Royal Indem. Co. v. Chicago Hosp.

• Decision Date: 27 March 2007
• Docket Number: No. 1-06-2357.,1-06-2357.
• Citation: 865 N.E.2d 317
• Parties: ROYAL INDEMNITY COMPANY, Plaintiff-Appellant, v. CHICAGO HOSPITAL RISK POOLING PROGRAM, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

865 N.E.2d 317

ROYAL INDEMNITY COMPANY, Plaintiff-Appellant, v. CHICAGO HOSPITAL RISK POOLING PROGRAM, Defendant-Appellee.

No. 1-06-2357.

Appellate Court of Illinois, First District, Second Division.

March 27, 2007.

Clausen Miller, P.C., Chicago (Edward M. Kay, Dominick W. Savaiano, Salvatore A. Pellegrino, Kimbley A. Kearney, of counsel), for Appellant.

Mayer Brown Rowe & Maw, LLP, Paul L. Langer, Daniel G. Hildebrand, Chicago, for Appellee.

Justice SOUTH delivered the opinion of the court:

Plaintiff, Royal Indemnity Company (Royal), appeals a decision of the circuit court of Cook County which granted defendant Chicago Hospital Risk Pooling Program's (CHRPP) motion to compel arbitration. Pursuant to Supreme Court Rule 307(a)(1) (188 Ill.2d R. 307(a)(1)), plaintiff brought this interlocutory appeal, arguing it was not a party to a trust agreement that was entered into between CHRPP and certain participating hospitals.

CHRPP is an Illinois trust that was established in 1978 by a group of Chicago-area non-profit community hospitals pursuant to the Illinois Religious and Charitable Risk Pooling Trust Act (215 ILCS 150/1 et seq. (West 2004)) as a charitable risk pooling trust to provide self-funded coverage of malpractice liabilities to its member hospitals. Under the trust agreement, several Chicago hospitals combine their individual assets to share the risks and burdens of self-insurance against potential medical malpractice claims. The trust agreement, which is at the center of this controversy, was entered into by the participating hospitals, one of which is Palos Community Hospital (Palos), the trustees, who are either officers, directors or full-time employees of one of the participating hospitals, and the independent corporate fiduciary, which is the Continental Illinois National Bank and Trust Company of Chicago or any other recognized independent bank appointed by the trustees. Royal was an excess and surplus claims insurance carrier that provided medical professional liability coverage in excess of the primary liability coverage provided to Palos under the trust agreement. The excess insurance coverage provided by Royal was $5 million in excess of the $5 million layer provided by CHRPP.

A medical malpractice action was filed against Palos, two of its physicians, and members of its staff regarding the delivery and care of an infant born on March 5, 1985. That action, known as "The Donahue Action," alleged that as a proximate result of the actions of Palos, its physicians, and employees, the infant, Daniel Donahue, suffered "severe and permanent disabilities including, but not limited to, brain damage, blindness, severe lack of gross motor function control, and daily seizures, requiring daily professional care." Pursuant to the trust agreement, CHRPP retained counsel to represent Palos and its agents in the Donahue action. That counsel investigated Palos' defense and potential damages and concluded that the hospital's liability exposure for the Donahue action would likely exceed CHRPP's $5 million primary coverage. The recommendation was to settle the matter within that layer of coverage before the matter proceeded to trial, but allegedly CHRPP did not follow that recommendation, and the matter proceeded to trial in 2002. Once trial commenced, the attorney for the Donahue matter refused to settle within the primary coverage layer. Before a verdict was rendered in the case, a settlement agreement was reached in the amount of $18 million, and CHRPP became liable for its entire $5 million layer of primary liability coverage, Royal became liable for its entire $5 million layer of excess liability coverage, and the remaining $8 million was paid by another excess carrier which provided second layer excess coverage to Palos for liabilities exceeding $10 million.

On April 6, 2006, Royal filed a one-count first amended complaint, alleging CHRPP breached its good-faith duty to settle the Donahue action. Specifically, the first amended complaint alleged that CHRPP was made aware by its hired counsel and Royal that Palos' liability exposure was likely to exceed its $5 million layer of coverage, and that CHRPP knew or should have known that the matter could have been settled within that layer but refused to do so. Additionally, the first amended complaint alleged that approximately two weeks after the trial commenced, CHRPP still refused to settle, despite being informed by hired counsel that the case was a "dead bang loser," and ignored the admonishments until it was too late. According to the first amended complaint, once CHRPP agreed to settle the matter, counsel for the Donahue matter demanded no less than $18 million, which caused Royal to be liable for its entire $5 million layer of excess liability coverage.

In response, CHRPP filed a motion to compel arbitration of the complaint on the grounds that Royal's excess policy was a "following form" policy in that it adopted and incorporated the terms of the underlying coverage, i.e., the trust agreement which established Palos' $5 million self-insured coverage with CHRPP. Royal opposed the motion on the grounds that the trust agreement was entered into solely between CHRPP and Palos and did not apply to any claims between Royal and CHRPP, and CHRPP's duty to Royal arose independent of any language within the trust agreement.

On July 27, 2006, the trial court granted defendant's motion to compel. Royal timely filed its notice of interlocutory appeal pursuant to Illinois Supreme Court Rule 307(a) (188 Ill.2d R. 307(a)).

The sole issue before us is whether a nonsignatory to an arbitration agreement can be compelled to arbitrate a claim pursuant to that agreement.

We note at the outset that even though this is not an appeal from a final order, we have jurisdiction over this interlocutory order under Rule 307(a) since a motion to compel arbitration is analogous to a motion for injunctive relief. Nagle v. Nadelhoffer, Nagle, Kuhn, Mitchell, Moss & Saloga, P.C., 244 Ill.App.3d 920, 924, 184 Ill.Dec. 304, 613 N.E.2d 331 (1993). A denial or grant of that motion can be reviewed by an appellate court as an interlocutory appeal pursuant to Supreme Court Rule 307(a)(1). 188 Ill.2d R. 307(a); Yandell v. Church Mutual Insurance Co., 274 Ill.App.3d 828, 830, 211 Ill.Dec. 337, 654 N.E.2d 1388 (1995). The only question before us on an interlocutory appeal of this type is whether there was a sufficient showing to sustain the order of the trial court granting or denying the relief sought. J & K Cement Construction, Inc. v. Montalbano Builders, Inc., 119 Ill. App.3d 663, 667, 75 Ill.Dec. 68, 456 N.E.2d 889 (1983). The trial court did not hold an evidentiary hearing in this case and or make any factual findings. Furthermore, none of the relevant underlying facts are in dispute. Rather, the court's decision was based on a purely legal analysis. Thus, we review the trial court's denial of the motion to compel arbitration de novo. Hutcherson v. Sears Roebuck & Co., 342 Ill.App.3d 109, 115, 276 Ill.Dec. 127, 793 N.E.2d 886 (2003); Bass v. SMG, Inc., 328 Ill.App.3d 492, 496, 262 Ill.Dec. 471, 765 N.E.2d 1079 (2002).

The trust agreement's provision at issue on this appeal is contained within section 6.21 of that agreement, which states in relevant part:

"The Trustees shall devise a policy to govern the settlement of claims against a Hospital for Coverage Losses * * *. The policy so devised shall provide for consultation with a representative of said Hospital involved and, where appropriate, the defense counsel selected pursuant to Section 6.18, before any settlement is approved, and further shall provide that any settlement shall require the concurrence of both a majority of the Trustees and the Hospital. * * * In the event that any Hospital and the Trustees are unable to concur in a settlement, and the Trustees conclude that said inability is to the detriment of the Participating Hospitals, said settlement dispute shall be subjected to arbitration by an ad hoc committee to be composed of three Trustees who are representatives of the participating hospitals appointed by the Chairman of the Trustees. The decision reached by said ad hoc committee shall be final and not subject to attack in any court of law or equity, either directly or collaterally." (Emphasis added.)

While the parties do not dispute that Royal did not actually sign the trust agreement, CHRPP directs our attention to item 3 on the declarations page of Royal's excess policy, which states that the coverage to be provided was "Straight Excess Following Form Hospital Professional Liability and Comprehensive General Liability." (Emphasis added.) Additionally, CHRPP directs our attention to item 5 of the declarations page of Royal's excess policy which identifies the company providing the underlying policy and limits as the "Sixth Amended Trust Agreement, as per copy on file with company." By placing that language in its excess policy, CHRPP contends, Royal was incorporating the trust agreement in its entirety, including section 21 of article 6, which relates to arbitration and dispute resolutions.

In response, Royal argues that the "following form" language on its declarations page relates solely to "coverage," which is addressed exclusively in articles IV and V of the trust agreement, and that while it follows the form of those two articles, it does not follow the form of the remaining 13 articles of the 15-article agreement. Royal draws this court's attention to the fact that article IV of the trust agreement pertains to "Coverages and Exclusions," and article V pertains to "Limitations and Deductibles," as opposed to article VI, which pertains solely to the "Powers, Rights and Duties of the Trustees."

In construing an insurance policy, the court's primary function of is to ascertain and enforce the intention of the parties as expressed in the agreement. CILCO v. Home Insurance Co., 342 Ill. App.3d 940,...