By Kathryn A. Formeller, Esq. of Tressler LLP
A professional liability insurer was not estopped from raising coverage defenses despite its delay in asserting its coverage position because the insured maintained control of its defense and suffered no prejudice. The insurer, however, was obligated to provide coverage for the underlying lawsuit and settlement as the “genesis” of the underlying claims constituted “professional services.” Rosalind Franklin Univ. of Medicine and Science v. Lexington Ins. Co., 2014 IL App (1st) 113755 (1st Dist. March 7, 2014).
Rosalind Franklin University of Medicine and Science (Rosalind) administered a research study of a breast cancer vaccine developed by Dr. Georg Springer (Springer). The vaccine program was funded by $2.5 million donated by Springer. After two decades, Rosalind discontinued the study claiming the treatment had not shown its intended results. Fifty patients who participated in the study filed suit against Rosalind, arguing that the decision to discontinue the vaccination program put their lives at risk. The patients sought to require Rosalind to disgorge all monies received from Springer. The patients also sought damages for breach of fiduciary duty, breach of contract, unjust enrichment, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, common law fraud, and negligence. The parties ultimately settled the case. The settlement agreement provided that Rosalind pay: (1) $2.5 million to be placed in trust for the plaintiffs to resume the vaccine study; (2) $1 million if the plaintiffs successfully resumed the study; and (3) $500,000 to compensate the plaintiffs for pain and suffering.
During the relevant time period, Rosalind had both a primary and excess Health Professional Services Liability policy issued by Lexington Insurance Company (Lexington) and a D&O policy issued by Landmark American Insurance Company (Landmark). Rosalind tendered the underlying lawsuit and settlement to Lexington and Landmark. Landmark denied coverage based upon the policy’s medical malpractice exclusion which precluded coverage for Loss “based upon or attributable to any medical or professional malpractice including but not limited to the rendering or failure to render any medical or professional service(s).” Lexington denied coverage as well, but did not provide its coverage position until after the underlying lawsuit was settled. Rosalind filed suit against Lexington and Landmark, seeking a declaration of coverage. Rosalind asserted that Lexington was estopped from raising any coverage defenses because it failed to either defend Rosalind under a reservation of rights or file a declaratory judgment action as required by Illinois law. Rosalind alternatively argued that Lexington was estopped from raising coverage defenses because it appointed defense counsel while failing to disclose coverage issues that would present a conflict of interest.
Lexington filed a cross-claim against Landmark, contending that the Landmark policy should provide coverage for the underlying suit and settlement. The trial court found that Lexington had both a duty to defend and indemnify Rosalind and was estopped from asserting coverage defenses due to a conflict of interest. The trial court also found that the medical malpractice exclusion precluded coverage under the Landmark D&O policy. In addition, Landmark was not obligated to provide coverage for the $500,000 of the underlying settlement that was to compensate the plaintiffs’ pain and suffering as it was precluded by the bodily injury exclusion of the Landmark policy.
The First District Appellate Court of Illinois acknowledged that Lexington appointed defense counsel for Rosalind, but found that Rosalind helped “to control and direct” the defense through its general counsel. As Rosalind failed to show that it had been prejudiced, Lexington was not estopped from raising its coverage defenses.
The court next turned to whether Lexington’s and Landmark’s policies provided coverage for the defense and indemnity of the underlying lawsuit and settlement. First, the court rejected the insurers’ argument that the underlying settlement represented a disgorgement of funds which does not constitute “damages” or “loss” under the policies. The court observed that contrary to the insurers’ contentions, the Springer funds were not designated solely for use in connection with the vaccine program but rather were to be used for cancer research in general. The court further observed that the underlying settlement was paid out of Rosalind’s general operating account rather than the Springer funds.
The court also rejected Lexington’s argument that the primary focus of the underlying lawsuit and settlement did not constitute “professional services,” but wrongful “administrative acts.” The court instead found that the “genesis” of the claims in the underlying lawsuit was Rosalind’s decision to end the vaccine program which involved “specialized medical knowledge.” Illinois courts have adopted an expansive definition of “professional services” which “refers to any business activity conducted by the insured which involves specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature.” Thus, the underlying lawsuit fell within the coverage grant of Lexington’s primary and excess policies, as well as the medical malpractice exclusion of Landmark’s policy.
The court then found that Lexington waived its argument that it had no duty to indemnify Rosalind because Rosalind failed to obtain its consent before settling the underlying lawsuit. Although Lexington was aware of the underlying settlement negotiations, it did not provide Rosalind with its coverage position until two days after the settlement. Moreover, Lexington’s coverage position did not indicate that it intended to pursue a voluntary payment defense based on the settlement agreement. The court similarly found that Lexington waived its right to assert that it had no duty to defend because it was not aware that the self-insured retention of the primary policy had been exhausted. Finally, the court held that the trial court did not abuse its discretion in finding that Lexington did not act in bad faith pursuant to Section 155 of the Illinois Insurance Code. Lexington’s conduct did not rise to the level of being “vexatious and unreasonable.”
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