Arizona Property and Cas. Ins. Guar. Fund v. Helme

• Decision Date: 26 March 1987
• Docket Number: No. CV-86-0368-PR,CV-86-0368-PR
• Citation: 735 P.2d 451,153 Ariz. 129
• Parties: , 64 A.L.R.4th 651 The ARIZONA PROPERTY AND CASUALTY INSURANCE GUARANTY FUND, a subdivision of the Department of Insurance of the State of Arizona, Plaintiff-Appellant, v. William B. HELME, M.D. and Jane Doe Helme, husband and wife; Neurological Surgeons, P.C., an Arizona corporation; Glenda Worsham, surviving spouse of Linward A. Worsham, and Chanita Lin Engelke and Choya Lynn Worsham, surviving children of Linward A. Worsham, Defendants-Appellees.
• Court: Arizona Supreme Court

Page 451

735 P.2d 451

153 Ariz. 129, 64 A.L.R.4th 651

The ARIZONA PROPERTY AND CASUALTY INSURANCE GUARANTY FUND, a subdivision of the Department of Insurance of the State of Arizona, Plaintiff-Appellant, v. William B. HELME, M.D. and Jane Doe Helme, husband and wife; Neurological Surgeons, P.C., an Arizona corporation; Glenda Worsham, surviving spouse of Linward A. Worsham, and Chanita Lin Engelke and Choya Lynn Worsham, surviving children of Linward A. Worsham, Defendants-Appellees.

No. CV-86-0368-PR.

Supreme Court of Arizona, In Banc.

March 26, 1987.

Reconsideration Denied May 5, 1987.

Holloway & Thomas, P.C. by Benjamin C. Thomas, Grant H. Goodman, Phoenix, for plaintiff-appellant.

Leonard & Clancy, P.C. by Kenneth P. Clancy, Phoenix, for defendants-appellees.

FELDMAN, Vice Chief Justice.

Arizona Property and Casualty Insurance Guaranty Fund (Fund) brought a declaratory judgment action to limit its obligation to pay claims against doctors whose professional liability insurance carrier became insolvent. The court of appeals reversed the trial court's grant of summary judgment in favor of the doctors, limiting the Fund's liability to the one claim it had already paid. Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 123, 735 P.2d 445 (Ct.App.1986). Defendants have asked us to review that opinion pursuant to Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. (Supp.1986). Because the issue is a matter of first impression, we granted the petition to correct an error of law regarding the Fund's obligations.

We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

FACTS

The trial court granted summary judgment in favor of defendants. Therefore, we view the record in the light most favorable to the Fund. Farmers Insurance Co. v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983).

Linward A. Worsham became paralyzed and eventually died following an April 29, 1975 automobile accident. Alleging medical malpractice, his wife and children (survivors) brought a wrongful death action against numerous doctors and medical personnel. The complaint did not specify the acts of alleged negligence, but during discovery it became clear that the predominant theory of recovery was based on the failure of those treating Worsham to either Dr. John A. Eisenbeiss and Neurological Surgeons, P.C. (NSPC), the professional corporation of which Eisenbeiss was a shareholder and employee, were among the named defendants. Survivors' complaint alleged that the negligence of Eisenbeiss and other unspecified NSPC employees contributed to Worsham's death.

[153 Ariz. 132] examine his spinal x-rays or react to his worsening condition. According to survivors, the x-rays showed a fracture dislocation of Worsham's cervical vertebra, a condition which, unrecognized, was left untreated and allegedly caused Worsham's subsequent quadriplegia and resulting death.

NSPC and its shareholders had purchased professional liability insurance coverage with Imperial Insurance Company of California (Imperial). Under the Imperial policies, NSPC and each of NSPC's employed doctors were insured for up to $3 million coverage per "occurrence." Imperial, however, became insolvent in May 1975 and was unable to honor the claims. As a consequence, the Fund, created by the state of Arizona in 1970 to pay claims of insolvent insurers, assumed Imperial's claim obligations. See A.R.S. §§ 20-661 et seq. The Fund, however, may pay no more than $99,900 on each "covered claim." A.R.S. § 20-664(A)(1). ¹ A "covered claim" is "an unpaid claim ... which arises out of and is within the coverage of an insurance policy" issued by an insolvent insurer. A.R.S. § 20-661(3).

When the Fund becomes involved, it assumes all the "rights, duties and obligations" of the insolvent insurer. A.R.S. § 20-664(A)(2). ² Accordingly, when the Fund received notice of survivors' lawsuit, it retained counsel to defend Eisenbeiss and NSPC, thus fulfilling its obligation under the policy provision which required Imperial to defend any suit against the insured. Discovery ensued. During February 1980, survivors offered to discharge Eisenbeiss, NSPC, and any other NSPC shareholders for $99,900, the Fund's per claim liability limit. The Fund declined this settlement offer.

As discovery continued, survivors learned that Dr. William B. Helme, another NSPC employee and shareholder, might also have been negligent in failing to examine Worsham's x-rays. ³ Survivors' attorneys believed that their failure to name Helme as a defendant presented no obstacle to recovery because they believed that survivors could recover from NSPC for Helme's negligence under respondeat superior principles.

Shortly before trial, survivors' attorneys notified the Fund that they now were seeking to recover $199,800 for separate claims based on the separate acts of negligence of the two doctors, Eisenbeiss and Helme. The Fund took the position that its liability was limited to $99,900 because (1) neither Helme nor NSPC could be liable for Helme's negligence as he was not a named defendant and the statute of limitations had run against him, and, (2) even if NSPC could be held liable for Helme's negligence, there had been only one "occurrence" under the Imperial policy and, therefore, survivors could recover for only one "covered claim" under A.R.S. § 20-664(A)(1).

In a March 18, 1981 letter, survivors' attorneys told the Fund that they were willing to settle the suit against Eisenbeiss, Helme, and NSPC for $137,500. The letter also mentioned that the doctors had retained private counsel and were discussing settlement possibilities with survivors. The letter continued:

[The doctors] are concerned about personal exposure for sums in excess of the $100,000 coverage you [the Fund] claim[s] to have. They believe, and we believe, that there is $200,000 in coverage. There is some discussion (preliminary only) that a stipulated judgment be Once the Fund declined this settlement offer, Eisenbeiss, Helme, and NSPC, on the advice of their personal attorney, entered into a settlement agreement with survivors. The doctors and the corporation allowed survivors to obtain a judgment against them and NSPC for $350,000 in exchange for the survivors' covenant not to execute against the doctors or NSPC. This type of agreement is commonly referred to as a "Damron" ⁴ agreement. In addition, each doctor made certain stipulations as to his own negligence, the number of individual negligent acts, and the number of separate occurrences under the Imperial policy.

[153 Ariz. 133] entered in the amount of $350,000 in exchange for a release of any personal liability of Dr. Eisenbeiss or his group.

The Fund had declined an invitation to participate in the settlement negotiations. In an affidavit, Robert H. Renaud, the attorney hired by the Fund to defend Eisenbeiss and NSPC, said that he was aware of the settlement discussions, but did not desire to attend or to participate.

The Fund then paid $99,900 for the Eisenbeiss claim and filed this action requesting a declaration that its liability does not exceed that amount. The Fund named Helme, NSPC, and survivors as defendants. ⁵ In its partial summary judgment motion, the Fund reiterated the single claim argument and also contended that it has no obligation to pay any amount exceeding $99,900 because Helme and NSPC breached their express contractual duty to cooperate by making the Damron agreement. The parties raised other issues in the trial court, but did not address them in their motions for summary judgment.

Without explanation, the trial court granted survivors' cross-motions for summary judgment on all counts. The court of appeals reversed. The court agreed with survivors that under established respondeat superior principles NSPC could be held liable for Helme's negligence, even if Helme was not named as a party. 153 Ariz. at 126 - 27, 735 P.2d at 448-49. However, the court determined that the negligence of Eisenbeiss and Helme was a "series of related omissions" that constituted only one "occurrence" under the Imperial policy. Id. at 127 - 28, 735 P.2d at 449-50. Although this holding meant that the Fund was liable for $99,900 only, two members of the court of appeals' panel also held that the Fund was not obligated to pay the second claim because Helme and NSPC had breached their duty to cooperate. Id. at 127 - 28, 735 P.2d at 449-50.

Neither side has requested review of the court of appeals' holding that survivors can recover from NSPC for Helme's negligence even though Helme was not a named defendant. We therefore accept that holding as the law of the case ⁶ and address only the following issues:

1. Were the negligent omissions of Eisenbeiss and Helme one "occurrence" under the Imperial policy, thus constituting only one "covered claim" pursuant to A.R.S. §§ 20-664(A)(1) and 20-661(3)?

2. Did Helme and NSPC breach the contractual duty of cooperation by entering into the settlement agreement with survivors?

DISCUSSION

A. Number of "Covered Claims"

The Fund is liable for a maximum of $99,900 per "covered claim." A.R.S. § 20-664(A)(1). A "covered claim" is a claim that would have been covered by the insolvent insurer's policy. A.R.S. § 20-661(3). Neither the statutes nor the insurance policy defines "claim," but the parties agree that it means a third party's assertion of a legal right against an insured. As the parties and court of appeals recognized, the Imperial contracted to indemnify its insureds separately up to the limit per occurrence for "each occurrence" in which an insured became legally obligated to pay damages because of professional negligence. Under A.R.S. § 20-664(A)(1), that limit became $99,900 per occurrence. The policy defines "occurrence" as "any incident, act or omission, or series of related incidents, acts or omissions resulting in injury...." (emphasis added). The court of appeals held that the Fund is liable for only one...