Is Insurer Estopped from Asserting Coverage Defenses if it Undertakes Defense of its Insured?
In Rosalind Franklin University of Medicine and Science v. Lexington Insurance Company, the case arises out of a declaratory judgment. Rosalind Franklin University of Medicine and Science (“Rosalind”) claimed coverage for a settlement it paid in an underlying lawsuit brought by former patients who sought compensation for Rosalind’s decision to discontinue an experimental breast cancer vaccine program. Fifty of the former vaccine patients filed suit against Rosalind, claiming that the decision to discontinue the vaccine program put their lives at risk. The patients alleged that the vaccine treatments “have helped save and prolong the patients’ lives.” As a result, the termination of the vaccine program “has caused these patients to suffer incalculable damage.” Lexington Insurance Company’s (“Lexington”) policies covered liability “resulting from a medical incident arising out of professional services,” while Landmark American Insurance Company’s (“Landmark”) policy contained a specific exclusion for medical malpractice damages. When both insurers denied coverage, Rosalind brought a declaratory judgment action against them.
The court reviewed whether Lexington was estopped from raising coverage defenses under the Lexington Primary Policy because of its actions with respect to the defense of Rosalind in the underlying suit. Secondly, the court reviewed the issue of whether Lexington and Landmark’s policies provided coverage of the defense and indemnity of the underlying suit.
Lexington argued that it should not be estopped from raising coverage defenses for two reasons. First, Lexington argued that it did not undertake the defense of Rosalind; insofar as attorney Robert Vogt, who represented Rosalind in the underlying suit, was not appointed by Lexington. Second, it argued that even if Vogt was appointed by Lexington, the record showed that Rosalind did not surrender control of its defense, but rather maintained control through the involvement of attorney Patricia Bergeson, Rosalind’s general counsel. Notwithstanding the foregoing, Lexington argued that Rosalind was not prejudiced by Vogt’s appointment where Rosalind did not surrender control of the case to him. Rosalind, on the other hand, argued that Vogt controlled the defense and, in particular, was the driving force behind the negotiations that culminated in the settlement agreement for which Lexington now refuses to pay.
Under Illinois law, an insurer is estopped from asserting coverage defenses if it undertakes the defense of its insured, inducing the insured to surrender control of its defense and thereby causing prejudice to the insured. The insured has the burden of establishing prejudice by clear, concise, and unequivocal evidence, and prejudice will not be presumed from an insurer’s mere entry of appearance and assumption of the defense. The court concluded that Lexington was not stopped from raising coverage defense, since Rosalind was represented by its own attorney and had not established that Vogt’s representation was defective or that counsel for Rosalind would have conducted the defense differently.
The major issue in this case was whether Lexington’s and Landmark’s policies provided coverage for the defense and indemnity of the underlying suit. Lexington and Landmark contend that the settlement represented a disgorgement of funds that Rosalind had no legal right to retain, which does not constitute “damages” or a “loss” under their respective policies. Lexington and Landmark disagree as to whether the primary focus of the underlying suit was medical in nature. Lexington contends that the underlying suit did not seek damages “resulting from a medical incident arising out of professional services,” as would bring it within coverage of Lexington’s policies.
In the present case, although the underlying plaintiffs alleged many different causes of action, the genesis of all of those claims was the decision by Rosalind’s IRB to shut down the Springer vaccine program. In making this decision, the IRB purported to be acting upon its specialized medical knowledge, citing safety concerns and a lack of demonstrable efficacy of the treatment. This is consistent with the general function of an IRB of a medical institution such as Rosalind. An IRB is responsible for ensuring the safety of human subjects and for establishing informed consent protocols. Based upon the foregoing, the court determined that the “primary focus” of the underlying complaint consists of activity involving specialized medical knowledge, thus bringing it within the ambit of Lexington’s professional liability policies, as well as the medical malpractice exclusion in Landmark’s policy.
Rosalind Franklin Univ. of Med. & Sci. v. Lexington Ins. Co., 2014 IL App (1st) 113755 (Ill. App., 2014).
