Jury Finds AIG Client’s Refusal to Settle Was Not a Wrongful Act

Opinion: A medical malpractice carrier’s refusal to settle in its $200,000 limit was not a “wrongful act” despite a $14 million verdict against a Texas insured, and now the carrier’s reinsurer is faced with paying the settlement on a bad faith claim by the injured patient’s family.

Facts: The female decedent patient’s family sued the carrier’s insured, a doctor, in 2002 and made a demand that the malpractice carrier pay the policy limits of $200,000. There was a statutory cap in place, which theoretically should have cap the exposure at $1.7 million in the event of an adverse verdict. The malpractice carrier refused and thereafter at trial the family won a $14 million judgment against the doctor. The verdict was initially reduced to $1.7 million pursuant to statutory caps, but astonishingly the Texas Supreme Court made a novel ruling in 2009 that the family could pursue the malpractice carrier for the entire award.

Armed with a judgment against the insured, the family filed a bad faith suit against the malpractice carrier days later. Eventually the carrier settled for between $5-6 million. The malpractice carrier then sued the reinsurer (AIG) in 2013 in federal court for coverage of the bad faith settlement, asserting damages of roughly $5 million. The reinsurer denied coverage, asserting that the malpractice carrier had known earlier that the reinsurer was exposed but failed to make a claim during the appropriate policy period.

In 2018, the U.S. District Court judge agreed and granted the reinsurer summary judgment. However, the Seventh Circuit overturned that decision and asserted that a jury question remained. The Appellate Court panel agreed that the malpractice carrier should have been able to foresee litigation arising from its refusal to settle, but an issue of fact remained over whether that refusal constituted a “wrongful act” that wouldn’t trigger coverage under the reinsurance policy.

Last week, a jury ruled that the refusal to settle was not a “wrongful act.” Had the jury ruled that the malpractice carrier’s failure to settle was a wrongful act, the reinsurer would have been absolved of any coverage duty. The malpractice carrier asserted that the refusals were eminently reasonable because it believed the doctor’s hospital and nurses were mainly responsible for the patient’s death.   The reasons for the Court’s decision concerning setting aside the caps is baffling and not fully flushed out.

Cathleen Kelly Rebar
Partner

Joyce S. Pickles
Associate