West Penn Allegheny Health Sys. v. Med. Care Availability and Reduction of Error Fund

• Decision Date: 21 December 2010
• Citation: 11 A.3d 598
• Parties: WEST PENN ALLEGHENY HEALTH SYSTEM d/b/a Allegheny General Hospital, Petitioner v. MEDICAL CARE AVAILABILITY AND REDUCTION OF ERROR FUND (MCARE) and Kiana Townes, a Minor, by Tamara Blanchard, Guardian, Respondents.
• Court: Pennsylvania Commonwealth Court

11 A.3d 598

WEST PENN ALLEGHENY HEALTH SYSTEM d/b/a Allegheny General Hospital, Petitioner

v.MEDICAL CARE AVAILABILITY AND REDUCTION OF ERROR FUND (MCARE) and Kiana Townes, a Minor, by Tamara Blanchard, Guardian, Respondents.

Commonwealth Court of Pennsylvania.

Argued Sept. 13, 2010.

Decided Dec. 21, 2010.

Steven J. Forry, Pittsburgh, for petitioner.

Cindy E. Sheaffer, Harrisburg, for respondents.

BEFORE: LEADBETTER, President Judge, and BROBSON, Judge, and FLAHERTY, Senior Judge.

OPINION BY President Judge LEADBETTER.

West Penn Allegheny Health System d/b/a Allegheny General Hospital (Allegheny General) has filed an application for summary relief in its declaratory judgment action filed against the Medical Care Availability and Reduction of Error Fund (MCARE Fund) and Kiana Townes, a minor, in this Court's original jurisdiction. The MCARE Fund has also filed a cross-application for summary relief. We are asked to decide whether the MCARE Fund's obligation under Section 715 of "the Medical Care Availability and Reduction of Error (MCARE) Act" (MCARE Act), Act of March 20, 2002, P.L. 154, as amended, 40 P.S. § 1303.715, to defend and pay "extended claims" up to $1,000,000 per occurrence of a breach of contract or tort is subject to the MCARE Fund's annual aggregate liability limit set forth in other provisions of the MCARE Act and its predecessor, the Health Care Services Malpractice Act (Malpractice Act), Act of October 15, 1975, P.L. 390, as amended, 40 P.S. §§ 1301.101-1301.1004.

I.

The issue raised by the parties involves the following statutory framework. In 2002, the Legislature repealed the Malpractice Act and enacted the MCARE Act in its place. Both Acts set forth a stated purpose to make medical professional insurance obtainable at an affordable and reasonable cost. Section 102(3) of the MCARE Act, 40 P.S. § 1303.102(3); Section 102 of the Malpractice Act, 40 P.S. § 1301.102. Similarly, each of the Acts established a fund for the payment of claims.¹ Section 712(a) of the MCARE Act, 40 P.S. § 1303.712(a), provides:

There is hereby established within the State Treasury a special fund to be known as the [MCARE Fund]. Money inthe fund shall be used to pay claims against participating health care providers ² for losses or damages awarded in medical professional liability actions against them in excess of the basic insurance coverage required by section 711(d) [of the MCARE Act, 40 P.S. § 1303.711(d) ],³ liabilities transferred in accordance with subsection (b) ⁴ and for the administration of the fund. [Emphasis and footnotes added.]

Subsection (c) goes on to provide both per occurrence and annual aggregate limits for the fund's coverage, varying in amounts for successive years. Under the MCARE Act, the MCARE Fund serves primarily as "a statutory excess carrier that provides excess medical malpractice insurance coverage to the extent a health care provider's liability exceeds its basic coverage in effect at the time of an occurrence." Fletcher v. Pa. Prop. & Cas. Ins. Guar. Ass'n, 603 Pa. 452, 454-55 n. 2, 985 A.2d 678, 680 n. 2 (2009) (emphasis added).⁵ There is no question that both the per occurrence and annual aggregate limits set out in subsection (c) apply to this excess coverage.

The issue before us arises because the MCARE Fund, like the CAT Fund under the Malpractice Act before it, assumes an additional role as a primary insurer. Section 715 of MCARE Act provides under the heading "Extended claims":

(a) General rule.—If a medical professional liability claim against a health care provider who was required to participate in the Medical Professional Liability Catastrophe Loss Fund [CAT Fund] under section 701(d) of the ... Malpractice Act ... is made more than four years after the breach of contract or tort occurred and if the claim is filed within the applicable statute of limitations,⁶ the claim shall be defended bythe [Insurance Department] if the department received a written request for indemnity and defense within 180 days of the date on which notice of the claim is first given to the participating health care provider or its insurer....

(b) Payment.—If a health care provider is found liable for a claim defended by the department in accordance with subsection (a), the claim shall be paid by the fund [MCARE Fund]. The limit of liability of the fund for a claim defended by the department under subsection (a) shall be $1,000,000 per occurrence.

(c) Concealment.—If a claim is defended by the department under subsection (a) or paid under subsection (b) and the claim is made after four years because of the willful concealment by the health care provider or its insurer, the fund shall have the right to full indemnity, including the department's defense costs, from the health care provider or its insurer.

(d) Extended coverage required.—Notwithstanding subsections (a), (b) and (c), all medical professional liability insurance policies issued on or after January 1, 2006, shall provide indemnity and defense for claims asserted against a health care provider for a breach of contract or tort which occurs four or more years after the breach of contract or tort occurred and after December 31, 2005. [Emphasis and footnote added.]

The obligation of the MCARE Fund under Section 715 and the previous obligation of the CAT Fund under Section 605 of the Malpractice Act to defend and fully indemnify health care providers for claims against them is commonly referred to as "first-dollar indemnity." Pa. Med. Soc'y Liab. Ins. Co. v. Med. Prof'l Liab. Catastrophe Loss Fund, 577 Pa. 87, 90, 842 A.2d 379, 381 (2004). Notably, while Section 712 sets out both per occurrence and annual aggregate limits for excess claims, Section 715 sets out only a per occurrence limit for these "first dollar" or "extended" claims, which gives rise to the present dispute.

II.

In June 2008, Tamara Blanchard, the parent and guardian of Kiana Townes, filed a medical malpractice action against Allegheny General on behalf of Townes in the Court of Common Pleas of Allegheny County. Blanchard alleged that Townes was born on March 29, 1998 at Allegheny General by an emergency C-section and that Townes experienced seizures at birth and was diagnosed with birth asphyxia and multi-organ dysfunction as a result of the negligent care of Allegheny General and its nursing staff on the day of her birth. In July 2008, Gateway Risk Services, Inc., which provides claims services for Allegheny General's professional liability insurance carrier, sent the MCARE Fund notice of a potential extended claim under Section 715 of the MCARE Act and asked the MCARE Fund to defend and indemnify Allegheny General for Townes' claim.

In a letter dated September 25, 2008, the MCARE Fund's chief counsel informed Allegheny General that the MCARE Fund had accepted Townes' action as an extended claim under Section 715 of the MCARE Act.⁷ The chief counselfurther stated that the MCARE Fund was required to provide Allegheny General with a legal defense and indemnity coverage up to $1,000,000 for each occurrence, but that "any exhaustion of aggregate limits may affect available coverage." The trial court scheduled a jury trial on Townes' action for March 16, 2010. Before the case reached a jury verdict, the parties settled the action for $1,100,000 on March 26, 2010, which settlement was approved by the trial court.

Before the settlement, Allegheny General filed a petition for review in the nature of a declaratory judgment action against the MCARE Fund and Townes in this Court's original jurisdiction. Allegheny General sought a declaration that the MCARE Fund's $1,000,000 per occurrence liability limit under Section 715(b) of the MCARE Act is not subject to the MCARE Fund's annual aggregate liability limit. After the close of pleadings, Allegheny General filed an application for summary relief, and the MCARE Fund filed a cross-application for summary relief. The MCARE Fund alleged that the MCARE Fund's annual aggregate liability limit for 1998, when Townes' cause of action accrued, was $2,700,000 under Section 701(d)(1) of the Malpractice Act and that Allegheny General had eroded the MCARE Fund's 1998 annual aggregate liability limit and had only $394,917 available to cover Townes' extended claim. The MCARE Fund averred that it agreed to pay Blanchard $394,917 on December 30, 2010. This Court issued a briefing schedule and ordered the matter to be submitted for expedited consideration. Blanchard advised the Court that she would not file a brief and would not participate in oral argument.

Allegheny General argues that the MCARE Fund is required to pay Allegheny General $1,000,000 in first-dollar indemnity coverage under the plain and unambiguous language in Section 715(b) of the MCARE Act and that the MCARE Fund's annual aggregate liability limit in other provisions of the Malpractice Act and the MCARE Act does not apply to extended claims. Allegheny General maintains that the Legislature included the MCARE Fund's annual aggregate liability limit for excess claims but omitted such a limit for extended claims in Section 715(b) of the MCARE Act, in order to relieve primary insurance carriers from the effects of very long tails of potential liability due to the discovery rule and the tolling of the statute of limitations period for minors, and to provide stability and predictability in assessing accurate insurance rates. Allegheny General asserts that the MCARE Fund should have advised health care providers to purchase tail policies ⁸ to avoidpotentially significant liability exposure resulting from the erosion of the annual aggregate limit.

The MCARE Fund counters that both excess claims and extended claims are subject to the MCARE Fund's annual aggregate liability limit when Section 715 and other provisions of the MCARE Act are construed together. The MCARE Fund states:

[I]t makes sense that, under either excess coverage or Section 715 coverage, the health care provider's M[CARE] coverage is

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