Hospital Underwriting Group, Inc. v. Summit Health Ltd.

• Decision Date: 19 September 1995
• Docket Number: 94-5031,Nos. 93-6609,s. 93-6609
• Citation: 63 F.3d 486
• Parties: HOSPITAL UNDERWRITING GROUP, INC., Plaintiff-Appellee, Cross-Appellant, v. SUMMIT HEALTH LTD., Defendant-Appellee, Sarahmarge Crigler, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 486

63 F.3d 486

HOSPITAL UNDERWRITING GROUP, INC., Plaintiff-Appellee, Cross-Appellant, v. SUMMIT HEALTH LTD., Defendant-Appellee, Sarahmarge Crigler, Defendant-Appellant, Cross-Appellee.

Nos. 93-6609, 94-5031.

United States Court of Appeals,

Sixth Circuit.

Argued March 21, 1995.

Decided Aug. 29, 1995.

Rehearing Denied Sept. 19, 1995.

Jay S. Bowen (argued and briefed), Bass, Berry & Sims, Nashville, TN, for plaintiff-appellee, cross-appellant.

Ames Davis (argued), Joseph A. Woodruff (briefed), Waller, Lansden, Dortch & Davis, Nashville, TN, for defendant-appellee.

Daniel P.J. Miller (argued and briefed), Kenneth L. Tucker, Kenneth L. Tucker & Associates, Phoenix, AZ, for defendant-appellant, cross-appellee.

Before: JONES, CONTIE, and BATCHELDER, Circuit Judges.

BATCHELDER, J., delivered the opinion of the court, in which CONTIE, J., joined. JONES, J., concurred in the judgment.

BATCHELDER, Circuit Judge.

In this case of "Let's you and him fight," the trial court has been diverted from the real issues of the declaratory judgment action. Hospital Underwriting Group, Inc. ("HUG") filed this action against Summit Health Ltd. ("Summit"), seeking to establish that it has no liability under an excess insurance policy for payment of any part of a judgment in an Arizona wrongful death action, or, alternatively, that it is entitled to indemnification from Summit for any amounts that HUG may be found liable to pay. The district court held that HUG is entitled to summary judgment because, although it is liable under the excess policy, a post-judgment settlement agreement entered into in the Arizona litigation between the plaintiff in that action and Summit and its additional insureds is unreasonable, excessive and collusive and therefore is not binding on HUG.

We hold that HUG is entitled to summary judgment because it has no liability under the excess insurance policy, and that the district court's ruling that the settlement agreement is invalid must be reversed.

I.

On Christmas Eve 1985, Oscar Crigler died of acute respiratory failure shortly after Dr. James Baumann treated him for asthma and released him from the emergency room of Mesa General Hospital ("Mesa"). Mrs. Crigler filed a wrongful death action against Mesa and Baumann in Arizona state court. Mesa is a wholly-owned subsidiary of Summit, a corporate holding company of numerous hospitals, including Mesa. Summit had its primary insurance coverage with Meridian Insurance Company ("Meridian"), and its excess coverage with HUG, a Tennessee corporation. The HUG policy provided $25 million in coverage in excess of a $2 million deductible to Summit, hospitals owned by Summit and certain doctors working in Summit's hospitals. Mesa and Baumann were insured under the HUG policy, although they did not know of the policy until HUG denied coverage to Summit. The policy specified that "[t]he insurance afforded applies separately to each Insured against whom claim is made or suit is brought." The policy explicitly required notice as a condition precedent to coverage. ¹ The policy prohibited impleader or joinder of HUG.

Summit, the "Member Insured," received a copy of the HUG policy, procedure manual and forms; the additional insureds did not. HUG did not maintain a department for handling or investigating claims. It was HUG's practice to rely on the primary carrier to provide investigation and defense of claims. Dr. Baumann had promptly notified his private medical malpractice insurance company of the Crigler claim. His carrier tendered his defense to Mesa and its carrier. Summit's primary insurance policy with Meridian covered Mesa and Dr. Baumann. Summit, Mesa and Baumann all believed that the primary coverage limit was $8 million and that the potential liability of the defendants if the jury returned an adverse verdict was in the range of $300,000--$500,000, an amount well within the primary coverage. Crigler's last pre-trial settlement demand had been for $650,000. Meridian provided a vigorous defense during both the pre-trial phase and the three-week trial, expending $140,000 in defense costs.

Because of turnover of Summit's employees in the group responsible for administering insurance, Summit's risk manager was unaware of possible coverage under the HUG policy until after the Arizona jury rendered its unexpectedly high verdict of $4 million in January 1988. At that point, defense counsel learned that the available primary coverage was actually $2 million rather than $8 million. Summit then investigated its files and discovered the HUG policy. Only then did Summit notify HUG of the claim and verdict, inviting HUG to intervene in the litigation and to participate in settlement negotiations and in the post-trial motions filed to attack the judgment. When it received notice of the claim and verdict, HUG reserved its rights because of Summit's failure to comply with the policy's notice requirements. A few weeks later, HUG denied coverage. HUG did not move to intervene in the Arizona litigation in the post-trial motion/appeal phase. Instead, after denying coverage, on March 28, 1988, HUG filed this declaratory judgment action against Summit, Mesa and Baumann in federal court in Tennessee.

HUG had notice that, because it had denied coverage, the parties in the Arizona action were negotiating a settlement. On April 20, 1988, Crigler entered into a settlement agreement with Mesa, Baumann and Summit. In exchange for payment of the $2 million immediately available from the primary insurer and an assignment from Mesa, Baumann and Summit of their rights against HUG, Crigler agreed not to execute against the assets of Mesa, Baumann and Summit. The settlement agreement provided that it was governed by Arizona law and acknowledged that HUG's declaratory judgment action was pending in federal court. The Arizona defendants withdrew their post-trial motions, the time for appeal passed, and the jury verdict became a final judgment of the Arizona court.

On motion of Summit, Crigler was joined as a necessary party to the declaratory judgment action. Summit then moved to have Crigler substituted for Summit as the proper defendant on HUG's complaint for declaratory judgment. Crigler answered on behalf of Baumann and Mesa (whose rights she had assumed in the Arizona settlement agreement) that, because the doctor and hospital were blamelessly ignorant of HUG's notice provisions, they were excused under Tennessee law. The district court found that Summit was HUG's "agent" for purposes of receiving notice under the policy, and since the additional insureds had notified Summit, HUG's notice provisions were satisfied as to Baumann and Mesa; therefore, HUG was liable to Crigler under its policy. The court found it unnecessary to rule on Summit's motion to substitute. Hospital Underwriting Group v. Summit Health Ltd., 719 F.Supp. 627, 634-37 (M.D.Tenn.1989).

After that decision, all that remained for the district court to determine was whether HUG ultimately would have to bear the cost of the $2 million owing on Crigler's claim or would be entitled to judgment on its claim against Summit for indemnification. The district court ordered that the indemnification claim proceed to trial. Faced with the possibility that, in spite of its best efforts to turn this action into a dispute between HUG and Crigler, Summit might yet be found liable for paying the claim it thought it had escaped in 1988, Summit took a new tack. At the indemnification trial, Summit argued that under Arizona law, the settlement agreement it had helped negotiate was invalid. Summit claimed the settlement was unreasonable and collusive because it was excessive in amount and because HUG was not represented, since the attorney for Summit was also representing Baumann and Mesa.

Citing "compelling public policy reasons," the district judge vacated his prior summary judgment order only to the extent that it held HUG liable to Crigler for the unpaid portion of her judgment, ² and ordered that the issue of the reasonableness of the settlement agreement be briefed and argued. Relying on United Services Automobile Ass'n v. Morris, 154 Ariz. 113, 121, 741 P.2d 246, 254 (1987) (en banc), the district court concluded that under Arizona law, HUG would not be bound by the settlement agreement to the extent that the court found the agreement unreasonable or if the court found the agreement collusive. The district court held that Crigler had not proven that the settlement agreement was reasonable and non-collusive; therefore, HUG was not bound by the settlement and was entitled to summary judgment in its favor. The district court did not reach the issue of whether HUG was entitled to indemnification from Summit.

II.

In spite of Summit's successful diversionary tactics in the district court, the issue before us in this appeal is not whether, because the Arizona settlement is invalid, HUG can escape liability for payment of the amount of the jury verdict that exceeds the primary coverage. The issue here is whether the district court erred in holding (1) that Summit was HUG's agent for purposes of receiving notice of claims against additional insureds, and (2) that despite Summit's failure to notify HUG of the Crigler claim, the additional insureds, Dr. Baumann and Mesa General hospital, were nevertheless entitled to coverage under the excess policy because they notified Summit of claims against them. 719 F.Supp. at 634-37. We hold that the district court erred.

The parties do not dispute that Tennessee law governs the contract of insurance at issue in this action. Therefore, we must look to the language of the contract itself, and to Tennessee's law of agency, contract and notice. It is well settled in Tennessee that notice provisions of an insurance policy are valid conditions precedent to recovery on the policy, and that the failure to provide the insurer with the required notice may defeat coverage under the policy....