dr. Phillips's $200, 000 policy limits; (2) argued that MedPro's handling of the matter made it liable for extra-contractual damages; and (3) demanded that MedPro settle the lawsuit, even if that meant paying more than Dr. Phillips's policy limits. This claim was asserted against MedPro thereafter on multiple occasions by counsel for both Dr. Phillips as well as the Bramletts.

         AISLIC argued that, under these facts, a reasonable juror could reach only one conclusion: that the demand for extra-contractual damages against MedPro was a claim first made against MedPro prior to inception of the 2006 AISLIC policy, and therefore was not a claim “first” made against MedPro between July 1, 2006, and July 1, 2007.[2] It argued that these same facts established that coverage is excluded under Exclusion M, which bars coverage for a claim for a Wrongful Act if any Insured, prior to purchasing insurance, knew or could have foreseen that such wrongful act could result in a claim or suit. AISLIC also asserted that Indiana's known loss doctrine precluded coverage.

         The Court of Appeals, interpreting Exclusion M, agreed that the Bramletts' claim was foreseeable to MedPro. However, the question of foreseeability would only be reached if the trier of fact first found that MedPro committed a “Wrongful Act” by failing to settle with the Bramletts. On that issue, the Court of Appeals disagreed with the district court's ruling and determined that a genuine issue of fact existed. Med. Protective Co., 911 F.3d at 447 (“MedPro argues that it handled the Bramletts' Stowers demands appropriately and that its rejection of the demands was not ...


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