News: A patient suffered catastrophic birth injuries and filed a lawsuit against a hospital, resulting in a $7.75 million award. During the process, the hospital’s insurance provider refused to accept a settlement offer lower than the ultimate award, despite the hospital’s request that such offer be accepted.
Following the award, the hospital filed suit against the insurer to seek restoration of the difference in its coverage that applied to both aggregate and individual claims. A trial court rejected the hospital’s suit but was reversed by an appellate court for further proceedings, leaving open the possibility the hospital reclaims coverage.
Background: A hospital purchased medical malpractice insurance from a company with a $7.25 million coverage limit on both aggregate and individual claims.
In 2017, a patient’s guardian filed a malpractice claim alleging catastrophic birth injuries. The defendant hospital tendered the case to its insurance provider; the insurer accepted the case and directed the defendant hospital’s defense. During settlement negotiations, the patient’s guardian presented evidence of estimated damages in the hundreds of millions and demanded the insurance policy’s limit. The defendant informed the insurer it wanted to accept the settlement demand. However, the insurer failed to attend a settlement conference and failed to accept the settlement demand.
The parties entered a high-low arbitration, with the low limit of $2.5 million and the high limit of $7.75 million. The plaintiff demanded $6 million before the presentation of evidence. Again, the defendant requested its insurer accept the settlement, but the insurer did not accept or engage in settlement negotiations. The arbitrator awarded the plaintiff far above the high limit of $7.75 million, but that was reduced to the maximum due to the agreed-upon process.
The insurer paid a portion of this settlement, and the defendant alleged the insurer’s failure to accept the lower offers resulted in a significant depletion of the hospital’s aggregate coverage. The hospital filed a lawsuit against the insurer, alleging breach of contract, bad faith, and vicarious liability. The hospital sought a $1.75 million restoration to its policy aggregate coverage, calculated as the difference between the final settlement demand of $6 million and the final award of $7.75 million.
A trial court dismissed the hospital’s action, claiming the hospital failed to adequately plead actual monetary damages. An appellate court rejected this conclusion, finding the hospital was not seeking any payment but instead equitable relief in the form of restoration of its coverage. The appellate court sent the matter back to the trial court for a determination on whether such equitable relief is available for the hospital.
What this means to you: There appears to be no real dispute as to the underlying medical malpractice or liability in this matter. As a result, this case provides lessons concerning aspects of malpractice litigation that do not focus on challenging the actions of the care providers. Generally, an injured party alleging malpractice must prove four elements: a duty of care, a breach of that duty, a causal connection between the care provider’s breach of duty and the patient’s injury, and damages. When the breach of duty is unquestionable, defendants can and should focus on these other aspects, depending on the facts and circumstances of the case.
Challenging causation may be appropriate if, for example, the patient’s own actions contributed to the patient’s injury or even solely caused the patient’s injury. A provider may avoid liability if the patient is partially or completely at fault, even if the care provider’s actions fell below the applicable standard of care. Similarly, defendants can demonstrate the patient’s injuries were pre-existing such that the care provider’s conduct was irrelevant to the patient’s harm. Experts regularly testify about the nature and extent of a patient’s damages to estimate future costs, and minor injuries are likely to result in lower damages award if liability is found.
In this case, the injured plaintiff apparently easily proved the defendant’s negligence and significant damages. Fortunately, the parties entered into a high-low agreement, which is a binding mechanism that allows parties to reduce the otherwise inherent risk and uncertainty in litigation. A high-low agreement guarantees the plaintiff recovers at least some amount — the “low” figure — while preventing the plaintiff from recovering beyond the “high” figure. Such an agreement must be made in advance of a finder’s award of damages but provides plaintiffs with security they will recover some damages — and, importantly, provides defendants with security they will not be hit with a runaway verdict, as such verdicts may be eight or nine figures.
This was a useful tactic for the defense in this case because the arbitration awarded the plaintiff well above the high figure. As a result, the defendant effectively limited its liability by agreeing to pay a minimum amount.
Another interesting aspect of this litigation is the insurance coverage issue. Here, the defendant hospital maintained a policy with a $7.25 million coverage limit applicable to aggregate liability as well as to individual claims. The defendant hospital appropriately tendered the matter to its insurance company, which provided legal defense coverage pursuant to the policy, and the hospital worked with the insurer on the matter. It seems likely the hospital recognized the breach of duty and that it would be found liable because the hospital urged the insurer multiple times to accept settlement offers from the injured plaintiff. Unfortunately, the insurer failed or refused to accept, even though the last offer was for an amount lower than the policy limit.
Just as providers owe duties to their patients, insurance providers have their own set of duties and obligations that are owed to their insureds. A failure to abide by those duties may subject the insurer to liability from their insured, as resulted in this case. There is no question the defendant hospital was liable or that the insurer bore the financial cost of that liability. But the defendant hospital argued it should not bear the prospective cost of the insurer’s failure to accept a reasonable and better settlement offer.
This presents an interesting lesson for providers: It is important to be attentive and active in litigation, even if an insurer is principally guiding the defense activities and litigation generally. A medical malpractice insurer may breach its duties to a provider, and then the previous defendant may flip roles and become the active plaintiff in litigation against the insurer. When insurance is involved, providers can and should maintain an active interest in the litigation to protect their own interests. The hospital in this case could restore $1.75 million in policy coverage because of its attentive participation and its insurer’s neglect.
REFERENCE
- Decided April 12, 2023, in the United States Court of Appeals for the Third Circuit, Case Number 21-3264.
This case provides lessons concerning aspects of malpractice litigation that do not focus on challenging the actions of the care providers. Just as providers owe duties to their patients, insurance providers have their own set of duties and obligations that are owed to their insureds. A failure to abide by those duties may subject the insurer to liability from their insured, as resulted in this case.
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