A not-for-profit medical school administered a research study of a breast cancer vaccine. The purpose of the study was to evaluate whether stimulating a person's immune system was effective in fighting breast cancer. The study was funded through a gift agreement through which the doctor who developed the vaccine, who died before the instant litigation, provided the medical school a donation of common stock valued at $2.5 million.
Each patient who participated in the vaccine program executed a consent form that provided, in relevant part: “I understand that the purpose of this experimental research is to stimulate the immune system in an attempt to fight cancer. . . . T/Tn antigen treatment will be continued ad infinitum.” The consent form additionally stated: “[P]rocedures involved in this research are not part of my routine treatment and are not intended to potentially benefit my personal health. I am taking part in a study accumulating information on my body's response to T/Tn antigen vaccination.”
Fifteen years after the study began, the medical school's institutional review board (IRB) decided to discontinue the vaccine program, citing the following reasons: (1) inadequate information from the program's principal investigator, (2) lack of scientific validity, (3) lack of demonstrable efficacy, and (4) inadequate assurance of safety.
Following this decision, approximately fifty of the former vaccine patients filed suit against the medical school, claiming that the decision to discontinue the vaccine program put their lives at risk. The complaint was prefaced with a preliminary statement alleging that the vaccine treatments had helped save and prolong the patients' lives and, as a result, the termination of the vaccine program had caused these patients to suffer incalculable damage. The preliminary statement additionally stated that a cardinal principle of the medical profession was that, once care was undertaken, patients may not be abandoned. This litigation sought relief for such abandonment of the plaintiffs. Each of the claims in the complaint arose as a direct and proximate result of the hospital’s improvident decision to terminate the life-saving treatments that had sustained these women for many years following their horrific experiences of breast cancer, surgery, radiation, chemotherapy, and other trauma.
The complaint alleged the following facts about the medical school’s decision to discontinue the vaccine program. The FDA cited the vaccine program for multiple violations of proper laboratory management and research techniques. Instead of spending the necessary money to correct these deficiencies, the medical school chose to end the program. To this end, its administrators allegedly manipulated the IRB to ensure the termination of the vaccine program. The complaint acknowledged that the IRB cited lack of scientific validity as a reason for ending the program, but it stated that this justification was a ruse and contradicted decades of evidence to the contrary. The complaint further alleged that the decision to end the program significantly increased the likelihood that the patients will suffer a recurrence of cancer. In support, the complaint cited an alleged statement by the doctor who developed the vaccine that in order to maintain its effectiveness against any possible recurrence of cancer, the vaccine treatments must be continued throughout the patient's lifetime.
The plaintiffs sought injunctive relief as well as damages for breach of fiduciary duty, breach of contract, unjust enrichment, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 2012)), common law fraud, and negligence. In the count for injunctive relief, the plaintiffs asked the court to require the medical school to disgorge all sums received from the doctor who developed the vaccine and release the available vaccines as well as all records pertinent to the program.
Immediately after the vaccine lawsuit was filed, the medical school notified the providers of its insurance policies.
A hearing took place on the plaintiffs' motion for a preliminary injunction to secure the funds that were gifted by the doctor who developed the vaccine as well as the remaining vaccine. After the second day of the hearing, counsel for the medical school determined that the case was not proceeding well and that the possibility of a settlement should be explored. Consequently, the preliminary injunction hearing turned into a settlement conference. The parties reached a settlement in principle, which the medical school's president and board of trustees subsequently approved. The agreement provided for payments by the medical school of: (1) $2.5 million to be placed in a 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.” The plaintiffs did not succeed in restarting the vaccine program and, therefore, the medical school's total settlement payment was $3 million.
The hospital was insured by two insurers. One insurer’s primary and excess healthcare liability policies covered liability resulting from a medical incident arising out of professional services. The other insurer’s directors and officers liability policy contained a specific exclusion for medical malpractice damages.
The primary policy contained a limit of $1 million per medical incident, subject to a $100,000 self-insured retention. The policy covered sums that the medical school became legally obligated to pay as damages resulting from a medical incident arising out of professional services. The phrase “medical incident” was defined as any act, error or omission in the providing of or failing to provide professional services. The phrase “professional services” was defined as medical, surgical, dental, nursing or other health care services including but not limited to the furnishing of food or beverages in connection with such services; the practice of nuclear medicine; the furnishing or dispensing of drugs or medical, dental or surgical supplies or appliances; or the handling or treatment of deceased human bodies, including but not limited to, autopsies, organ donation or other procedures.
The primary policy contained a voluntary payment provision which provided that without the insurer's consent, the insured shall not except at its own cost, voluntarily make a payment, assume any obligation, or incur any expense.
The excess policy had a limit of $2 million for each medical incident and otherwise contained the same relevant coverage provisions as the primary policy.
The directors and officers liability policy had an aggregate limit of $5 million per policy period. Under this policy, the insurer agreed to provide coverage to the medical school for any covered loss that the medical school became legally obligated to pay as a result of a claim for a wrongful act. The term “loss” was defined as follows, in relevant part: damages, settlements, judgments and defense expenses, including punitive or exemplary damages, if insurable under the law pursuant to which this policy is construed. Loss, however, shall not include: matters which are uninsurable under the law pursuant to which this policy shall be construed or any amount which an insured person is obligated to pay as a result of a claim seeking relief or redress in any form other than money damages. The term “wrongful act” was defined as any actual or alleged error, omission, misstatement, misleading statement, neglect or breach of duty by an insured person solely in their capacity as an insured person acting on behalf of the insured organization.
The directors and officers liability policy also contained two exclusions. First, it contained a medical malpractice exclusion, which stated, in relevant part: the insurer shall not be liable to make any payment for loss in connection with any claim made against any insured person and/or the insured organization 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 services. Second, the policy also excluded bodily injury, including pain and suffering, as follows: the insurer shall not be liable to make any payment for loss in connection with any claim made against the insured persons for any actual or alleged bodily injury, sickness, disease, or death of any person, mental anguish, or emotional distress.
When both insurers denied coverage with regard to the defense and settlement of the vaccine case, the medical school brought a declaratory judgment action against them. Subsequently, the primary and excess insurer filed a cross-claim against the insurer that provided only the directors and officers liability policy, contending that the latter policy should provide coverage for the vaccine suit and settlement. The parties did not dispute that the insurer who provided only the directors and officers liability policy owed no defense obligation with regard to the vaccine suit. Thus, the only issue with regard to this insurer was whether the directors and officers liability policy provided indemnity to the medical school for the settlement paid to the vaccine study plaintiffs.
The Cook County Circuit Court granted the hospital partial summary judgment, finding that the primary and excess insurer had a duty to defend and indemnify the medical school and was estopped from asserting coverage defenses due to a conflict of interest. The trial court denied summary judgment to the primary and excess insurer on its cross-claim against the directors and officers liability policy insurer, declining to find that the latter had the sole duty to indemnify the medical school for the vaccine settlement. The trial court granted partial judgment against the primary and excess insurer in the amount of $1 million (the amount of the primary policy), minus the $100,000 self-insured retention, plus interest and defense costs. The trial court found that the directors and officers liability policy was primary to the excess policy, such that the directors and officers liability policy needed to be exhausted before the excess policy could be triggered. Thus, the court allocated the remaining $2 million of the vaccine settlement to the directors and officers liability policy, minus a setoff for that policy’s $100,000 self-insured retention, plus interest. The trial court declined to find for the medical school on its claim of bad faith against the primary and excess insurer. The trial court additionally granted partial summary judgment for the directors and officers liability policy insurer with respect to the $500,000 of the vaccine settlement that was to compensate the plaintiffs for pain and suffering, finding that it came within the bodily injury exclusion of that policy. The insurers appealed and the hospital cross-appealed.
The First District Appellate Court of Illinois, Fifth Division, affirmed in part, reversed in part, and remanded. In holding that the trial court erred in finding that the primary and excess insurer was estopped from raising coverage defenses under the primary policy because of its actions with respect to the defense of the medical school in the vaccine suit, the court held that evidence supported the trial court's finding that the primary and excess liability insurer appointed counsel to defend the hospital in the prior suit, however, the hospital did not surrender control of its defense to appointed counsel. With regard to the substantive coverage issues, the court held that the hospital's settlement was not disgorgement of wrongly retained funds, but rather constituted damages; the former patients' claims were premised on professional services and fell within the primary and excess liability insurer's policy; the claims concerning provision of medical services fell under the medical malpractice exclusion of the directors and officers liability insurance policy; the directors and officers liability insurer was not responsible for pain and suffering damages in the underlying settlement; and the primary and excess insurer waived the defense to coverage that the medical school failed to obtain its consent for the underlying settlement.
The court held that an insurer is estopped from asserting coverage defenses if it undertakes defense of its insured, inducing insured to surrender control of its defense and thereby causing prejudice to the insured. The court found that evidence supported the trial court's finding that the primary and excess liability insurer appointed counsel to defend the hospital in the vaccine suit. The counsel purportedly appointed by the primary and excess liability insurer testified that it was his understanding that both the insured and the insurer consented to his involvement in the vaccine suit and that he had discussed his involvement in the suit with the insurer's claims representative. The insured's in-house counsel testified that he had received notification that the insurer had appointed counsel around the time of the appointed counsel's entry into the case. However, the court found that the hospital did not surrender control of its defense to appointed counsel, such that the insurer was not estopped from raising coverage defenses. Although the appointed counsel played a substantial role in the vaccine litigation, it was apparent that the medical school's in-house counsel helped control and direct the defense after the appointed counsel's entry into the case. The medical school did not rely exclusively on the appointed counsel. Therefore, the court concluded that that the primary and excess liability insurer could assert coverage defenses.
With regard to the substantive coverage issues, the court held that if an underlying complaint alleged facts that are within or even potentially within the scope of insurance coverage, then an insurer has a duty to defend. An insurer's duty to defend extends to cases where an underlying complaint alleges several causes of action, one of which is within coverage of policy, even if others are not. An insurer's duty to indemnify only arises where the insured's activity and resulting damages actually fall within the coverage of the insurance policy. When an insured settles an underlying claim, it must show that the settlement was made in reasonable anticipation of liability for an otherwise covered loss for the insurer's duty to indemnify to arise. In cases where an insured enters into a settlement that disposes of both covered and non-covered claims, the insurer's duty to indemnify encompasses the entire settlement if the covered claims were the primary focus of the litigation.
The court held that the medical school's settlement was not disgorgement of wrongly retained funds, but rather constituted damages as defined in the insurers' policies, for the medical school's alleged breaches of duties, fraud, and misrepresentation. The court noted that the funds used for the vaccine program were to be used for cancer research generally, such that the medical school did not forfeit its right to use the funds upon termination of the vaccine program. The settlement disposed of all of all of the patients' underlying claims, including claims for nondisgorgement, and the hospital paid the settlement out of its general operating account, rather than from vaccine program funds.
The court held that the former patients' claims were premised on professional services and fell within the primary and excess liability insurer's policy. A professional service, in the context of professional liability insurance policies, refers to any business activity conducted by an insured which involves specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed to physical or manual in nature. The court reasoned that the claims asserted in the settlement agreement were based on the medical school’s IRB’s determination to discontinue the experimental vaccine program which was part of the medical school’s professional services. In making its decision, the IRB acted upon its specialized medical knowledge, and the IRB's actions were consistent with its general functions, which were medical in nature and required judgment aimed at protecting patients. Therefore, the claims were covered by the primary and excess liability insurer's policy for damages arising out of professional services.
The court also held that the former patients’ claims concerning the provision of medical services fell under the medical malpractice exclusion of the directors and officers liability insurance policy. In determining liability under professional liability policies, courts do not rely upon ancillary allegations but consider the genesis from which the claims arose. The genesis of all of the patients' claims, including the misrepresentation and fraud claims, was the medical school's termination of the vaccine program, which was premised on the hospital's professional services. The allegations of misrepresentation and fraud did not concern administrative decisions, but rather concerned the provision of medical services, and thus fell under the medical malpractice exclusion of the directors and officers liability insurance policy.
The court held that the directors and officers liability insurer was not responsible for pain and suffering damages in the vaccine settlement, despite the medical school’s contention that the damages were actually intended as attorney fees. The pain and suffering damages fell within the bodily injury exclusion of the insurer's policy. Even if the damages were for attorney fees, they would fall under medical malpractice exclusion of the directors and officers policy.
As a general rule, absent a breach of the duty to defend, the insured must obtain the consent of its insurer before settling with an injured plaintiff. However, a long delay in asserting an insurance policy defense or disclaimer may constitute waiver of that defense where there is evidence of prejudice to the insured. Strong proof is not required to show waiver of an insurance policy defense, but only such facts as would make it unjust, inequitable, or unconscionable to allow the defense to be interposed. Based on those principles, the court held that the primary and excess liability insurer waived its voluntary payment defense to the medical school's coverage claim for the settlement of the vaccine action, since the insurer failed to raise the defense after it learned that settlement negotiations were ongoing. It would be inequitable to allow the primary and excess liability insurer to raise the defense after the settlement was finalized. The primary and excess liability insurer also waived its argument that its duty to defend the medical school was not triggered because it was not aware of the potential exhaustion of the self-insured retention in the insurer's primary policy, since the insurer voluntarily undertook the defense and appointed counsel in the vaccine action.
The First District Appellate Court of Illinois, Fifth Division, affirmed the trial court’s grant of the medical school’s motion for summary judgment in so far as the insurers were required to indemnify the medical school for the costs of settling the vaccine case.
See: Rosalind Franklin University of Medicine and Science v. Lexington Ins. Co., 2014 IL App (1st) 113755, 2014 WL 905547 (Ill.App. 1 Dist., March 07, 2014) (not designated for publication).
See also Medical Law Perspectives, January 2013 Report: Vaccines: An Ounce of Prevention May Lead to a Pound of Injury