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Defense Digest

The Continuing Evolution of Derivative Claims

Defense Digest, Vol. 28, No. 12, December 2022

December 1, 2022

by Maura Waters Brady

Key Points:

  • Through derivative claims, plaintiffs often seek to find additional sources of funds to cover judgments or settlements in cases valued in excess of a doctor’s usual $1 million liability policy.
  • These attempts need to be evaluated, as they may place a health care provider’s personal assets at risk.

It is obvious to all of us who practice in the health care defense litigation field that both judgments and settlements have increased in value. In contrast, the availability of insurance coverage to cover those claims has actually decreased. While most doctors continue to maintain the minimum required $1–$3 million policy for their own liability, many of their practices have switched their policies to shared limit policies, which do not provide the “excess coverage” that has been traditionally available in a separate group policy.

For plaintiffs, the obvious question is where to find additional sources of funds to cover judgments or settlements in cases valued in excess of that usual $1 million policy. If plaintiffs are thinking about this, we should be thinking about it, too. In the last few years, we have seen plaintiffs file a variety of motions seeking to expand liability, including attacking the charitable immunity status of hospitals based upon their profits and seeking to obtain information about the personal assets of individual physicians who own thriving practices. These lines of attack have only resulted in minimal success and will need legislative input to support such approaches.

However, working within the confines of the current case law, we are now seeing new approaches to hold parties in cases on derivative claims for the negligence of another physician. In recent trial court opinions, we have seen corporate defendants brought into cases as direct defendants where a franchisee has been named as a defendant and, in another, a surgeon held in on a derivative claim in a case against a defendant anesthesiologist. In both of these cases, the rulings arguably put physicians’ personal assets at risk.

Estate of Cordero v. Christ Hospital, 958 A.2d 101 (N.J. Super. App. Div. 2008) confirmed that when a hospital provides a doctor to a patient and the circumstances are such that a reasonable patient would believe that the doctor’s care is rendered on behalf of the hospital, an agency relationship is presumed unless rebutted. Accordingly, it has become common practice to make patients aware that the physicians were not employees of the hospital but of a different practice group.

In a case where the treating medical care provider worked in a franchise location, the doctor was questioned during his deposition as to what information was provided to the patient to make it clear that he was not an employee of the corporate franchisor. The doctor denied having specifically advised the patient that he was not an employee of the corporation; consequently, the corporation was then joined as a defendant on a theory of “apparent authority.” However, pursuant to the franchise agreement, the corporate defendant had a right to seek indemnification from the provider. In the event that a judgement is entered against the defendant/provider for an amount in excess of his policy limits, he will be personally liable to the corporation for the excess amount.

In another case, the court denied a motion for summary judgment brought by the defendant surgeon and the surgeon’s practice, which owns a surgical center, in a case brought against the codefendant anesthesiologist on a claim of “apparent authority.” The court found the defense argument that Cordero did apply, as it the practice group was not a hospital, was “a distinction with no relevance.” The practice group was in the business of offering medical care that required the services of an anesthesiologist, and the difference, therefore, was merely “one of semantics.” The court noted that the anesthesiologist was identified as a member of a different practice and, arguably, was an independent contractor.

Nonetheless, the extent to which the practice group represented that they “would provide the anesthesiologist” and that “the anesthesiologist was part of the surgical team” was an indicator of an apparent agency relationship upon which a reasonable fact finder could find the practice group “vicariously liable” for the actions of the anesthesiologist. That fact, therefore, remained in dispute, and the jury was required to decide whether the defendants could overcome the presumption of agency.

The court made it clear it was not holding the doctor in the case under a theory of “Captain of the Ship,” which is not a recognized doctrine in New Jersey, but there remained an open question as to whether the doctor could be vicariously liable for the actions of other individuals involved in the surgical procedure. Of greater concern is the fact that the surgeon maintains a policy of insurance relative to his medical care of a patient. The practice group maintains a policy of insurance that “shares” policy limits with the doctor’s policy but denies coverage for any other physician’s medical care. Should the jury find that a reasonable patient would have concluded the practice group was vicariously liable for the care of the anesthesiologist, the group could be held responsible for any judgment in excess of the anesthesiologist’s policy. However, since there is no coverage for another physician’s care, the plaintiff could argue the physician who owns the group is personally liable for the excess judgment.

On the defense side, we should be facing these issues head-on. We know that in cases where facts are very specific, appeal of issues such as these can often lead to unfavorable precedent. The risk of personal liability could require recommending settlement of an otherwise defensible case. Medical care providers who own or have relationships with other corporations, such as surgical centers, urgent care centers or corporations with multiple sites and franchises, should be made aware of these risks. We should anticipate arguments like these and evaluate the practices of both the provider and the corporation to determine whether an argument for vicarious liability would be successful and potentially expose the doctor to personal liability. Even if it is not an issue in the case in front of us, it may be an issue in a future matter. Evaluating and addressing these issues now may go a long way to preventing an unfavorable opinion in the future when, inevitably, this issue is considered on appeal.

Firm Highlights

Thought Leadership

Florida Supreme Court Rules Florida Statute §627.70152 Does not Apply Retroactively

In a decision that resolves years of appellate uncertainty and confirms that insurers and insureds alike can rely on the legal framework in place when a policy is issued, the Supreme Court of Florida last week found that Florida Statute §627.70152, which involves an insured’s requirement to provide an insurer with pre-suit notice before filing a suit, cannot be applied retroactively. In Universal Property & Casualty Insurance Company v. Hughes, the Court was presented with the issue of whether the statutory pre-suit notice requirement applied retroactively and whether it would apply to a breach of contract of an insurance policy that was issued before the statute went into effect. Before the Court was an appeal from a homeowner, Ms. Hughes, who sued her insurance carrier, Universal Property & Casualty Insurance Company (Universal) for breach of contract under an insurance policy that was in effect from April 24, 2019 through April 24, 2020. During the policy period, Ms. Hughes suffered a loss and, on May 29, 2019, made a claim for water damage. The carrier investigated the loss and issued payment; Ms. Hughes disputed the payment, finding the amount insufficient for repairs. On July 1, 2021, Florida Statute §627.70152 went into effect, which required insureds to provide notice of intent to initiate litigation against the carrier prior to filing a lawsuit; if an insured filed the lawsuit without complying with §627.70152, a court must dismiss the case without prejudice. On August 4, 2021, Ms. Hughes filed her lawsuit against Universal for breach of contract. Universal moved to dismiss based on her failure to comply with §627.70152. Ms. Hughes contended the notice requirement could not be applied retroactively. The trial court disagreed and dismissed the lawsuit without prejudice, and Ms. Hughes appealed. During the appeal, the Fourth District Court of Appeal, in Cole v. Universal Property & Casualty, 363 So. 3d 1089 (Fla. 4th DCA 2023), ruled that Florida Statute §627.70152 did apply retroactively to policies issued before the effective date of §627.70152. However, the Sixth District Court agreed with Ms. Hughes and overturned the trial court’s ruling, finding the statute could not retroactively apply to policies issued prior to the statute effective date. Thereafter, the other district courts weighed in, with the Third District Court agreeing with the Fourth District Court, and the First, Second and Fifth District Courts agreeing with the Sixth District Court. In resolving the conflict amongst the district courts, the Supreme Court advised “as a general rule, ‘the statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that contract.’ Hassen v. State Farm Mut. Auto. Ins. Co., 674 So. 2d 106, 108 (Fla. 1996). The Court applied the two-step test when deciding whether a statute has retroactive application: “First, the Court must ascertain whether the Legislature intended for the statute to apply retroactively. Second, if such an intent is clearly expressed, the Court must determine whether retroactive application would violate any constitutional principles.” Menendez v. Progressive Exp. Ins. Co., 35 So. 3d 873, 877 (Fla. 2010). In analyzing the Legislature’s intent, the Court must determine whether the Legislature has manifested a clear command for retroactivity in the statutory text.  In review of the statutory text, the Court found nothing in the language of the statute to indicate that the phrase “all suits” was serving another purpose of expanding its reach to suits based on policies that both predate and postdate the enactment of the statute. Buis v. Universal Prop. & Cas. Ins. Co., 394 So. 3d 738, 741 (Fla. 2d DCA 2024). Further, the Court noted the statute has an effective date, which has long been considered to be evidence against retroactive application of a statute. The Court concluded that, on its face, no provision of §627.70152 speaks to application of the statute to insurance policies issued before the statute’s effective date and therefore, the Legislature did not clearly command retroactivity of the statute to include insurance policies issued prior to the enactment of the statute. The Court briefly reviewed Universal’s argument that the presuit notice requirement was procedural, not substantive, and therefore should be applied retroactively; however, the Court agreed with the Sixth District Court’s finding that, in its entirety, §627.70152 transformed an insured’s ability to sue an insurance company under a property insurance policy and an insurer’s obligations to respond to and pay insurance claims, thus making the requirement a substantive change. The Court thereby upheld the decision of the Sixth District and disapproved the decision of the Fourth District in Cole.

Thought Leadership

The Tolling Trap: Filing Alone Will Not Toll the Statute Without Good-Faith Service

The Eastern District of Pennsylvania recently reinforced a critical limitation on bad faith claims, holding that a timely filing alone will not preserve a cause of action absent a good-faith effort to serve the original process. The plaintiff had presented a claim for underinsured motorist benefits to his auto insurer. The insurer evaluated the claim and determined that the plaintiff’s accident-related damages did not exceed the bodily injury liability insurance limits of the at-fault driver and denied his claim. Among other claims, the plaintiff sought to present a claim for insurance bad faith under 42 Pa. C.S.A. § 8371, to which a two year statute of limitation applies. He first filed a praecipe for writ of summons before the expiration of the statute of limitation. However, the plaintiff did not attempt to serve the praecipe or writ until after the statute of limitations had expired. Additionally, the service failed as the plaintiff had mailed the original process to an incorrect address. Despite receipt of the Postal Service’s failure to deliver the original process, the plaintiff did not attempt to re-serve the writ. Two months later, the plaintiff filed a complaint and then successfully served that complaint. The insurer sought to dismiss the plaintiff’s bad faith claim as time-barred by the statute of limitations. The district court agreed. Though the plaintiff had filed a praecipe for a writ of summons prior to the expiration of the statute of limitations, the statute is only tolled if there is a good faith effort to serve that original process. In this case, the court determined that the plaintiff had failed to perform a “good faith effort to serve the original process”. Additionally, though the filing and service of a complaint can serve as alternative original process when the lawsuit is commenced by the filing of a praecipe for a writ of summons, the plaintiff filed his complaint after the statute of limitations had expired. The plaintiff’s bad faith claim was therefore determined to be barred by the statute of limitations and dismissed by the court, with prejudice. A key takeaway for the defense is not to assume that the statute of limitations has been successfully tolled by a plaintiff merely because a praecipe for a writ of summons or complaint has been filed prior to the expiration of the statute. A filed complaint or writ is only part of the equation. The defense should carefully review the docket and filings to confirm that the plaintiff also performed the requisite good faith effort to serve that original process. A thorough review of the docket may reveal that the plaintiff failed to make the good-faith service efforts necessary to toll the statute of limitations.

Thought Leadership

Commonwealth Court Reaffirms the Constitutionality of Act 111's IRE Provisions

In this case, the claimant sustained a work injury of January 6, 1994, which was acknowledged by Notice of Compensation Payable (NCP). After the claimant’s receipt of 104 weeks of temporary total disability benefits, the employer filed a Request for an Impairment Rating Examination (IRE). The IRE was performed in May 2023 and the IRE physician found that the claimant had a 5% whole person impairment, under the AMA Guides. The employer filed a Petition based on the IRE results, and the Petition was granted by the WCJ. During litigation, the claimant argued that the IRE provisions of Act 111 (Section 306(a.3) of the Act) were not applicable to her injury, since it predated June 24, 1996, the date Act 57 went into effect, and that the IRE provisions were unconstitutional. The Workers’ Compensation Judge (WCJ)) granted the Petition and the Board affirmed. On appeal to the Commonwealth Court, the claimant argued that Act 111 violated the nondelegation doctrine and that its retroactive application to the claimant’s injury was unconstitutional. The court rejected the arguments on the basis that they had already found the same arguments without merit in multiple, prior cases. The court also addressed an argument made by the claimant that Act 111 was procedurally defective under the Pennsylvania Constitution because it was only considered on two days in each House after having undergone amendments and reassignments. The court noted that the Pennsylvania Constitution requires every bill to be considered on three different days in each House. The claimant maintained that, according to the legislative history, the bill did not receive three separate days of consideration from each House when it was assigned a new bill number. The court pointed out, however, that the bill number, H.B. 1840 remained constant and was considered on three occasions by the House. Further, the court concluded that minor amendments to the bill were germane to its original subject, which was to modify the Act’s IRE process, in accordance with Protz II.