Court Opinion

ID: 9948950
Source: CourtListenerOpinion
Date Created: 2024-03-08 15:15:14.066366+00
Date Added: 2024-06-11T14:26:25.104328
License: Public Domain

RENDERED: MARCH 1, 2024; 10:00 A.M.
                  NOT TO BE PUBLISHED

           Commonwealth of Kentucky
                  Court of Appeals
                     NO. 2016-CA-0372-MR

DARWIN SELECT INSURANCE
COMPANY N/K/A ALLIED WORLD
SURPLUS LINES INSURANCE
COMPANY                                            APPELLANT

       ON REMAND FROM SUPREME COURT OF KENTUCKY
                   NO. 2020-SC-0260-DG

             APPEAL FROM BOYD CIRCUIT COURT
v.         HONORABLE C. DAVID HAGERMAN, JUDGE
                  ACTION NO. 15-CI-00070

ASHLAND HOSPITAL
CORPORATION D/B/A KING’S
DAUGHTERS MEDICAL CENTER;
JOHN VAN DEREN, III, M.D.;
KENTUCKY HEART INSTITUTE,
INC.; MATTHEW SHOTWELL, M.D.;
RICHARD E. PAULUS, M.D.; AND
SRIHARSHA VELURY, M.D.                             APPELLEES

AND
                           NO. 2016-CA-0396-MR

HOMELAND INSURANCE
COMPANY OF NEW YORK                                             APPELLANT

          ON REMAND FROM SUPREME COURT OF KENTUCKY
                      NO. 2020-SC-0260-DG

                 APPEAL FROM BOYD CIRCUIT COURT
v.             HONORABLE C. DAVID HAGERMAN, JUDGE
                      ACTION NO. 15-CI-00070

ASHLAND HOSPITAL
CORPORATION D/B/A KING’S
DAUGHTERS MEDICAL CENTER;
JOHN VAN DEREN, III, M.D.;
KENTUCKY HEART INSTITUTE,
INC.; MATTHEW SHOTWELL, M.D.;
RICHARD E. PAULUS, M.D.; AND
SRIHARSHA VELURY, M.D.                                          APPELLEES

                             OPINION
                          AFFIRMING AND
                     REMANDING WITH DIRECTIONS

                               ** ** ** ** **

BEFORE: CALDWELL, KAREM, AND TAYLOR, JUDGES.

TAYLOR, JUDGE: This case is before the Court of Appeals on remand from the

Kentucky Supreme Court by Opinion rendered October 20, 2022, and made final

by Order Denying Petitions for Rehearing on February 16, 2023. The Supreme

                                     -2-
Court reversed and remanded the case to the Court of Appeals, directing this Court

to address the issues raised by Darwin Select Insurance Co., n/k/a Allied World

Surplus Lines Co. (Allied) and Homeland Insurance Company of New York

(Homeland), regarding the application of Policy Exclusions 10 and 16 asserted by

the insurers under their respective policies to deny insurance coverage to appellees

(collectively referred to as KDMC), which were rejected by the trial court below as

insufficient defenses. This Court did not address Exclusions 10 and 16 in its

earlier opinion rendered on February 14, 2020, as this Court reversed the trial court

based upon the application of Exclusion 15, which the Supreme Court has

concluded was in error.1 In accordance with the Supreme Court mandate, our

review proceeds accordingly as to whether Exclusions 10 and 16 preclude

insurance coverage for KDMC under the respective policies. For the reasons

stated, we affirm and remand with directions.

                                   BACKGROUND

             We will not restate in detail all of the underlying facts to this appeal as

the Supreme Court has carefully surmised the relevant facts in its Opinion which

are binding upon our review of Exclusions 10 and 16. See Ashland Hosp. Corp., v.

Darwin Select Ins. Co., 664 S.W.3d 509, 512-15 (Ky. 2022). However, for

1
 Judge Joy Kramer was Presiding Judge of the original Opinion rendered by this Court on
February 14, 2020. Judge Kramer retired on September 1, 2021. On remand, a new panel has
been assigned this case with Judge Jeff S. Taylor presiding.

                                           -3-
purposes of examining the applicable exclusions, we will restate those facts

necessary to facilitate our review.

             KDMC obtained professional liability insurance from Allied for

various policy periods, with the policy period of 2012-13 being relevant to the

issues on appeal. Homeland issued KDMC an excess liability policy for the same

period of coverage. The exclusions in these policies are identical. In 2013,

KDMC received letters from attorneys representing over 600 individuals with

potential claims against KDMC regarding alleged unnecessary cardiac operations

and procedures performed on patients at KDMC by KDMC physicians, as well as a

lack of informed consent from these patients for the operations and procedures.

The legal notices directed KDMC to put its insurance carriers on notice of the

patients’ claims, which it did.

             The central theme in all of the individual patient complaints looked to

medical malpractice. However, the genesis of these claims was an investigation of

KDMC by the United States Department of Justice (DOJ) in 2011 for alleged

health care offenses under applicable federal laws. Central to the investigation was

the alleged conduct of unnecessary cardiac operations and procedures performed

                                        -4-
by KDMC and its physicians which resulted in alleged overbilling and defrauding

various federal programs like Medicare and Medicaid.2

              In late 2013, and 2014, several lawsuits were filed in Boyd Circuit

Court against KDMC, for over 600 patient/plaintiffs. The pool of plaintiffs was

subsequently reduced to 127 claimants. To manage this massive litigation, a

central case styled In re: Cardiac Litigation, No. 2014-CA-09999 (the Cardiac

Cases) was initiated, using a “bellwether format” to organize and manage

discovery and coordinate litigation in all of the cases in an orderly fashion.

              In May of 2014, KDMC entered into a settlement agreement with the

DOJ which required the payment by KDMC of approximately $40.9 million to

resolve the government’s claims. KDMC did not admit liability to the government

for its various claims nor did KDMC acknowledge liability to individual patients

who had undergone cardiac operations or procedures during 2006-2011.

              On February 3, 2015, KDMC initiated this declaration of rights

lawsuit in the Boyd Circuit Court against Allied and Homeland, seeking a

declaration that the insurers were obligated to defend and indemnify KDMC in the

Cardiac Cases for the 2012-2013 policy period. The primary issue that arose in

2
  Specifically, the DOJ (United States Department of Justice) asserted that Ashland Hospital
Corporation d/b/a King's Daughters Medical Center, John Van Deren, III, Kentucky Heart
Institute, Inc., Matthew Shotwell, Richard E. Paulus, and Sriharsha Veluury (collectively
referred to as KDMC), performed unnecessary cardiac catheterizations and coronary stents on
patients to overbill Medicare and Medicaid programs, dating from January 1, 2006, through
December 31, 2011.

                                              -5-
this litigation was whether Policy Exclusions 10, 15, and 16 precluded insurance

coverage for KDMC in the Cardiac Cases by the insurers. Subsequently, all of the

parties filed motions for summary judgment. By Order and Judgment entered

November 13, 2015, the circuit court ruled in favor of KDMC, holding that none of

the exclusions were applicable or otherwise excused the insurers from their duty to

defend KDMC in the Cardiac Cases. As concerns Exclusion 10 and alleged willful

misconduct by KDMC, the circuit court did not reach the issue of whether the

insurers must indemnify KDMC for any judgment or settlements “because the facts

have not yet been determined.” Order and Judgment at 5. Our review follows.

                           STANDARD OF REVIEW

            As noted, the circuit court granted a summary judgment to KDMC in

the declaratory action below. The Supreme Court, in its opinion, detailed our

standard of review for summary judgments as follows:

                    Summary judgment should only be granted when
            “there is no genuine issue as to any material fact and that
            the moving party is entitled to a judgment as a matter of
            law.” Kentucky Rules of Civil Procedure (CR) 56.03.
            “[T]he proper function of summary judgment is to
            terminate litigation when, as a matter of law, it appears
            that it would be impossible for the respondent to produce
            evidence at the trial warranting a judgment in his favor.”
            Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d
            476, 480 (Ky. 1991). “Because summary judgment does
            not require findings of fact but only an examination of
            the record to determine whether material issues of fact
            exist, we generally review of summary judgment without
            deference to either the trial court’s assessment of the

                                        -6-
            record or its legal conclusions.” Hammons v. Hammons,
            327 S.W.3d 444, 448 (Ky. 2010). Our review therefore
            is de novo. Id.

                    “De novo review extends to the trial court’s
            interpretation of the insurance contract as a matter of
            law.” Thomas v. State Farm Fire & Cas. Co., 626
            S.W.3d 504, 506 (Ky. 2021). “Additionally, we adhere
            to our long[-]held standard that when we interpret
            insurance contracts, perceived ambiguities and
            uncertainties in the policy terms are generally resolved in
            favor of the insured.” Id. at 506-07. This rule of
            construction favoring coverage, however, “does not
            interfere with the rule that the policy must receive a
            reasonable interpretation consistent with the parties’
            object and intent or narrowly expressed in the plain
            meaning and/or language of the contract.” St. Paul Fire
            & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870
            S.W.2d 223, 226 (Ky. 1994). Nonetheless, “[a]s long as
            coverage is available under a reasonable interpretation of
            an ambiguous clause, the insurer should not escape
            liability, and the exclusionary provision addressed herein
            may be subject to more than one good faith
            interpretation.” Id. at 227. An ambiguity may exist
            either on the face of the contract, i.e., from the nature of
            the language itself, or “when a provision is applied to a
            particular claim.” Id. The latter is a latent ambiguity that
            arises when the contractual terms “are brought in contact
            with the collateral facts.” Carroll v. Cave Hill Cemetery
            Co., 189 S.W. 186, 190 (Ky. 1916). “When analyzing
            challenged terms for clarity we note that the terms of
            insurance contracts have no technical legal meanings and
            must be reasonably interpreted as they would be
            understood by a lay reader.” Thomas, 626 S.W.3d at
            507.

Ashland Hosp. v. Darwin Select Ins. Co., 664 S.W.3d 509, 515-16 (Ky. 2022).

                                        -7-
                            EXCLUSIONS 10 AND 16

             As mandated by the Supreme Court, our review is limited to the

application of Exclusions 10 and 16 and whether the circuit court erred in

concluding that those exclusions did not preclude coverage under Allied’s and

Homeland’s policies as concerns the claims in the Cardiac Cases. The exclusions

are set out in paragraph III.D. of the respective policies as follows:

             D. This policy shall not apply to any Claim based on,
             arising out of, directly or indirectly, resulting from, in
             consequence of, or in any way involving:

                ....

                10. any willful misconduct or dishonest, fraudulent, or
                   malicious act, error or omission by any Insured;
                   any willful violation by any Insured of any law,
                   statute, ordinance, rule or regulation; any Insured
                   gaining any profit, remuneration or advantage to
                   which such Insured was not legally entitled; or any
                   alleged criminal conduct by an Insured. For
                   purposes of this Exclusion, no act, error or
                   omission of any Insured shall be imputed to any
                   other Insured;

                ....

                16. any administrative, disciplinary, licensing or
                   regulatory Claim asserted by or on behalf of a
                   government entity. This specifically includes, but
                   is not limited to, any Claim arising out of or based
                   on the alleged misuse or improper release of
                   confidential, private or proprietary information, or
                   any actual or alleged act, error or omission in
                   violation of the Health Insurance Portability and
                   Accountability Act of 1996 (HIPAA) and any

                                          -8-
                    regulations promulgated in connection therewith,
                    including but not limited to the Privacy Rule and
                    the Security Rule[.]

Allied World Policy at 13, 15, and 17 (and as following form from Homeland

Excess Policy).

                                    ANALYSIS

(i)   EXCLUSION 10 –

             Darwin and Homeland argue that Exclusion 10 precludes any

coverage for the Cardiac Cases as a result of KDMC’s alleged willful misconduct,

fraudulent acts, and illegal profiting from the performance of unnecessary cardiac

operations and procedures during the period in question. The circuit court ruled on

this issue as follows:

             7.     The insurers also argue that they have no duty to
             defend or indemnify because the cardiac lawsuits allege
             fraud and fall squarely within Exclusion 10 for willful
             misconduct. If the only claims asserted in those cases
             were for performing unnecessary procedures for
             improper financial gain the insurers would be correct.
             However, the Plaintiffs in the underlying cases also
             allege a variety of other causes which sound in
             negligence. Since we cannot prophesy what the trier of
             fact would find after hearing the proof we cannot know if
             the exclusion for willful misconduct applies until the
             facts have been established. Thus, the fact that the
             negligence claims have been asserted triggers the insurers
             duty to defend KDMC and the insured physicians.

Order and Judgment at 4.

                                        -9-
             As the circuit court aptly points out, which is supported by the record

below, the complaints filed in the Cardiac Cases clearly assert claims for alleged

medical negligence by KDMC and its physicians. The complaints also assert

claims for fraud and unlawful conduct by KDMC and its physicians. We agree

with the circuit court’s analysis that as concerns the insurers’ duty to defend

KDMC and its physicians in the Cardiac Cases, coverage was properly triggered

under the policies and was not precluded by Exclusion 10.

             However, we emphasize that our ruling on this Exclusion is limited to

that of the circuit court’s ruling – only on the duty to defend under the policies.

The allegations of medical negligence and the insured’s duty to defend are clearly

covered by both policies. As concerns Exclusion 10, the circuit court did not

address the insurers’ liability for payment or indemnification of any claims

asserted in the Cardiac Cases against KDMC as the facts of each individual case

had not been established. The Cardiac Cases are not before this Court. Based on

our review of the record, the circuit court has not addressed whether the specific

provisions of Exclusion 10 as concerns willful misconduct or fraudulent conduct

by KDMC precipitated claims by patients for unnecessary cardiac operations or

procedures. Certainly, legitimate claims for medical malpractice by those patients

receiving necessary cardiac care at KDMC would be covered claims under the

policies. Those individual claims have not been addressed below and this Court is

                                         -10-
not a fact-finder, but rather a court of review. For this reason, we must both affirm

the court’s ruling regarding Exclusion 10 and remand for further proceedings

below.

               Accordingly, on remand, the circuit court will have to address the

facts of the Cardiac Cases on a case-by-case basis to determine if the provisions of

Exclusion 10 apply to preclude payment or indemnification to KDMC for any

claims arising therefrom.3

(ii) EXCLUSION 16 –

               This exclusion specifically states that a claim is excluded for coverage

that arises out of results from, or is in any way involved with any administrative,

disciplinary, licensing or regulatory claim asserted by or on behalf of a government

entity. The circuit court addressed the exclusion as follows:

               6.     Exclusion 16 in the Darwin policy, which relates
               to government claims, is also inapplicable. That
               exclusion relates to administrative, disciplinary, licensing
               or regulatory claims by or on behalf of a government
               entity. The cardiac lawsuits are brought by private
               citizens seeking damages from KDMC and the
               physicians. The cardiac lawsuits having nothing to do
               with any claims by a government entity.

3
  At oral argument, the parties acknowledged that all of the Cardiac Cases had been settled.
While these settlements are not part of the record on appeal, this Court takes judicial notice of
those settlements in the Boyd Circuit Court in Civil Action Nos. 14-CI-0812, 14-CI-9999, and
17-CA-0341. Whether or how those settlements affect the insurance issues raised in this appeal
are not before this Court on appeal. Those issues will have to be addressed by the circuit court
on remand.

                                              -11-
Order and Judgment at 3-4.

             Based on our review of the record, we agree that Exclusion 16 is not

relevant to the claims asserted by patient/plaintiffs in the Cardiac Cases. The

insurers argue that since the DOJ investigation uncovered the alleged unnecessary

cardiac operations and procedures, the individual patient litigation asserting actual

claims for negligence is explicitly covered by the exclusion. We disagree.

             Asserting claims for personal injuries by individual plaintiffs is not

the same as the government asserting a claim for the overbilling of unnecessary

medical procedures under applicable federal law. There is no evidence in the

record that the DOJ’s investigation actually examined the purported injuries

suffered by individual patients/plaintiffs as a result of the alleged unnecessary

medical procedures performed by KDMC and its physicians. And, the government

is not a party to the Cardiac Cases. Similarly, there is no reference to the

individual patient claims in the settlement between the DOJ and KDMC. In other

words, there is no direct nexus between the individual patient claims for negligence

and the DOJ investigation, which was focused on the overbilling of the

government for the medical procedures performed. The claims were triggered by

alleged unnecessary medical procedures, not a government investigation. Simply

put, the record on appeal is not sufficient for this Court to determine whether the

medical procedures performed below were necessary or not as concerns each

                                         -12-
individual patient. The insurers’ argument on this issue is better suited under

Exclusion 10, as alleged willful misconduct or violation of applicable laws.

Therein, the duty to defend under the policy has been established, but the insurers’

liability for payment or indemnification of actual claims must be addressed on a

case-by-case basis by the circuit court on remand.

                                   CONCLUSION

             For the reasons stated, under Exclusion 10, we affirm the circuit

court’s finding of the insurer’s duty to defend the Cardiac Cases and any other

related case under the policies issued by Allied and Homeland for the policy period

2012-2013. On remand, the circuit court is directed to conduct an evidentiary

hearing in the Cardiac Cases to establish on a case by case whether Exclusion 10

precludes the payment or indemnification of any claims arising from the Cardiac

Cases. The Court further affirms the circuit court’s ruling that Exclusion 16 is not

applicable to the facts of this case.

             For the reasons stated, we affirm the Boyd Circuit Court’s November

13, 2015, Order and Judgment as to Appeal Nos. 2016-CA-0372-MR and 2016-

CA-0396-MR, and remand for proceedings consistent with the directions set out in

this Opinion.

             ALL CONCUR.

                                        -13-
BRIEFS FOR APPELLANT,          BRIEFS FOR APPELLEES:
DARWIN SELECT INSURANCE
COMPANY, NOW KNOWN AS          Perry M. Bentley
ALLIED WORLD SURPLUS LINES     Todd S. Page
INSURANCE COMPANY:             Lexington, Kentucky

Ernest H. Jones, II            ORAL ARGUMENT:
Jamie Wilhite Dittert
Lexington, Kentucky            Perry M. Bentley
                               Lexington, Kentucky
Jonathan D. Hacker
Washington, D.C.

Jeffrey Michael Cohen
Miami, Florida

ORAL ARGUMENT:

Jonathan Hacker
Lexington, Kentucky

BRIEFS FOR APPELLANT,
HOMELAND INSURANCE
COMPANY OF NEW YORK:

D.C. Offutt, Jr.
Matthew L. Mains
Anne Liles O’Hare
Huntington, West Virginia

Charles E. Spevacek
Tiffany M. Brown
Minneapolis, Minnesota

ORAL ARGUMENT :

Charles E. Spevack
Minneapolis, Minnesota

                             -14-