Can State Legislature’s “Impair” the Obligations and Rights of Insurance Contracts to Force Insurers to Cover Losses to Commercial Enterprises Under Commercial Insurance Policies Due to COVID19?

Post on Contract Clause and State Legislation to Force Insurers to Cover Losses Under Commercial Insurance Policies due to COVID19 Pandemic

Court of Appeals Enforces Indemnity Agreement’s Duty to Defend Provision and Affirms Imposition of “Reasonable Settlement” Upon Nursing Services Company that Refused to Defend Hospital After Hospital Provided Notice

This opinion provides a classic example of the consequences of an indemnitor ignoring or refusing to take up the defense and then participate in a contractual indemnitee’s settlement discussions against a plaintiff in an underlying lawsuit.

The plaintiff in this case, the hospital, entered into an agreement with a nursing staff company, the defendant, wherein the latter agreed to defend and indemnify the hospital against “all demands, class actions, or causes of action based upon or arising out of the acts or omissions of” the nursing staff company.

Plaintiff in the underlying lawsuit, the estate of a deceased patient of the hospital, filed a wrongful death action against the hospital, alleging negligence and vicarious liability against the hospital “based on acts performed by the nursing staff” provided by the nursing staff company.

The hospital provided notice to the nursing staff company and provided it with a copy of the lawsuit.  The hospital also informed the nursing staff company of a scheduled facilitation and formally requested the nursing staff company to participate.  Despite receiving notice, the nursing staff company did not participate, nor did it take up the defense of the hospital pursuant to the indemnity agreement.

The hospital entered into a settlement agreement with the decedent’s estate.  It then filed suit against the nursing staff company stating causes of action in contractual indemnification, common-law indemnification, and contribution.  The trial court entered judgment for the hospital and the nursing staff company appealed.

The Court of Appeals (Riordan, O’Connell, and Hoekstra) affirmed.  The Court recited the rule that where an indemnitor has notice of an action and declines the tender of the claim and refuses to participate in the defense of the indemnitee in the underlying lawsuit, the indemnitor will be bound by any reasonable, good faith settlement the indemnitee might thereafter enter into with the plaintiff in the underlying lawsuit.  Slip Op. at 2.  Moreover, the Court noted, where the indemnitor has notice of the claim and refuses to defend the indemnitee under the indemnity agreement, the indemnitee need only demonstrate potential liability to the claimant in the underlying suit, rather than actual liability.

This principle applies not only to indemnitee agreements but also to insurance policies and where insurance companies receive notice of a claim and refuse to defend under a reservation of rights.  The same consequence obtains such that if the insured settles the underlying lawsuit on the basis of potential liability (and, in the insurance context, this would apply even to claims that may not be covered precisely because the insurer did not reserve its rights under the policy), the insurer will be liable for any reasonable, good faith settlement.

It should also be noted that in the insurance context, the rule in Michigan is that the right to recover from the insurer in such circumstances is ex contractu, i.e., outside the policy’s terms and conditions, and thus, neither the policy limits, nor any reserve provisions or “defense costs” limitations (e.g., burning limits policies) apply.

In short, in the latter circumstance, the insurance company would be required by common law principles of indemnity to make the settling insured whole.

With this particular panel of the Court of Appeals having ruled unequivocally in favor of the hospital, I seriously doubt the Supreme Court would take this case up.

Here is the opinion: Henry Ford Health System v. ACT-1 Group et al.opn