New England Ins v. Healthcare Underwriters Mutual Ins.

• Decision Date: 09 July 2002
• Docket Number: 01-7945,2
• Parties: NEW ENGLAND INSURANCE COMPANY,, v. HEALTHCARE UNDERWRITERS MUTUAL INSURANCE COMPANY, FORMERLY KNOWN AS HOSPITAL UNDERWRITERS MUTUAL INSURANCE COMPANY, AND HOSPITAL UNDERWRITERS MUTUAL INSURANCE COMPANY,
• Court: U.S. Court of Appeals — Second Circuit

NEW ENGLAND INSURANCE COMPANY, PLAINTIFF-APPELLANT,
v.
HEALTHCARE UNDERWRITERS MUTUAL INSURANCE COMPANY, FORMERLY KNOWN AS HOSPITAL UNDERWRITERS MUTUAL INSURANCE COMPANY, AND HOSPITAL UNDERWRITERS MUTUAL INSURANCE COMPANY, DEFENDANTS-APPELLEES.

Docket No. 01-7945
August Term, 2001

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: May 2, 2002
July 9, 2002

Evan H. Krinick, Rivkin Radler Llp (Michael P. Versichelli and Lee S. Siegel, of counsel), Uniondale, Ny, for Plaintiff-Appellant.

Lawrence W. Mumm, McAloon & Friedman, P.C. (Timothy J. O'Shaughnessy and Gillian Fisher, of counsel), New York, Ny, for Defendants-Appellees.

Before: Miner and Sack, Circuit Judges, and Berman, District Judge. (FN1)

Berman, District Judge

Appeal from an order of the United States District Court for the Eastern District of New York (Arthur D. Spatt, Judge) setting aside a jury verdict for plaintiff and granting defendants' motion for judgment as a matter of law following trial. In the district court, plaintiff had claimed and the jury agreed, that defendants' refusal to settle a medical malpractice action against plaintiff's and defendants' insured constituted "bad faith." We reverse with instruction to the trial court to reinstate the jury verdict and enter judgment for plaintiff.

BACKGROUND

I. The Medical Malpractice Action

On May 23, 1982, David Weinstock was born at Huntington Hospital (the "Hospital") and suffered severe and permanent brain damage resulting from inadequate intake of oxygen. Dr. Lawrence A. Horn ("Dr. Horn"), the attending obstetrician, had diagnosed fetal distress and performed an emergency cesarean section when he realized that David was not receiving enough oxygen in the womb. Upon delivery, David was resuscitated by the attending anesthesiologist, because there was no pediatrician present in the delivery room. Following the delivery, Dr. Horn sent David to the nursery, believing (incorrectly) that the Hospital had called a pediatrician to attend to David there. Dr. Horn did not himself contact a pediatrician, nor did the Hospital. In fact, a pediatrician was not called until a nurse became concerned over David's labored breathing and other signs of continued respiratory distress in the nursery. As a result, David was not seen by a pediatrician until forty minutes after his difficult birth. (FN2) David's injuries left him unable to walk or talk and with no possibility of improvement. At the same time, psychological testing revealed that David was "highly intelligent" with "amazing" conceptual abilities. On December 7, 1984, the Weinstock family ("Weinstocks") commenced a medical malpractice action in the New York State Supreme Court, Suffolk County, against Dr. Horn and the Hospital. The claims against Dr. Horn were, inter alia, that he "failed to evaluate the signs of fetal distress"; and "fail[ed] to notify the . . . pediatrician of [David's] condition and status." In February, 1991, prior to trial, the Weinstocks settled with Dr. Horn for $1.2 million.

The claims against the Hospital were, inter alia, that it "fail[ed] to properly oxygenate [David]"; "fail[ed] to make sure that there was a pediatrician in attendance at the delivery"; and failed to have rules and regulations in place to ensure that proper pediatric staff was available. The litigation against the Hospital was controlled by Healthcare Underwriters Mutual Insurance Company ("Healthcare") which had issued a $1 million primary insurance policy. New England Insurance Company ("New England") was responsible for $3 million in excess coverage. Healthcare retained Robert Lapping ("Lapping") to defend the malpractice action. The Healthcare policy required that the Hospital consent to the settlement of any claims.

Healthcare never made a settlement offer on behalf of the Hospital at any time prior to or during the malpractice litigation. Healthcare apparently refused to entertain settlement because it contended (i) that Dr. Horn was responsible for calling a pediatrician, and (ii) that David's injuries occurred before birth. At the same time, Healthcare was aware early on of weaknesses in the case, which included the Hospital's failure to have any written rules and regulations specifying who was responsible for contacting a pediatrician, and expert opinion that David's injuries occurred immediately prior to his birth at the time when he and his mother were in the care of both the Hospital and Dr. Horn.

Before the Weinstocks settled with Dr. Horn in February 1991, their settlement demand to the Hospital was $500,000, only one-half of Healthcare's policy limit. (FN3) Following the settlement with Dr. Horn, the Weinstocks raised the amount demanded of the Hospital to $1 million. On June 26, 1992 -- prior to trial and while the Weinstocks' settlement demand to the Hospital was still $1 million -- New England sent Healthcare the first of five "bad faith" letters demanding that Healthcare offer its policy limit to settle with the Weinstocks, and warning that the case possessed "enormous verdict potential" given the profound brain damage David had suffered and "the Hospital's failure to have a pediatrician present during the Cesarean section delivery and immediately thereafter." (FN4)

Healthcare allowed the malpractice action to proceed to trial on July 7, 1992 with the Hospital as the sole defendant. On July 17, 1992, during the plaintiff's case, the Weinstocks raised their settlement demand from $1 million to $2 million. At about that time, the trial judge, reversing an earlier ruling, allowed the Weinstocks' rehabilitation expert, Dr. Joseph Carfi ("Dr. Carfi"), to testify that the cost of David's lifetime care would be $10 million. Plaintiffs' economist, Dr. Kershner ("Dr. Kershner"), projected $17 million in total economic damages. At this point, Lapping believed that the best the Hospital could expect in the event of a plaintiffs' verdict was that the jury would award $8.5 million in damages and apportion 50% of the liability to the Hospital and 50% to Dr. Horn.

At the conclusion of the plaintiffs' case, the Weinstocks raised their settlement demand to $4 million, the total amount of coverage available under the combined limits of the Healthcare and New England policies. (FN5) In addition to the bad faith letters sent by New England, on July 30, 1992, the Hospital also sent a bad faith letter to Healthcare demanding settlement: "[T]his case will be difficult to win and . . . the exposure far exceeds the limits of insurance coverage we purchased a decade ago." Healthcare remained unmoved.

The trial resumed on August 10, 1992 with the presentation of the defense case. On that date, Dr. Horn testified, based in part upon his written notes, that he expected that someone from the Hospital would have called a pediatrician before the emergency cesarean section and that, when he sent David to the nursery, he believed a pediatrician had already been called by the Hospital. Dr. Horn acknowledged that it is generally the attending obstetrician's responsibility to call the pediatrician. On August 18, 1992, on cross-examination, Dr. Leonard Rosenzweig ("Dr. Rosenzweig"), the Hospital's pediatric expert, conceded a "departure" from medical procedure by the Hospital in not starting David on an I.V. drip until the pediatrician arrived in the nursery, although he also testified on redirect that this departure was not likely to have caused David's injuries. (FN6)

On September 1, 1992, the jury returned a verdict for the Weinstocks in the amount of $9.6 million, 75% (or $7.2 million) of which was attributed to Dr. Horn and 25% (or $2.4 million) of which was attributed to the Hospital. Thereafter, the case settled for $2.1 million. Of this amount, Healthcare paid $1 million (its policy limit) and New England paid $1.1 million.

II. The Bad Faith Action

On March 23, 1998, New England sued Healthcare in the district court (based upon diversity jurisdiction) alleging that Healthcare had the opportunity and the obligation to settle the Weinstock action within the primary policy limit of $1 million both prior to and during the malpractice trial and that its refusal to do so constituted bad faith. (FN7) New England sought to recover $1.1 million, plus interest. The bad faith action was tried before a jury beginning in November 2000. At the close of New England's direct case, Healthcare moved for judgment as a matter of law pursuant to Federal Rule of Civil Procedure ("Fed. R. Civ. P.") 50. The district court denied the Rule 50 motion, concluding that "it would be a jury question . . . whether [the Hospital] would have consented [to settle] if asked to consent." (Trial Transcript ("Tr.") at 1611). The court also noted that "there is evidence in this case, . . . much evidence, that [the Hospital's representative] was never consulted, and that he would seriously have considered consenting, if he had been asked to consent. . . . He went along with Healthcare's recommendation. . . . They never asked him to consent to anything." (Tr. at 1610-11). (FN8) The court further stated, "I think there is enough evidence on clear liability for the jury." (Tr. at 1610). Healthcare moved again for judgment as a matter of law at the close of all the evidence. Once again, the district court denied the motion, this time stating, "I am not the jury. . . . [I]t is not a case where there can be but one conclusion that reasonable jurors would reach. No reasonable juror would be compelled to accept the view of [Healthcare] in this case." (Tr. at 1845) (emphasis added). The trial court also reasoned that "whether Huntington Hospital would have consented had a timely [settlement] opportunity [been] afforded it, is a question for the jury to decide." (Tr. at 1843-44).

During the charge conference preceding jury deliberations, the district judge initially informed counsel that he intended to instruct the jury, inter alia, that New England bore the burden of proving...