Hershey Medical Center v. CAT FUND

• Decision Date: 21 November 2000
• Citation: 763 A.2d 945
• Parties: The MILTON S. HERSHEY MEDICAL CENTER OF the PENNSYLVANIA STATE UNIVERSITY, Plaintiff, v. COMMONWEALTH OF PENNSYLVANIA MEDICAL PROFESSIONAL LIABILITY CATASTROPHE LOSS FUND and John Reed, Director of Commonwealth of Pennsylvania Medical Professional Liability Catastrophe Loss Fund, Defendants.
• Court: Pennsylvania Commonwealth Court

763 A.2d 945

The MILTON S. HERSHEY MEDICAL CENTER OF the PENNSYLVANIA STATE UNIVERSITY, Plaintiff, v. COMMONWEALTH OF PENNSYLVANIA MEDICAL PROFESSIONAL LIABILITY CATASTROPHE LOSS FUND and John Reed, Director of Commonwealth of Pennsylvania Medical Professional Liability Catastrophe Loss Fund, Defendants.

Commonwealth Court of Pennsylvania.

Argued September 12, 2000.

Decided November 21, 2000.

John A. Snyder, State College, for plaintiff.

Zella Smith Anderson, Harrisburg, for defendants.

BEFORE: McGINLEY, Judge, KELLEY, Judge, JIULIANTE, Senior Judge.

McGINLEY, Judge.

Before this Court, in our original jurisdiction, are the preliminary objections of the Pennsylvania Medical Professional Liability Catastrophe Loss Fund (CAT Fund), in the nature of a demurrer to the complaint filed by the Milton S. Hershey Medical Center of the Pennsylvania State University (HMC). We overrule the preliminary objections.

This matter stems from two alleged incidents of medical malpractice.¹ The first incident concerns allegations of obstetrical malpractice whereby HMC and several of its physicians were named as defendants in a July 1996, complaint filed in the Court of Common Pleas of Dauphin County. The conduct occurred in January 1995 and involved allegations of inappropriate care rendered to the plaintiff mother that caused injuries to her plaintiff child.

Under the Health Care Services Malpractice Act² (Act 111), HMC was required to provide $200,000.00 of basic insurance to its providers, while the CAT Fund provided excess insurance of $1,000,000.00 per provider.³ As the controversy proceeded, the attending OB/Gyn physician and HMC became the only remaining defendants. The physician was undisputedly the agent of HMC and HMC was vicariously liable. The CAT Fund authorized a $1.2 million settlement offer to the plaintiffs.

HMC tendered $400,000.00 on behalf of itself and the physician. The CAT Fund provided $1,000,000.00. The physician had excess coverage for the loss above $4,000,000.00. Therefore, HMC was uninsured for the $2.8 million beyond the first $1.2 million of insurance provided by the basic and excess coverage. The CAT Fund did not contribute toward settlement on behalf of HMC in light of HMC's vicarious liability and because all private excess coverage was not exhausted. As a result of the CAT Fund's refusal, HMC was required to pay the disputed amount to effectuate the settlement.

In April 1997, a second medical malpractice complaint was filed in the Court of Common Pleas of Dauphin County, this time against a pediatric cardiologist and HMC for alleged negligence occurring in September 1995 when a procedure was performed on the plaintiff's minor son. Here, the settlement value was in excess of $2.4 million. The CAT Fund again refused to contribute toward settlement on behalf of HMC because HMC was vicariously liable. Thus, HMC was forced to pay beyond the basic coverage in order to avoid prohibitive verdicts and delay damages.

On December 13, 1999, HMC filed a complaint⁴ in this Court challenging the CAT Fund's policy that it is not obligated to contribute to settlement for HMC's vicarious liability until all layers of insurance available to the liable defendants are exhausted. HMC asserted in its complaint the following eight counts:

Count I—Declaratory Relief

Count II—Violation of Act 111

Count III—Indemnification

Count IV—Subrogation

Count V—Estoppel

Count VI—Quasi Contract

Count VII—Denial of Due Process and Equal Protection Rights

Count VIII—Bad Faith.

Throughout the complaint, HMC reiterates that it seeks "damages for an amount sufficient to compensate HMC for the CAT Fund's wrongful refusal to participate in the settlements of the Obstetrical Malpractice Action and the Pediatric Cardiology Action...." Additionally, HMC requests that this Court "enter a declaratory judgment that the CAT Fund may not, under ... Act 111 ... subordinate the priority of payment of vicarious liability claims." See Complaint at 23-24.

On January 24, 2000, the CAT Fund filed preliminary objections⁵ alleging that HMC failed to state a cause of action against the CAT Fund in Counts II through VIII due to legal insufficiency of the pleading. Obviously, at this juncture, HMC does not shoulder the burden of proving its cause of action. The Court must evaluate whether the facts in the complaint "are sufficient to entitle it to relief." Meier, 648 A.2d at 606.⁶

A.

The CAT Fund first contends that HMC failed to state a cause of action in Counts II, III, and IV because the CAT Fund's director properly determined that the CAT Fund need not pay twice for the negligence of a defendant physician. In Count II, HMC alleges that "[t]he CAT Fund's wrongful refusal to make settlement contributions on behalf of HMC ... was a violation of Act 111." Complaint, paragraph 69 at 13. Count III reflects that "[a]s a result of the CAT Fund's wrongful refusal ..., HMC was forced to pay the disputed amounts ... that should have been paid by the CAT Fund." Thus, "HMC is entitled to indemnification as against the CAT Fund, and claim is made therefore." Complaint, Paragraphs 73 and 77, at 14 and 15. HMC alleges at Count IV that "[u]nder the doctrine of subrogation, the CAT Fund should be required to reimburse HMC for the settlement proceeds which were paid out in order to effectuate the reasonable settlements." Complaint, Paragraph 86 at 16.

The CAT Fund's premise is that HMC has no clear right to recovery under Act 111, based upon the language of the statute itself. The CAT Fund focuses upon the director's authority "to defend, litigate, settle, or compromise any claim payable by the fund," as set forth in Section 702(f). 40 P.S. § 1301.702(f). In addition, Section 702(h) states that "[n]othing in this act shall preclude the director from adjusting or paying for the adjustment of claims." 40 P.S. § 1301.702(h). The CAT Fund contends that these two sections authorize the director to determine whether the CAT Fund will pay toward the settlement of a claim, and if so, the amount. According to the CAT Fund, the director exercised such discretion when he denied CAT Fund payment based upon vicarious liability.

However, the payment and adjustment of claims are distinct from coverage issues between the CAT Fund and its covered providers. In Ohio Casualty Group of Insurance Companies v. Argonaut Insurance Company, 514 Pa. 430, 436, 525 A.2d 1195, 1198 (1987), our Pennsylvania Supreme Court stated:

The provisions of the Act are directed to resolving claims brought by injured patients against health care providers. In resolving these claims the Act anticipates the participation of the director and the Fund in the successful completion of such proceedings. The Act does not anticipate, nor was it intended to anticipate, claims brought directly against the Fund which are premised upon the alleged failure of the Fund to complete its statutory duty to pay its share.

Therefore, the director is authorized to evaluate the personal injury claims of malpractice claimants; not to determine who is covered and when such coverage applies.

Next, the CAT Fund addresses Section 705(a) within the context of vicariously liable hospital employees not entitled to coverage. Section 705(a) provides in pertinent part that:

No insurer providing excess professional liability insurance to any health care provider eligible for coverage under the fund shall be liable for payment of any claim against a health care provider for any loss or damages except those in excess of the fund coverage limits.

40 P.S. § 1301.705(a). Moreover, the CAT Fund maintains that the Pennsylvania Supreme Court has accepted this interpretation of Section 705(a). American Casualty Company v. PHICO Insurance Company, 549 Pa. 682, 702 A.2d 1050 (1997).⁷

The CAT Fund submits that the HMC physicians, unlike the nurse in American Casualty Company, were separately covered for direct liability, and there is no reason why the CAT Fund should issue a second $1 million payment absent negligence on the part of HMC. It must be emphasized, however, that neither this Court⁸ nor our Pennsylvania Supreme Court suggested that Section 705(a) was limited to vicarious liability cases involving a provider not covered by the CAT Fund.

As HMC highlighted, Section 705(a) does not specifically address the subordination of claims for vicarious liability. Further, HMC stresses that Act 111 makes no reference to treating vicarious liability claims differently than direct claims. We must agree with HMC that if the legislature intended that there be differential treatment between vicarious liability claims and direct liability claims, it would have provided a statutory directive.

For purposes of statutory interpretation, it is also necessary to address Section 701(d) which sets forth a limit of liability for various calendar years "for each occurrence for each health care provider." 40 P.S. § 1301.701(d). The CAT Fund asserts that if it were to pay on behalf of a vicariously liable HMC, it would be paying twice for the same health care provider, an absurd result. To the contrary, HMC responds that the CAT Fund is not paying twice but once for each covered provider. In essence, the CAT Fund ignores the allegation that each defendant paid for coverage and was allegedly entitled to protection. The allegations are that the CAT Fund was required to provide coverage for vicarious liability. Lastly, the CAT Fund asserts it must maintain fiscal integrity and decline payment based upon the hospital's vicarious liability until the physician's coverage is exhausted. Solvency is not the issue. The CAT Fund, depending upon its losses, has the authority to surcharge providers based on Section 701(e). 40 P.S. § 1301.701(e).

Next, the CAT Fund submits that common law indemnification principles support the CAT Fund's interpretation of Act 111. In particular, the CAT Fund notes that a vicariously liable employer has a right of indemnity...