Journal
AMERICAN BANKRUPTCY INSTITUTE
Issues and Information for Today’s Busy Insolvency Professional
The Medical Malpractice Claim Dilemma
Contributing Editor: business files for bankruptcy or otherwise
Nancy A. Peterman About the Authors cannot pay the self-insured portion of
Greenberg Traurig LLP; Chicago the coverage, the medical malpractice
Nancy Peterman is a shareholder at
petermann@gtlaw.com claimant or the insured (the health care
Greenberg Traurig LLP in Chicago and
Also Written by: business) may expect the excess insurer
chairs its Business Reorganization and
Jason L. Weidberg to “drop down” and pay the entire
Bankruptcy Department. She is an ABI
Greenberg Traurig LLP; New York malpractice claim, including the self-
Director and is a contributing author
weidbergj@gtlaw.com insured portion. The excess insurer, on
to the Health Care Insolvency Manual,
the other hand, will likely argue that they
O
ver the years, many health available at www.abiworld.org/abistore.
have no obligation to make any payments
care businesses, particularly Jason Weidberg is an associate in
until the health care business has paid the
hospitals, have struggled with the Business Reorganization and
self-insured portion in full. As you may
procuring medical malpractice insurance. Bankruptcy Department of Greenberg
suspect, and as discussed herein, most
The costs associated with obtaining Traurig’s New York office focusing
courts have reached a middle ground on
such insurance have been high. Many on chapter 11 debtors’ and creditors’
this issue.
health care businesses have elected to rights, workouts and restructurings,
The dilemma of
be self-insured for medical malpractice adversary proceeding litigation,
excess insurance
claims and are typically self-insured up corporate litigation and securities law.
coverage dates
to certain levels with excess insurance back to the 1920s.
coverage above such amounts. bankruptcy estate, a number of possible In Zeig v. Mass.
Depending on the problems may arise. Bonding & Ins.
types of services This article explores the ability to Co., 2 the plaintiff
provided by the “tap” the excess insurance coverage purchased an excess-
health care business, when a health care business has insurance policy.
in a bankruptcy case, insufficient funds to satisfy the self- Jason L. Weidberg In consideration for
the dollar amount of
medical malpractice
claims may be large
and may significantly Intensive Care
Nancy A. Peterman increase the size
of the unsecured
claim pool. These claims may present insured portion of the coverage, as well the reduced premium charged for the
an obstacle for a health care business to as certain procedures utilized in cases policy, the excess coverage protected
emerge from bankruptcy and may limit in order to efficiently liquidate these the plaintiff for losses above $15,000.
the restructuring options. As a result, medical malpractice claims to pave the The policy also required the plaintiff to
understanding the medical malpractice way for a health care business to emerge purchase primary insurance of at least
insurance coverage and the related from bankruptcy. $5,000. The relevant provision in the
exposure is an important element in policy stated that excess coverage “shall
preparing a bankruptcy filing for any Excess Insurance: apply and cover only after all other
health care business. “Drop Down” Coverage insurance herein referred to shall have
A bankruptcy filing can dramatically Many health care businesses are self- been exhausted in the payment of claims
shift the landscape for both the insured up to certain amounts for medical to the full amount of the expressed limits
insured and the insurer with respect to malpractice claims with excess insurance of such other insurance.” 3 The claims
their rights and obligations under an coverage above such self-insured against the insurers providing coverage
insurance policy. Insurance policies, amounts. Therefore, when a health care below the excess policy floor were settled
if deemed to be an asset of the estate, 1 See 11 U.S.C. §541(a)(1). The vast majority of courts have held that by the plaintiff for less than their face
will generally fall under the jurisdiction insurance policies are considered to be property of the estate. In re
Titan Energy Inc., 837 F. 2d 325 (8th Cir. 1988) (ruling that insurance amount. The issue in Zeig was whether
of the bankruptcy court as property of policies that indemnified debtor for loss were property of estate the excess insurer was liable only to the
because estate was worth more with these policies than without them);
the estate. 1 Once an insurance policy MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988) 2 23 F.2d 665 (2d Cir. 1928).
is determined to be an asset of the (finding that product liability insurance policies are property of estate). 3 Id. at 665.
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extent of the excess insurance policy The claim bifurcation in this excess insurers to “drop down” and pay
(i.e., for losses above $15,000) or for no plan was created to deal with two for losses under the primary insurance
amounts at all. The excess insurer argued contested malpractice claims to which policy or the SIR amount,9 but one should
that since the plaintiff settled with the a self-insured retention (SIR) amount always review the express language of
primary insurer below the face amount applied. Pursuant to the terms of the the policy in order to determine the type
of those policies, the excess insurance applicable insurance policy, the debtor of coverage.
was not owed and further argued that it was required to pay a SIR amount of
was necessary for the plaintiff to actually $1 million for each claim before the Practically Dealing with
collect the full amount of the primary excess insurer was required to satisfy Medical Malpractice Claims
insurance policies, in order to “exhaust” any remaining insurance obligations. As previously noted, depending on
the primary insurance. The court rejected The excess insurer objected to the plan the type of insurance coverage available
this interpretation, and held that it found and argued that the plan impermissibly and the type of services provided by a
nothing in the excess insurance policy allowed the debtor and its former health care business, the number and
before it that required a construction so partners to avoid the SIR obligations. amount of medical malpractice claims
burdensome to the insured. The excess The court held that the SIR was satisfied may be a significant obstacle to the
insurer was liable for those amounts due by the plan’s grant to Class IV creditors health care business’s emergence from
under the excess policy, as though the of an unsecured claim for the SIR bankruptcy. As a result, courts have
primary coverage had been “exhausted” portion of their recovery. Furthermore, employed various procedures in order
and paid in full.4 the excess insurer was not liable to the to efficiently liquidate these claims and
This same reasoning was adopted in Class IV claimants for the SIR amount. pave the way for the health care business
Pereira v. National Union Fire Ins. Co. Rather, the SIR amount was treated as a to emerge from bankruptcy.
of Pittsburgh,5 a case involving an action general unsecured claim under the plan For example, in In re Saint Vincents
for the collection of proceeds under a and received the same distribution as Catholic Medical Centers of New York
directors and officers liability insurance any other unsecured claim. The excess (SVCMC),10 a number of requests were
policy. Pereira involved a multi-layering insurer was only liable for those amounts made for relief from the automatic stay
system of excess insurance coverage for in excess of the SIR amount that were to pursue alleged medical malpractice
the insured which was provided by three covered by the excess insurance policy. claims. SVCMC proposed a systematic
different excess insurers. The first layer In the end, the court found that the plan’s approach to dealing with these requests
of excess insurance was written by an treatment of the SIR obligation was that hinged on whether there was
insurance company that had subsequently consistent with the terms of the excess primary commercial insurance available
gone into liquidation and, therefore, was policy and, therefore, was permissible.7 for the asserted claims and whether a
unable to pay the insured amount. The “Drop down” cases arise in claimant was prepared to limit his or her
third-layer provider of excess insurance situations involving the insolvency of recovery to available primary insurance.
argued that it was not responsible for the primary insurer and in situations The alleged medical malpractice
providing coverage because the excess where excess insurers have been lawsuits constituted, in the aggregate, a
layers below were not and would not asked to “drop down” because the potentially significant liability for which
be exhausted. The district court rejected policyholder has filed for bankruptcy SVCMC had only limited third-party
this argument and stated that to interpret and is unable to, or fails to, pay the commercial primary insurance available.
the excess insurance policy to excuse deductible or SIR amount. Generally, SVCMC generally maintained
the excess insurers from providing courts have held that excess insurers three layers of professional liability
coverage within their respective layers are not required to “drop down” and insurance: (1) commercial insurance;
on account of the unrelated insolvency pay policyholders for losses below the (2) self-insurance, but only in part; and
of an intermediary insurer would cause excess insurance coverage.8 However, (3) excess insurance. With respect to
undue hardship on the insured. the language of the excess policy will medical malpractice claims, bankruptcy
Finally, in In re Keck Mahin & Cate,6 be key in reaching any such conclusion. courts may lack jurisdiction to decide the
the debtor was before the bankruptcy court Many insurance companies have amount or the validity of these claims
for the confirmation of the third amended contemplated the exact situations and may not have the authority to fix
plan. There were only two objectors, one described above and attempted to the amount of a distribution to be made
of which was the debtor’s malpractice incorporate specific language into their to a holder of a claim of this type under
insurance provider. The malpractice insurance policies to address when and a chapter 11 plan of reorganization.11
insurer was potentially responsible for two if excess coverage is “tripped.” If the A claim for medical malpractice may
substantial claims dealt with in the plan. As language in the policy is ambiguous have to be litigated in state court or
part of the plan, class IV claimants were or unclear, courts may require excess federal district court. Given the large
entitled to receive the proceeds of any insurers, in limited cases, to “drop down” 9 To minimize drop-down risk for excess insurers, policies typically
include specific provisions, such as “in the event there is no recovery
applicable insurance policy awarded as a and provide insurance coverage for all available to the insured as a result of the bankruptcy or insolvency of
result of legal malpractice. If any portion of loses suffered by the insured, including the underlying insurer, the coverage hereunder shall apply in excess
of the applicable limit of liability.” See Lamb Bros. Lumber Co. v. South
these malpractice claims were not satisfied any SIR amount. At the current time, Carolina Ins. Co., 366 S.E. 2d 388 (Ga. Ct. App. 1988); American Re-Ins.
by insurance proceeds, then such claims most courts have upheld provisions in Co. v. Universal Builders Supply Inc., 532 N.Y.S. 2d 712 (N.Y. Sup.
Ct. 1988) (“Under New York law, the result is clear: where an excess
would become class VI claims. Class VI insurance contracts that do not require insurer defines its obligations…it does not become an insurer of the
solvency of the underlying insurers.”); St. Vincent’s Hosp. & Med. Ctr.
was comprised of the claims of general 7 See In re Keck Mahin & Cate, 241 B.R. at 595-97. The court also
V. Ins. Co. of North America, 457 N.Y.S. 2d 670 (N.Y. Sup. Ct. 1982)
unsecured creditors. pointed out in its opinion that absent a drop-down provision, an insurer
is not obligated to pay an insured’s initial self-insured retention amount.
(holding that insolvency of and/or inability to identify primary insurance
carrier does not require excess carrier to “drop down” and cover
4 Id. at 666. See Home Ins. Co. v. Hooper, 294 Ill.App.3d. 626, 633 (1998). shortfall left by primary policy).
5 2006 WL 1982789 (S.D.N.Y. July 12, 2006). 8 See, e.g., In re Amatex Corp., 107 B.R. 856 (E.D. Pa. 1989) (denying 10 See St. Vincent’s Hosp. & Med. Ctr. V. Ins. Co. of North America, 457
6 241 B.R. 583 (Bankr. N.D. Ill. 1999). debtor’s motion to require insurer to drop down and pay SIR amount). N.Y.S. 2d 670 (N.Y. Sup. Ct. 1982).
44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org
amount of medical malpractice claims, establishing a common pool. Most
the potential obligations of SVCMC importantly, SVCMC believed it would
and the numerous lift-stay motions, be difficult to convince the excess-
SVCMC developed a proposed uniform insurance providers to contribute to a
systematic approach to resolving the lift- common pool because of a significant
stay motions.12 This approach divided the risk of being required to make “drop-
medical malpractice claims into three down” payments.
categories: (1) medical malpractice Ultimately, the above procedures
claims where commercial insurance was were generally implemented in
available to pay the SVCMC debtors’ SVCMC’s bankruptcy case in order to
defense costs and a medical malpractice liquidate the malpractice claims. Similar
claimant was willing to limit his or procedures have been used in other
her recovery to available commercial similar cases to efficiently liquidate the
insurance (in which instance the stay claims and maximize the benefits of the
would be lifted to allow those claims commercial insurance.
to proceed in state court to judgment so
the claimant could collect any insurance Conclusion
recovery); (2) medical malpractice It is important to consider the
claims where commercial insurance potential problems that may arise
was available to pay SVCMC’s defense in a health care bankruptcy case
costs but the medical malpractice involving medical malpractice claims.
claimant was unwilling to limit his or If a particular case involves numerous
her recovery to available commercial prepetition malpractice claims, it may
insurance (in which instance the stay flood the unsecured claim pool and dilute
would be lifted to allow those claims possible distributions. It is essential for
to proceed in state court to liquidate the bankruptcy practitioner to be aware
the claim but not allow recovery on any of the effect that a bankruptcy filing may
judgment); and (3) medical malpractice have on the types of insurance coverage
claims where commercial insurance in a bankruptcy case, how to maximize
was not available and the claimant that insurance coverage’s value and
and SVCMC were unable to agree to a how best to structure a procedure for
methodology to liquidate the claim (in liquidating the medical malpractice
which instance the automatic stay would claims in order to efficiently and
remain in effect until a compulsory effectively deal with these claims and not
mediation process was implemented). unduly delay the health care business’s
The rationale behind this approach was emergence from bankruptcy. n
intended to balance SVCMC’s need to Reprinted with permission from the ABI
propose a plan, the limited jurisdiction Journal, Vol. XXVIII, No. 8, October 2009.
of the bankruptcy court to decide the
medical malpractice claims, and the The American Bankruptcy Institute is a
availability of commercial insurance to multi-disciplinary, nonpartisan organization
pay defense costs or claims themselves devoted to bankruptcy issues. ABI has
without diminishing estate assets. more than 12,300 members, representing
Other alternatives were considered, all facets of the insolvency field. For more
such as using any insurance proceeds information, visit ABI World at www.
to establish a pool or common fund for abiworld.org.
the proportionate benefit of all medical
malpractice claimants. A number of
concerns were raised with respect to
11 28 U.S.C. §157 (2006). Section 157(b)(2)(B) exempts “the liquidation or
estimation of contingent or unliquidated personal injury tort or wrongful
death claims against the estate for purposes of distribution in a case
under title 11.” In addition, §157(b)(5) of title 28 provides that “personal
injury tort and wrongful death claims shall be tried in the district court
in which the bankruptcy case is pending, or in the district in which the
claim arose, as determined by the district court in which the bankruptcy
case is pending.” Although bankruptcy courts may not be permitted to
adjudicate medical malpractice claims, they may estimate these claims
for the purpose of determining the feasibility of a chapter 11 plan.
See In re Federal-Mogul Global Inc., 330 B.R. 133, 154 (D. Del. 2005
(permitting estimation for purposes of plan); In re Owens Corning, 322
B.R. 719 (D. Del. 2005).
12 According to the debtor’s statement in support of its proposed
approach, a number of factors were considered, including, without
limitation: (1) limited bankruptcy court jurisdiction over the medical
malpractice claims; (2) availability of commercial insurance covering
the SVCMC debtors’ liabilities arising from the medical malpractice
claims; (3) the lack of any commercial insurance for liabilities arising
from the medical malpractice claims; and (4) the payment of the
SVCMC debtors’ defense costs without diminution of available primary
insurance coverage to pay claims.
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