Hanover American Insurance v. Balfour

HARTZ, Circuit Judge,

concurring and dissenting:

I am pleased to join Judge Kelly’s opinion in resolving the claim against Hanover. But I respectfully dissent from the disposition of the claim against NCMIC. I would reverse the judgment in favor of NCMIC because a malpractice liability policy with *542a duty-to-defend provision requires the insurer to defend a meritless claim that the insured had a professional duty to protect the plaintiff.

A doctor obtains a professional-liability policy to protect herself in case she is sued for professional malpractice. Her concern is not just with meritorious suits, for which she needs insurance protection to pay any judgment. She also is worried about non-meritorious, even frivolous, ones; although ultimately there will be no judgment against her, she could be out a good bit of money for the expense of defending herself. Therefore, she chooses a policy that also pays for the defense of suits claiming (correctly or incorrectly) that she engaged in professional malpractice.

Here, one of the doctor’s patients has been grievously assaulted. It is not at all obvious why the doctor should be hable for the assault, but she is sued. The complaint is creative in coming up with the theory that she had a professional responsibility to protect her patient from the assault by warning the patient of danger from the assailant. To defend the complaint, she will surely argue that a doctor has no duty as a doctor to warn a patient about dangers from other persons. What if this is a very good argument? Such a good argument that almost any court would agree? In that event does the malpractice insurer have no duty to make that argument for her? Can the insurer simply go to court and obtain a declaratory judgment that because the claim has no legal ■merit, it is not really a malpractice claim and the insurer has no duty to defend? I would hope not. I would assume that the duty to defend, which undoubtedly encompasses the duty to defend against a malpractice claim that has no factual basis, also encompasses the duty to defend against a malpractice claim that has no legal basis. Rather than making the no-malpractice argument in a duty-to-defend suit against the doctor, the insurer should make that argument for the doctor in the patient’s suit against the doctor.

My difference with the majority opinion boils down to one sentence on page 9 of the opinion. The majority writes: “NCMIC’s duty to defend is triggered only if the injuries alleged in the Breiner complaint were the result of the provision of ‘professional services.’” Op. at 530 (emphasis added). I would restate the rule as follows: “NCMIC’s duty to defend is triggered only if the Breiner complaint alleged that the injuries were the result of the provision of ‘professional services.’ ” In other words, I would say that NCMIC cannot escape the duty to defend just because, as a matter of law, Dr. Balfour had no professional duty to do what the complaint says she had a duty to do. Perhaps some jurisdiction would hold that a doctor has a duty to warn patients of a danger posed by someone known to the doctor. Or, more importantly, perhaps a plaintiff would sue a doctor on that malpractice theory. It should be the duty of the malpractice-insurance carrier to represent the doctor in such a suit.

The Oklahoma Supreme Court has declared that “the insurer’s duty to defend its insured arises whenever the allegations in the complaint stated a cause of action that gives rise to the possibility of a recovery under the policy; there need not be a probability of recovery.” First Bank of Turley v. Fid. & Deposit Ins. Co., 928 P.2d 298, 303 n. 14 (1996) (internal quotation marks omitted). Apparently, the court has not specifically addressed coverage of a claim that is legally meritless; but I see no reason why it would not follow the prevailing law on that issue. Section 15 of Tentative Draft No. 2 (revised), July 23, 2014, of the American Law Institute’s Principles of the Law of Liability Insur-*543anee (ALI Principles), recently approved by the Council and membership of the ALI, states:

(1) An insurer that has issued a liability insurance policy that includes a duty to defend must defend any claim that is based in whole or in part on any set of alleged facts and an associated legal theory that, if proven, would be covered by the policy, without regard to the merits of those allegations or that theory.

(emphasis added). Comment a to that provision explains:

Duty to defendant is independent of the merits of the claim. The insurer’s duty to defend does not depend on the probability of the claimant’s success in the claim. The weaker a potentially covered claim is on the merits, the more valuable the defense coverage is in relation to the indemnity coverage. This is a central rationale underlying the long-established liability insurance principle that the duty to defend is broader than the duty to indemnify or cover a claim. In almost every case in which an insured is named as a defendant in a lawsuit, the insured will need a lawyer to provide a defense — to investigate the plaintiffs factual assertions, to determine the credibility of the evidence, and to evaluate the legal theory on which the legal claim is based. Only in a subset of cases will payment of a judgment be required. In the absence of a defense from the insurer, the insured could be forced by a frivolous lawsuit either to pay an out-of-pocket settlement or to incur large legal bills to defend against the suit.

ALI Principles § 15 cmt. a.

The Reporters’ Note to Section 15 provides case law support: The Kansas Supreme Court recently stated that under a duty-to-defend provision an insurer “ ‘is contractually obligated to defend even meritless suits that fall within coverage.’ ” Miller v. Westport Ins. Corp., 288 Kan. 27, 200 P.3d 419, 423 (2009), quoting Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law Section § lll[a], at 826?27 (4th ed.2007). And more recently the New Jersey Supreme Court wrote: “Notably, the potential merit of the claim is immaterial: the duty to defend is not abrogated by the fact that the cause of action stated cannot be maintained against the insured either in law or in fact-in other words, because the cause is groundless, false or fraudulent.” Abouzaid v. Mansard Gardens Assocs., LLC, 207 N.J. 67, 23 A.3d 338, 347 (2011) (emphasis added) (internal quotation marks omitted). It is worth quoting the explanation for this rule given by the Seventh Circuit:

Any other rule would have the paradoxical effect that the less meritorious the' suit, the less protection a liability insurance policy would give the defendant. ... The insured who has bought a liability policy that entitles him to defense as well as indemnification wants to be defended against claims of liability regardless of their merit. He doesn’t want to be stuck with the lawyer’s bill just because he wins and therefore doesn’t need to look to the insurer for indemnification. If he wanted that he would just buy indemnification and not defense.

Scottsdale Ins. Co. v. Subscription Plus, Inc., 299 F.3d 618, 622-23 (7th Cir.2002); see also Sheets v. Brethren Mut. Ins. Co., 679 A.2d 540, 544-45 (Md.1996).

If a plaintiff sued Dr. Balfour in a standard tort claim for injuries suffered in a motor-vehicle collision while Dr. Balfour was driving her child from home to a Little League game, NCMIC could easily get a declaratory.judgment that it had no duty to defend her under a malpractice policy. The legal theory of the suit against her would just be that she violated the common-law duty to exercise care in driving on the streets. In contrast, here the claim *544is that Dr. Balfour’s failure to warn Breiner was a violation of her duty as a doctor. The majority opinion makes a convincing case that there was no such professional duty. But NCMIC had as much an obligation to represent Dr. Balfour in making that argument as it would to represent her in establishing that she had never met Breiner. One is a legal defense; the other is a factual defense. NCMIC had the same duty to raise either defense. “[T]he obligation to defend arises anytime an action is filed against the insured in which the allegations of the third party would bring the claim, if successful, within coverage.” Jerry & Richmond, supra, § lll[a], at 794 (5th ed.2012).

I would reverse the judgment in favor of NCMIC and remand for further proceedings.