A Rhode Island federal district court has ruled that two D&O policies respond to a nearly $30 million judgment against an insured health system organization that was sued in connection with its disaffiliation from a non-profit hospital.  Lifespan Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA., No. 1:12-cv-00300-M–LDA (D.R.I. Nov. 17, 2014).

The insured and the hospital entered into a dissolution agreement pursuant to which the hospital was to pay the insured a series of payments totaling $30 million.  After the hospital refused to make the final two required payments, the insured brought suit against the hospital for breach of contract.  The hospital responded by asserting a number of counterclaims, alleging that it suffered significant losses as a result of misconduct by the insured during the parties’ affiliation, including with respect to negotiating reimbursement contracts and an interest swap deal.  The state attorney general, acting “on behalf of the public interest,” intervened in the litigation and also asserted claims against the insured.  Following a bench trial, the court concluded that the insured breached its fiduciary duty of care to the public and that the insured’s gross negligence directly and solely caused the hospital to suffer losses for which the insured was responsible for indemnifying the hospital under the terms of the dissolution agreement.

The insured sought coverage for the judgment under its primary and excess D&O policies.  The insurers denied coverage on a number of grounds, including several exclusions.  In the coverage litigation that followed, the court focused first on the policies’ unfair advantage and deliberate fraud exclusions, both of which required a “judgment, final adjudication or binding arbitration adverse to the Insured(s).”  As to the unfair advantage exclusion, the court concluded that the trial court’s finding that a senior executive of the insured pushed through a multi-million dollar interest swap deal with the “hope” of securing an invitation to a wine club did not suffice to trigger the exclusion.  With respect to the deliberate fraud exclusion, the court held that while the trial court had made “individual factual findings” indicating that the insured had committed fraud, the exclusion did not apply because the judgment adverse to the insured was for breach of fiduciary duty and contractual indemnification, and neither claim required any element of fraud.

The court next addressed the contractual liability exclusion, which barred coverage for loss in connection with a claim “alleging, arising out of, based upon or attributable to any actual or alleged contractual liability . . . under an express (written or oral) contract or agreement.”  In rejecting the insurers’ reliance on the exclusion, the court found that the insurers impermissibly sought to ignore the phrase “contractual liability” and instead substitute the word “contract.”  According to the court, “[t]he issue is not whether the liability of the [insured] arose out of a ‘contract,’ but rather whether the liability of the [insured] arose out of its ‘contractual liability.’”  In this regard, the court opined that the insured could not have any contractual liability to the hospital under the original affiliation agreement because all such liability was released under the dissolution agreement.  The court also rejected the notion that the “arising out of, based upon” language extended the reach of the exclusion to the breach of fiduciary duty claim by the attorney general, which, according to the court, arose from the special relationship created by the public’s interest in the administration of a non-profit hospital.

The court rejected the insurers’ reliance on the professional services exclusion as well.  This provision barred coverage for a claim arising out of or based upon an insured’s “performance or rendering of . . . medical or other professional services or treatments for others.”  The insurers argued that the exclusion applied because the claims at issue arose out of the insured’s “professional services” – namely, corporate management services to the hospital.  The court, however, reading the exclusion in the context of the D&O policy as whole, concluded that the exclusion applied only to medical and healthcare-related services that might be performed by the hospital and its staff.