Opinion
NO. 2016-CA-000372-MRNO. 2016-CA-000396-MRNO. 2017-CA-001167-MRNO. 2017-CA-001168-MRNO. 2017-CA-001756-MR
02-14-2020
DARWIN SELECT INSURANCE COMPANY, now known as ALLIED WORLD SURPLUS LINES INSURANCE COMPANY APPELLANT v. ASHLAND HOSPITAL CORPORATION d/b/a KING'S DAUGHTERS MEDICAL CENTER; KENTUCKY HEART INSTITUTE, INC.; RICHARD E. PAULUS, M.D.; SRIHARSHA VELURY, M.D.; JOHN VAN DEREN, III, M.D.; AND MATTHEW SHOTWELL, M.D. APPELLEES AND HOMELAND INSURANCE COMPANY OF NEW YORK APPELLANT v. ASHLAND HOSPITAL CORPORATION d/b/a KING'S DAUGHTERS MEDICAL CENTER; KENTUCKY HEART INSTITUTE, INC.; RICHARD E. PAULUS, M.D.; SRIHARSHA VELURY, M.D.; JOHN VAN DEREN, III, M.D.; AND MATTHEW SHOTWELL, M.D. APPELLEES
BRIEFS FOR APPELLANT, DARWIN SELECT INSURANCE COMPANY, now known as ALLIED WORLD SURPLUS LINES INSURANCE COMPANY: Ernest H. Jones, II, Esq. Jamie Wilhite Dittert, Esq. Lexington, Kentucky Jonathan D. Hacker, Esq. Washington, D.C. Jeffrey Michael Cohen, Esq. Miami, Florida BRIEFS FOR APPELLANT, HOMELAND INSURANCE COMPANY OF NEW YORK: D.C. Offutt, Jr. Matthew Mains Anne Liles O'Hare Huntington, West Virginia Charles E. Spevacek Tiffany M. Brown Minneapolis, Minnesota BRIEFS FOR APPELLEES: Perry M. Bentley Todd S. Page Lexington, Kentucky
NOT TO BE PUBLISHED APPEAL FROM BOYD CIRCUIT COURT
HONORABLE C. DAVID HAGERMAN, JUDGE
ACTION NO. 15-CI-00070 OPINION
REVERSING AS TO APPEAL NOS. 2016-CA-000372 AND 2016-CA-000396; DISMISSING AS TO APPEAL NOS. 2017-CA-001167, 2017-CA-001168, AND 2017-CA-001756
** ** ** ** **
BEFORE: DIXON, KRAMER AND TAYLOR, JUDGES. KRAMER, JUDGE: Darwin Select Insurance Co., n/k/a Allied World Surplus Lines Insurance Co. ("Darwin"), along with Homeland Insurance Company of New York ("Homeland"), appeal declaratory judgments of the Boyd Circuit Court in favor of the above-captioned appellees (collectively "KDMC"). Upon review, we reverse.
These five consolidated appeals address the same overarching issue: namely, two insurers' (Darwin's and Homeland's) contested liability for providing defense coverage to KDMC relating to 127 lawsuits asserted against KDMC in Boyd Circuit Court. From a procedural standpoint, those 127 other lawsuits were collectively managed in Boyd Circuit Court under the ambit of In re: CardiacLitigation, 14-CI-09999. In re: Cardiac Litigation is not before this Court, and the parties herein represented to the Court during oral arguments that all 127 of the lawsuits related to it have recently been settled. Nevertheless, because the coverage exclusions at issue in these appeals depend upon the nature of the claims asserted in In re: Cardiac Litigation, it is impossible to resolve these appeals without some understanding of that separate matter.
I. In re: Cardiac Litigation
1. The triggering event of In re: Cardiac Litigation: KDMC receives a wide-ranging subpoena from the United States Department of Justice.
On July 25, 2011, the United States, by and through the Department of Justice (DOJ), began an investigation of KDMC and several of KDMC's affiliated entities and physicians. The DOJ's investigation began with a subpoena, which directed KDMC to produce:
1. All medical records and files, digital images and/or films of catheter procedures, intracoronary stent placements, billing records, and schedules reflecting cath lab usage pertaining to all patients treated in the hospital by physicians associated with Cumberland Cardiology and the Kentucky Heart Institute, from August 1, 2006, until present. These physicians include Richard E. Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, and Arshad Ali.
. . .
3. All communications, including email and meeting minutes, that refer or relate to the volume of
intracoronary stent placements performed by Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heard Institute.
4. Documents identifying all health care insurance companies (and their correct business addresses) billed for services by King's Daughters relating to intracoronary stent placements by Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heart Institute.
5. Files of all complaints received regarding Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heart Institute, whether from patients, physicians, nursing personnel, hospital staff, hospital administrators or any other source, concerning intracoronary stent placements.
6. Files and/or documents related to any peer review proceedings, revocation of hospital privileges proceedings, and any other disciplinary or investigatory proceeding concerning Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, and Arshad Ali.
7. Documents identifying or a list of any and all complaints, demand letters and/or lawsuits alleging or suggesting medical malpractice or other wrongdoing relating to Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali,
or any other employee of Cumberland Cardiology or Kentucky Heart Institute.
8. Names and records of any and all patients who died and/or suffered complications as a result of or within one month of an angioplasty from August 1, 2006, until present.
9. All contractual agreements between King's Daughters and Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, Cumberland Cardiology, or Kentucky Heart Institute.
10. Results of any internal or external audits of the work performed in the catheterization lab.
11. Results of any internal or external audits, or due diligence, performed on Cumberland Cardiology before their acquisition by King's Daughters Medical Center.
12. Employment contracts, financial agreements, position descriptions, incentives or bonuses offered to Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday and Arshad Ali.
As to why, the DOJ further stated in its subpoena that this documentation was:
[N]ecessary in the performance of the responsibility of the U.S. Department of Justice to investigate Federal health care offenses, defined in 18 U.S.C. § 24(a) to mean violations of, or conspiracies to violate: 18 U.S.C. §§ 669, 1035, 1347, or 1518; and 18 U.S.C. §§ 287, 371, 664, 666, 1001, 1027, 1341, 1343, or 1954 if the
violation or conspiracy relates to a health care benefit program (as defined in 18 U.S.C. § 24(b)).
United States Code.
In sum, the subpoena identified who the DOJ was initially investigating, and why. In light of the statutes cited in its subpoena, the DOJ was investigating KDMC and the named associated entities and physicians to determine whether those individuals had either separately or collectively defrauded, stolen, or embezzled funds from Medicare, Medicaid, or federally-regulated employee benefit plans, by overbilling those programs for cardiac medical services that were not only unnecessary under federal reimbursement guidelines but potentially harmful to the patients.
See, e.g., 18 U.S.C. § 1347(a).
To that end, the DOJ had subpoenaed an extensive amount of information from KDMC -- what eventually became over seven million pages of records. KDMC also represents that the expense of assembling and producing that information amounted to several millions of dollars.
KDMC had a "directors and officers" ("D&O") policy with Darwin's sister company, Darwin National Assurance Company ("National"), covering claims arising between October 1, 2010 through October 1, 2011. So, on or about December 30, 2011, KDMC notified National about the DOJ's subpoena and investigation, and sought coverage of its consequent expenses by submitting the matter as a claim under the provisions of that policy. National accepted KDMC's claim and, thereafter, paid KDMC the $15 million limits of the D&O policy.
2. KDMC settles the DOJ's civil claims.
The DOJ's investigation proceeded until early 2014, when it culminated into a settlement wherein KDMC paid the United States $40.9 million but admitted no wrongdoing. The settlement agreement stated in relevant part:
B. The United States contends that KDMC submitted or caused to be submitted claims for payment to the Medicare Program (Medicare), Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395kkk-1, and Medicaid Program (Medicaid), 42 U.S.C. §§ 1396-1396w-5.
C. The United States contends that it has certain civil claims against KDMC arising from the following conduct:
1. The United States contends that KDMC engaged in conduct to maximize Medicare and Medicaid reimbursement for the performance of unnecessary diagnostic catheterizations and coronary stents (hereinafter referred to as the "unnecessary interventional cardiac procedures"). The United States contends that KDMC knew, deliberately ignored, or recklessly disregarded the fact that cardiologists associated with or employed by KDMC and its subsidiaries were performing unnecessary interventional cardiac procedures. The United States further contends that KDMC knew, deliberately ignored, or recklessly disregarded the fact that such cardiologists associated with or employed by KDMC and its subsidiaries were falsifying KDMC's medical records in order to create the appearance of a need for the unnecessary interventional cardiac procedures. Between January 1, 2006 and
December 31, 2011, KDMC or its agents submitted false claims for payment for unnecessary interventional cardiac procedures to the Medicare and Kentucky Medicaid programs, and received millions of dollars in reimbursement as a result of such claims.
. . .
D. This Settlement Agreement is neither an admission of liability by KDMC nor a concession by the United States that its claims are not well founded.
To reemphasize, the settlement agreement recited that the United States had, due to its investigation, asserted civil claims against KDMC. As to the basis of those claims, the settlement agreement recited in Paragraph C.1 that the United States alleged KDMC had illicitly profited by either participating in or failing to prevent fraud perpetrated by "cardiologists associated with or employed by" KDMC. The settlement identified the fraud at the center of this claim, which consisted of performing, falsifying medical records regarding, and billing for interventional cardiac procedures that were unnecessary under federal guidelines and thus potentially harmful to patients.
3. The initial 647 aggrieved patients/claimants in the cardiac litigation.
While the DOJ's investigation remained ongoing, it received publicity. And after learning of the DOJ's investigation of KDMC -- while that investigation remained ongoing -- five or six attorneys (including attorneys from The Poppe Law Firm) acquired several hundred former patients of KDMC's cardiac department as clients. On June 12, 2013, the Poppe Law Firm sent a "litigation hold" letter to KDMC, directing KDMC to preserve the medical records of "approximately 500 individuals with potential claims" against KDMC. On September 5, 2013, the number of aggrieved former cardiac patients had evidently grown, and these attorneys sent demand letters to KDMC on behalf of 647 individuals. Each of the 647 demand letters advised KDMC to place its insurance carrier on notice immediately of their "claims for monetary damages."
4. The approximately 550 complaining patients/plaintiffs.
Not all the 647 aggrieved patients/claimants filed civil complaints. Following their demand letters, only about 550 of those individuals chose to do so. Between September 30, 2013, and March 2014, these 550 individuals filed suit in Boyd Circuit Court.
To an extent, these individuals filed 550 separate suits; to an extent, they did not; however, a class action was never certified. To explain, most of these individuals formed into separate groups, and each separate group filed a single complaint that asserted each of the claims of every group member. Consequently, between all 550 of the individuals who filed suit against KDMC and its associates, fewer than twenty complaints were filed between them, but their complaints were massive. Indeed, two such complaints (i.e., McIntyre et. al. v. Ashland Hosp. Corp. d/b/a King's Daughters Medical Ctr., et al., 14-CI-00159; and Ross, et. al. v. Ashland Hosp. Corp. d/b/a King's Daughters Medical Ctr., et al., 14-CI-00160) were filed by groups of approximately 250 individuals who designated themselves as co-plaintiffs.
We can find no Kentucky procedural rules that allow litigation to ensue as it did in In re: Cardiac Litigation. Because that matter is not before the Court, counsel for the parties in these appeals could not articulate the procedural mechanism that permitted such litigation and whether, for example, each individual litigant paid a circuit court filing fee or whether one fee was paid for each "group" of litigants. The In re: Cardiac cases are not before this Court; hence, we cannot address these troubling issues.
5. The common substance of the complaints: Allegations of intentional misconduct and violations of federal health care law.
In the underlying proceedings relating to these appeals, many of the complaints filed in In Re: Cardiac Litigation were included as part of an appendix that Darwin attached to a motion for summary judgment it filed on March 3, 2015. The parties in this appeal agree those complaints accurately reflect what was filed before the Boyd Circuit Court in In re: Cardiac Litigation; that the claims and general allegations in each respective complaint were identical or substantially the same; and that each of those complaints named, as defendants, KDMC as well as many of its various current and formerly affiliated cardiologists. To borrow from the McIntyre complaint (which asserted claims on behalf of 250 of the claimants and substantially repeated the allegations set forth in the other complaints), the former patients/plaintiffs alleged in relevant part:
Introduction
1. This case arises out of the pattern and practice by Defendants of performing, allowing to perform, and billing for, medically unnecessary and harmful cardiac procedures such as percutaneous transluminal coronary angioplasty ("PTCA") with stenting, coronary artery bypass grafts ("CABG") and pacemaker and defibrillator implantation.
2. KDMC's cardiology service and certain physicians are currently under investigation by the United States Department of Justice for participating and facilitating the performance of unnecessary cardiac procedures.
3. Defendants in this case routinely misrepresented patients' cardiac conditions in order to justify the performance of procedures on the patients' hearts.
4. The overstating of the extent of the disease allows Defendant healthcare providers to bill insurance companies, federal and state governments, and the patients themselves, for unnecessary procedures.
. . .
9. Plaintiffs join in this action and assert their right to relief jointly, severally, or in the alternative, as Defendants' actions arise out of the same transaction or occurrence, or series of transactions or occurrences, and Plaintiffs' claims involve common questions of law and fact.
. . .
Facts Common to All Counts
15. At all relevant times, Ashland Hospital Corporation owned, and/or operated King's Daughters Medical Center.
16. At all relevant times, Defendant Paulus and any other cardiologist and/or cardio-thoracic surgeon who performed the procedures listed on Exhibit A were the agents, ostensible agents, servants, or employees of [KDMC].
. . .
19. Defendant physicians performed, and the other Defendants allowed them to perform, multiple unnecessary cardiac procedures on Plaintiffs.
20. On information and belief, Defendants dramatically misrepresented patients' conditions in order to justify the performance of cardiac procedures.
21. Defendants knowingly subjected such patients, including Plaintiffs, to significant medical risks with no countervailing benefit and procured consent to the procedure based on those representations that the procedure was necessary based on fraudulent concealment of medical facts.
22. The nurses, technicians, and staff in the cardiac catheterization lab at KDMC knew or should have known KDMC's employed and non-employed physicians were performing unnecessary and non-indicated procedures and they failed to prevent or report the physicians' actions.
. . .
24. Despite the fact that they knew or should have known that KDMC's employees and non-employees
were regularly ordering and performing unnecessary and non-indicated procedures, the Defendants allowed its [sic] employees and non-employees to order, perform, and bill the procedures.
In no particular order, the cardiologists or cardio-thoracic surgeons associated with KDMC and identified as defendants in some or all of the various complaints filed in In re: Cardiac Litigation were as follows: Richard Paulus, M.D.; John Van Deren, III, M.D.; Richard Heuer, M.D.; Sriharsha Velury, M.D.; Nallathamby Thayapran, M.D.; and Matthew Shotwell, M.D.
In short, the former patients/plaintiffs asserted that the same alleged acts and omissions that had formed the bases of the United States' civil claims against KDMC, its agents, and its associated entities and physicians also formed the bases of their own civil claims against KDMC, its agents, and its associated entities and physicians. They reasserted and reincorporated those salient allegations of intentional and fraudulent conduct, and violations of federal healthcare law, into all their theories of recovery. And, to borrow again from the McIntyre complaint and further underscore this point, the hundreds of former patients/plaintiffs also made the following allegations, or ones substantially similar to the following allegations:
Based upon KDMC's alleged misconduct, the former patients/plaintiffs asserted theories of "negligence/gross negligence;" "lack of informed consent;" "negligent misrepresentation;" "fraud and fraudulent concealment;" "negligent hiring, supervision, credentialing, and privileging;" "civil conspiracy;" "unjust enrichment;" "consumer protection act;" "battery;" and in some instances "loss of consortium."
62. Defendants, by agreement among themselves and pursuant to a common design, committed tortious acts including, but not limited to, knowingly and unlawfully providing medical facilities and substantial assistance needed to perform, and did in fact perform, the unnecessary, non-indicated and unlawful procedures on Plaintiffs.
63. This agreement or understanding allowed all Defendants to benefit financially from unnecessary and non-indicated procedures, and was likely in violation of Kentucky and federal laws regarding kickbacks and referrals.
Thus, consistently with what the DOJ had concluded following its investigation, the 550 individuals who filed suit against KDMC asserted that KDMC had, due to an underlying and improper profit motive, (1) paid its cardiologists on more or less of a "commission" basis, based upon the quantity and complexity of the cardiac surgeries they performed; and had (2) deliberately or recklessly failed to provide its cardiologists with adequate oversight. By doing so, they asserted KDMC had either encouraged the performance of harmful and unnecessary or unnecessarily complex medical procedures or conspired with its affiliated doctors to breach the applicable medical standard of care and commit fraud.
In other words, the various plaintiffs acknowledged they had not all been injured in the same way, to the same degree, at the same time, or by the same doctors. But, they asserted the common nexus of their claims was, in their view, that they had all been victimized by the same alleged, long-running practice in KDMC's cardiac department to fraudulently overstate the extent of their respective medical conditions in order to justify overbilling for unneeded and potentially harmful surgeries.
6. Managing the eventual 127 aggrieved patients/plaintiffs.
After some initial motion practice, and before any intensive discovery had taken place, KDMC and the complaining litigants informed the circuit court during an October 22, 2015 hearing that the pool of approximately 550 claimants had been reduced to 127. Thereafter, the issue became how the circuit court would manage all 127 of these patients/plaintiffs.
The litigants conducted core discovery and coordinated the procedural aspects of each individual suit through what could be considered a "master docket." To that end, yet another suit listing no specific plaintiff was filed in Boyd Circuit Court, styled In re: Cardiac Litigation, 14-CI-09999. Afterward, the circuit court entered procedural and discovery-related orders on that docket; and in each of the individual suits filed by the 127 plaintiffs, a corresponding order was entered in each respective docket stating that the parties in each of those respective suits agreed to be bound by whatever order was entered in In re: Cardiac Litigation.
In re: Cardiac Litigation then became the coordinating mechanism at the heart of the ensuing proceedings. Aside from directing discovery matters, the In re: Cardiac Litigation docket was designed to enable the circuit court and the litigants to coordinate which of the various plaintiffs would present their cases first. The purpose behind this procedure was for each side to present their best cases first to get an idea of how to go about settling, rather than trying, the rest of the cases.
This procedure, which the litigants outlined at length during a pair of hearings before the circuit court on October 22, 2015 and January 7, 2016, was referred to by the litigants during the hearing as a "bellwether format," and it somewhat resembled a procedure utilized in federal multidistrict mass tort litigation and class action proceedings under the purview of 28 U.S.C. § 1407. As an aside, no authority reflects whether Kentucky permits or forbids this type of procedural mechanism for managing multiple cases. Kentucky does not have procedural rules in place that address these mechanisms.
For a more extensive discussion of the rationale behind the "bellwether" procedure, see 4 Newberg on Class Actions § 11:12 (5th ed.).
Cases like this illustrate the need for adopting procedures for circuit courts to handle mass tort litigation.
7. Notwithstanding this "bellwether" format, no case was ever tried.
After instituting this "bellwether" format to manage the 127 individual actions associated with In re: Cardiac Litigation, the parties then went about conducting an expensive amount of discovery between 2014 through 2019, an endeavor that resulted in several million dollars in litigation costs and attorneys' fees. However, no case ever went to trial. As indicated, KDMC and the aggrieved patients/plaintiffs entered a sealed global settlement agreement, and the claims were all dismissed in 2019 -- despite the fact that the issues surrounding whether Darwin and Homeland had a duty to defend and provide coverage to KDMC had yet to be finally resolved in the declaratory actions that form the basis for these appeals.
II. The five consolidated appeals before this Court
The five appeals before this Court indirectly relate to In re: Cardiac Litigation. The issue here is not, strictly speaking, the merits of those claims or the propriety of those proceedings. Instead, the issue here regards who was obligated to pay for KDMC's millions of dollars of defense expenses.
1. KDMC's insurers, appellants Darwin and Homeland.
As stated, KDMC had health care organization umbrella liability insurance policies with two insurers, Darwin and Homeland Insurance. Darwin was KDMC's primary insurer and was obligated to pay any covered liability and defense expenses first. KDMC had three "claims made" policies with Darwin covering one-year increments between 2010 and 2013 (i.e., from October 16, 2010-October 16, 2011; October 16, 2011-October 16, 2012; and October 16, 2012-October 1, 2013 (hereinafter respectively referred to as "Umbrella Policy 1;" "Umbrella Policy 2;" and "Umbrella Policy 3")). The aggregate limit of each Darwin policy was $10,000,000. There is no dispute that Umbrella Policy 1 is irrelevant to these appeals.
Homeland was KDMC's excess insurer, meaning it had no obligation to pay any covered liability until Darwin's policy limits were exhausted. KDMC had three policies with Homeland, covering the same year-to-year increments. The aggregate limit of each Homeland policy was $20,000,000. The terms and exclusions of Homeland's policies were also "follow-form," meaning they copied those of Darwin's policies.
2. Darwin responds with a qualified acceptance of KDMC's request for coverage, arguing three exclusions applied and that at most there was only $495,000 in remaining coverage under the operative policy period. Homeland asserts that the same three exclusions also apply to its coverage.
Before September 30, 2013, when the multitude of aggrieved patients/plaintiffs began filing suit in Boyd Circuit Court, KDMC contacted Darwin and Homeland and requested defense coverage. Darwin tentatively provided KDMC a defense; however, it did so under an explicit reservation of rights. In a November 20, 2013 letter to KDMC, Darwin stated in relevant part:
Darwin Select will provide a defense and otherwise meet its obligations under Umbrella Policy 2 until a determination is made as to the applicability of the Exclusions in Umbrella Policy 2 which may apply to preclude coverage to the insureds. If it is determined that there is no coverage for the Stent Claims, Darwin Select reserves its rights to seek recoupment of any Defense Expenses and/or indemnity payments advanced.
Darwin cited three different exclusions in its policies with KDMC and argued it would ultimately not be liable for covering any of KDMC's defense and litigation costs.
The first exclusion ("Exclusion 10") was set forth in Section III, part D, subsection 10, of the Darwin policies. It dealt with intentional acts. It denied coverage for any claim "based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving . . . any willful misconduct or dishonest, fraudulent, or malicious act, error or omission by any Insured; any willful violation by any Insured of any law, statute, ordinance, rule or regulation; any Insured gaining any profit, remuneration or advantage to which such Insured was not legally entitled; or any alleged criminal conduct by an Insured. . . ." Judging from the allegations set forth in the various complaints filed in In re: Cardiac Litigation -- which specifically accused KDMC of acting intentionally, willfully, fraudulently, and illegally -- Darwin argued this provision applied.
The second exclusion ("Exclusion 15") was set forth in Section III, part D, subsection 15, of the Darwin policies. It dealt with prior claims. It denied coverage for any claim "based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any facts, matter, events, suits or demands notified or reported to, or in accordance with, any policy of insurance in effect prior to the Inception Date" of the policy. Darwin pointed out that KDMC had made a prior claim under KDMC's D&O policy with National regarding the DOJ investigation. Based on the allegations set forth in the various complaints filed in In re: Cardiac Litigation -- which specifically referenced and appeared to be predicated upon the DOJ investigation -- Darwin argued this provision applied.
The third exclusion ("Exclusion 16") was set forth in Section III, part D, subsection 16, of the Darwin policies. It dealt with government-related claims. It denied coverage for any claim "based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving . . . any administrative, disciplinary, licensing or regulatory Claim asserted by or on behalf of a government entity . . . ." Considering the allegations set forth in the various complaints filed in In re: Cardiac Litigation -- which specifically referenced the DOJ investigation and were predicated upon the violation of federal Medicaid and Medicare provisions -- Darwin argued this provision also applied.
Lastly, as indicated, Darwin added that even if it was liable for providing coverage, its coverage was at most limited to "Umbrella Policy 2," KDMC's "claims made" policy that covered the period of 2011 through 2012 -- and not "Umbrella Policy 3," which covered the date that the first of the cardiac cases was filed (i.e., September 30, 2013). In support, Darwin cited Section IV, part F of its policy, which provided:
All Related Claims, whenever made, shall be deemed to be a single Claim and shall be deemed to have been first made on the earliest of the following dates:
1. the date on which the earliest Claim within such Related Claims was received by an Insured; or
2. the date on which written notice was first given to any Insurer of an act, error, omission or Occurrence which subsequently gave rise to any of the Related Claims, regardless of the number and identity of claimants, the number and identity of Insureds involved, or the number and timing of the Related Claims, and even if the Related Claims comprising such single Claim were made in more than one Policy Period.
In other words, Darwin argued that regardless of when a covered loss occurred, the policy that would indemnify a covered loss would be the policy in effect on the date that the insured effectively reported the covered loss. So, if a loss occurred in 2010 -- but the insured did not report the loss until mid-2011 -- the policy in effect between 2011 and 2012 would cover the loss -- not the policy from 2010 to 2011. Unless, that is, the loss reported in 2011 "related" to another claim previously reported and deemed covered in the 2010 policy. In that case, the loss would relate back to and receive whatever coverage remained under the 2010 policy; it would not receive a new $10,000,000 increment of coverage under the later policy.
Citing this provision, Darwin asserted that August 28, 2012, was the date KDMC had first notified it of the acts, errors, omissions, and occurrences that had given rise to the hundreds of In re: Cardiac Litigation claims; and that Umbrella Policy 2, which only had $495,000 of remaining coverage due to a pair of unrelated civil claims against KDMC that had already been paid out of that policy's limits, was therefore the only policy that could provide KDMC with any amount of coverage.
In support, Darwin noted that on August 28, 2012, KDMC (by and through its Insurance Director, Travis Sanders) had provided a written supplement to an answer it had previously submitted regarding a question on its 2012-2013 insurance application -- specifically, a supplement to an answer KDMC provided regarding whether there had been any "major changes in exposures" to its level of risk. In its August 28, 2012 supplement, KDMC stated, in pertinent part:
[B]ecause we are unsure about the breadth of this question and for the avoidance of doubt, we add to our response that the Department of Justice served a subpoena duces tecum on the Ashland Hospital Corporation on or about July 25, 2011. We have previously submitted this subpoena to you in connection with our claim for coverage under our directors and officers policy of defense costs incurred in connection with the investigation referenced in the subpoena. We are cooperating with the government's investigation and have produced voluminous documents to the government in response to the subpoena.
Darwin argued any covered "loss" described in the various In re: Cardiac Litigation actions was rooted in the common allegation that KDMC had engaged in a pattern and practice of performing and billing for medically unnecessary cardiac procedures. Moreover, Darwin argued KDMC's August 28, 2012 supplement had effectively notified it of the acts, errors, omissions, and occurrences that had given rise to the In re: Cardiac Litigation actions; and thus, it effectively qualified as a report of a loss within the operative period of Umbrella Policy 2.
Homeland, being a follow-form insurer, seconded all of Darwin's arguments regarding the applicable exclusions; after all, those were also its exclusions.
3. The instant declaratory action ensues.
KDMC was not satisfied with Darwin's and Homeland's qualified acceptance of coverage, their asserted exceptions, or Darwin's assertion that the depleted 2011-2012 policy (Umbrella Policy 2) -- rather than the fully-funded 2012-2013 policy (Umbrella Policy 3) -- provided defense expense coverage. What followed was a declaratory action which KDMC filed in Boyd Circuit Court on February 3, 2015. This declaratory action is the focus of all five of these appeals. It was never consolidated with (but proceeded parallel to) In re: Cardiac Litigation.
KDMC had filed a prior declaratory action in federal court, but jurisdiction was declined. See In Re: Ashland, Nos. 14-CV-85 and 14-CV-123, 2014 WL 12646055 (E.D. Ky. Dec. 23, 2014).
4. One order of the Boyd Circuit Court entered in the declaratory action directly or indirectly triggered all five of these appeals.
All five of the appeals before this Court originated directly or indirectly from a single order of the Boyd Circuit Court, entered November 13, 2015, which resolved the parties' cross-motions for summary judgment. There, the circuit court determined none of the three asserted exclusions applied and that Darwin was obligated to provide coverage under its 2012-2013 policy. The pertinent findings and conclusions of the circuit court's order were as follows:
1. On June 12, 2013, KDMC received a letter from the Poppe Law Firm stating that it represented approximately five hundred (500) cardiac patients with potential claims against KDMC and the physicians. The letter demanded that KDMC preserve all records of those patients listed in the letter and that KDMC and the physicians could reasonably expect to be sued. On June 19, 2013 this material was forwarded to the claims office of both Darwin and Homeland. At that time, the insurers received notice of "an act, error, omission or occurrence" within the purview of Section IV.F.2 of the policies. This conclusion is inescapable. The cardiac law suits, which are "related claims" and viewed as one claim, invoke the policy period of 2012-2013 of both insurers.
2. In addition to the above, KDMC forwarded six hundred forty seven (647) demand letters from the Poppe Law Firm to Homeland and Darwin's claims department on September 12, 2013. This constituted another notice to the insurers during the 2012-2013 policy period.
3. KDMC also gave notice of the first of the cardiac law suits that was actually filed in the Boyd Circuit Court on September 30, 2013, which was the last day of the 2012-2013 policy period.
4. The letter from Travis Sanders sent on August 28, 2012 to supplement KDMC's renewal application was not a notice within the meaning of Section IV.F.2 of the policies. It was simply sent as a precaution to inform the insurers of the Department of Justice subpoena so that the insurers could consider that information when evaluating the risk and calculating the premium for the 2012-2013 policy period. It provided no notice of an event, act, omission, occurrence or error. Further it was sent via the broker to the application staff, not the claims group as would be required by the policy for notice under Section IV.F.2. It was made in the interest of full disclosure during the application process. Any attempt to construe it or the Department of Justice subpoena as a claim notice made during the 2011-2012 policy period is groundless.
5. When KDMC gave notice to Darwin National on December 30, 2011 that it had been served with the Department of Justice subpoena and that it was seeking coverage under the Directors and Officers policy it did not entitle the insurers to avail themselves of the protection of Exclusion 15 of the policy. Once again, the insurers are attempting to label the letter and the subpoena as something that they are not. There is nothing contained therein that describes any supposed wrongful conduct, let alone any allegation of performing unnecessary cardiac procedures. The provisions of Exclusion 15 simply do not apply.
6. Exclusion 16 in the Darwin policy, which relates to government claims, is also inapplicable. That exclusion relates to administrative, disciplinary, licensing or regulatory claims by or on behalf of a government entity. The cardiac lawsuits are brought by private citizens seeking damages from KDMC and the physicians. The cardiac lawsuits having [sic] nothing to do with any claims by a government entity.
7. The insurers also argue that they have no duty to defend or indemnify because the cardiac lawsuits allege
fraud and fall squarely within Exclusion 10 for willful misconduct. If the only claims asserted in those cases were for performing unnecessary procedures for improper financial gain the insurers would be correct. However, the Plaintiffs in the underlying cases also allege a variety of other causes which sound in negligence. Since we cannot prophesy what the trier of fact would find after hearing the proof we cannot know if the exclusion for willful misconduct applies until the facts have been established. Thus, the fact that the negligence claims have been asserted triggers the insurers' duty to defend KDMC and the insured physicians.
Accordingly, the motion of the Plaintiffs for summary judgment is sustained and IT IS ORDERED AS FOLLOWS:
1. The motion for summary judgment on behalf of Darwin is overruled.
2. The motion for summary judgment on behalf of Homeland is overruled.
3. The applicable policies for the cardiac lawsuits for both Darwin and Homeland are the policies for the 2012-2013 period.
4. Darwin has a duty to defend until it's [sic] policy limits have been expended on the 2012-2013 policy. Once Darwin's limits have been expended, Homeland has a duty to defend until the limits of it's [sic] 2012-2013 policy have been expended.
5. Exclusions 15 and 16 of the Darwin policy do not insulate the insurers from the duty to defend the underlying cardiac cases as those exclusions simply do not apply.
6. The willful misconduct exclusion (Exclusion 10) does not relieve the insurers of the duty to defend because of the other claims asserted.
7. It cannot be determined if the insurers have a duty to indemnify any settlements or judgments at this time because the facts have not yet been determined.
This is a final order and there is no cause for delay.
In various ways and at varying intervals over the next several years, Darwin and Homeland contested these findings as further detailed below.
In 2019, Darwin then tendered KDMC what remained of the $10,000,000 limits of its 2012-2013 liability policy, an amount it stipulated KDMC could use in any way KDMC saw fit, subject to Darwin's explicit reservation of its right of recoupment. Homeland also tendered KDMC an amount reflecting its own policy obligations subject to the same conditions.
As stated, KDMC settled with the In re: Cardiac Litigation claimants shortly afterward. Consequently, there has never been any determination made regarding the merits of the 127 In re: Cardiac Litigation actions. In other words, "the facts" of those cases have never been "established." 5. The general nature of these fiveappeals.
The Darwin and Homeland monies were later deposited into a sealed "global settlement fund" designed to administer compensation for the 127 In re: Cardiac Litigation claimants. The circuit court later "appointed" a "special master commissioner" to oversee distribution of the "global settlement fund." But, such an "appointment" cannot be valid; only the Chief Justice of the Kentucky Supreme Court could have appointed a special master commissioner in this context. See Kentucky Rule of Civil Procedure (CR) 53.01. There is no such appointment by the Chief Justice in the record in the In re: Cardiac Litigation. This appears to be a practice in these types of cases because in the request to appoint a special master commission to oversee the settlement in In re: Cardiac Litigation, the parties note that the special master commission they requested to oversee those cases was also overseeing, as a "special master commissioner," a similar global settlement fund that arose from a similar mass of litigation brought against a similarly situated hospital in the same region. The underlying basis of Catholic Health Initiatives, Inc. v. Wells, Nos. 2016-CA-001919-MR and 2017-CA-000081-MR, 2018 WL 3798562 (Ky. App. Aug. 10, 2018), stemmed from that other litigation. Again, In Re: Cardiac Litigation is not before this Court; hence, we have no authority to set aside the appointment, even in the absence of approval of the Chief Justice.
This summary is directed toward the five appeals pending before us. Darwin and Homeland filed two other appeals, enumerated 2017-CA-001072 and 2017-CA-001338, both of which a motion panel of this Court disposed of as duplicative.
In Appeal No. 2016-CA-000372, Darwin argues the circuit court erred in failing to apply its three previously-discussed exclusions and that according to those three exclusions it had no duty to defend KDMC in In re: Cardiac Litigation -- and by extension no duty to indemnify KDMC if the plaintiffs had prevailed in In re: Cardiac Litigation.
Alternatively, Darwin argues, as it did below, that Umbrella Policy 2 applied (i.e., the policy with only $495,000 in coverage).
Failing that, Darwin argues the circuit court did not properly declare the parties' rights because it did not resolve all the rights at issue. As set forth in its brief, Darwin's argument to this effect is vague and perfunctory; but, it appears from a review of the record that Darwin takes issue with the circuit court's failure to address whether KDMC had exhausted, prior to invoking coverage with Darwin, a $1 million self-insured retention amount. Darwin's stance is that the circuit court's November 13, 2015 order was simply a preliminary declaration of rights, not a complete one, and it asserts that the circuit court incorrectly led it to believe it would later have an opportunity to address this point in subsequent proceedings.
In Appeal No. 2016-CA-000396, Homeland (being a follow-form insurer with the same provisions and exclusions in its policies as Darwin) makes the same arguments Darwin has made in 2016-CA-000372.
As to Appeal No. 2017-CA-001167, this appeal relates to a CR 60.02 motion filed by Darwin during the pendency of 2016-CA-000372. Darwin moved to set aside the circuit court's November 13, 2015 order, and the circuit court denied its motion. In its motion, Darwin argued -- once again -- that Exclusion 15 and Exclusion 16 precluded coverage and excused it from paying KDMC's defense and litigation costs. As to why Darwin reasserted the same arguments as it had before, it related to what the parties refer to as the "Duley Defense Costs."
Regarding the background of the Duley Defense Costs, the DOJ subpoenaed the extensive amount of information from KDMC on July 25, 2011. Thereafter, National paid KDMC the $15 million limits of the D&O policy, and KDMC paid a significant portion of that money to Duley Enterprises, LLC, a computer consulting firm. Duley, in turn, aided in the creation of two extremely large (i.e., several terabytes in size) databases of scanned records that were responsive to the DOJ's subpoena.
Due to the confidential nature of those medical records, several "timed delete" directives were embedded into the databases, meaning that after the DOJ was finished with its investigation, the databases would essentially erase themselves. And, because of the sheer size of the databases, the databases purportedly cost around $100,000 per month to maintain.
As an aside, the circuit court earlier found that these costs were not unreasonable given the size of the data.
But, before the DOJ had completed its investigation, the Poppe Law Firm sent KDMC the June 2013 "litigation hold" letter discussed earlier, directing KDMC to preserve every record belonging to his hundreds of clients. Due to the receipt of the litigation hold letter, KDMC in turn instructed Duley to disable the "timed delete" directives in the database and to continue maintaining the database indefinitely. From that point forward, the "Duley Database" served a dual role, enabling KDMC to effectively respond to the DOJ's subpoena and to the In re: Cardiac Litigation claimants' discovery requests.
This leads to why Darwin reasserted its prior arguments regarding its policy exclusions. When KDMC exhausted the $15 million it had received from its National D&O policy limits -- money it had received by virtue of its claim under that policy (i.e., to respond to the DOJ's investigation and ultimately settle) -- little remained from insurance proceeds paid at that time for KDMC to continue paying to maintain the Duley Database for purposes of responding to the In re: Cardiac Litigation claimants' discovery requests relating to their civil claims. Hence, after the circuit court entered the November 13, 2015 declaratory judgment, KDMC sought coverage from its 2012-2013 Darwin policy to pay for the continued maintenance of the Duley Database.
However, Darwin has always argued it had no obligation to pay KDMC's defense expenses arising out of the In re: Cardiac Litigation; in its view, all the In re: Cardiac Litigation claims derived or arose from KDMC's alleged acts or omissions that also prompted the DOJ's investigation and thus implicated its Exclusions 15 and 16 regarding prior claims and regulatory claims. Consequently, Darwin took issue when, in a letter of August 16, 2016, KDMC (1) informed Darwin for the first time about the existence of the Duley Database; and (2) demanded $4,108,289.85, which KDMC represented were its expenses in maintaining the Duley Database since July 2013 to the date of its letter. Darwin believed the Duley Database expenses were, more or less, an admission by KDMC that In re: Cardiac Litigation did in fact derive from or arise out of the DOJ investigation -- both sets of claims were based upon the same evidence of KDMC's alleged acts and omissions.
Darwin sought discovery of the documents KDMC had produced to the DOJ from the Duley Database. Darwin argued there was no way the Duley Database expenses could not have derived from or arisen out of the DOJ's prior regulatory action -- that action was the reason the Duley Database had been created. Moreover, the Duley Database invoices KDMC had tendered related to maintenance expenses that had accrued while both of those proceedings remained ongoing and had overlapped: The In re: Cardiac Litigation actions were filed in 2013; the DOJ's claims were not settled until May 2014; and the $4,108,289.85 was owed for database maintenance from 2013 to 2016.
As to the circuit court's disposition of Darwin's motion, the circuit court denied it primarily because the circuit court did not regard Darwin's motion as timely, or the information about the Duley Database as "new evidence" within the meaning of CR 60.02. On appeal, Darwin argues the circuit court's disposition of its motion was erroneous.
In Appeal No. 2017-CA-001168, Homeland notes that its CR 60.02 motion was substantially identical to Darwin's CR 60.02 motion, and that its motion was denied by the circuit court for the same reasons. On appeal, Homeland argues the circuit court erred for the same reasons Darwin has outlined in 2017-CA-001167.
Lastly, in Appeal No. 2017-CA-001756, Darwin appeals a garnishment. The premise of this appeal relates once again to the November 13, 2015 order -- this time to the circuit court's general statement to the effect that Darwin "has a duty to defend until it's [sic] policy limits have been expended on the 2012-2013 policy."
After KDMC provided Darwin with its first itemized legal expenses on May 17, 2016, the circuit court determined nothing prevented KDMC from garnishing its legal expenses from Darwin because Darwin had failed to post a supersedeas bond. Thus, in two separate orders which the circuit court specified as interlocutory (dated June 9, 2017 and August 1, 2017, respectively), the circuit court determined KDMC was owed $407,678.35 for attorneys' fees, and $4,735,064.85 for the maintenance of the Duley Database from the dates of August 9, 2013, through October 6, 2016. Pursuant to subsequent orders of September 15, 2017, and October 12, 2017, the circuit court then directed Darwin to distribute $2 million to KDMC "forthwith;" to segregate another $3,142,743.20 "until further orders of the Court;" and to post a supersedeas bond for $5 million "to secure the possible exposure to it's [sic] insured."
The problem, according to Darwin, is that because the circuit court had never specified any monetary amount of its liability in the November 13, 2015 order, the circuit court had effectively prevented it from being able to secure a supersedeas bond. We agree. Indeed, at the time of the November 13, 2015 order, KDMC had not yet even delineated what its defense costs were.
Therefore, Darwin argues if it is required to pay KDMC any amount at all, it should only be required to pay that amount after a final judgment is entered; and that absent a final order, the circuit court's garnishment order --which effectively controls the disposition of an amount of its assets in excess of its policy limits of $10 million -- was in error. Darwin also argues that its appeal of the circuit court's garnishment order should not be dismissed as interlocutory because, like the denial of a claim of absolute immunity, this is a special circumstance that involves "due-process and risk-of-loss concerns."
III. Resolution of all five appeals
1. Standard of review
Summary judgment serves to terminate litigation where "the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." CR 56.03. Summary judgment should be granted only if it appears impossible that the nonmoving party will be able to produce evidence at trial warranting a judgment in his favor. Steelvest, Inc. v. Scansteel Service Ctr., Inc., 807 S.W.2d 476, 480 (Ky. 1991). Summary judgment "is only proper where the movant shows that the adverse party could not prevail under any circumstances." Id. (citing Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255 (Ky. 1985)).
On appeal, we must consider whether the circuit court correctly determined that there were no genuine issues of material fact and that the moving party was entitled to judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App. 1996). Because summary judgment involves only questions of law and not the resolution of disputed material facts, an appellate court does not defer to the circuit court's decision. Goldsmith v. Allied Bldg. Components, Inc., 833 S.W.2d 378, 381 (Ky. 1992). Our review is de novo. Likewise, the issues in this case involve the interpretation and meaning of terms in a contract. The interpretation of a contract or statute is a question of law for the courts and is subject to de novo review. Cumberland Valley Contrs., Inc. v. Bell County Coal Corp., 238 S.W.3d 644, 647 (Ky. 2007).
2. Analysis
As noted, this is a dispute over whether a policy of insurance provides coverage under the circumstances presented. If Darwin does not have to provide coverage, then Homeland, as an excess carrier, does not have to provide coverage.
Under Kentucky law, the party seeking to establish coverage bears the burden of establishing that the incident at issue was within the scope of the policy. North Am. Acc. Ins. Co. v. White, 258 Ky. 513, 80 S.W.2d 577, 578 (1935). The burden is on the insurer, however, to establish that an exclusion bars coverage. See 17A Couch on Insurance 3d § 254:12; see also Inter-Ocean Ins. Co. v. Engler, 632 S.W.2d 459, 461 (Ky. App. 1982) (holding insurer had burden to prove insured's covered disease manifested within specified exclusion period).
As to how an insurance policy is interpreted, "(1) the contract should be liberally construed and all doubts resolved in favor of the insureds; and, (2) exceptions and exclusions should be strictly construed to make insurance effective." Kentucky Farm Bureau Mut. Ins. Co. v. McKinney, 831 S.W.2d 164, 166 (Ky. 1992) (quotation marks and citations omitted). However, this does not mean that every doubt must be resolved against the insurer; rather,
the policy must receive a reasonable interpretation consistent with the parties' object and intent or narrowly expressed in the plain meaning and/or language of the contract. Neither should a nonexistent ambiguity be utilized to resolve a policy against the company. . . . [C]ourts should not rewrite an insurance contract to enlarge the risk to the insurer.St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226-27 (Ky. 1994); see also Stone v. Kentucky Farm Bureau Mut. Ins. Co., 34 S.W.3d 809, 811 (Ky. App. 2000) ("the terms should be interpreted in light of the usage and understanding of the average person"). Finally, as with any contract, when construing an insurance policy, the policy should be read as a whole. SunLife Ins. Co. v. Taylor, 108 Ky. 408, 56 S.W. 668, 668 (1900). If any of Darwin's claimed exclusions apply, it does not have to provide coverage.
The issue of whether Darwin and Homeland can seek reimbursement after offering policy limits under a reservation of rights is not an issue before this Court; the only issue before the Court regards coverage. But to put this matter in context, we pause for a brief explanation. In disputes over coverage, an insurer can offer to provide an insured a defense under a reservation of rights; and, contemporaneously with providing that defense, the insurer or insured can institute a declaratory action for a determination of coverage. See, e.g., Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830, 841 (Ky. 2005), as modified on reh'g (Jan. 19, 2006) ("If the insurer believes there is no coverage, it has several options. One is to defend the claim anyway, while preserving by a reservation of rights letter its right to challenge the coverage at a later date."). This is what happened below in these cases. Moreover, the parties have not disagreed, and we are persuaded it is consistent with Kentucky law, that when there is a clear statement from an insurer -- and there is in these cases -- to the effect that it is reserving its right to seek recoupment of any defense expenses advanced under a reservation of rights -- as there was below from Darwin and Homeland -- Kentucky law permits an insurer the right to recoup those defense expenses if it is later judicially determined that the terms of the insurance policy never required the insurer to provide a defense.
As noted supra, in a November 20, 2013 letter to KDMC, Darwin stated in relevant part:
Darwin Select will provide a defense and otherwise meet its obligations under Umbrella Policy 2 until a determination is made as to the applicability of the Exclusions in Umbrella Policy 2 which may apply to preclude coverage to the insureds. If it is determined that there is no coverage for the Stent Claims, Darwin Select reserves its rights to seek recoupment of any Defense Expenses and/or indemnity payments advanced.
See, e.g., Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby Co., Inc., 598 F.3d 257, 268 (6th Cir. 2010) ("Therefore, we conclude that Kentucky, like the majority of jurisdictions, will allow reimbursement for an insurer after a unilateral reservation of rights by the insurer over the objection of the insured in at least the narrow circumstances posed in this case and in cases such as Blue Ridge. This reimbursement right arises under an implied-in-law contract theory to allow an insurer to seek reimbursement when '(1) the insurer has timely asserted a reservation of rights; (2) the insurer has notified the insured of its intent to seek reimbursement; and (3) the insured has meaningful control of the defense and negotiation process.' Travelers Prop. Cas. Co., et al. v. Hillerich & Bradsby Co., Inc., 2006 WL 2524145, at *2 (W.D. Ky. 2006)."); see also Nat'l Trust Ins. Co. v. Heaven Hill Distilleries, Inc., No. 3:14-CV-394-DJH-CHL, 2018 WL 1542148, at *9 (W.D. Ky. Mar. 29, 2018) ("Because Kentucky imposes a strict duty to defend on insurers, even for claims plausibly not within a policy's coverage, it is unlikely that Kentucky would also bar an insurer from later seeking to recoup defense costs in the event that a court determines the claim does not fall within the coverage.").
With that said, we now turn to the overarching issues presented in this matter; namely, whether the circuit court properly required Darwin and Homeland to provide KDMC with defense coverage. We conclude it did not.
As explained in James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Insurance Co., 814 S.W.2d 273, 279 (Ky. 1991),
The insurer has a duty to defend if there is any allegation which potentially, possibly or might come within the coverage of the policy. O'Bannon v. Aetna Casualty and Surety Company, Ky., 678 S.W.2d 390 (1984). The
insurance company must defend any suit in which the language of the complaint would bring it within the policy coverage regardless of the merit of the action. [Wolford v. Wolford, 662 S.W.2d 835 (Ky. 1984)]. The determination of whether a defense is required must be made at the outset of the litigation. Knapp v. Chevron USA, Inc., 781 F.2d 1123 (5th Cir. 1986). The duty to defend continues to the point of establishing that liability upon which plaintiff was relying was in fact not covered by the policy and not merely that it might not be. 7C Appelman, Insurance Law and Practice § 4683.01 at 69 (Berdal Ed. 1979).
Here, Exclusion 15 is applicable and dispositive. As indicated, it excluded coverage for any claim "based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any facts, matter, events, suits or demands notified or reported to, or in accordance with, any policy of insurance in effect prior to the Inception Date" of the policy. As discussed, KDMC had previously secured coverage under its D&O policy with National regarding the DOJ investigation. KDMC's D&O policy qualified as "any policy of insurance in effect prior to the Inception Date" of KDMC's relevant Umbrella Policies with Darwin. And, judging from the allegations set forth above in the various complaints filed in In re: Cardiac Litigation, the claims asserted in that mass of litigation unavoidably fell within the remaining ambit of this exclusion.
Given this, we decline to review the other exclusions as redundant.
As previously summarized, the DOJ identified at the onset (e.g., in its July 25, 2011 subpoena) who it was investigating and why. The DOJ was investigating whether KDMC and its associated entities and physicians had conspired to fraudulently overstate the extent of their patients' respective medical conditions to justify overbilling for unneeded and potentially harmful surgeries; or whether KDMC had at least recklessly or deliberately failed to prevent the practice from occurring.
At some point prior to the May 2014 settlement, the DOJ asserted civil claims against KDMC based upon the facts, matter, and events it discovered as a result of its investigation; namely, it concluded KDMC and its associated entities and physicians had engaged in a pattern of conduct spanning several years indicating they had conspired to fraudulently overstate the extent of their patients' respective medical conditions to justify overbilling for unneeded and potentially harmful surgeries; or that KDMC had at least recklessly or deliberately failed to prevent the practice from happening.
And, consistent with what the DOJ concluded following its investigation, the 550 individuals who initially filed suit against KDMC (and 127 who maintained their suits thereafter) also asserted KDMC and its associated entities and physicians had conspired to fraudulently overstate the extent of their patients' respective medical conditions to justify overbilling for unneeded and potentially harmful surgeries; or that KDMC had at least recklessly or deliberately failed to prevent the practice from happening. This was, in the words of each of their respective complaints, the "common nexus" linking their hundreds of separate actions. Indeed, each of the In re: Cardiac Litigation complaints specifically referenced the DOJ's investigation and was predicated upon what the DOJ had investigated.
In other words, the facts, matter, and events the DOJ sought to discover and clarify through its investigation -- which the DOJ ultimately cited as the bases of its "civil claims" against KDMC -- were "in accordance with" the same facts, matter, and events that formed the bases of the civil claims asserted in In re: Cardiac Litigation.
Notwithstanding, KDMC argues Exclusion 15 does not apply for three reasons. First, in its appellee brief in 2016-CA-000372, KDMC reads "any policy of insurance," as set forth in Exclusion 15, to mean "any professional liability policy of insurance," and reasons that because its D&O policy was not a "professional liability" policy of insurance, the prior claim it submitted for coverage under that policy is therefore irrelevant. But, KDMC is incorrect. A court may not read words into or add conditions to a contract but is bound to consider the contract as written. See Alexander v. Theatre Realty Corp., 253 Ky. 674, 70 S.W.2d 380 (1934). Exclusion 15 simply relates to any policy of insurance.
Second, KDMC asserts that the DOJ's July 25, 2011 subpoena, which it provided National when it made its December 30, 2011 claim under its D&O policy, listed no "facts, matter, events, suits or demands." Therefore, it could not have qualified as a notice or report of "facts, matter, events or demands" for purposes of this Exclusion 15.
However, as Darwin points out, nothing in Exclusion 15 required all relevant details to be catalogued in one communication. It merely required "any facts, matter, events, suits or demands" to be "notified or reported to, or in accordance with, any policy of insurance . . . in effect prior to the Inception Date" of the Darwin policy. Here, even if the July 25, 2011 subpoena and KDMC's December 30, 2011 coverage request provided no indication of any "facts, matter, events or demands," National accepted KDMC's coverage claim relating to the DOJ investigation; and the DOJ's investigation eventually clarified what the "facts, matter, events or demands" relative to KDMC's coverage claim were. As discussed, the "facts, matter, events or demands" were "in accordance" with the In re: Cardiac Litigation claims.
Third, KDMC argues in relevant part:
[Darwin] is effectively arguing that, by giving timely notice to its D&O insurer of a government investigation,
the Hospital forfeited professional liability coverage for any subsequent malpractice lawsuits. In other words, the Hospital could have coverage for the government investigation under the [National] policy, or for the Cardiac Lawsuits under the Darwin Select policy, but not both. One of the two policies was illusory. Darwin Select never advised the Hospital that it would take such a position.
. . .
And in Kentucky, exclusions are strictly construed to make insurance effective, and only an unequivocally clear statement of the insurer's intent will defeat the insured's reasonable expectation of coverage.
Thus, KDMC's third argument contains two assertions: namely, that enforcement of Exclusion 15 would (1) render its coverage with Darwin "illusory;" and (2) defy KDMC's "reasonable expectations."
We disagree with each of KDMC's assertions. Generally speaking, "[t]he doctrine of illusory coverage, like the doctrine of reasonable expectations, operates to qualify the general rule that courts will enforce an insurance contract as written." Sparks v. Trustguard Ins. Co., 389 S.W.3d 121, 128 (Ky. App. 2012). Coverage is "illusory" when an insured cannot foresee any circumstances under which he or she would collect under a particular policy provision. Id. at 128-29 (discussing the doctrine of illusory coverage). This is not the case here. As well explained by another tribunal faced with a similar exclusion,
[t]he problem with claims made policies, from an insurer's perspective, is that insureds might try to obtain
coverage for claims they know or are reasonably certain will be made against them in the near future. This moral hazard threatens to undermine one of the basic principles of insurance, which is that known liabilities generally are not insurable. Russ and Segalla, Couch on Insurance § 102:7, at p. 102-17 (3rd ed. 1997) ("Implicit in the concept of insurance is that the loss occur as a result of an event that is fortuitous, rather than . . . anticipated.").LaValley v. Virginia Sur. Co., Inc., 85 F.Supp.2d 740, 744 (N.D. Ohio 2000).
The purpose of Exclusion 15 appears to have been to eliminate some of this uncertainty by precluding coverage where the insured has notified a previous insurer of the circumstances surrounding an insurable claim and later notifies its current insurer of a subsequent claim born of any of the same circumstances. Whether the insured knew that multiple claims would be brought against it is irrelevant; under Exclusion 15, claims stemming from "facts, matter, events, suits or demands notified or reported to, or in accordance with, any policy of insurance in effect prior to the Inception Date" of the policy will be excluded. This provision may have been restrictive, but it did not render coverage illusory. Rather, it addressed the level of risk Darwin was willing to underwrite, and insurers have the right to reduce exposure to risks they were not paid to underwrite. State Farm Mut. Auto. Ins. Co. v. Hodgkiss-Warrick, 413 S.W.3d 875, 881 (Ky. 2013).
Lastly, we address KDMC's argument regarding the doctrine of reasonable expectations. As explained in Simon v. Continental Insurance Co., 724 S.W.2d 210, 212-13 (Ky. 1986),
The nature of the doctrine of reasonable expectations is summarized in R.H. Long's The Law of Liability Insurance, § 5.10B, which states, in pertinent part:
"The gist of the doctrine is that the insured is entitled to all the coverage he may reasonably expect to be provided under the policy. Only an unequivocally conspicuous, plain and clear manifestation of the company's intent to exclude coverage will defeat that expectation.
. . . .
The doctrine of reasonable expectations is used in conjunction with the principle that ambiguities should be resolved against the drafter in order to circumvent the technical, legalistic and complex contract terms which limit benefits to the insured."
"Reasonable expectations" are not ascertained from the subjective belief, however genuine, of the insured. This Court has specified that the test in determining reasonable expectations is based on construing the policy language as a layman would understand it, rather than considering the policyholder's subjective thought process regarding his policy. Estate of Swartz v. Metro. Prop. & Cas. Co., 949 S.W.2d 72, 75 (Ky. App. 1997). Only actual ambiguities in the policy language will trigger the doctrine of reasonable expectations. True v. Raines, 99 S.W.3d 439, 443 (Ky. 2003). Here, Exclusion 15 may have been drafted in broad terms, but the doctrine of reasonable expectations is not triggered. KDMC does not contend -- and we do not conclude -- that any aspect of Exclusion 15 is ambiguous. Thus, this doctrine does not provide an avenue to circumvent the exclusion.
IV. Conclusion
For the reasons stated, Exclusion 15 is applicable and dispositive of these appeals. Coverage was not triggered by the cases comprising In re: Cardiac Litigation. Consequently, we conclude that the Boyd Circuit Court erred in its decision. We therefore REVERSE as to Appeal Nos. 2016-CA-000372 and 2016-CA-000396; and we DISMISS as MOOT Appeal Nos. 2017-CA-001167, 2017-CA-001168, and 2017-CA-001756.
ALL CONCUR. BRIEFS FOR APPELLANT,
DARWIN SELECT INSURANCE
COMPANY,
now known as ALLIED WORLD
SURPLUS LINES
INSURANCE COMPANY: Ernest H. Jones, II, Esq.
Jamie Wilhite Dittert, Esq.
Lexington, Kentucky Jonathan D. Hacker, Esq.
Washington, D.C. Jeffrey Michael Cohen, Esq.
Miami, Florida ORAL ARGUMENT: Jonathan Hacker
Lexington, Kentucky BRIEFS FOR APPELLANT,
HOMELAND INSURANCE
COMPANY OF NEW YORK: D.C. Offutt, Jr.
Matthew Mains
Anne Liles O'Hare
Huntington, West Virginia Charles E. Spevacek
Tiffany M. Brown
Minneapolis, Minnesota ORAL ARGUMENT: Charles E. Spevacek
Minneapolis, Minnesota BRIEFS FOR APPELLEES: Perry M. Bentley
Todd S. Page
Lexington, Kentucky ORAL ARGUMENT: Perry M. Bentley
Lexington, Kentucky