ProSelect Insurance Company v. Levy

Citation: Not availableDocket: S1292

Court: Vermont Superior Court; June 14, 2010; Vermont; State Appellate Court

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ProSelect Insurance Company seeks a declaration that its professional liability insurance policy issued to Dr. Peter J. McKenna does not cover claims made in an underlying lawsuit by Robyn Levy against the Estate of Peter J. McKenna and Linda McKenna. This underlying suit alleges medical malpractice and sexual assault. ProSelect's complaint includes two counts: one against the Estate and another against Mrs. McKenna, asserting it is not obligated to defend or reimburse them for attorney fees.

The defendants, the Estate and Mrs. McKenna, have filed an answer and a counterclaim with five counts: 1) a declaration of coverage for the Estate under Levy’s complaint; 2) coverage for Mrs. McKenna; 3) reimbursement of costs for a Medical Practice Board proceeding; 4) reimbursement of costs for the underlying lawsuit defense; and 5) reimbursement based on an alleged improper policy cancellation. The last three claims pertain to a policy provision allowing reimbursement of up to $100,000 for defense expenses.

ProSelect has moved for partial summary judgment on its claims against the Estate and certain counts of the counterclaim, while the Estate has cross-moved for summary judgment on additional counts. Levy has filed an opposition to ProSelect’s motion and supports the Estate's arguments.

The undisputed facts include that ProSelect issued a "claims made" policy effective March 6, 2005, which covers damages resulting from professional services, but only for claims made and reported during the policy period. The policy period extends until either March 6, 2006, or cancellation, and contains specific exclusions from coverage.

Exclusion 13 delineates that the Policy does not cover any liability, damages, incidents, claims, or suits related to specific allegations, including sexual misconduct, abuse, harassment, mishandling of patient relationships, or failure to terminate such relationships by an insured. It also excludes negligent employment practices related to individuals involved in such conduct. The Policy defines a "suit" as a civil action alleging damages covered by the Policy. ProSelect may reimburse insureds for reasonable defense expenses (up to $100,000) in civil suits or regulatory proceedings alleging sexual misconduct during the policy period, provided the insured notifies ProSelect of such an incident within the same period. Exclusion 13 does not apply to the reimbursement for defense expenses mentioned. 

On June 1, 2005, the Vermont Board of Medical Practice informed Dr. McKenna of allegations regarding an improper sexual relationship with a patient, Robyn Levy. Following an investigation, Dr. McKenna admitted to the relationship, resulting in the Board opening a complaint and suspending his medical license. ProSelect was notified of the suspension and subsequently informed Dr. McKenna that his policy would be canceled effective July 22, 2005. ProSelect expressed that it would not have renewed the policy in March 2006 due to the suspension and Dr. McKenna's no contest plea in a related criminal case. The Estate contests this assertion, claiming it lacks factual support and does not demonstrate a legal obligation for ProSelect to renew the policy.

Dr. McKenna acquired a "Reporting Endorsement" allowing him and his Estate to report claims related to incidents occurring between March 6, 2003, and July 22, 2005, indefinitely. However, this endorsement does not extend the reimbursement period for reasonable expenses as per section VI(5) of the Policy. Following an interview on May 31, 2005, Dr. McKenna was arrested and arraigned on charges alleging he engaged in sexual activity with a vulnerable adult, identified as Patient A (Ms. Levy), while treating her under Medicaid from September 2003 to February 2005. Dr. McKenna pled nolo contendere to two charges on July 26, 2005, resulting in probation and a restitution payment of $6,000 to Medicare and Medicaid. He passed away on March 21, 2006. On August 31, 2006, Ms. Levy filed a "Written Statement of Claim" against his estate for malpractice related to psychiatric services provided from August 2003 to March 2005. The Estate forwarded this claim to ProSelect, which has been defending against Levy's subsequent lawsuit, including claims of medical malpractice and sexual assault against both Dr. McKenna and his widow, Linda McKenna. ProSelect asserts a reservation of rights regarding coverage. The primary legal issues involve whether Exclusion 13 of the Policy excludes coverage for the claims against the Estate and whether the Estate can receive reimbursement for its defense costs under the Policy despite this exclusion. ProSelect contends that Exclusion 13 applies due to the allegations of sexual misconduct, while the Estate argues that the exclusion is ambiguous, potentially contrary to public policy, and that concurrent causation doctrine necessitates coverage.

Levy contests the Estate's arguments by asserting a genuine issue of material fact regarding the independence of Dr. McKenna's alleged malpractice from his sexual abuse, which challenges Exclusion 13's presumption that professional malpractice is typically inseparable from sexual misconduct. The court emphasizes that when interpreting an insurance contract, it must adhere to the plain and ordinary meanings of the terms involved, relying on case law to clarify that ambiguous provisions must be interpreted in favor of the insured's reasonable expectations. However, unambiguous terms that benefit the insurer will not be disregarded. 

ProSelect bears the burden of proving the applicability of Exclusion 13, which states the policy excludes liability for any claims involving allegations of sexual misconduct. The court finds Exclusion 13 unambiguous, noting that Levy’s lawsuit, which includes a count of sexual assault, unequivocally falls within the exclusion, voiding coverage for the entire action regardless of any unrelated malpractice claims. The court references precedents indicating that allegations of sexual misconduct can bar coverage for the whole suit. Levy attempts to differentiate the cited case, Franklin v. Professional Risk Management Services, by arguing that it involved specific circumstances of transference mishandling, yet the court clarifies that the Franklin decision did not rely on such distinctions and that the exclusion applied clearly.

The Estate's claim that the first count of Levy’s amended complaint constitutes a separate "suit" not involving sexual assault is rejected by the court, which asserts that a single civil action can encompass multiple claims.

The definition of "suit" as a "civil action" in the Policy at IX(13) is deemed too narrow when applied to individual counts within multiple claims. The Policy defines "claim" as "suit" (IX(2)), and Exclusion 13 addresses both "claims" and "suits," thus avoiding ambiguity unlike in the case of Legion Ins. Co. v. Vemuri, where "claim" was undefined. The Estate contends that applying Exclusion 13 to deny coverage for medical malpractice contradicts the reasonable expectations of insured physicians. However, recent Supreme Court rulings emphasize that reasonable expectations cannot override clear policy language, and that expectations must be reasonable to prevent exploitation by uninformed policyholders. The explicit language of Exclusion 13 renders any expectation of coverage for claims of sexual misconduct unreasonable. 

Regarding the claim of ambiguity in Exclusion 13 due to the phrase "in whole or in part," the court finds that it modifies "claims or suits" and does not create confusion, countering the Estate's interpretation. Precedents in similar medical liability policies support this interpretation. Furthermore, the Estate's argument that excluding coverage for medical malpractice claims involving sexual misconduct contravenes public policy is countered by ProSelect, which cites that subsequent court rulings have upheld similar exclusions against public policy challenges, contrary to the Estate's reference to American Home Assurance Co. v. Cohen.

ProSelect argues that exclusions like Exclusion 13 do not discourage reporting sexual misconduct and may serve public interests. Vermont law allows courts to void contract provisions that violate public policy if they harm public interests or contravene societal norms. The public interest includes protecting individuals from sexual abuse by medical professionals, as reflected in various statutes addressing unprofessional conduct and abuse of vulnerable adults. The key issue is whether Exclusion 13 harms this interest. 

In the case of Cohen, the Washington Supreme Court found it against public policy for insurers to offer lesser coverage for a psychologist's nonsexual misconduct when sexual misconduct was also alleged. The court noted that such exclusions discourage reporting unethical behavior, ultimately harming public safety and undermining legislative efforts to address sexual misconduct. Other courts have echoed this reasoning, emphasizing that limitations on coverage could deter professionals from committing misconduct due to the awareness of insufficient insurance coverage for resultant damages.

While the McDonald case initially suggested that such exclusions might deter reporting, it concluded that evidence was lacking to support this claim. The court ultimately reasoned that limiting coverage might actually prevent misconduct by making professionals aware of the potential financial consequences of their actions.

Psychotherapist personal liability serves as a significant deterrent against sexual misconduct, as seen in various case law, including Am. Home Assurance Co. v. Levy, which emphasizes that therapists face personal liability and lack insurance coverage for such misconduct. The Sexual Misconduct Provision aims to discourage inappropriate behavior by therapists. Courts have noted a lack of evidence that patients consider therapists' insurance before reporting misconduct, indicating that therapists are more likely to be aware of their insurance terms when engaging with patients. 

The Estate and Levy claim their case involves professional malpractice claims that are separate from sexual misconduct; however, the court finds that the language of Exclusion 13 negates the need to determine if the alleged malpractice is intertwined with the misconduct. The court supports this position by referencing decisions from multiple jurisdictions that uphold similar exclusions as consistent with public policy. 

Regarding concurrent causation, the Estate argues that Levy’s alleged negligence is independent from excluded conduct and thus coverage should be provided. However, ProSelect counters that the exclusion is not based on causation and that the alleged negligent acts do not jointly cause a single injury. Vermont's concurrent causation doctrine, established in State Farm Mutual Automobile Insurance Co. v. Roberts, allows for coverage if an incident is caused by a risk within the policy, even if a separate excluded risk also contributed to the injury.

The court concurs with other jurisdictions that the doctrine of concurrent causation does not apply when an exclusion is clearly defined, even with independent concurrent causes. The case of Cranford is noted as distinguishable due to the ambiguous nature of its exclusion, which contrasts with the unambiguous Exclusion 13 in the current matter, allowing ProSelect to obtain summary judgment on its declaratory judgment complaint and on the Defendants’ counterclaim. The court addresses three of the four defenses presented by the Defendants: (1) concurrent causation, (2) public policy, and (3) ambiguity, while noting the fourth defense concerns only Mrs. McKenna and is not part of the current motions. 

Regarding reimbursement for claim expenses, ProSelect contends it is not obligated to reimburse the Estate for costs incurred in defending a suit filed after the policy lapsed, arguing that reimbursement is only for suits initiated during the policy period. The Estate counters that a governmental regulatory proceeding initiated within the policy period should suffice for reimbursement eligibility, as well as asserting that ProSelect was notified of the related allegations during that timeframe. Alternatively, the Estate claims reimbursement is warranted even if the suit had to be filed within the policy period because ProSelect's cancellation of the policy was unlawful. ProSelect counters this by stating that the notice of the regulatory proceeding does not impact its reimbursement obligation and that questions about the policy's cancellation are moot since it would not have been renewed anyway.

The court applies established principles of contract interpretation to the Policy's "Defense and Claims Expenses" section, which stipulates that ProSelect will reimburse the insured for reasonable defense expenses (up to $100,000) related to civil suits or governmental proceedings alleging sexual misconduct, provided the insured notifies ProSelect within the policy period. ProSelect acknowledges that a proceeding against Dr. McKenna was initiated in June 2005, involving allegations of sexual misconduct, and that it was notified before the policy was canceled. Consequently, the parties agree that the Estate is entitled to summary judgment for reimbursement of reasonable fees incurred in defending the Board proceeding.

The Estate also seeks reimbursement for defense costs in a separate civil action, but ProSelect argues it is not liable since that suit was not reported while the policy was active. ProSelect's position emphasizes the limitations of "claims made" policies, which only cover claims reported during the policy period. The Estate contends that ProSelect received notice of the underlying incident during the policy period, but ProSelect maintains that the lack of a suit being filed during that time is decisive.

The court agrees with ProSelect regarding this point but notes that a specific provision in the Policy may allow for prospective coverage, stating that if the insured reports an incident that could lead to a claim during the policy period, subsequent claims connected to that incident will be considered reported on the last day of the policy. The court decides to allow further briefing on this provision's relevance to the Estate's counterclaims before making a ruling on count IV. Regarding count V, the Defendants argue that ProSelect improperly canceled Dr. McKenna's policy, which should entitle the Estate to reimbursement even if the claim was reported after the policy period.

ProSelect is entitled to summary judgment on count V of the Defendants’ counterclaim, as the policy period would have expired before the underlying suit regardless of whether ProSelect canceled the Policy. There is no evidence of a legal obligation for ProSelect to renew the Policy, given the absence of a renewal clause. The court grants ProSelect’s motion for partial summary judgment, concluding that the policy does not cover the substantive claims in the underlying suit, resulting in no duty to defend. Additionally, ProSelect's summary judgment motions on counts I and V of the Defendants’ counterclaims are granted, while the court reserves judgment on count IV. The Estate's cross motion for summary judgment on count III of the Defendants’ counterclaim is granted, but its motions on counts I and V are denied, with the court also reserving judgment on count IV. All parties must submit additional briefings within 30 days regarding the impact of section 2 of the Policy on the Estate's counterclaims for damages under section VI(5).