Court Finds Coverage Under Professional Liability Policies For Settlement In Breast Cancer Vaccine Case

In this declaratory judgment action, the plaintiff, Rosalind Franklin University of Medicine and Science (Rosalind), seeks coverage from its insurers, Lexington Insurance Company (Lexington) and Landmark American Insurance Company (Landmark), after both insurers denied coverage for a settlement Rosalind paid in an underlying lawsuit brought by former patients who sought compensation for Rosalind’s decision to discontinue an experimental breast cancer vaccine program. Lexington filed a cross-claim against Landmark, contending that Landmark’s policy should provide coverage for the underlying suit and settlement.

Lexington and Landmark argued that the settlement was a disgorgement of funds that Rosalind had no legal right to retain, which did not constitute “damages” or a “loss” under the policies.  The Appellate Court of Illinois found that the settlement did not represent a disgorgement of funds because Rosalind paid the underlying settlement out of its general operating account.

Lexington also argued that the underlying suit did not seek damages “resulting from a medical incident arising out of professional services.”  Conversely, Landmark argued that the underlying suit involved a failure to render medical services and therefore fell within the medical malpractice exclusion in its policy. Lexington also argued that Rosalind failed to obtain consent for the settlement and failed to inform it of the exhaustion of the self-insured retention thus precluding any duty to indemnify on Lexington’s part.

The Appellate Court noted that the primary focus of the underlying complaint was activity involving specialized medical knowledge.  Thus it fell within the ambit of coverage provided by Lexington’s professional liability policies, as well as the medical malpractice exclusion of Landmark’s policy.

The court also noted that Lexington waived its voluntary payment defense because it had multiple opportunities to raise the issue of consent to settle or a voluntary payment defense, but failed to do so until after Rosalind executed the final settlement agreement.  Similarly, by voluntarily undertaking the defense in the underlying suit, Lexington waived any argument that it was not aware of the potential exhaustion of the self-insured retention.