Connecticut Appeals Court Rules that Guaranty Company and Insolvent Insurance Company are Not Liable for Malpractice Settlement

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494499_74504756_03202012.jpgThe Appellate Court of Connecticut issued an opinion on a case that could have an impact on other personal injury claims. In Connecticut Insurance Guaranty Association v. Drown, an appellate panel held that the appellant, a guaranty company covering an insolvent insurance company, is not obligated to pay a settlement from the malpractice claim on behalf of the insurance company. This leaves the appellees, who had entered into a settlement agreement with a clinic, with no means of collecting the judgment.

The lawsuit was originally filed on behalf of Joshua Drown by his parents in May 2000. Drown’s mother, while pregnant with him, was a patient at Health Specialists. She alleged that two doctors who treated her failed to diagnose a placental abruption, which subsequently caused brain damage in Joshua Drown and physical injuries in the mother. The lawsuit sought to impose vicarious liability on Health Specialists for the alleged negligence and malpractice of the two doctors.

Health Specialists, according to the court opinion, reported the claim to its insurance carrier, Exchange, in a timely manner. Exchange provided counsel to defend against the lawsuit. In September 2006, the counsel for Health Specialists did not appear for a court-scheduled mediation. Exchange then sent a letter stating that it was denying coverage based on an exclusion in the policy for claims based solely on injuries caused by individual medical professionals. The counsel retained by Exchange for Health Specialists stopped appearing in court, and in December 2006 the court entered a default judgment in favor of the Drowns. The Drowns and Health Specialists signed a settlement agreement in March 2007 in which Health Spcialists agreed to pay the insurance policy limit amount of $2 million, and the court dismissed the case against Health Specialists. The Drowns agreed not to directly pursue Health Specialists to recover the settlement amount.

Exchange filed for bankruptcy not long after this, and a New Jersey bankruptcy judge ordered a liquidation. The Connecticut Insurance Guaranty Association became legally obligated to pay some “covered claims” based on Exchange’s policy contracts. In early 2009, the Association filed motions for declaratory judgment and summary judgment, arguing that the exclusion originally cited by Exchange in denying the claim relieved the Association of the obligation to pay. The defendants filed a cross-motion for Summary Judgment, arguing that the Association was responsible for the entire settlement amount.

The trial court granted the defendants’ motion and ruled against the Association. It also reportedly held that the Association was estopped from enforcing the provisions of the insurance policy because its predecessor, Exchange, breached its duty to Health Specialists to defend them in the litigation. The association appealed, and the appeal was heard in October 2011.