Why it matters

Did the decision to terminate a breast cancer vaccine program constitute a wrongful administrative act or involve medical or professional services? When falling on the side of a medical and professional service, a recent holding from the Illinois Court of Appeals meant coverage from one insurer for the insured medical educational institution and the application of an exclusion from a second. The court additionally held that the primary insurer waived its right to argue that it did not consent to an underlying settlement when it failed to timely object to the deal, despite knowledge of the settlement negotiations.

Detailed Discussion

The dispute began with a decision by nonprofit educational institution Rosalind Franklin University of Medicine to stop an experimental breast cancer vaccine program. Former patients sued. Despite the findings by Rosalind’s institutional review board that the program lacked scientific validity and demonstrable efficacy, the patients argued the program’s halt put their lives at risk.

After a preliminary hearing fared poorly for Rosalind, the school pursued a settlement with the former patients. The parties reached a deal where the university paid $2.5 million into a trust for the patients to resume the study with an additional $1 million to be paid if the plaintiffs were successfully able to get it started again, and $500,000 “to compensate the plaintiffs for pain and suffering.”

Rosalind sought coverage from two insurers: Lexington, which had issued primary and excess healthcare liability policies to the university, and Landmark, under a directors and officers liability policy.

Lexington paid for counsel, albeit with a reservation of its rights, and refused to contribute to the settlement. The deal represented a disgorgement of funds and not “damages” or a “loss” under the policies, Lexington argued. It also took the position that the underlying suit was not medical in nature and therefore was not within the ambit of Lexington’s policies; the former patients were really challenging an administrative decision to halt the program, the insurer said.

Landmark, which the parties agreed could only be on the hook for indemnification, also declined to chip in for the settlement. Landmark took an opposite stance as to the medical nature of the underlying complaint, arguing that the allegations involved a failure to render medical services and therefore fell under a medical malpractice exclusion in its policy.

Rosalind sued. In a somewhat mixed ruling for the insured, the Illinois Court of Appeals affirmed that the complaint fell under the professional services acts coverage of Lexington’s policy and that Lexington failed to timely object to the settlement. However, the court also determined that Landmark’s policy exclusion for medical malpractice precluded indemnification under the D&O policy.

The panel first rejected both insurers’ contention that the settlement constituted disgorgement. The vaccine program was funded by a donation from a deceased doctor and earmarked for cancer research generally, the court said, not the specific research program at issue. The remaining funds are still being held for that purpose, the court added, as Rosalind paid the former patients from general operating funds.

“[T]he underlying complaint also sought damages for breach of duties, fraud, and misrepresentation, which cannot be framed as disgorgement or a turnover of fund. The settlement agreement disposed of all of the underlying plaintiffs’ claims, including the nondisgorgement claim. Therefore, it is apparent that the settlement did not represent a disgorgement,” the panel wrote.

Did the former plaintiffs allege acts of a medical nature? Yes, the panel concluded, bringing the suit within the covered acts of professional services under the Lexington policy.

The preliminary statement of the complaint “alleges that Rosalind violated a cardinal principle of the medical profession” and “failed to ‘comport with their professional responsibilities as articulated in the Code of Medical Ethics’ by discontinuing care,” the court noted. The genesis of the former patients’ claims was the decision to shut down the vaccine program based on a lack of demonstrable efficacy of treatment, among other reasons.

Such decision-making constitutes “medical functions that require judgment aimed at protecting patients,” the panel explained. “Thus, Rosalind’s exercise of judgment in this regard constitutes professional service.”

While the court’s rejection of Lexington’s wrongful administrative acts argument meant one victory for the insured, it also brought the complaint under the medical malpractice exclusion in Landmark’s policy, negating indemnification under that policy for Rosalind.

Finally, the panel held that Lexington waived an argument that it failed to consent to the underlying settlement and therefore should not have to pay for it. Lexington was notified of the deal and its terms, the court said, and after it learned that settlement negotiations were ongoing, “had multiple opportunities to raise the issue of consent to settle or a voluntary payment defense, but it declined to do so until after Rosalind had executed the final settlement agreement.”

The insurer even sent a reservation of rights letter during the settlement negotiations and never referenced the pending deal. “Under such circumstances, we agree with the trial court that it would be inequitable to allow Lexington to raise the voluntary payment defense now,” the court concluded.

To read the order in Rosalind Franklin University of Medicine and Science v. Lexington Ins. Co., click here.