July 1, 2019
In a case dealing with the very highly charged issue of a bad faith claim against an insurer for failing to settle for the policy limit, the Seventh Circuit, applying Illinois law, determined that this specific insurer did not act in bad faith. The case is Surgery Ctr. At 900 N. Mich. Ave., LLC. V. Am. Physicians Assurance Corp., 922 F.3d 778 (7th Cir. 2019).
The plaintiff-appellants (Surgery Center) is an outpatient surgery center that permits outside physicians to perform surgeries at its facility. The Defendants-appellees, the American Physicians Assurance Corporation, Inc. and American Physicians Capital, Inc. (together, APA) is the medical malpractice company that insured Surgery Center. Surgery Center purchased an insurance policy from APA that limited APA's liability to $1 million per claim. The policy limited APA's liability to $1 million per claim and noted that APA would defend and indemnify Surgery Center for claims that were covered under the policy.
In November 2002, a doctor, Harrith Hasson, performed an outpatient laparoscopic surgery on a healthy 34-year old woman named Gwendolyn Tate at the Surgery Center. Hasson was an outside physician who had surgery privileges at Surgery Center. He was not a Surgery Center employee. He did not see Tate or check her discharge papers before Surgery Center released her. She was discharged, and her discharge instructions were given to her boyfriend. Four days later, Tate checked into the hospital with surgical complications that eventually rendered the healthy young woman a quadriplegic.
Tate sued Dr. Hasson and the Surgery Center for medical malpractice. APA hired a law firm, Lowis & Gellen, to defend Surgery Center according to the policy. The insurer set aside reserves of $500,000, and labeled the case “high exposure” because there was a higher risk of the verdict exceeding the policy. After discovery and prior to both of the two trials, the patient's counsel offered to settle for $1 million, which was rejected. Later, the trial court granted summary judgment for the Surgery Center. The Appellate Court reversed that decision and remanded for trial. After another $1 million settlement was rejected, the jury handed down an award of $5.17 million. In the end, there was a settlement for $2.25 million, APA paid $1 million, but Surgery Center was subjected to that excess exposure. So Surgery Center sued APA for failing to settle for the policy limit.
During the ensuing bad faith trial, evidence surfaced that showed APA's new company-wide strategy to promote aggressive defense of claims against insureds, and noted that the suit against Surgery Center was recorded on the severity scale as a 9 out of 10. Prior to the second trial, the insurer told Surgery Center of the renewed $1 million settlement demand and indicated that it would not be negotiating a settlement. Tate failed to have an expert testify, which APA thought was a good indication under Illinois law.
Evidence also revealed that even though Surgery Center knew of the potential for an adverse verdict, it retained counsel and told counsel not to settle under the belief that Surgery Center was not negligent.
At the close of trial, the district court granted a judgment as a matter of law for APA because the duty to settle was not triggered. The district court concluded that the duty to settle was not triggered, and that although there was a reasonable probability of recovery that exceeded the limits, many people involved thought there was a strong probability of finding no liability.
The Seventh Circuit agreed, stating that despite statements opposing this, many of the implicated documents showed that Surgery Center's president himself believed that the case was defensible. The Seventh Circuit also noted that APA had notified Surgery Center repeatedly of the amount of their policy limits, and that the insured would be responsible for that excess. So, the mere possibility that Surgery Center would be found liable was not sufficient to overturn the ruling of the district court.
Editors Note: In this case, the Seventh Circuit painstakingly examined the prior case in order to make the proper verdict. Evidence revealed that Surgery Center was aware of the potential of a verdict against them, but still implored their counsel, hired by the insure, not to settle under their belief that they were not negligent.
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