Capson Physicians Insurance Co v. MMIC Insurance Inc.

Citation: 829 F.3d 951Docket: 15-2459

Court: Court of Appeals for the Eighth Circuit; July 19, 2016; Federal Appellate Court

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Capson Physicians Insurance Company filed a complaint against MMIC Insurance, Inc. in the United States Court of Appeals for the Eighth Circuit, seeking a declaration that MMIC was the primary professional liability insurer for Dr. Karl J. Hasik, with Capson as the excess insurer. MMIC counterclaimed and sought rescission of its insurance policy or a declaration absolving it of the obligation to defend or indemnify Dr. Hasik in two medical negligence cases. The district court granted summary judgment to MMIC, determining it was entitled to rescission under Iowa law. Capson appealed this decision, while MMIC filed a conditional cross-appeal.

Dr. Hasik, a physician in obstetrics and gynecology, had initially purchased liability insurance from State Volunteer Mutual Insurance Company before moving to Iowa, where he acquired a claims-made policy from Capson. This policy covered claims with a retroactive date of January 2, 2007, allowing Dr. Hasik to avoid purchasing tail coverage from State Volunteer. After accepting a position at a hospital in Iowa, the hospital's CEO applied for insurance with MMIC, indicating Dr. Hasik was insured by Capson. Discussions between MMIC's agents about prior-acts coverage ensued, with MMIC eventually offering such coverage with a quoted premium. The court ultimately affirmed the district court's judgment and dismissed the cross-appeal as moot.

Ms. Hamilton confirmed that MMIC would provide first-year coverage if the hospital opted out of prior-acts coverage, detailing the premium for coverage without prior acts. Dr. Hasik, who began working at the hospital on October 29, 2012, applied for professional liability insurance, disclosing two previous medical malpractice lawsuits from 1983 and 1997, both resolved by former insurers. Dr. Hasik stated he was unaware of any pending claims. MMIC insured him starting November 1, 2012, with an effective date of October 31, 2012, the date he began treating patients. Dr. Hasik believed he had coverage for prior acts from both Capson and MMIC, while the hospital had not yet decided on purchasing prior-acts coverage. Todd Thams, the hospital’s insurance agent, indicated that the decision was to forgo prior-acts coverage, as he requested proof of tail coverage from Capson, confirming that MMIC would only cover claims arising from Dr. Hasik’s first year. The hospital later sought prior-acts coverage from MMIC on November 30, 2012. Meanwhile, Dr. Hasik was served with a lawsuit alleging medical negligence related to a stillbirth he handled in June 2011. Although Capson agreed to defend him under a reservation of rights after he notified them of the lawsuit, neither Dr. Hasik nor the hospital reported the lawsuit to MMIC initially. On November 20, 2012, Ms. Cole informed Mr. Bruce that MMIC was awaiting a decision regarding tail coverage before issuing a certificate of insurance. After returning from vacation, Mr. Bruce learned about the Wilson complaint, and on November 30, he decided to proceed with MMIC for both current and prior acts insurance rather than obtaining tail coverage from Capson.

Mr. Bruce sought confirmation regarding the progress of a process and a certificate of insurance. Ms. Hamilton informed Ms. Ducept that Dr. Hasik was being added to the Crawford County policy with prior acts coverage. An endorsement was issued by MMIC on December 3, 2012, retroactive to January 2, 2007, and effective October 31, 2012. Bruce received and forwarded this endorsement to Dr. Hasik on December 4, 2012, suggesting a meeting to discuss an ongoing case. On December 7, 2012, Bruce notified MMIC about a lawsuit involving Wilson. Subsequently, on January 22, 2013, Dr. Hasik was served a complaint alleging negligence related to the delivery of the Ray baby. Medical records were requested by the Ray baby's parents in April 2012, and disclosed by Dr. Hasik's office in June 2012. MMIC learned of the Ray lawsuit on January 24, 2013, two days after Dr. Hasik was served. MMIC denied coverage for both lawsuits and sought rescission of Dr. Hasik’s coverage, asserting that he was aware of potential claims before the policy's effective date. Capson initiated a lawsuit on June 20, 2013, claiming MMIC was the primary insurer. In response, MMIC filed a counterclaim and a third-party complaint against Dr. Hasik, arguing that the claims were not covered due to prior knowledge of potential claims and alleging material misrepresentations by Dr. Hasik. Capson later amended its complaint to seek rescission or a declaration of exclusion for the lawsuits. The parties moved for summary judgment, with MMIC asserting that Dr. Hasik's failure to notify them of the Wilson complaint constituted a material misrepresentation. Citing the doctrine of uberrimae fidei, MMIC argued that this warranted rescission. The district court, applying Iowa law, concluded that Dr. Hasik was not aware of potential claims when he applied for insurance and that reasonable circumstances did not suggest he should have been aware of such claims at that time. The court noted the generic nature of the record requests, lacking indications of malpractice or investigation into the circumstances of the births involved.

Representation or investigation of a medical malpractice claim is absent in this case, and there is no indication of notifying the carrier. Requests made were deemed insufficient, involving either a paralegal or a lawyer's signature. The district court ruled that MMIC could not rescind its prior-acts coverage based on Dr. Hasik's application misrepresentation, as they failed to attach it to the policy, violating Iowa Code sections 515.133 and 515.134. However, the court ultimately ruled in favor of MMIC because Dr. Hasik and the hospital did not timely disclose the service of the Wilson lawsuit. This nondisclosure was significant as they had a duty to inform MMIC of any material changes relevant to the risk assessment for prior acts coverage. The court concluded that this failure justified rescinding the coverage, with MMIC required to return the premium. The principle of uberrima fides, which mandates full disclosure, underlines the need for applicants to report material circumstances during the insurer's deliberation on coverage. The judgment favored MMIC, dismissing remaining claims. The court's decision is reviewed de novo, affirming that summary judgment is appropriate when no genuine disputes of material fact exist. Iowa law governs this diversity action, and Capson did not contest its applicability. The analysis includes a review of Iowa's equitable rescission law, which permits contract avoidance due to misrepresentation if five elements are established: representation, falsity, materiality, intent to induce action, and justifiable reliance. The court acknowledged that failure to disclose material facts can equate to misrepresentation, and non-disclosure may constitute fraud under Iowa law, referring to the Restatement (Second) of Contracts on the matter.

A duty to disclose material facts can arise in contractual relationships, particularly when one party has superior knowledge that may affect the other party's assumptions. In Iowa, courts recognize this duty even in arms-length transactions, where mere silence typically does not constitute fraud unless there is an inequality of knowledge. In the case at hand, Dr. Hasik and the hospital's failure to disclose the pending Wilson lawsuit amounted to a false assertion, significantly affecting the risk that MMIC agreed to underwrite. MMIC believed it was providing coverage to a physician without pending claims, a basic assumption necessary for their decision. The undisclosed lawsuit meant MMIC was unwittingly assuming the burden of defense and potential liability. The obligation to disclose was reinforced by the principle that known material changes must be reported before policy issuance. The Stipcich case exemplifies this duty, as the insured's failure to disclose a relevant medical condition prior to policy delivery rendered the contract voidable. Thus, Dr. Hasik and the hospital were legally bound to inform MMIC about the Wilson lawsuit before issuing prior-acts coverage.

The Court reinforced the obligation of the insured to disclose material changes affecting risk after submitting an insurance application, emphasizing that the insurer relies on the accuracy of the application to make underwriting decisions. The doctrine of uberrimae fidei was deemed applicable, despite Capson's argument that it conflicts with Iowa law, which typically places the information-seeking burden on the insurer. The Court cited Iowa law permitting equitable rescission for misrepresentation, noting that even in the absence of explicit instructions to update information, the insured has a duty to disclose new claims or potential claims that arise before policy issuance. In this case, Dr. Hasik and the hospital failed to disclose a pending lawsuit against Dr. Hasik, which constituted a material misrepresentation. The Court found that the elements for equitable rescission were met, affirming MMIC's right to rescind prior-acts coverage based on this nondisclosure. Additionally, Iowa code sections 515.133 and 515.134, which govern the insurer's obligations regarding the application copies, do not prevent rescission in cases of nondisclosure of facts that arise after application submission. The judgment was affirmed, and the cross-appeal was dismissed as moot.