Aves By and Through Aves v. Shah

Citation258 Kan. 506,906 P.2d 642
Decision Date03 November 1995
Docket NumberNo. 73184,73184
PartiesDarcy M. AVES, a minor, by and through Dan J. AVES and Faye E. Aves, her Mother and Father, Natural Guardians and Next Friends; Darcy M. Aves, Individually; and Dan J. Aves and Faye E. Aves, Individually, Plaintiffs, v. Nasreen B. SHAH, M.D., Defendant, and Ron Todd, Commissioner of Insurance, as Administrator of the Health Care Stabilization Fund, Garnishee.
CourtUnited States State Supreme Court of Kansas

Syllabus by the Court

1. Rules of statutory construction are stated and applied.

2. K.S.A. 40-3403(e) and K.S.A. 40-3412(c) are construed, and it is held that the statutes prohibit an action against the Health Care Stabilization Fund for bad faith or negligent failure to settle a claim.

3. The "reasonable basis" test is violated only if the statutory classification rests on grounds wholly irrelevant to the achievement of the State's legitimate objective. The state legislature is presumed to have acted within its constitutional power, even if the statute results in some inequality. Under the reasonable basis test, a statutory discrimination will not be set aside if any state of facts reasonably may be conceived to justify it.

Randall E. Fisher, of Law Offices of Randall E. Fisher, of Wichita, argued the cause, and Derek S. Casey and Chan P. Townsley, of Hutton & Hutton, of Wichita, Arden Bradshaw and Troy Gott, of Bradshaw & Johnson, of Wichita, and Robert L. Howard, of Foulston & Siefkin, of Wichita, were with him on the briefs for the plaintiffs Aves.

Richard I. Stephenson, of Fleeson, Gooing, Coulson & Kitch, argued the cause and was on the briefs for the defendant Shah.

Steven C. Day, of Woodard, Blaylock, Hernandez, Roth & Day, of Wichita, argued the cause and was on the brief for the garnishee.

Wayne T. Stratton, Charles R. Hay, and David N. Harger, of Goodell, Stratton, Edmonds & Palmer, L.L.P., of Topeka, were on the brief for amici curiae Kansas Hospital Association and Kansas Medical Society.

ABBOTT, Justice:

This case is before the court on questions certified by the United States District Court for the District of Kansas under the Uniform Certification of Questions of Law Act, K.S.A. 60-3201 et seq. Judge Patrick F. Kelly certified to this court the following questions:

I. Whether, in light of the provisions of the Health Care Provider Insurance Availability Act, Kansas law recognizes a claim of bad faith against the Health Care Stabilization Fund when a judgment is returned in excess of the Fund's statutory limits of liability.

II. May the plaintiffs holding the excess judgment prosecute such a bad faith action against the Fund by way of garnishment in light of K.S.A. 60-723(d)?

The facts as set forth in the district court's order certifying these questions are as follows. Plaintiffs Darcy Aves, a minor, and her parents, Faye and Dan Aves, brought an action in 1988 for medical malpractice against Dr. Nasreen B. Shah and the Central Kansas Medical Center (CKMC) for damages arising from negligence related to Darcy's birth. On November 15, 1990, the jury returned a verdict which found Dr. Shah 90% at fault and CKMC 10% at fault. The jury awarded total damages in excess of $23 million; Dr. Shah's share of the damages was in excess of $21 million. The United States 10th Circuit Court of Appeals affirmed the verdict on appeal. Aves v. Shah, 997 F.2d 762 (10th Cir.1993).

The present action pending before Judge Kelly is a garnishment action filed on October 18, 1993. Plaintiffs contend that Fletcher Bell, the former Commissioner of Insurance of the State of Kansas, serving as Administrator of the Health Care Stabilization Fund (the Fund), acted negligently and in bad faith in conducting the defense of Dr. Shah in the underlying action and in failing to settle the claim. The plaintiffs named Ron Todd as the garnishee in this action. He succeeded Fletcher Bell as Commissioner of Insurance of the State of Kansas.

Judge Kelly made the following assumptions for the purposes of certification: The Fund acted negligently and in bad faith in failing to settle plaintiffs' claims. During 1990, the Fund effectively assumed the defense of Dr. Shah, employing an attorney for her defense. The Fund required this attorney to report to and take directions from the Fund's staff. Prior to and during the trial, the attorney notified the Fund that he did not believe he could obtain a verdict for less than the combined policy limits of Dr. Shah's insurance policies, which was $3.2 million. A second attorney hired by the Fund as anindependent advisor also advised the Fund that the plaintiffs would probably receive a verdict for more than $3.2 million. Despite being informed by two attorneys that a verdict in excess of the $3.2 million policy limits was likely, the Fund rejected the plaintiffs' offers to settle for either $3.1 or $3.2 million. Instead, the Fund extended settlement offers of $1.2 million prior to trial and $1.5 million during trial. Representatives of the Fund advised plaintiffs' counsel that they were not concerned with whether Dr. Shah was "stuck" with a big verdict, but they were only concerned with "trying to avoid paying $3.2 million."

Before this court addresses the merits of the case, an understanding of the statutory insurance plan is helpful. In the mid-1970s, the legislature, in response to the high cost and unavailability of medical malpractice insurance, adopted the Health Care Provider Insurance Availability Act (the Act), K.S.A. 40-3401 et seq. The Act required licensed health care providers to obtain primary malpractice insurance as a condition precedent to practicing their profession in Kansas. Originally, the Act required a health care provider to obtain primary medical malpractice insurance with at least $100,000 per occurrence coverage and not less than $300,000 annual aggregate coverage for all claims of primary medical malpractice insurance. At the time of the events that are the subject matter of this lawsuit, K.S.A. 40-3402 required a primary coverage of $200,000 per occurrence and not less than $600,000 annual aggregate for all claims.

If a health care provider could not obtain primary malpractice insurance from a private insurance carrier, the Act provided health care providers with primary malpractice insurance through the Health Care Provider Insurance Availability Plan (the Plan). Thus, the health care provider could purchase primary malpractice insurance from a private insurance carrier or be placed in what amounted to an assigned risk pool in the Plan. The Plan was managed by an insurance company through a contract with the Kansas Insurance Department. Dr. Shah carried a primary malpractice insurance policy through the Plan.

The Act also provides excess medical malpractice insurance through the Fund. While mandatory, a health care provider's excess coverage which is provided by the Fund may be canceled if the Fund determines that the health care provider presents a material risk of significant future liability to the Fund. Originally, the Fund paid all judgments which were beyond the policy limits of the health care provider's primary coverage. Later, the Fund was capped, and it currently only pays $3 million on any judgment above the health care provider's primary policy in any one case.

The Fund itself is funded by a surcharge on the primary policy purchased by all health care providers. The Fund is independently supported by the surcharges. The Fund and the Plan are interrelated in that any loss by the Plan's contract carrier in excess of the premiums paid by the health care provider is made up by the Fund and any profits are paid to the Fund. The State does not pay any of the expenses or losses of either the Plan or the Fund. (The State does pay the premium and surcharges for health care providers employed by the State, for medical students, and for residents of the University of Kansas School of Medicine.) The Fund money is held in a segregated fund in the state treasury (K.S.A. 40-3403[a] ). All money in the Fund comes from surcharges against health care providers when they purchase mandatory basic coverage and interest and investment income earned thereon.

When a health care provider is sued for malpractice, the primary coverage insurance carrier may choose to provide a defense for the health care provider, or it may pay its limits to the Fund and the Fund may take over the defense. If the Fund settles a case, the settlement must be approved by a district court judge. K.S.A. 40-3410. On occasion, the Fund has demanded that the primary insurance carrier settle within its policy limits or face a negligence or bad faith claim.

The facts submitted to us are that the Fund was not only negligent, but it also acted in bad faith in settlement negotiations. Yet, the persons administering the Fund will experience no financial consequences regardless of the outcome of this case, while the other parties, directly and indirectly involved in the case, will experience severe financial consequences depending upon the outcome. This is the real tension in this case. On the one hand, Dr. Shah will be financially devastated if the Fund is not liable for its refusal to settle within the policy limits. On the other hand, if the Fund is liable for bad faith or negligent failure to settle, it is the health care providers of this State, required by law to participate in the Fund, who will be financially affected by the Fund's liability. The Fund itself will not be affected. Rather, the health care providers will pay for the Fund's liability via an increased surcharge on their basic coverage premiums. This increased surcharge will not cover the medical malpractice of a health care provider but will simply cover the negligence or bad faith of the Fund's administrators in refusing to settle within the statutory limits. This tension is not a factor in this case other than it might have some bearing on legislative intent.

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