Court Opinion

ID: 1057747
Source: CourtListenerOpinion
Date Created: 2013-10-09 18:26:44.882783+00
Date Added: 2024-06-11T11:00:39.679773
License: Public Domain

Present:   All the Justices

THE DOCTORS COMPANY
                                             OPINION BY
v.   Record No. 120702             JUSTICE LEROY F. MILLETTE, JR.
                                           April 18, 2013
WOMEN'S HEALTHCARE ASSOCIATES,
INC., ET AL.

               FROM THE CIRCUIT COURT OF LOUDOUN COUNTY
                         Burke McCahill, Judge

      This appeal arises from a declaratory judgment action in

which The Doctors Company (TDC), a professional liability

insurance company, sought a determination that its coverage of

policyholder Women's Healthcare Associates (WHA) did not apply

to a pending breach of contract action brought by the Davidson

family against WHA.    The pending breach of contract action

relates to WHA's participation in the Virginia Birth-Related

Neurological Injury Compensation Act, Code § 38.2-5000 et seq.

(the "Birth Injury Fund").     For the reasons stated herein, we

affirm the holding of the circuit court finding that the policy

covers the claim alleged by the Davidsons in their complaint

against WHA.

                         I. Facts and Proceedings

      The Birth Injury Fund is a statutory structure creating a

no-fault source of compensation for families whose children

suffer birth-related neurological injuries when delivered by a

participating physician or hospital.     Code § 38.2-5000 et seq.

Physicians or hospitals voluntarily pay into the fund, which
operates in lieu of civil suits for medical malpractice.   Code

§ 38.2-5002.   Physicians and hospitals are required to give

written notification to their obstetrical patients of their

participation or non-participation in the fund.   Code § 38.2-

5004.1.

     The case at bar stems from an underlying breach of contract

action by the Davidson family against WHA, which is not

currently before this Court but integral to these proceedings.

The Davidsons allege that, on December 27, 2006, they entered

into an express contract in which WHA agreed

     to provide obstetrical care and pre-natal management
     of her pregnancy. . .; to provide her with management
     of her ultimate labor and delivery of that child; to
     participate in the Virginia Birth-Related Neurological
     Injury Compensation Program ("Birth Injury Fund"); and
     to inform her if they ceased participating in the
     Birth Injury Fund. Such services and contractual
     obligations of WHA, through its employee-agents,
     continued through at least May 17, 2007, and the
     birth[.] In exchange for such services and
     contractual obligations, Michele Davidson agreed to
     consent to treatment, tender payment on behalf of
     herself and [the baby], and waive future malpractice
     claims which might arise from a birth-related
     neurological injury to [the baby].

The Davidsons then allege that, after they entered into this

contract in part in reliance on WHA's participation in the Birth

Injury Fund, WHA materially breached the contract by failing to

pay into the fund as represented to the Davidsons; that their

child suffered an otherwise compensable injury under the fund

when delivered; and that, due to the breach, the Davidsons were

                                 2
not able to receive compensation under the fund.   The Davidsons'

complaint includes a copy of WHA's written notification of its

participation in the fund, acknowledged as received by Michele

Davidson, as evidence that such representation was part of the

contract.   Although WHA had participated in the fund in the

past, it is undisputed that WHA was not paying into the Birth

Injury Fund at either the time of the notification or at the

time of the birth of the Davidsons' son, a child alleged to have

been born with quadriplegic cerebral palsy and static

encephalopathy.   It is likewise undisputed that WHA never

notified the Davidsons of its non-participation during this time

period.   As a result of WHA's non-participation, the Davidsons

could not file a claim with the Commonwealth under the Birth

Injury Fund, and instead filed a complaint against WHA setting

forth several related counts of breach of contract and breach of

fiduciary duty.   After initial motions before the circuit court,

only two breach of contract counts, one on behalf of Michele

Davidson and one on behalf of her husband, Nathan Davidson,

remain at issue between the Davidsons and WHA.

     The action before this Court is a separate declaratory

judgment action in which WHA's professional liability insurance

company, TDC, seeks to establish that the pending breach of

contract action is not covered under the TDC insurance policy

held by WHA.   TDC's policy with WHA generally states that it

                                 3
provides coverage for "those sums that the [insured] becomes

legally obligated to pay as damages for Claims covered by this

Policy resulting from . . . Professional Services rendered."

(Emphasis in original.)   In the policy's "Definitions" section,

a "Claim" is defined as "a demand for payment of damages or for

services arising from a Professional Services Incident . . . not

otherwise excluded by the terms and conditions of this Policy."

(Emphasis in original.)   One such exclusion is "[l]iability

arising out of any . . . violation of any statute."   TDC argued

below that the alleged liability does not stem from professional

services and is therefore not covered under the policy.    In the

alternative, TDC also argued that the liability arising from the

inaccurate notification was in violation of a state statute

requiring notification of participation in the Birth Injury Fund

and therefore excluded from coverage under the language of the

policy.

     The circuit court found in favor of WHA and the Davidsons,

and TDC now appeals to this Court.   Only the Davidsons filed a

brief in opposition.

                           II.   Discussion

A.   Standard of Review

     The material facts before the Court are undisputed.    The

issues before the Court concern the interpretation and

application of terms of the insurance contract to those

                                 4
undisputed facts.     We therefore review these questions of law de

novo.     Virginia Farm Bureau Mut. Ins. Co. v. Williams, 278 Va.
75, 80, 677 S.E.2d 299, 302 (2009).

B.      Whether the Breach of Contract Claims are Covered as
        "Professional Services"

        The initial question is whether the claim falls under the

scope of "Section II: What Liability Is Covered," subsection b:

"Coverage B – Entity Professional Liability."     The section

states that TDC "will pay on behalf of the [insured] those sums

that it becomes legally obligated to pay as damages for Claims

covered by this Policy resulting from . . . Professional

Services rendered by a Protected Party for whose acts or

omissions the [insured] is legally responsible."     (Emphasis in

original.)

        In addition, Section VII of the policy provides the

following definitions to define the scope of these terms:

        a. Claim means a demand for payment of damages or for
           services arising from a Professional Services
           Incident . . . that is not otherwise excluded by the
           terms and conditions of this Policy.

                                . . . .

        l. Professional Services means the diagnosis,
           treatment, care, or consultation, regarding a
           patient's medical condition.

                                . . . .

        m. Professional Services Incident means the
           performance of or failure to perform Professional
           Services . . . by:

                                   5
            1. a Healthcare Professional, when acting within
               the scope of his or her specialty and
               training[.]

(Emphasis in original.)

     TDC takes the position that the alleged breach, injury, and

damages resulted from a misrepresentation in a contract, which

is not within the scope of a provider's specialty and training,

and therefore lacked a causal nexus with professional services

rendered.    TDC acknowledges that there were professional

services employed in the birth of the child.    TDC argues,

however, that the breach was the misrepresentation and the

injury and damages sustained were incurred due to a lack of

compensation under the fund based on the contractual

misrepresentation, not "resulting from" the professional service

itself as would be alleged in a tort action.

     The Davidsons argue that the lack of compensation cannot be

severed from the professional services because one of the

elements required for compensation under the fund, in addition

to a qualifying birth injury, is that the child must have been

delivered by a participating professional service provider or in

a participating hospital.    The Davidsons therefore contend that

the injury would not have been possible without the rendering of

professional services, and so the claim is one "arising from"

professional services.

                                  6
     The parties point to separate portions of the Policy to

support their respective arguments.   TDC argues that a plain-

language reading of the term "resulting from" professional

services, as stated in Section II(b) describing the coverage

under the policy, requires a direct nexus, and that a

contractual misrepresentation that is out of the scope of the

doctor's professional training lacks this nexus.   The Davidsons

respond that the operative language defining a covered claim is

clarified by the "Definitions" of Section VII to include any

claim "arising from" professional services and not otherwise

excluded by the policy.

     The Court is left to resolve this apparent conflict.      TDC

has conceded that the use of different language in the drafting

of the contract was not accidental and that "arising from" has a

broader definition than "resulting from."   We have said that

"when considering the meaning of any part of a contract, we will

construe the contract as a whole."    Cappo Mgmt. V, Inc. v.

Britt, 282 Va. 33, 37, 711 S.E.2d 209, 211 (2011) (quoting

Lansdowne Dev. Co. v. Xerox Realty Corp., 257 Va. 392, 401, 514,

S.E.2d 157, 161 (1999)); see Vega v. Chattan Assocs., Inc., 246
Va. 196, 199, 435 S.E.2d 142, 143 (1993).   As a result, despite

TDC's urging that we should apply a plain-language reading of

the term "resulting from," we are obligated to consider both

                                7
phrases and resolve the ambiguity that arises from their

presence in the same contract.

     We have consistently held that "[i]n the event of an

ambiguity in the written contract, such ambiguity must be

construed against the drafter of the agreement."   Cappo Mgmt.,

282 Va. at 37, 711 S.E.2d at 211 (quoting Martin & Martin, Inc.

v. Bradley Enters., Inc., 256 Va. 288, 291, 504 S.E.2d 849, 851

(1998)) (alteration in original); see Mahoney v. NationsBank of

Va., 249 Va. 216, 222, 455 S.E.2d 5, 9 (1995); Winn v. Aleda

Constr. Co., 227 Va. 304, 307, 315 S.E.2d 193, 195 (1984).     This

document, therefore, must be construed against TDC, using the

broader construction attributable to "arising from."

     Employing this broader construction thus permits a less

direct nexus between the professional services rendered and the

damages incurred, although such nexus must still be present.    We

conclude that, using the common understanding of the language,

the term "arising from" is sufficient to include the

professional services rendered in the birth of the Davidsons'

child, as the rendering of such services would have been

required to receive a payment from the Birth Injury Fund and

therefore to recover damages in the underlying suit.

     While not looking at this precise issue, the Fourth Circuit

has had occasion to consider the definition of "professional

services" in a professional liability insurance contract

                                 8
construed under Virginia law, and its conclusion reinforces

today's decision.   See St. Paul Fire & Marine Ins. Co. v.

Jacobson, 48 F.3d 778, 782 (4th Cir. 1995).   The Court stated

that, "in determining whether an insured physician has engaged

in a professional service, courts must look at the nature of the

insured's act or the service provided which gave rise to the

damages complained of."   Id.   There, as in this case, the

provider's actions included both acts that would be construed as

professional services and others that would not, and the parties

disagreed on "which . . . acts one must look to in determining

whether the suit arose from professional services."    Id.    The

Fourth Circuit held that, because "[t]he act complained of in

the instant civil action[] necessarily included [a] medical

act," the act was a professional service under the terms of the

policy.   Id.

     In the case at bar, the alleged breach — non-participation

in the Birth Injury Fund at the time of delivery — and resulting

damages could not have occurred without the professional medical

services provided, i.e., the delivery of the child by WHA.     The

delivery of the child by WHA was as necessary an element in the

chain of causation as WHA's failure to participate in the fund

as represented; in the absence of either, the Davidsons could

not be owed compensation under the fund and there could be no

                                 9
damages.   We thus affirm the ruling of the circuit court as to

this issue.

C.   Whether the liability "ar[ose] out of any . . . violation
     of any statute."

     Section VI of the policy, styled "Exclusions," states that

TDC "will not pay any damages arising from, or defend against,

any of the following: . . . f. Liability arising out of any:

. . . 3. violation of any statute, code, ordinance, or

regulation."   (Emphasis added.)

     Arguing that WHA's misrepresentation of its participation

was in violation of Code § 38.2-5004.1, which requires

disclosure of participation status to patients, TDC disclaims

any obligation to pay.   TDC argues that the Court should apply

the plain meaning of the phrase "arising out of," and that,

because the liability arises out of actions that also violate

Code § 38.2-5004.1, the claim should be excluded from coverage

under the policy.

     The Davidsons agree that a plain-language reading is

appropriate, but argue that such a reading requires the Court to

consider from where the liability itself arises.   In this case,

they argue, the liability is not based on a violation of the

statute, although one may have occurred, but rather on the

breach of WHA's contractual obligation to participate in the

Birth Injury Fund as claimed in the amended complaint.

                                   10
     Thus, the Court is once again asked to construe the term

"arising" in the context of this insurance policy.    Unlike the

first question, however, which required the Court to choose

between the narrower term ("resulting from") and the broader

term ("arising from"), the parties here both correctly

acknowledge that, under Virginia law, a plain meaning

application is appropriate.   See Bentley Funding Group, L.L.C.

v. SK&R Group, L.L.C., 269 Va. 315, 329, 609 S.E.2d 49, 56

(2005) ("When contract terms are clear and unambiguous, we must

construe those terms according to their plain meaning."

(quoting Lansdowne, 257 Va. at 400, 514 S.E.2d at 161)); accord,

Bridgestone/Firestone, Inc. v. Prince William Square Assocs.,

250 Va. 402, 407, 463 S.E.2d 661, 664 (1995).

     Here, we conclude that a plain reading of the contract

requires that the Court direct its attention to the elements

necessary for liability, as pled in the action brought by the

Davidsons against WHA.   Consistent with our interpretation of

the similar term "arising from" in Part II.B., while there need

not be a direct causal nexus between the statutory violation and

the liability, there must be a sufficient nexus between them to

consider the liability to be "arising out of" the statutory

violation in order for the claim to be exempt.

     We therefore consider the allegations within the well-

established framework of breach of contract claims:   a legally

                                11
enforceable obligation between the defendant and plaintiff,

breached by defendant, which proximately caused damages to the

plaintiff.    Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610,

614 (2004).   Here, liability would thus arise out of a finding

that a contract existed between WHA and the Davidsons that

included a legal obligation to participate in the Birth Injury

Fund, that WHA materially breached the contract by failing to

participate in the fund, and that this breach proximately caused

the damages – the lack of compensation from the fund – when the

Davidsons' child was delivered by this provider and suffered an

injury otherwise compensable by the fund.

     The alleged liability arises specifically out of WHA's

failure to participate after a promise of participation — that

is, failure to act in accordance with the terms of the express

contract when performing its services — not its failure to

accurately notify of participation, which is the act alleged to

be in violation of the statute.    Thus, WHA would be equally

liable for breach of the contract if it were indeed a

participant in the Birth Injury Fund at the time of the

notification but not at the birth, thereby complying with the

statute but denying the child coverage.   Furthermore, WHA would

be in no way liable if it had not been a participant at the time

of the notification but began paying into the fund in Mrs.

                                  12
Davidson's eighth month of pregnancy, therefore having violated

the statute but resulting in no damages to the Davidsons.

        The Davidsons will have to prove at trial that the promise

of participation was a material aspect of WHA's performance of

the contract and that it was breached.    Nonetheless, the fact

that the breach is in part evidenced by a written notification

reflecting the misrepresentation of its participation status at

the alleged initiation of the contract does not bear upon the

liability.     The statute has no private cause of action, and the

misrepresentation in the notification is incidental to the

breach of contract action.    The performance of the alleged

contract included WHA's promise of participation in the fund.

        Thus, using even the broad and common meaning of the term,

the alleged liability is "arising out of" the elements of the

breach of the contract, not a violation of the statute.    None of

these elements – the lack of participation months after a

representation of participation, the delivery of the baby, and

alleged resulting lack of coverage – arise out of a violation of

the statute.    Interpreting "arising out of" to include any

overlap with statutory law, even when that law affords no cause

of action and is not necessary to the elements of the cause of

action, would be outside the scope of the common usage of the

term.    We therefore affirm the ruling of the circuit court as to

this issue.

                                  13
                        III.   Conclusion

     TDC concedes that in this instance its duty to defend and

duty to indemnify are one and the same:     TDC has a duty to

defend that which would be indemnified under the policy.

Because the underlying action is covered by the insurance

policy, it must both defend and indemnify WHA in the underlying

breach of contract action.

     For the aforementioned reasons, we affirm the holding of

the circuit court.

                                                           Affirmed.

JUSTICE POWELL, with whom JUSTICE McCLANAHAN joins, dissenting.

     In my opinion, the majority ignores the fact that the

Davidsons specifically allege that the basis of their breach of

contract claim is the misrepresentation, which, in turn, is a

violation of Code § 38.2-5004.1.     Therefore, I must respectfully

dissent.

     According to the majority, “[t]he alleged liability arises

specifically out of WHA’s failure to participate after a promise

of participation - that is, failure to act in accordance to the

terms of the express contract when performing its services, not

its failure to accurately notify of participation, which is the

act alleged to be in violation of the statute.”    In their

                                14
complaint, however, the Davidsons repeatedly reference the

failure to notify as the material breach that serves as the

basis for the present action.     Indeed, in Count I of their

complaint, the Davidsons specifically state:

             As of at least January 1, 2007, Defendant
             WHA was not participating in the Birth
             Injury Fund. Under the terms of the
             contract and the laws of Virginia, WHA was
             required to notify Plaintiff Michelle
             Davidson that it did not participate in the
             Birth Injury Fund. . . . At no time prior to
             Baby Grant’s birth did WHA notify Plaintiff
             Michele Davidson that it did not participate
             in the Birth Injury Fund. WHA’s failure to
             notify Plaintiff Michele Davidson
             constituted a material breach of its
             contract with Plaintiff Michele
             Davidson[.] . . . Had Defendants fulfilled
             their obligations under the contract,
             Plaintiff Michele Davidson would have sought
             medical treatment from an obstetrician who
             did participate in the Birth Injury Fund.

(Emphasis added.)

     Similarly, the Davidsons repeatedly state that, “[h]ad WHA

informed Plaintiff Michele Davidson that they did not

participate in the Birth Injury Fund, then Plaintiff Michele

Davidson would not have entered into a contract for WHA’s

services.”    (Emphasis added.)   The clear implication here is

that it was the misrepresentation that formed the basis of their

breach of contract claim.    Were it not for the

misrepresentation, the Davidsons affirmatively state that they

would have taken their business elsewhere.

                                  15
     Conspicuously, the only document produced by the Davidsons

in support of their allegations directly rebuts the majority’s

claim.   The “Notice to Obstetrical Patients” states that WHA

“does . . . participate in the Virginia Birth-Related

Neurological Injury Compensation Program.”    As the Notice is

written in the present tense, the only inference that can be

drawn is that WHA was misrepresenting its participation in the

Birth Injury Fund, not that it was promising to participate in

the Birth Injury Fund.

     Thus, in my opinion, the entire basis of the majority’s

holding is belied by the plain language of the Davidsons’

complaint.    Therefore, I would hold that the liability alleged

by the Davidsons arises out of WHA’s failure to accurately

notify - in violation of Code § 38.2-5004.1- and therefore the

Exclusions provisions apply.

     Furthermore, I agree with the majority that our focus must

be on the elements necessary for liability in a breach of

contract action.    As this Court has repeatedly recognized:

             The elements of a breach of contract action
             are (1) a legally enforceable obligation of
             a defendant to a plaintiff; (2) the
             defendant's violation or breach of that
             obligation; and (3) injury or damage to the
             plaintiff caused by the breach of
             obligation.

Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610, 614 (2004)

(citations omitted).

                                  16
     However, application of these elements to the present case

clearly demonstrates that liability arises from WHA’s violation

of Code § 38.2-5004.1.   As evidenced by the “Notice to

Obstetrical Patients,” the legally enforceable obligation

created by the alleged contract between the parties is only

WHA’s statutorily mandated obligation to inform the Davidsons of

its participation or non-participation in the Birth Injury Fund.

The breach of that obligation came when WHA violated Code

§ 38.2-5004.1 and misrepresented its participation in the Birth

Injury Fund.    Finally, the injury or damage to the Davidsons was

their inability to collect from the Birth Injury Fund as a

result.   Notably, the Davidsons assert that WHA’s express

communication of its participation, which forms the basis for

their breach of contract claim, was through the notification

required by Code § 38.2-5004.1.    Clearly, if WHA had not

violated the statute, there would have been no

misrepresentation, and thus, no breach of contract.

     As I previously noted, in bringing this action, the

Davidsons specifically relied upon WHA’s violation of “the laws

of Virginia.”   Indeed, even the majority recognizes that the

elements include “the lack of participation months after a

representation of participation” - in other words the lack of

participation after a misrepresentation.    Thus, the “promise” at

the heart of the majority’s claimed promise to participate is

                                  17
the misrepresentation by WHA, which was in violation of the

statute.      Therefore, it is inconceivable that the violation of

the statute is merely “incidental” to the breach of contract

when it serves as the very basis for the underlying action.

     Furthermore, the majority’s narrow application of the

phrase “arising out of” with regard to the Exclusions provisions

is inconsistent with its broad application of the phrase

“arising from” with regard to Professional Services.     As the

majority explained, a broad construction of the phrase “permits

a less direct nexus between the professional services rendered

and the damages incurred, although such nexus must still be

present.” 1    Employing the same broad application to the

Exclusions provisions would require a holding that also permits

a less direct nexus between the violation of the statute and the

breach of contract, although such nexus must still be present.

Thus, even though the majority has deemed the direct

relationship between the breach of contract and the violation of

the statute as merely “incidental,” it is clear that such a

relationship would be sufficient to exclude the claim from

     1
       “In the insurance context ‘arising out of’ is broader than
‘caused by,’ and ordinarily means ‘originating from,’ ‘having
its origin in,’ ‘growing out of,’ ‘flowing from,’ or ‘incident
to or having connection with.’” Trex Co. v. ExxonMobil Oil
Corp., 234 F. Supp. 2d 572, 576 (E.D. Va. 2002) (applying Virginia
law) (quoting St. Paul Fire & Marine Ins. Co. v. Insurance Co.
of North America, 501 F. Supp. 136, 138 (W.D. Va. 1980) (applying
Virginia law)).

                                   18
coverage under the broad application espoused by the majority

with regard to Professional Services. 2

     It is further worth noting that, under the majority’s

logic, we look only to how the claim is styled and ignore the

actual basis of that claim.   Such an approach is destined to

lead to unreasonable results, such as those in this case: a

medical malpractice insurer having to defend a breach of

contract claim that does not require the victim to prove that

any malpractice actually occurred.   Furthermore, the majority

ignores the unintended consequences of its actions.   As this is

a breach of contract claim, it is not subject to limitations on

recovery that apply to medical malpractice claims.    See Code §

8.01-581.15.   Thus, not only is The Doctors Company required to

defend a claim that does not require the Davidsons to actually

prove malpractice, it could be potentially liable for $4

million, more than twice the total amount it would be liable for

in a medical malpractice claim under Code § 8.01-581.15.

     For these reasons, I would reverse the decision of the

trial court and grant the declaratory judgment sought by The

Doctors Company.

     2
       I recognize that the majority uses the term “claim” rather
than liability. However, the term “claim,” as defined in
Section VII of the policy “means a demand for payment of
damages . . . arising from a Professional Services
Incident . . . that is not otherwise excluded by the terms and
conditions of this Policy.” Thus, the term “claim” in this
context is clearly synonymous with liability.

                                19