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New Hampshire Supreme Court Issues an Important Decision Regarding Professional Liability Insurance Umbrella Coverage
Exeter Hospital, Inc. v. Steadfast Insurance Company, No. 2015-0624 (N.H. June 22, 2017)
The New Hampshire Supreme Court ruled in favor of Exeter Hospital in a dispute with its professional liability carrier over the applicable limits of insurance under an umbrella Health Care Professional Liability policy. Exeter was primarily insured under a Self-Insurance Trust Agreement (“SIT”) which provided professional liability coverage in the amount of $1 million per medical incident, with a $4 million annual aggregate cap. Exeter also maintained a policy with Steadfast which provided excess health care professional liability coverage, which included a Retained Limit of $100,000. The policy provided that Steadfast “will pay only such damages that are in excess of the Retained Limit specified in Item 4 of the Declarations or that are in excess of the underlying limit, whichever is greater….” Improper conduct by a cardiovascular technician which resulted in his infecting many patients with the Hepatitis C virus led to many claims against Exeter.
Once Exeter had paid approximately $3 million in claims through its SIT, Steadfast accepted Exeter’s tender of defense of the remaining claims. However, it advised Exeter that once the SIT aggregate limit was exhausted, it would only pay damages in excess of the Retained Limit of $100,000 for each medical claim. Steadfast maintained that once the SIT limit was exhausted, the underlying limit effectively became zero and therefore, the Retained Limit became the trigger to determine Steadfast’s obligation to pay any damages incurred post exhaustion of the SIT. Exeter took the position that once the SIT’s aggregate limit was reached, it did not have to pay the Retained Limit amount of $100,000 for each remaining claim, arguing that the policy required Exeter to pay either the amount of its underlying insurance (the limit of the SIT) or the Retained Limit but not both.
Applying its well–established standards for construing insurance policies, the Supreme Court concluded that both Exeter and Steadfast offered plausible interpretations of the relevant policy language. Given that one of those interpretations favored coverage, the Court ruled that the resulting ambiguity would be construed in favor of Exeter. This construction of the policy was consistent with the purpose of an umbrella policy, designed to serve as a gap filler, picking up where primary coverages end. Justice Lynn agreed with the result of the majority opinion but offered a special concurrence. While sympathetic to Steadfast’s position that under the policy, the “applicable underlying limit” is a variable amount that reduces as claims are paid, Justice Lynn noted other provisions of the policy which did not call for a comparison between the “applicable underlying limit” and the Retained Limit, including provisions which relieved Steadfast of so-called “drop down liability” in the event of a bankruptcy, insolvency or any refusal or inability to pay by the insured or underlying insured. Accordingly, he agreed that a reasonable interpretation of the policy was that Steadfast’s liability for each claim is not subject to the $100,000 Retained Limit after exhaustion of the $4 million annual aggregate of Exeter’s SIT.
For further information about this decision, please contact Margaret H. Nelson.