Ia Physicians' Clinic Med. v. Physicians Ins.

• Decision Date: 31 October 2008
• Docket Number: No. 08-1297.,08-1297.
• Citation: 547 F.3d 810
• Parties: IOWA PHYSICIANS' CLINIC MEDICAL FOUNDATION, doing business as Iowa Health Physicians, Plaintiff-Appellant, v. PHYSICIANS INSURANCE COMPANY OF WISCONSIN, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

547 F.3d 810

IOWA PHYSICIANS' CLINIC MEDICAL FOUNDATION, doing business as Iowa Health Physicians, Plaintiff-Appellant, v. PHYSICIANS INSURANCE COMPANY OF WISCONSIN, Defendant-Appellee.

No. 08-1297.

United States Court of Appeals, Seventh Circuit.

Argued September 15, 2008.

Decided October 31, 2008.

George F. Galland, Jr. (argued), Miner, Barnhill & Galland, Chicago, IL, for Plaintiff-Appellant.

William K. McVisk (argued), Johnson & Bell, Chicago, IL, for Defendant-Appellee.

Before KANNE, EVANS, and WILLIAMS, Circuit Judges.

EVANS, Circuit Judge.

The plaintiff in this case, the Iowa Physicians' Clinic Medical Foundation, which does business under the name Iowa Health Physicians (IHP), asks us to predict that the Illinois Supreme Court, if confronted with the issue, would hold that the tort of bad faith in refusing to settle a claim at or within the policy limits of a medical malpractice insurance policy extends to a noninsured under the policy. Because we think it is doubtful that the Illinois high court would go that far, we reject IHP's appeal and affirm the district court judgment dismissing its complaint.

Because this case was decided on a motion for judgment on the pleadings, we accept the allegations in the complaint as true and draw all reasonable inferences in favor of IHP. Forseth v. Village of Sussex, 199 F.3d 363, 368 (7th Cir.2000). Here, then, are the facts. IHP runs a medical clinic in Geneseo, Illinois, where Dr. Randall Mullin works as a family doctor. While working at the clinic, Dr. Mullin treated Dennis Goetz, who needed antimalarial therapy in anticipation of his trip to Africa. Tragically, Dr. Mullin's treatment was ineffective and Mr. Goetz contracted malaria during his trip. To make matters worse, Dr. Mullin failed to timely diagnose Mr. Goetz's condition upon his return. Mr. Goetz eventually died, and his wife filed suit against Dr. Mullin for his negligent care and against IHP on a theory of vicarious liability.

Dr. Mullin was protected by a medical malpractice insurance policy issued by the Physicians Insurance Company of Wisconsin (PIC), which covered his liability up to $1 million and provided for the defense of claims made against him. The policy gave PIC control over Dr. Mullin's defense, which meant that Dr. Mullin could only settle a claim if PIC consented in writing. IHP, who was listed as the policyholder on this insurance contract, paid the premiums on behalf of Dr. Mullin as part of the package used to entice him into working at their clinic. But throughout the policy it was reiterated that coverage did not extend to IHP. Policyholders could purchase insurance from PIC, but IHP declined to do so. Instead, it was covered by a combination of self-insurance and a separate commercial insurance policy. Accordingly, IHP hired its own attorney to represent it in the Goetz case.

From the beginning, the case did not look good for IHP or Dr. Mullin. Many experts agreed that Dr. Mullin provided substandard care to Mr. Goetz, and the damages in the wrongful death suit threatened to be large. The economic damage to Mr. Goetz's widow and son alone was estimated at over half a million dollars. What's more, Mr. Goetz suffered severe pain before passing away. Both IHP and Dr. Mullin urged PIC to settle the case. The plaintiff offered to settle the case for $900,000—just below the policy limit—at least twice. But on both occasions PIC simply ignored the demand. Shortly thereafter, even the defense's expert witness admitted in his deposition that Dr Mullin's treatment deviated from the standard of care. This concession led to Mrs. Goetz withdrawing her $900,000 offer and demanding $1.5 million instead. PIC eventually countered with a $200,000 offer, which Mrs. Goetz didn't deign worthy of a response, and the case proceeded to trial. The jury found Dr. Mullin and IHP liable and awarded $3.5 million in damages. PIC paid $1 million, the limit on Dr. Mullin's policy, and IHP, upon agreement with Dr. Mullin, paid the rest.

IHP and Dr. Mullin then joined forces and sued PIC in the Illinois courts. They claimed that PIC breached a duty owed to both of them to settle the claim in good faith. PIC removed the case to federal court, resting on diversity jurisdiction. Once before the federal court, PIC filed a motion for judgment on the pleadings as to both IHP and Dr. Mullin. PIC first argued that the duty to settle in good faith extends only to Dr, Mullin, who was insured under the malpractice policy, not IHP, who was excluded from coverage. PIC went on to argue that since IHP paid the judgment in excess of the policy limit, Dr. Mullin suffered no damages, dooming his claim as well. The judge (Magistrate Judge John A. Gorman sitting by consent) agreed that PIC had no duty to IHP but held that since Dr. Mullin sought damages for injury to his reputation and for emotional distress his claim could proceed. IHP asked the judge to reconsider his decision or, in the alternative, enter a final judgment as to IHP so that it could immediately appeal the decision. FED. R. CIV. P. 54(b). The motion for reconsideration was denied, but seeing no reason to delay IHP's appeal, the judge directed entry of a final judgment as to IHP. IHP now appeals. Dr. Mullin's claim against PIC remains pending in the district court.

An insurer's duty to settle in good faith on behalf of its insured, which is well-settled in Illinois, Haddick v. Valor Ins., 198 Ill.2d 409, 261 Ill.Dec. 329, 763 N.E.2d 299, 303 (2001); Cramer v. Ins. Exch. Agency, 174 Ill.2d 513, 221 Ill.Dec. 473, 675 N.E.2d 897, 903 (1996), arises from the covenant of good faith and fair dealing implied in an insurance contract. This duty is a narrow exception to the Illinois courts' otherwise steadfast refusal to recognize an independent tort arising from the breach of this contractual covenant. Voyles v. Sandia Mortgage Corp., 196 Ill.2d 288, 256 Ill.Dec. 289, 751 N.E.2d 1126, 1130-31 (2001). The paradigmatic duty-to-settle case involves three parties: the injured third party; the insured, who is being sued; and the insurer, who controls the insured's defense. If the third party sues the insured for an amount above the policy limit and seeks a settlement at the upper limit of the policy, a conflict of interests arises. In this situation, the insurer may be tempted to decline the settlement offer, no matter how good the deal is for the insured, and go to trial. It makes no difference to the insurer's bottom line whether the case is settled or the jury awards astronomical damages; in either event it will pay out only the maximum on the policy. And if the case goes to trial, at least there's a shot that they will win and pay nothing. The insured, on the other hand, calculates the risks of trial differently because he will be stuck paying anything above the policy limit. Cramer, 221 Ill.Dec. 473, 675 N.E.2d at 903. To combat the temptation to ignore an insured's interest and to make sure that the intent behind the insurance contract is upheld, Illinois courts have recognized that an insurer has a "duty to act in good faith in responding to settlement offers," and if that duty is breached the insurer is on the hook for the entire judgment, regardless of the policy limit. Id.

This case, however, presents a permutation of the paradigmatic duty-to-settle case. It involves four parties: the injured third party, the insured, the insurer,...