Waiver of indemnification claim in settlement agreement sways decision in coverage reallocation suit
In Interstate Fire and Casualty Co. v. Washington Hospital Center Corp., No. 10-1193 (D.D.C. March 28, 2012), the Court was faced with a dispute between two insurers as to the proper allocation of the cost of a multi-million dollar settlement of a medical malpractice action. The Court awarded summary judgment to Interstate, thus requiring the Washington Hospital Center's insurer to reimburse Interstate for a settlement of $3,055,000, plus fees and expenses.
To understand the dispute, a brief discussion of the underlying claim is required.
The underlying action was a medical malpractice claim brought in Superior Court by a patient against the Washington Hospital Center and two doctors. The Washington Hospital Center filed a third-party complaint against a temporary nurse staffing agency, Progressive Nursing Staffers of Virginia, Inc., and a temporary nurse involved in the plaintiff's post-op care. The third-party complaint was based, in part, on a contractual indemnification clause in Progressive's contract with WHC (the "Temporary Staffing Agreement"). The Washington Hospital Center was insured by Greenspring Financial Insurance Limited ("GFIL"). The nursing staff agency and the temporary nurse were insured by Interstate Fire and Casualty Company ("Interstate"). The medical malpractice action was settled for a total of $4,105,000, of which Interstate paid $3,055,000 and GFIL paid the remainder. The settlement agreement, however, was drafted to as to preserve Interstate's rights to seek reallocation of the settlement.
Following the settlement, Interstate filed a declaratory judgment action in D.C. federal court to pursue reallocation of the settlement. Interstate's arguments, in essence, were that the temporary nurse it supplied to WHC was, for purposes of GFIL's insurance, an employee of WHC, and that under the "other insurance" clauses of the GFIL policy and the Interstate policy, GFIL was primary and Interstate was excess. After some discovery, the parties filed cross motions for summary judgment.
The District Court awarded summary judgment to Interstate, finding that the temporary nurse was an employee within the meaning of the GFIL policy. This finding was based on the fact that it was undisputed that WHC had the right to control the temporary staffing nurse's conduct while working at WHC. This included the right to determine and ascertain what the assignment of the individual nurse would be, and what kind of medical care or attention to give to a particular patient. Although Court did not find all the relevant factors governing the employee/employer relationship weighed against WHC, the power to control the servant's conduct is the most important factor, and along with the weight of some other factors, was enough to lead the Court to find that the temporary nurse and WHC had an employee/employer relationship.
Interestingly, the Court noted that the Temporary Staffing Agreement specified that Progressive nurses remain Progressive employees. The Court found that that was parol evidence that it could not consider when interpreting the insurance contract between WHC and GFIL, and secondly, that nothing in D.C. law would prohibit the finding that the temporary nurse was en employee of both Progressive and WHC at the time of her alleged negligence.
The District Court also found that under the competing "other insurance" clauses, Interstate was clearly in an excess position.
The District Court did not find it necessary to reach the question whether the responsibility for covering the temporary nurse's liability was determined by the indemnification agreement in the Temporary Staffing Agreement, because the Court found that WHC had given Progressive a complete general release of any liability under the Temporary Staffing Agreement.
The Temporary Staffing Agreement included an indemnification clause under which Progressive was required to "indemnify WHC for claims arising from the negligence of Progressive or its registered nurse employees who were provided to WHC", and the indemnification clause served as the basis for the third-party complaint filed by WHC in the underlying action. The District Court found that "the indemnification clause was waived by the broad language of the Settlement Agreement . . . [in the medical malpractice action]."
Consequently, as a result of the Settlement Agreement, GFIL lost its right to step into WHC's shoes to sue for indemnification. Thus, the Court rejected GFIL's argument against circular litigation, i.e., that if the Court finds it liable, GFIL through subrogation, could file suit against Progressive for indemnification, and Progressive would then seek reimbursement from Interstate, resulting in Interstate being ultimately responsible.
Impact: This decision underscores that in any case where a settlement agreement is drafted so as to "carve out" one side's rights to pursue a coverage reallocation action, the other side must be equally careful to preserve its position in the anticipated coverage action.