If a verdict form contains the jury’s specific finding that the insured engaged in “fraudulent, malicious, oppressive, wanton, willful, or reckless conduct,” you might think that would trigger the exclusion for fraudulent misconduct in the applicable D&O insurance policy. But apparently not, at least according to a May 12, 2011 Southern District of West Virginia ruling (here) in a case involving the Charleston Area Medical Center (CAMC). The case makes for some interesting reading and interesting analysis.

 

Background       

In September 2004, CAMC determined that Dr. R.E. Hamrick’s plan to self-fund his medical professional liability was inadequate and not actuarially sound. Based on this determination and the fact that Dr. Hamrick’s insurance coverage had lapsed, CMAC revoked his clinical privileges. Dr. Hamrick went to court seeking injunctive relief and three days later succeed in having his clinical privileges restored. He then pursued a damages claim against CAMC. Dr. Hamrick’s amended complaint contained a claim for defamation and a claim for invasion of privacy/false light. Dr. Hamrick also sought punitive damages.

 

In February 2008, Dr. Hamrick’s damages claim went to the jury. In Section 1 of the jury Verdict form, entitled “Liability,” the jury indicated that they found in favor of Dr. Hamrick. In Section 2 of the Verdict form, entitled “Damages,” the jury awarded Dr. Hamrick $5 million in compensatory damages. In Section 3, labeled “Punitive Damages,” the jury found that CAMC had engaged in “fraudulent, malicious, oppressive, wanton, willful, or reckless conduct with respect to Dr. Hamrick,” and awarded $20 million in punitive damages. In Section 4 of the form, labeled “Other,” the jury found that CAMC had acted in “bad faith, vexatiously, wantonly or for oppressive reasons with respect to Dr. Hamrick.”

 

In July 2008, the court granted CAMC’s motion for remittitur, and reduced the damages award to $2 million in compensatory and $8 million in punitive damages. The case ultimately settled for $11.5 million, representing the remittitur award of $10 million, post-judgment interest of $476,917 and attorneys’ fees of $1.023,083.

 

The Insurance Coverage Dispute

CAMC was insured, inter alia, by a  D&O insurance policy with a primary limit of liability of $10 million., including a punitive damages limit of $5 million (the punitive damages limits is part of not in addition to the primary $10 million limit.) The policy contains an exclusion stating that the insurer will “not pay Loss for Claims brought about or contributed to in fact (1) by any dishonest or fraudulent act or omission or any willful violation of any statute, rule or law by any Insured.”

 

The D&O insurer filed a coverage action seeking a judicial declaration that at least some portion of the settlement falls under the dishonest/fraudulent acts exclusion and therefore is not covered, maintaining further that the jury’s findings necessitate an allocation between covered and non-covered conduct. CAMC filed a counterclaim, and the parties filed cross motions for summary judgment.

 

The May 12 Opinion

In his May 12, 2011 opinion (here), Southern District of West Virginia Chief Judge Joseph R. Goodwin held that the insurer had not carried its burden under West Virginia law to prove the facts necessary to support an exclusion to coverage.

 

In attempting to carry its burden, the insurer had sought to rely on the jury’s determinations in Sections 3 and 4 of the verdict form. Judge Goodwin found that these portions of the verdict form “quite clearly related to damages and attorney’s fees, as the jury assessed liability only in Section 1 of the jury form,” adding that the insurer’s arguments that “the jury’s findings in Section 3 and 4 related to something other than damages and attorney’s fees is somewhat hard to fathom.”

 

Judge Goodwin noted that the standards in Sections 3 and 4 “are not elements of any of the causes of action on which the jury’s liability finding in Section 1 could have been predicated, nor are those standards relevant to compensatory damages.” As a result “the only reason for the jury to have made such findings would have been in relation to punitive damages and attorney’s fees.”

 

Judge Goodwin went on to state that the insurer

 

has lost sight of the simple fact that the claims presented to the Hamrick jury were for defamation and invasion of privacy, not fraud. Because Dr. Hamrick never pressed a cause of action that was predicated on fraudulent or dishonest conduct, the jury could not possibly have found for him on such a claim. Moreover, [the insurer] cannot identify any particular dishonest or fraudulent act or omission on the part of CAMC.

 

Instead, [the insurer’s] entire position boils down to the argument that the last two sections of the jury verdict form somehow transformed the claim into one involving dishonest or fraudulent conduct. …CAMC was alleged to have wronged Dr. Hamrick by communicating to others his lack of insurance coverage, the actuarial deficiencies of his self-insurance program, and his revoked clinical privileges. There is no fraudulent or dishonest conduct in those acts or omissions, however, and the mere fact that the jury made predicate findings with regard to punitive damages and attorney’s fees does not alter the nature of the conduct giving rise to the claim.

 

Judge Goodwin further stated that “there were only two claims in this case – for defamation and invasion of privacy – and no colorable argument that the conduct giving rise to them fit within the Dishonest/Fraudulent Act Exclusion,” adding that the insurer’s “argument for denying coverage stems not from the nature of the claims or the conduct giving rise to them, but from specific findings made by the jury as part of the damages award.”

 

Judge Goodwin entered summary judgment against the insurer and in favor of CAMC.

 

Discussion

This coverage dispute is different than the usual clash over the fraudulent misconduct exclusion. Disputes about the fraudulent misconduct exclusion are usually over the fact that there are all kinds of allegations but unless there has been a finding that the precluded conduct actually occurred, then the exclusion doesn’t apply. Here the usual debate has been completely turned on its head. The assertion is that regardless of the jury’s specific finding of precluded misconduct, the exclusion doesn’t apply because the precluded misconduct was never alleged.

 

Judge Goodwin emphasizes that the specific legal theories on which Hamrick proceeded did not allege or depend upon precluded acts or omissions. Perhaps Judge Goodwin reads the phrase precluding coverage for “Loss for Claims brought about or contributed to in fact” by the excluded conduct to mean (1) that it is not sufficient if the Loss is brought about or contributed to by the precluded act or omission; (2)  the exclusion applies only if the Loss arises from Claims brought about or contributed to precluded act or omission. Because the Claims on which Hamrick relied and which he asserted did not depend on or even allege precluded conduct, then the exclusion would not apply, regardless of whether or not Loss was brought about or contributed to by precluded conduct.

 

The arguable problem with this analysis is that it  exalts mere pleading over proof – regardless of what Hamrick’s pleadings might have alleged , the fact is that the  jury specifically found that CAMC had engaged in “fraudulent, malicious, oppressive, wanton, willful or reckless conduct” with respect to Dr. Hamrick. (Moreover, Judge Goodwin doesn’t seem to have considered the jury finding’s use of the disjunctive “or” to be inconsistent with a finding of “fraudulent “conduct. He seems to accept that the jury finding represents a finding of “fraudulent” conduct.)

 

Judge Goodwin emphasizes that the jury made its fraudulent misconduct determination in the portion of the verdict form that relates to damages rather than the portion of the form relating to liability. It may well be that this distinction is as determinative as he believes it to be. But he never explains why that is so, particularly with reference to the operative policy language. In the absence of this explanation, we are left to wonder why he finds that distinction determinative of the issue.

 

All of this analysis disregards what seems to be the real problem here –there doesn’t seem to have been any fraudulent misconduct pleaded or proven.  As Judge Goodwin states, the insurer “cannot identify any particular dishonest or fraudulent omission on the part of CAMC.” In other words, Judge Goodwin seems to to be saying, the fraudulent misconduct exclusion doesn’t apply because there wasn’t any fraudulent misconduct – notwithstanding the jury’s specific finding in the jury verdict form that there was fraudulent misconduct. Judge Goodwin eludes this problem with this statement: “The mere fact that the jury made predicate findings with regard to punitive damages and attorney’s fees does not alter the nature of the conduct giving rise to the claim.” Well,  what could “predicate findings” be based upon other than conduct?

 

Judge Goodwin doesn’t say anything about it expressly , but there really does seem to be something wrong with a result in which punitive damages have been awarded based on a jury finding for which there appears to be  no basis in the record. And that’s not all. For a few days loss of clinical privileges, Hamrick was awarded millions of dollars of damages for reputational harm. Even without the punitive damages, Hamrick seem immensely better off than he would have been if his privileges had not been briefly interrupted.  

 

I will leave it to others to assess what the result in the underlying case might imply about the process involved.  But given the apparent proclivity of West Virginia juries, Dr. Hamrick’s plan to self-insure really does not look like a great idea.

 

Special thanks to a loyal reader for sending along the opinion.