Ballow v. PHICO Ins. Co.

• Decision Date: 15 November 1993
• Citation: 875 P.2d 1354
• Docket Number: 92SC530
• Parties: Edward BALLOW, D.P.M.; Foot Associates, P.C.; Mark P. Berland, D.O.; Richard N. Bernhardt, M.D., Richard N. Bernhardt, M.D., P.C.; Leonard D. Bernstein, M.D., the OB/GYN Associates, P.C.; J. Tashof Bernton, M.D.; J. Tashof Bernton, M.D., P.C.; Roland J. Brandt, D.O.; High Country Orthopedic Associates of Colorado Springs, P.C.; Robert A. Brumfield, M.D.; Rustic Hills Orthopaedic Association, P.C.; W.M. Campbell, M.D.; Southern Colorado OB/GYN, P.C.; Joseph Carpenter, M.D.; Joseph Carpenter, M.D., P.C.; John Chisholm, M.D.; Denver Obstetrical and Gynecological Associates, P.C.; Harvey M. Cohen, M.D.; Cohen and Conner Professional Corporation; Wayne Conner, M.D.; Gayle P. Crawford, M.D.; Drs. Ross and Crawford, P.C.; David L. Crosson, M.D.; Pueblo Orthopedic Professional Corporation; Jacqueline M. Demolin, M.D.; Goodman OB/GYN Associates, P.C.; Larry M. Dewell, M.D.; Beverly E. (Jessup) Donnelly, M.D.; Fort Collins Women's Clinic, P.C.; Terry A. Downing, M.D.; Terry A. Downing, M.D., P.C.; John H. Drabing, D.O.; Thomas F. Driver, M.D.; Paul S. Drohan, M.D.; Paul S. Drohan, M.D., P.C.; Edward Duerksen, M.D.; Edward Duerksen, M.D., P.C.; Samuel C. Duhon, Jr., M.D.; Samuel C. Duhon, Jr., M.D., P.C.; Edward L. Ehrichs, M.D.; Reich & Ehrichs, P.C.; Frederick C. Feiler, M.D.; Glen C. Ferguson, D.O.; Glen C. Ferguson, D.O., P.C.; Glenn T. Foust, III, M.D.; Denver-Evergreen OB/GYN Group, P.C.; Donald P. Gazibara, M.D.; W.B. Goddard, M.D.; Woodridge Women's Clinic, P.C.; Reid A. Goodman, M.D.; Stanley N. Goodman, M.D.; Ronald A. Green, D.P.M.; Michael L. Hall, M.D.; Linder and Hall OB/GYN Associates, P.C.; Gordon C. Ham, M.D.; Gordon C. Ham, M.D., P.C.; Richard G. Hamill, M.D.; David Harris, M.D.; David Harris, M.D., P.C.; Lowell N. Harris, M.D.; James F. Hartman, M.D.; James F. Hartman, M.D., P.C.; Duval E. Harvey, M.D.; Robert W. Hendee, Jr., M.D.; Pediatric Neurosurgery, P.C.; Raymond W. Henry, M.D.; David F. Holz, D.P.M.; Allied Foot and Ankle Clinics of Colorado, P.C.; Br
• Court: Colorado Supreme Court

Page 1354

875 P.2d 1354

Edward BALLOW, D.P.M.; Foot Associates, P.C.; Mark P Berland, D.O.; Richard N. Bernhardt, M.D., Richard N Bernhardt, M.D., P.C.; Leonard D. Bernstein, M.D., the OB/GYN Associates, P.C.; J. Tashof Bernton, M.D.; J Tashof Bernton, M.D., P.C.; Roland J. Brandt, D.O.; High Country Orthopedic Associates of Colorado Springs, P.C.Robert A. Brumfield, M.D.; Rustic Hills Orthopaedic Association, P.C.; W.M. Campbell, M.D.; Southern Colorado OB/GYN, P.C.; Joseph Carpenter, M.D.; Joseph Carpenter, M.D., P.C.; John Chisholm, M.D.; Denver Obstetrical and Gynecological Associates, P.C.; Harvey M. Cohen, M.D.; Cohen and Conner Professional Corporation; Wayne Conner, M.D.; Gayle P. Crawford, M.D.; Drs. Ross and Crawford, P.C.; David L. Crosson, M.D.; Pueblo Orthopedic Professional Corporation; Jacqueline M. Demolin, M.D.; Goodman OB/GYN Associates, P.C.; Larry M. Dewell, M.D.; Beverly E. (Jessup) Donnelly, M.D.; Fort Collins Women's Clinic, P.C.; Terry A. Downing, M.D.; Terry A. Downing, M.D., P.C.; John H. Drabing, D.O.; Thomas F. Driver, M.D.; Paul S. Drohan, M.D.; Paul S. Drohan, M.D., P.C.; Edward Duerksen, M.D.; Edward Duerksen, M.D., P.C.; Samuel C. Duhon, Jr., M.D.; Samuel C. Duhon, Jr., M.D., P.C.; Edward L. Ehrichs, M.D.; Reich & Ehrichs, P.C.; Frederick C. Feiler, M.D.; Glen C. Ferguson, D.O.; Glen C. Ferguson, D.O., P.C.; Glenn T. Foust, III, M.D.; Denver-Evergreen OB/GYN Group, P.C.; Donald P. Gazibara, M.D.; W.B. Goddard, M.D.; Woodridge Women's Clinic, P.C.; Reid A. Goodman, M.D.; Stanley N. Goodman, M.D.; Ronald A. Green, D.P.M.; Michael L. Hall, M.D.; Linder and Hall OB/GYN Associates, P.C.; Gordon C. Ham, M.D.; Gordon C. Ham, M.D., P.C.; Richard G. Hamill, M.D.; David Harris, M.D.; David Harris, M.D., P.C.; Lowell N. Harris, M.D.; James F. Hartman, M.D.; James F. Hartman, M.D., P.C.; Duval E. Harvey, M.D.; Robert W. Hendee, Jr., M.D.; Pediatric Neurosurgery, P.C.; Raymond W. Henry, M.D.; David F. Holz, D.P.M.; Allied Foot and Ankle Clinics of Colorado, P.C.; Brett S. Hulet, M.D.; Herbert L. Jacobs, M.D.; Valerie A. Jacobs, M.D.; David Kessel, M.D., P.C.; Arvada Pediatric Associates, P.C.; Ransy L. Jeffrey, M.D.; Johnny E. Johnson, Jr., M.D.; Johnny E. Johnson, Jr., M.D., P.C.; Elisabeth Kandel, M.D.; Family Medicine Associates; Ralph L. Kelley, M.D.; Corwin Orthopedic Group, P.C.; Kelvin F. Kesler, M.D.; David Kessel, M.D.; Thomas E. Kilfoyle, M.D.; Edward Kirschman, M.D.; Michelson, Losasso, Kirschman, M.D., P.C.; Joshua J. Kopelman, M.D.; Eugene E. Lalli, D.O.; Eugene E. Lalli, D.O. & Associates, P.C.; David Leistikow, M.D.; Edward Lord, M.D.; Leonard J. Losasso, M.D.; Stephen L. Ludwig, M.D.; Gary A. Ludwin, M.D.; Eva Martin, M.D.; Thomas Tuttle McCarthy, D.O.; Edward Larry McCleary, M.D.; James W. Meeuwsen, M.D.; M.H. Melmed, M.D.; M.H. Melmed, M.D., P.C.; T. Robert Mestas, M.D.; Gary A. Meyer, D.O.; Abraham K. Michelson, M.D.; David J. Muller, M.D.; Martin E. Nowick, M.D.; Martin E. Nowick, M.D., P.C.; E.P. O'Loughlin, M.D.; Robert P. Paunovich, D.O.; Mark W. Pfenninger, M.D.; Mark W. Pfenninger, M.D., P.C.; Peter Press, M.D.; Anesthesia Associates, P.C.; Alan M. Rapaport, M.D.; Marshall P. Reich, M.D.; Bruce C. Richards, M.D.; Ira Rifkin, M.D.; Ira Rifkin, M.D., P.C.; Michael H. Ross, M.D.; Nancy A. Rudd-McCoy, M.D.; Keith Sadler, M.D.; Keith Sadler, M.D., P.C.; Ron Schneebaum, M.D.; Joseph M. Sherman, M.D.; Lloyd V. Shields, M.D.; Joseph Shroyer, M.D.; Murray M. Snyder, D.O.; Contemporary OB/GYN, P.C.; Stanley H. Solomon, D.P.M.; Lawrence Spivack, M.D.; Colorado Eye Specialists, P.C.; Stephen L. Stoll, M.D.; Phillip Tannenbaum, M.D.; Phillip Tannenbaum, M.D., P.C.; Richard C. Taylor, M.D.; Arapahoe Bone and Joint Surgeons, P.C.; Dwayne Thomason, D.O.; Yona Victor, M.D.; Joan Weiss, M.D.; Robert Weiss, D.O.; Robert Weiss, D.O., P.C.; Max L. Weissman, M.D.; Russell J. Weister, M.D.; Harry Wherry, M.D.; Patrick Wherry, M.D.; Kevin Whitaker, M.D.; Derek Williams, M.D.; Murray S. Willis, M.D.; Murray S. Willis, M.D., P.C.; Mark R. Wolf, M.D.; S. Steve Yasazawa, M.D.; S. Steve Yasuzawa, M.D., P.C.; and John R. Young, M.D., Petitioners, v.PHICO INSURANCE COMPANY, a Pennsylvania corporation, Respondent.

No. 92SC530.

Supreme Court of Colorado, En Banc.

Nov. 15, 1993.

Rehearing Denied Dec. 6, 1993.

McDermott, Hansen & Reilly, Gerald P. McDermott, William J. Hansen, Denver, for petitioners.

Wood, Ris & Hames, P.C., F. Michael Ludwig, Mary E. Kanan, Mary E. Gibbons, Denver, for respondent.

Hall & Evans, Alan Epstein, Denver, for amicus curiae the American Ins. Ass'n.

Catherine Sparkman, Denver, Richard E. Barnsback, Phillip E. Stano, David M. Leifer, Washington, DC, for amicus curiae Blue Cross and Blue Shield of Colorado and American Council Life Ins.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol.Gen., Merrill Shields, Deputy Atty. Gen., Richard Djokic, First Asst. Atty. Gen., Robert M. Howard, Senior Asst. Atty. Gen., Regulatory Law Section, Denver, for amicus curiaeColorado Com'r of Ins. Justice MULLARKEY delivered the Opinion of the Court.

We granted certiorari in this case to address several issues arising out of a medical malpractice insurance carrier's withdrawal from the Colorado market.The trial court, in a 294-page order, ruled in favor of the petitioners who are the doctors formerly insured by the medical malpractice insurance carrier.It held that the insurance carrier breached its contract with the doctors, engaged in fraud and negligent misrepresentation, and acted in bad faith.The court of appeals, in Ballow v. PHICO Insurance Co., 841 P.2d 344(Colo.App.1992), reversed, holding that the trial court erred in finding that the insurer breached its contract with the doctors, and that it engaged in fraud, negligent misrepresentation, and bad faith conduct.We granted certiorari and, for the reasons set forth below, we reverse.

I.

The petitioners are 105 medical doctors, doctors of osteopathy, and doctors of podiatric medicine practicing in the State of Colorado(collectively referred to in this opinion as doctors).The respondent, PHICO Insurance Co.(PHICO), is a medical malpractice insurance carrier owned by the Hospital Association of Pennsylvania(HAP).

PHICO was created in 1976 as a Pennsylvania malpractice insurer specializing in hospital coverage.In 1978, HAP decided to expand its programs and operations into states other than Pennsylvania, and to broaden its customer base to independent physicians.¹ PHICO began marketing a claims-made policy in Colorado in the spring of 1981 and sold its first independent physician policy here on February 1, 1982.

To properly approach this case, a basic understanding of the concepts relevant to claims-made insurance coverage is required.There are presently two basic types of professional liability insurance policies: claims-made and occurrence.SeeRegulation5-1-8, 3 C.C.R. 702-5(1992).A pure claims-made policy provides coverage for claims made during the policy period, regardless of when the events out of which the claim arose occurred.²7A J.Appleman, Insurance Law and Practice§ 4503, at 96 (Supp.1992).In contrast, an occurrence policy provides coverage for all "occurrences" which take place during a policy period, regardless of when the claim is made.Id.

Insureds who purchase claims-made policies can protect themselves against claims made after the policy terminates in one of two ways.One option is to obtain "prior acts" coverage.Under this option, the new insurer charges an additional premium to cover the insured for acts occurring before the inception date of the new policy.Insurers need not offer this coverage.Another option is to purchase extended reporting period, or "tail," coverage.SeeRegulation5-1-8, 3 C.C.R. 702-5(1992).This coverage, which is usually available, ³ is purchased from the first insurer and covers future claims made for incidents occurring during the time of the claims-made coverage.In effect, such coverage turns claims-made coverage into occurrence coverage.⁴ When PHICO entered the Colorado market, most physicians were insured under occurrence policies and were reluctant to switch to claims-made policies.This reluctance stemmed, in part, from uncertainty concerning the cost of tail coverage.Many doctors testified that they feared the cost of tail coverage would be "unpredictably expensive," and that "the insurance company would be able to create any number out of the air and say this is [what it's] going to cost you to get out of the company."To allay the doctors' fears concerning the unpredictable cost of tail coverage, PHICO made numerous guarantees in its marketing.For example, Mr. Rodger Hasty, PHICO's Regional Manager in Denver, wrote to a prospective insured on October 12, 1982, repeatedly emphasizing that PHICO offered a percentage "cap" on both claims-made policy and tail policy premiums.PHICO sent prospective insureds a letter dated April 25, 1983, containing similar assurances:

We have eliminated all of the "unknowns" in the purchase of a "tail" policy.Its cost is now as predictable as the occurrence rate.Each policy will contain an endorsement which guarantees the cost of the basic claims-made coverage, as a percentage of our occurrence rate, and the cost of a tail policy, as a percentage of our mature (4th year) claims-made rate in effect at the commencement of your current claims-made policy.

A further example can be found in a letter dated June 8, 1983, from a PHICO agent to a physicians' group.This letter promised that "[t]he tail charges are guaranteed in the policy and are in no way subject to underwriting whims."

An endorsement to PHICO's early policies provided that tail coverage would be available for 79 percent of the mature rate premium after one year of coverage with PHICO, 112 percent of the mature rate premium after two years of coverage, and 118 percent after the third and...