TIG argued that there was no special relationship between it and Regence because with regard to the duty to defend, the parties had entered into an agreement that “Regence maintained “the control of the defense of the litigation” in Thomas, and was authorized to “make the ultimate decisions relating to the strategy, including but not limited to, whether to settle; the terms and conditions of any settlement; the amount of any settlement …. ” However, the court also found that the parties agreed to discuss “all major strategic decisions” about the defense of Thomas, agreed to “work together to try to adopt mutually agreeable strategies,” and that Regence shared privileged documents with TIG.” The court found, under the facts of this case, that this was enough to give rise to a special relationship.
The Regence Group, et al. v. TIG Specialty Insurance Company, Oregon District Court Cause No. 3:07-cv-01337-HA, October 12, 2012 Opinion and Order on Summary Judgment (Dkt. No. 846)
Defendant TIG issued a Managed Care Organizational Liability Insurance Policy to Regence for the period of January 1, 2001 to January 1, 2002. The Policy provided coverage for managed care errors and omission liability, as well as insurance company errors and omissions. The Policy had professional liability limits of $50 million per claim/$ 50 million aggregate, and a self-insured retention applicable to indemnity of $250,000 per claim/$500,000 annually.
The Policy provided that TIG would pay sums Regence was obligated to pay as damages, including damages assumed under contract, arising out of” [ w ]rongful acts committed in the course of your business operations” and “[w]rongfu1 acts committed in the course of your providing insurance services.” The term “wrongful act” is defined under the Policy as “a negligent act, error, omission, misstatement or misleading statement, or breach of duty.” “Insurance services” is defined as “services of an insurance company rendered by or on behalf of the insured, including such services provided to others,” which includes “[c]laims handling and adjusting.”
“Business operations” is defined under the Policy as:
a. Review of healthcare services, including the cost of health care or necessity
of healthcare and utilization review/management, to evaluate the appropriate
use of medical care resources, including but not limited to:
• Cost of health care;
• Necessity of healthcare;
• Prospective review to authorize treatment or expenses;
• Concurrent review to evaluate continued patient care;
• Retrospective review to evaluate medical services already rendered; or
• Case management or disease management.
b. Claims handling.
c. Provider selection, contracting, retention, supervision, monitoring and
d. The following activities or services you provide, or contractually agree to
• Development of practice guidelines and treatment protocols which affect
healthcare treatment decisions ….
The Policy also included several exclusions, including the capitation exclusion, which provided that the Policy did not apply to “Business Risks.” According to the Policy, “Business Risks” included claims arising out of “[c]apitation payments, including any withholds for risk or bonus agreements, or payments, fee-for-service payments or other salary payments owed to contracted or employed health care providers[.]”
In exchange for an additional premium, Regence specifically negotiated coverage for RICO claims and an endorsement was added to the policy to that deleted the RICO exclusion in the policy. Regence believed that it was covered for all types of RICO claims, but TIG limited coverage to only certain types of RICO claims. However, TIG never communicated to Regence that it was its position that the capitation exclusion would preclude coverage for RICO claims.
Regence was sued in 2001 in three class action lawsuits alleging RICO claims. TIG agreed to defend Regence in all three actions, reserving its right to assert the capitation exclusion. In all the actions, the plaintiffs alleged that Regence violated RICO by systematically denying, delaying and or diminishing the payments due to physicians so they the physicians were not paid in a timely manner.
First, TIG argued that Oregon public policy precluded coverage for RICO claims which are based on intentional conduct. The court found that there was a genuine issue of material fact that precluded summary judgment on this question. The court found that Regence’s choice to settle the class action cases was not an affirmation that it violated RICO, rather the decision to settle could have been made for business decisions. Moreover, the court found that there had been no showing or evidence developed that Regence ever specifically intended to cause injury by entering into the alleged conspiracy. If TIG were to convince a jury that Regence acted intentionally to cause harm, then public policy likely would preclude coverage for the RICO claims.
What Standard Applies When Determining whether an Insurer Has a Duty to Pay a Settlement?
Next, the Court was asked to determine whether TIG had a duty to indemnify Regence for the settlement amount. The court found that although the Oregon courts have not decided this issue, other courts have held that when an insured settles a claim before trial, the court in a coverage action should determine whether the settled claims fall within the coverage of the policy by looking at the facts inherent in the settlement and the allegations in the underlying complaint. See, e.g., Texas Farmers Ins. Co. v. Lexington Ins. Co., 380 F. App’x 604, 607 (9th Cir. 2010) (quoting In re Feature Realty Litig., 468 F. Supp. 2d 1287, 1295-96 (E.D. Wash. 2006)); Travelers Ins. Co. v. Waltham Indus. Labs.Corp., 883 F.2d 1092, 1099 (1st Cir. 1989) (stating that the duty to indemnity following a settlement is determined by the basis of the settlement); Am. Home As sur. Co. v. Dykema, Gossett, Spencer, Goodnow & Trigg, 811 F.2d 1077, 1083 (7th Cir. 1987) (“Because the case was settled before trial, [the underlying] allegations are accepted as true for purposes of determining insurance coverage.”).
Regence, however, argued that when an insured settles a potentially covered claim, Oregon courts use the duty to defend analysis to determine whether the settled claim falls within the coverage of the policy. See Am. Hardware Ins. Grp. v. West One Auto. Grp., Inc., 2 P.3d 413, 415 (Or. Ct. App. 2000) (“Because defendant settled [the underlying] claims, the duty to indemnify is determined by the same principles.”). The court stated, “Regence appears to have misunderstood the standard. No other court has followed the reasoning in American Hardware, and in fact, the case on which the court in American Hardware relies holds to the contrary. See id. (citing Nw. Pump & Equip. Co. v. Am. States Ins. Co., 925 P.2d 1241, 1243 (Or. Ct. App. 1996) (“The duty to defend is triggered by the bare allegations of a pleading. In contrast, the duty to indemnify is established by proof of actual facts demonstrating a right to coverage.”)).”
The court found that the TIG policy unambiguously provided that it would pay both defense and indemnity for RICO claims. Interestingly, the court resorted to extrinsic evidence surrounding the formation of the policy to determine what the unambiguous language of the policy provided. Resorting to extrinsic evidence, as well as judicial estoppel, the Court explained, “This court need not decide which authority’s reasoning is more persuasive because TIG represented to its reinsurers during arbitrations that the Policy provided coverage for the Thomas claims. As a result, the court deems TIG to have admitted that the capitation exclusion does not apply to the claims alleged in Thomas.”
Bad Faith/ Special Relationship