Professional Liability Insurer Must Defend and Indemnify Obstetrical Practice in Breach of Contract Action due to Failure to Pay Into Birth Injury Fund

Virginia’s Birth Injury Fund is a statutory structure creating a no-fault source of compensation for families whose children suffer birth-related neurological injuries when delivered by a participating physician or hospital. Physicians or hospitals voluntarily pay into the fund, which operates in lieu of civil suits for medical malpractice. Physicians and hospitals are required to give written notification to their obstetrical patients of their participation or non-participation in the fund.


A couple entered into an express contract in which an obstetrical practice agreed to provide obstetrical care and pre-natal management of the wife’s pregnancy, to provide her with management of her ultimate labor and delivery of that child, to participate in the Virginia Birth Injury Fund, and to inform her if they ceased participating in the Birth Injury Fund. In exchange for such services and contractual obligations, the wife agreed to consent to treatment, tender payment on behalf of herself and the baby, and waive future malpractice claims which might arise from a birth-related neurological injury to the baby.


The obstetrical practice materially breached the contract by failing to pay into the fund. The obstetrical practice was not paying into the Birth Injury Fund at either the time of the notification or at the time of the birth of the couple's son. The obstetrical practice never notified the Davidsons of its non-participation during this time period.


The couple’s child was born with quadriplegic cerebral palsy and static encephalopathy, an otherwise compensable injury under the fund. As a result of the obstetrical practice's non-participation, the couple could not file a claim with the Commonwealth under the Birth Injury Fund. Instead the couple filed a complaint against the obstetrical practice setting forth several related counts of breach of contract and breach of fiduciary duty.


In a separate action the obstetrical practice's professional liability insurance company sought a declaratory judgment to establish that the pending breach of contract action is not covered under the professional liability insurance policy held by the obstetrical practice. The policy with the obstetrical practice generally states that it provides coverage for those sums that the insured becomes legally obligated to pay as damages for claims covered by this policy resulting from professional services rendered. In the policy's “Definitions” section, a “Claim” is defined as “a demand for payment of damages or for services arising from a Professional Services Incident ... not otherwise excluded by the terms and conditions of this Policy.” One such exclusion is “[l]iability arising out of any ... violation of any statute.” The Circuit Court of Loudoun County found in favor of the obstetrical practice and the couple that the policy covered the claim. The professional liability insurer appealed.


The Supreme Court of Virginia affirmed the holding of the circuit court finding that the policy covered the claim alleged by the couple in their complaint against the obstetrical practice. First, the court held that the couple's breach of contract claim was covered as professional services under the professional liability policy. Delivery of a child with a neurological injury was a necessary element in the couple's breach of contract claim. The alleged breach – the nonparticipation in the Birth Injury Fund at the time of delivery – and resulting damages could not have occurred without the professional medical services provided.


Second, the court held that the obstetrical practice's alleged liability did not arise out of any violation of a statute for purposes of the professional liability policy exclusion, and thus, the claim was covered by the policy. Although the statute required health care providers to disclose their participation status in the Birth Injury Fund to patients, the couple's claim was not based on a violation of the statute. Rather the claim was based on the breach of the obstetrical practice's contractual obligation to participate in the Birth Injury Fund.


The court concluded that because the underlying action was covered by the insurance policy, the insurer must both defend and indemnify the obstetrical practice in the underlying breach of contract action.


See: Doctors Co. v. Women's Healthcare Associates, Inc., 2013 WL 1686668 (Va., April 18, 2013) (not designated for publication).