Ironshore Specialty Ins. Co. v. Conemaugh Health Sys., Inc., CIVIL ACTION NO. 3:18-cv-153

423 F.Supp.3d 139

IRONSHORE SPECIALTY INSURANCE COMPANY, Plaintiff,

v.CONEMAUGH HEALTH SYSTEM, INC. and John O. Chan, M.D., Defendants.

CIVIL ACTION NO. 3:18-cv-153

United States District Court, W.D. Pennsylvania.

November 14, 2019

Ronald P. Schiller, Michael R. Carlson, Pro Hac Vice; Hangley Aronchick Segal Pudlin & Schiller, Philadelphia, PA, for Plaintiff.

H. M. Tepper, Kira N. Lum, Pro Hac Vice; Buchanan Ingersoll & Rooney PC, Philadelphia, PA, for Defendants.

MEMORANDUM OPINION

KIM R. GIBSON, UNITED STATES DISTRICT JUDGE

I. Introduction

This lawsuit arises out of a dispute over the extent of the coverage of a professional liability insurance policy (the "Ironshore Policy"). Before the Court is Plaintiff Ironshore Specialty Insurance Company's ("Ironshore") Motion to Dismiss (ECF No. 47) Defendants Conemaugh Health System, Inc., and Dr. John O. Chan, M.D.'s (collectively, "Conemaugh") Counterclaim. (ECF No. 40.) This Motion is fully briefed (see ECF Nos. 48, 60, 64, 67, 68-1) and ripe for disposition. For the reasons that follow, the Court DENIES Ironshore's Motion.

II. Jurisdiction and Venue

This Court has jurisdiction over the action because the parties are diverse and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332.

Venue is proper in the Western District of Pennsylvania because a substantial part of the events giving rise to this action occurred in the Western District of Pennsylvania. 28 U.S.C. § 1391.

III. Factual and Procedural Background

The Court draws the following facts, which the Court accepts as true for purposes of deciding this Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6), from Conemaugh's Answer and Counterclaim (ECF No. 40) as well as Plaintiff's First Amended Complaint.¹ (ECF No. 12.)

The factual and procedural background of this case is complex and extensive, and the Court recounts it in significant depth in order to provide necessary background.² Ironshore issued the Ironshore Policy to Conemaugh Health System, Inc. and, through Conemaugh, one of its physicians, Dr. Chan. (Id. ¶ 1.) Ironshore filed the Complaint in this case after a jury returned a verdict of $47,033,579—which this Court subsequently remitted to roughly $19,000,000—in another lawsuit against Conemaugh.³

A. The Ironshore Insurance Policy and Conemaugh's Other Insurance Policies

At the times relevant to this lawsuit, Conemaugh possessed several separate levels of liability insurance. (ECF No. 40 ¶69.⁴ ) Conemaugh purchased the following insurance policies from Coverys Specialty Insurance Company and ProSelect Insurance Company (collectively, "Coverys"): (1) ProSelect Primary HPL, Policy No. 2-25167HPL, with limits of $500,000 per claim and $2,500,000 in the aggregate; (2) ProSelect Primary Practitioners (MD), Policy No. 2-25167MD, with limits of $500,000 per claim and $1,500,000 in the aggregate; and (3) ProSelect First-Layer Excess Policy, with limits of $10,000,000 per claim and in the aggregate (collectively, the "Primary Policy"). (Id. ) The Primary Policy, which contained a first-layer excess policy,⁵ had a total coverage limit of $11,000,000 for medical malpractice liability coverage. (Id. )

The Primary Policy was effective for claims made against Conemaugh between January 1, 2014, and January 1, 2015.⁶ (Id. ¶ 70.) Conemaugh had an additional $1,000,000 in coverage under the Medical Care Availability and Reduction of Error Act ("MCare"), for a total Primary Policy limit of $12,000,000. (Id. ¶ 71.) In addition to the Primary Policy and MCare, Conemaugh also purchased the Ironshore Policy, a further excess insurance policy that covered claims that exceeded Conemaugh's underlying $12,000,000 coverage. (Id. ¶ 72.) Ironshore issued the Ironshore Policy to Conemaugh, and it was effective for claims made between January 1, 2014, and September 1, 2014.⁷ (ECF No. 40 ¶ 73.)

The Ironshore Policy contained several provisions relevant to this lawsuit. First, the Ironshore Policy stated that Ironshore would pay claims in excess of the $12,000,000 threshold so long as Conemaugh followed the necessary conditions (the "Activation Clause"):

[Ironshore] shall pay on behalf of [Conemaugh] for loss, damages, settlements and defense expenses by reason of exhaustion of the limits of liability of the [Primary Policy] by the issuers of such [Primary Policy] and/or [Conemaugh], subject to: (1) the terms and conditions of the Primary Policy (as submitted to [Ironshore] ), (2) the Limit of Liability stated in ITEM 3 of the Declarations, and (3) the terms and conditions of, and all endorsements attached to, this Policy

(Id. ¶ 74.) Second, the Ironshore Policy also contained a provision requiring Conemaugh to notify Ironshore of claims as a precondition to triggering the obligation to pay the claim (the "Notification Clause"):

As a condition precedent to any right to payment of [Conemaugh] under this Policy, [Conemaugh] shall give [Ironshore] written notice of: (1) any claim under the Underlying Insurance as soon as possible, but in no event later than required for reporting of claims under the Primary Policy; provided, that [Conemaugh] shall give [Ironshore] notice of any claim involving professional liability coverage as soon as practicable, but in no event later than ninety (90) days after the expiration of the Policy Period ...

(Id. ¶ 75.). The Ironshore Policy does not define the word "claim," but the Ironshore Policy allegedly followed the form of the Primary Policy,⁸ and the Primary Policy defines "claim" as "a written demand made or SUIT brought against an INSURED for DAMAGES." (Id. ¶ 76.)

Finally, the Ironshore Policy required Conemaugh to allow Ironshore to participate in defending any claim against Conemaugh that might implicate the Ironshore Policy, even if the underlying insurance is not exhausted (the "Cooperation Clause"); if Ironshore elected to participate in defending a claim, Conemaugh was obliged to cooperate with Ironshore and "make available all such information and records" as Ironshore "may reasonably require." (ECF No. 2 at 7, Ironshore Policy § VII(B).)

B. Harker v. Chan⁹

On October 29, 2015, Conemaugh and Dr. Chan, among others, were named as defendants in Harker v. Chan , No. 3:15-cv-00277, before this Court; the obligation to pay the verdict against Conemaugh and Dr. Chan in Harker provides the basis for the dispute in this case. (ECF No. 40 ¶¶ 78, 80.) The case was one that potentially triggered the Ironshore Policy, as Conemaugh believed that Harker involved a covered claim under the Ironshore Policy. (Id. ¶ 79.) The Harker Complaint pleaded that Conemaugh and Dr. Chan were responsible, as a result of negligent medical treatment, for the permanent disfigurement of a premature infant, GH,¹⁰ born on December 27, 2012. (Id. ¶ 80; see Harker ,¹¹ ECF No. 96 at 1.)

1. The Underlying Facts

Harker arose from the allegation that Conemaugh, through Dr. Chan, had negligently treated GH, a prematurely born girl, by wrapping her head with an ACE bandage shortly after birth, causing permanent disfigurement to her face and scalp. ( Harker , ECF No. 96 at 1.) GH was born at Conemaugh Memorial Medical Center, one of Conemaugh's facilities, on December 27, 2012, and due to her premature birth status, physicians at Conemaugh placed her in the neonatal intensive care unit, under the care of Dr. Chan. (Id. at 2.)

While GH was under Dr. Chan's care, he observed swelling on her head, an apparently not uncommon finding for newborn babies; the standard treatment for the condition is generally either monitoring and observing the child, or a blood transfusion, depending on the cause of the swelling. (Id. at 3.) Dr. Chan, however, based upon his medical education, instructed a nurse to wrap GH's head with an ACE bandage, which remained on GH's head for almost two days. (Id. ) When a nurse removed the bandage, her head was bruised and swollen and had abrasions that oozed blood and serum. (Id. ) In addition, GH's head had necrotic tissue where the bandage had been wrapped. (Id. )

As a result, GH was transferred to Texas Children's Hospital in Houston, where her doctors noted that GH had lost "significant soft tissue," and had suffered "substantial hair loss." (Id. at 4.) GH's scalp was also oozing fat, and her skull was compromised; as a result, she has undergone several painful procedures and physical therapy, and will require multiple further surgeries and years of treatment, none of which will ever fully remedy the damage caused by the ACE bandage. (Id. at 4–5.)

2. Pre-Trial Communications Between Conemaugh and Ironshore

Less than a week after Harker 's filing, on November 5, 2015, Conemaugh gave Ironshore a copy of the Complaint, which Ironshore acknowledged the following day, noting that Conemaugh had "reported" the matter. (ECF No. 40 ¶¶ 81–82.) At the time Conemaugh reported Harker to Ironshore, Conemaugh expected that Coverys and Conemaugh's excess carriers, including Ironshore, would cover any verdict against Conemaugh in full. (Id. ¶ 83.)

On January 29, 2018, Conemaugh's Director of Clinical Risk Management, Denise Weinzierl, contacted Ironshore Claim Technical Analyst Cheryl Scott, who Ironshore had previously assigned to the Harker case, and notified Scott that Harker could potentially implicate the Ironshore Policy. (Id. ¶ 84.) Weinzierl suggested that Conemaugh could prepare a status report on Harker to more fully update Ironshore on the status of the case, as well as how a resolution might impact the Ironshore Policy. (Id. ¶ 85.) Either that day or the next, Weinzierl requested that Conemaugh's counsel, Michael Sosnowski, prepare a status report on the case for Ironshore (the " Harker Report"). (Id. ¶ 86.) The Harker Report, dated February 5, 2018, indicated that Conemaugh was likely to receive an unfavorable verdict, and estimated that liability would likely top out at or near Ironshore's coverage threshold of $12,000,000. (Id. ¶¶ 86, 94, 98, 99.) Conemaugh emailed the Harker Report to Scott on February 6, 2018, and...