Med. Protective Co. of Fort Wayne v. Am. Int'l Specialty Lines Ins. Co.

Decision Date18 December 2018
Docket NumberNo. 18-1737,18-1737
Citation911 F.3d 438
Parties The MEDICAL PROTECTIVE COMPANY OF FORT WAYNE, INDIANA, Plaintiff-Appellant, v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE COMPANY, now known as AIG Specialty Insurance Company, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

John Richard Gerstein, Attorney, CLYDE & COMPANY US LLP, Washington, DC, for Plaintiff-Appellant.

Matthew J. Fink, Attorney, Charles A. Hafner, Attorney, Kimberly A. Hartman, Attorney, NICOLAIDES FINK THORPE MICHAELIDES SULLIVAN, Chicago, IL, for Defendant-Appellee.

Before Flaum, Manion, and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

In 2002, thirty-six-year-old Vicki Bramlett died from complications following routine surgery. Mrs. Bramlett’s family sued Dr. Benny Phillips, her treating physician. Dr. Phillips’s malpractice insurer, the Medical Protective Company of Fort Wayne, Indiana ("MedPro"), twice refused to settle the case for $200,000, Dr. Phillips’s insurance policy limit. At trial, a jury awarded a $14 million verdict against Dr. Phillips and other defendants. The Supreme Court of Texas later capped Dr. Phillips’s liability, and Mrs. Bramlett’s family sued MedPro for the excess verdict. MedPro eventually settled with the family.

MedPro was insured by American International Specialty Lines Insurance Company, now known as AIG Specialty Insurance Company ("AISLIC"), for claims made against it. AISLIC declined to cover MedPro’s settlement with Mrs. Bramlett’s family. When MedPro sued, the parties ultimately cross-moved for summary judgment. The district court granted summary judgment for AISLIC, concluding that coverage was excluded under the AISLIC policy because MedPro should have foreseen the Bramlett family’s claim before contracting with AISLIC. Because there is a genuine issue of material fact regarding whether MedPro should have settled with the Bramletts for $200,000, we affirm in part and reverse in part.

I. Background
A. The Bramlett Lawsuits

In late October 2002, in Lubbock, Texas, Dr. Benny Phillips performed a laparoscopic hysterectomy

on Vicki Bramlett, a thirty-six-year-old mother and wife. Following the surgery, while still hospitalized, Mrs. Bramlett suffered internal bleeding. She was rushed into surgery, but she died four days later after being removed from life support.

In May 2003, Mrs. Bramlett’s husband and children filed a wrongful death lawsuit against Dr. Phillips, his clinic (Lubbock Gynecologic Oncology Associates), Covenant Healthcare System (where Mrs. Bramlett had been hospitalized), and Covenant’s nurses. Dr. Phillips held a $200,000 healthcare professional liability insurance policy with MedPro, and he notified MedPro of the lawsuit. In November 2003, the hospital settled with the Bramletts for approximately $2.3 million, leaving only Dr. Phillips and his clinic remaining in the suit.

On December 17, 2003, the Bramletts wrote to Dr. Phillips’s attorney, Benjamin H. Davidson, II, making what is known in Texas as a Stowers demand. The Stowers doctrine comes from G.A. Stowers Furniture Co. v. Am. Indem. Co. , 15 S.W.2d 544 (Tex. Comm’n App. 1929, holding approved), and provides that if a plaintiff makes a demand to an insurer that is within the insured’s policy limit and that a reasonably prudent insurer would accept, but the insurer rejects the demand, the insurer will later be liable for any amount awarded over the policy limit. See also Phillips v. Bramlett , 288 S.W.3d 876, 879 (Tex. 2009). The Bramletts offered to settle the case for Dr. Phillips’s policy limit, $200,000. MedPro did not settle with the Bramletts. Discovery was still pending at the time, and MedPro wanted to wait and see what information would be unearthed during discovery.

The record reflects that, as early as January 5, 2004, MedPro knew that Dr. Phillips did not attend to Mrs. Bramlett’s internal bleeding because he had left the hospital to exercise. MedPro’s case notes from this time, however, suggest an understanding that Dr. Phillips had not been informed of concerns regarding Mrs. Bramlett’s recovery, and that if he had been informed, he would have immediately acted.

On March 23, 2004, the Bramletts made a second Stowers demand, again offering to settle for the $200,000 policy limit. The Bramletts also sent Dr. Phillips’s attorney, Mr. Davidson, an expert report from a doctor at the University of Texas. The expert opined that Dr. Phillips had breached the standard of care by failing to timely follow up on Mrs. Bramlett’s abnormal hemoglobin

and fluid challenge tests results, and that this breach was a proximate cause of Mrs. Bramlett’s death.

On April 12, 2004, Mr. Davidson responded to the second Stowers demand, rejecting it. Mr. Davidson wrote that he believed settlement was premature given that discovery was not complete, particularly because the parties had not yet deposed Mr. Bramlett and the hospital nurses. Mr. Davidson sent this response three days after the expiration of the Stowers settlement offer.

Discovery continued, and in May 2004, Mr. Davidson notified MedPro of defense issues he foresaw in the lawsuit. Notably, it was brought out during discovery that, in the evening following the surgery, Dr. Phillips had received a voicemail notifying him that Mrs. Bramlett’s hemoglobin levels had dropped. Despite this voicemail, Dr. Phillips left the hospital to exercise. Had Dr. Phillips gone straight to attend to Mrs. Bramlett rather than going to exercise, she likely would have lived. Even in the face of these facts, Mr. Davidson told MedPro that there was a 60 percent chance that Dr. Phillips’s defense would succeed. Mr. Davidson estimated that in the event of an adverse jury verdict, the award for the Bramletts would be approximately $2.5 to $3 million.

Dr. Phillips obtained additional counsel, who held a grimmer outlook on the likelihood of a successful defense. Later in 2004, that attorney, Nevill Manning, wrote to MedPro, stating quite bluntly that he believed "without hesitation ... that a jury of twelve people in Lubbock County, Texas, will almost assuredly conclude that the allegations made against Dr. Phillips and [his clinic] are correct, and, thus, liability may be imposed against them in a substantial proportion." He further noted his concern that MedPro had previously declined the Bramletts’ two Stowers demands. Mr. Manning demanded that MedPro settle with the Bramletts rather than proceed with what was likely to be a losing trial. Mr. Davidson also began to change his tune. In January 2005, he advised MedPro that the probability of a successful defense was about 20 percent and an adverse jury verdict was likely to be approximately $3 million.

In February 2005, the Bramletts and MedPro attended a mediation. According to MedPro’s case notes, the trial judge ordered the mediation because the Bramletts sought punitive damages against Dr. Phillips and were alleging "Stowers issues" as to MedPro. Prior to the mediation, MedPro made settlement offers to the Bramletts of $100,000, then $200,000. The Bramletts rejected both offers and instead demanded $2.3 million to settle the case, which MedPro rejected. After the mediation, a MedPro claims specialist who attended the mediation emailed the assigned claims specialist and his supervisor. He advised that, based on what he had learned at the mediation, an adverse verdict was likely and could be about $3 million. He further noted that MedPro’s responses to the Bramletts’ two Stowers demands had been inadequate and had not given sufficient reasoning for declining to settle the case. The claims specialist recommended that MedPro hire an attorney to protect its interests.

Mr. Manning also wrote to MedPro after the mediation, reiterating his belief in the likelihood of an adverse verdict and again demanding that MedPro negotiate with the Bramletts and accept their lowest settlement offer. Mr. Manning noted that "the mediator made it very clear ... that [Dr. Phillips] was certain of being held liable." The mediator had further expressed that MedPro faced "severe and certain exposure" for a verdict in excess of Dr. Phillips’s policy limit, given MedPro’s failure to accept the Bramletts’ Stowers demands.

In April 2005, a litigation attorney at MedPro was notified of the situation and sought advice from outside counsel. Outside counsel advised that MedPro had not acted in bad faith by declining the Stowers demands in order to investigate the claims. He stated that, at that time, there was no basis for MedPro to offer to settle with the Bramletts for more than the $200,000 policy limit—the Bramletts did not have standing to sue MedPro for a verdict above the policy limit, and, regardless, a jury had not yet returned any such verdict. MedPro’s litigation attorney agreed with this assessment, noting that the Bramletts’ Stowers claim was "relatively weak" and that settling with them could set a bad precedent for similar cases.

In August 2005, the case proceeded to trial. According to Mr. Davidson, prior to trial, the Bramletts dropped their settlement demand to $1 million, and on the day before trial dropped it to $500,000. The demand went back up to $1 million once trial began. MedPro rejected the offer, counteroffering only the policy limit of $200,000, and possibly some litigation costs.

The trial went as predicted, but the verdict was significantly higher than anticipated. The jury sided with the Bramletts and returned a $14 million verdict—$11 million in actual damages and $3 million in punitive damages.1 According to Dr. Phillips’s counsel, at the time, this verdict represented the largest medical negligence verdict ever awarded in Lubbock County, Texas.

After trial, additional counsel for Dr. Phillips wrote to MedPro, asserting that, per Stowers , a reasonable and prudent insurer would have settled the case for the $200,000 policy limit when the Bramletts so demanded. Counsel threatened that if MedPro did...

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