Evanston Insurance Company v. Agape Senior Primary Care, Inc, No. 14-2268 (4th Cir. 2016)

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UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 14-2268 EVANSTON INSURANCE COMPANY, Plaintiff - Appellant, v. AGAPE SENIOR PRIMARY CRIBBS; KEZIA NIXON, CARE, INC.; SCOTT MIDDLETON; FLOYD Defendants - Appellees, and VICKIE WATTS, as Personal Representative of the Estate of Dorothy Jones; MEREDITH WOFFORD; DORA ELIZABETH HANNA, by and through her Personal Representative, King C. Hanna, Jr., and on behalf of a Class of Individuals Similarly Situated; AGAPE SENIOR, LLC; JACKSON & COKER LOCUM TENENS, LLC, a/k/a Jackson and Coker; LAFAY WALKER, as Personal Representative of the Estate of Martha Sellers Blackwelder; AMANDA CURTIS; PRESTON WAYNE CHANDLER, as Personal Representative of the Estate of Mildred Louise Chandler, deceased; PATTY LARIMORE, as Personal Representative of the Estate of Annie Larimore, deceased; THE ESTATE OF CLARICE POTTER; AGAPE NURSING & REHABILITATION, INC.; AGAPE ASSISTED LIVING, INC.; AGAPE COMMUNITY HOSPICE, INC.; CAROLINAS COMMUNITY HOSPICE, INC., Defendants. Appeal from the United States District Court for the District of South Carolina, at Columbia. Joseph F. Anderson, Jr., Senior District Judge. (3:13-cv-00655-JFA) Argued: October 28, 2015 Decided: January 15, 2016 Before NIEMEYER and MOTZ, Circuit Judges, and M. Hannah LAUCK, United States District Judge for the Eastern District of Virginia, sitting by designation. Affirmed by unpublished per curiam opinion. ARGUED: Paul Lindsey Fields, Jr., FIELDS HOWELL, Atlanta, Georgia, for Appellant. Shaun C. Blake, ROGERS LEWIS JACKSON MANN & QUINN, LLC, Columbia, South Carolina, for Appellees. ON BRIEF: Gregory L. Mast, FIELDS HOWELL, Atlanta, Georgia, for Appellant. Jenkins M. Mann, ROGERS LEWIS JACKSON MANN & QUINN, LLC, Columbia, South Carolina, for Appellees. Unpublished opinions are not binding precedent in this circuit. 2 PER CURIAM: In 2012, Evanston Insurance Company issued a renewed Professional Liability Insurance Policy to Agape Senior Primary Care, Inc. and practitioners, certain of including Kezia (collectively, “Agape”). Agape, Ernest Osei its employees, Nixon doctors, and Dr. and Floyd nurse Cribbs Unbeknownst to any other employee at Addo had stolen Dr. Arthur Kennedy’s identity, and was fraudulently practicing medicine as an Agape “physician” ostensibly insured by Evanston. Once Addo’s deceit was uncovered, Evanston sought to rescind the policy as to all participants based on Addo’s fraudulent conduct and false statements on his insurance application. Evanston and Agape sought a declaration from the United States District Court for the District of South Carolina as to whether the fraudulent misrepresentations on an application for medical malpractice insurance by one person who masqueraded as a board-certified should vitiate including employees. the doctor, fooling coverage medical for employers all entity other that and patients innocent employed him alike, insureds, and its For the reasons that follow, we affirm the district court conclusion that South Carolina law and its principles of equity demand that coverage for the innocent co-insureds remain in place. 3 I. In the declaratory judgment action, both parties moved for summary judgment, largely agreeing employs physicians and nursing homes and assisted name. Agape uses nurse an as to the practitioners, living of Agape sending facilities “integration facts. with services” them to the Agape model that requires each patient to be treated by multiple physicians and nurse practitioners. Sometime around February 2012, Agape hired a man who held himself out to be Dr. Arthur Kennedy, a South Carolina board certified physician. Neither Agape nor any of its employees knew that “Kennedy” was actually Ernest Osei Addo, who was not a South Carolina board-certified physician. Addo had stolen the identity of Dr. Kennedy, a former friend of Addo who was out of the country during Addo’s fraudulent conduct at Agape. Dr. Kennedy’s identity, Addo had obtained a South Using Carolina driver’s license with his own photo and previously had gained employment as a physician with the South Carolina Department of Mental Health. In August 2012, approximately six months after hiring Addo, Agape learned of the fraud after police notified Agape of Addo’s true identity. South Carolina sentenced Addo to two arrested Addo and A federal court in years of imprisonment following his conviction for aggravated identity theft in 2014. 4 All parties agree that Addo fraudulently portrayed himself as Dr. Kennedy and that Addo’s conduct was dishonest, illegal, and intentional. Prior issued to Addo’s Physicians, criminal conviction, Surgeons, Dentists in 2011, and Evanston Podiatrists Professional Liability Insurance Policy No. MM-820866 for the policy period Policy”). August 1, 2011 to August 1, 2012 (the “First On February 11, 2012, Addo filled out an individual application for insurance through Evanston, representing himself to be Dr. Kennedy and board-certified in family medicine. Evanston had no other information regarding “Kennedy” except the application. After receiving Addo’s application, Evanston issued Endorsement 10-10, adding “Kennedy” to the First Policy and charging an additional $4,000 premium for “Kennedy.” On July 15, 2012, all applicants, including the individual physicians, applications. Addo, and Agape, submitted separate renewal Thereafter, Evanston issued Policy No. MM-822351 (the “Renewal Policy”) for the period from August 1, 2012 to August 1, 2013. Had Addo’s identity been disclosed, Evanston would not have issued Endorsement 10-10 or the Renewal Policy. The First Policy and the Renewal Policy were identical in relevant part, with the exception of the addition of Kennedy’s name to the list of insured physicians to the Renewal Policy. The Policies provided for two different coverages: 5 “Coverage A: Individual Liability Coverage” (“Coverage A”) and “Coverage B: Association, (“Coverage physicians, Corporation B”). each Coverage of whom or A Partnership related applied to for Liability a list of insurance Coverage” individual separately. Coverage B applied to Agape and certain of its employees. Three lawsuits have been filed against Agape that potentially relate to the declaratory judgment case on appeal. 1 Evanston currently defends Agape in the lawsuits, all of which proceed in South Carolina Courts of Common Pleas. 2 1 Other entities have given notice of intent to file suit or sent letters suggesting they might sue. 2 The relevant suits are: (1) The Hanna Class Action Lawsuit: This class action lawsuit was filed against Agape, Scott Middleton, Agape’s CEO, and Jackson & Coker Locum Tenens, LLC (“Jackson”) in the Court of Common Pleas for Richland County, South Carolina. Jackson operates as a physician recruitment and staffing agency and recommended Addo’s employment to Agape. Defendants removed the action to the United States District Court for the District of South Carolina, Columbia Division. Hanna v. Agape Sr. LLC, No. 3:12cv2872 (D.S.C. filed Oct. 4, 2012) (Anderson, J.). In February 2014, the Hanna plaintiffs filed their first amended complaint raising eight causes of action for negligent conduct stemming from Agape and Middleton’s hiring of Addo. The lawsuit does not allege medical malpractice by any doctors other than Addo. The district court remanded the action to state court before a second amended complaint was filed in the Class Action Lawsuit. Hanna, No. 3:12cv2872 (D.S.C. Jan. 20, 2015) (order granting motion to remand) (Anderson, J.). (2) The Larimore Lawsuit: The Larimore estate filed a complaint against Agape, two nursing homes, and Dr. Cribbs. The complaint contains two counts of medical malpractice and (Continued) 6 After brought the a filing separate of the Class declaratory Action action Lawsuit, against Evanston Agape in the United States District Court for the District of South Carolina, Division. 3 Columbia Evanston sought a “determination as to whether it has a duty to defend and/or indemnify the parties who have been named in underlying lawsuits (both filed and unfiled) against [Agape].” Evanston filed a motion for summary judgment, seeking “that a ruling the [Renewal Policy] does not afford coverage for the underlying suits and that [Evanston] is not required to defend or indemnify.” Agape filed a cross-motion for summary judgment, requesting a ruling “that the [Renewal Policy] does afford coverage for the claims made in the underlying actions.” The district court issued its amended order on the cross motions for summary judgment in October 2014. The district court noted that the Supreme Court of South Carolina held in McCracken v. Gov’t Emps. Ins. Co., 325 highlights poor care by Dr. Cribbs, Practitioners Nixon and Tonja Gantt. S.E.2d Addo, 62, 64 and (S.C. Nurse (3) The Curtis Lawsuit: In August 2013, Amanda Curtis filed suit against Agape and Jackson. The complaint alleges assault and battery; defamation, libel, and slander; and, negligence based on Agape’s hiring and retention of Addo, who treated Ms. Curtis. 3 Judge Anderson presided over both the Class Action Lawsuit and the present case. 7 1985), that “in the absence of any statute or specific policy language denying coverage to a co-insured for the arson of another co-insured, the innocent co-insured shall be entitled to recover his or her share of the insurance proceeds.” 325 S.E.2d at 64. Without express guidance from McCracken, the Supreme Court of South Carolina as to whether the innocent co-insured doctrine applied outside of the arson context, or whether the fraudulent application by one insured voided the contract ab initio as to others, the district court addressed this novel circumstance within the bounds of what would be South Carolina law. Private Assocs., Inc., Mortg. 296 Inv. F.3d Servs., 308, 312 Inc. (4th v. Hotel and Club Cir. 2002) (citation omitted); Brendle v. Gen. Tire & Rubber Co., 505 F.2d 243, 245 (4th Cir. 1974). The court ruled that the Renewal Policy was void as to Addo because of his fraudulent misrepresentations. The court did not “impute” Addo’s conduct to Agape, finding that (1) Addo applied separately for the Policies and Agape had no knowledge of his fraud; (2) the Renewal Policy demonstrated an intent to provide separate insurance coverage for the “co-insureds” and thus the Renewal Policy was not void ab initio; (3) Exclusion A did not bar coverage of the other named insureds for malpractice or personal injury committed in violation of any law or ordinance unless it was committed by or at the direction of “the Insured”; 8 (4) Endorsement 5, read in conjunction with Endorsement 7, was ambiguous and should be construed to afford the maximum coverage, meaning that not only were the named physicians and nurses covered by the Renewal Policy but also any employee or volunteer; (5) the Renewal Policy did not provide Agape coverage for its own Exclusion” negligent barred acts; coverage and, for (6) any the “Medical insured while Director acting as medical director, but the exclusion could not be applied to a specific case without more factual development. 4 Evanston filed the present appeal. II. This Court judgment de novo. reviews a district court's grant of summary Roe v. Doe, 28 F.3d 404, 406 (4th Cir. 1994). Summary judgment should be granted if, after reviewing all the pleadings, depositions, affidavits, and other documents submitted by the parties, the Court finds that the moving party is entitled to judgment as a matter of law. Id. at 406–07 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986)). In evaluating the evidence, the court must draw all reasonable inferences in favor of the non-moving party. Id. at 407. “Similarly, in our de novo review, this court must draw all reasonable inferences 4 Evanston did not challenge this ruling on appeal. 9 in favor of the appellant.” Id. (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)). The Supreme Court of South Carolina applies the “general rules of contract construction” to construe insurance policies. B.L.G. Enters., Inc. v. First Fin. Ins. Co., 514 S.E.2d 327, 330 (S.C. 1999) (citations terms in insurance favor an of the omitted). policy insured and “Ambiguous must be or construed strictly against conflicting liberally the in insurer.” Williams v. Gov’t Empls. Ins. Co. (GEICO), 762 S.E.2d 705, 710 (S.C. 2014) (quoting Diamond State Ins. Co. v. Homestead Indus., Inc., 456 S.E.2d 912, 915 (S.C. 1995)). A common general contract principle “allows an injured party to void a contract when that party’s assent to the bargain is induced by the fraudulent or material misrepresentation of the other contracting party, and the injured party relied on the misrepresentation in question.” Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law, 738 (5th ed. 2012). Some states, including South Carolina, statutorily modify the traditional contract requiring the insured insurance company. principle party Id.; to see, in the have insurance intended e.g., S.C. to Code context defraud § by the 38-71-40 (requiring intent to defraud in order to rescind accident and health insurance policies). 10 “Rescission is an equitable remedy that attempts to undo a contract from existed.” the beginning as contract, the substantial and contract.” Id. minor or the contract had never ZAN, LLC v. Ripley Cove, LLC, 751 S.E.2d 664, 669 (S.C. 2013) (citation omitted). a if plaintiff In order to completely rescind must fundamental as show to a breach defeat the that is “so purpose of the Thus, “[r]escission will not be granted for a casual breach of a contract, but only for those breaches which defeat the object of the contracting parties.” Id. (citations omitted). III. A. Evanston contends that the innocent co-insured doctrine does not apply, and that “principles of general contract law regarding fraudulent entire policy.” procurement We disagree. support rescission of the South Carolina law and principles of equity weigh in favor of allowing coverage for the innocent co-insured parties, who are the individual doctors, nurses, and Agape. insured. South Carolina law disfavors rescission against the In particular, under South Carolina law, three factors tip the equity scales in favor of Agape: (1) as the insurer and drafter, Evanston could have included forfeiture language in the policy; (2) neither Agape nor any of its employees had any knowledge of Addo’s fraud, rendering them “innocent” under South 11 Carolina law; and, (3) the public interest would not be served through rescission. South Carolina construes insurance policies “liberally in favor of the insured and strictly against the insurer.” USAA Prop. and Cas. Ins. Co. v. Clegg, 661 S.E.2d 791, 797 (S.C. 2008) (citation rescission, confirms the that favored.” omitted). Supreme In the Court “[f]orfeitures of of face of South an action Carolina insurance for repeatedly contracts are not Puckett v. State Farm Gen. Ins. Co., 444 S.E.2d 523, 524 (S.C. 1994); Johnson v. S. State Ins. Co., 341 S.E.2d 793, 794 (S.C. 1986); Small v. Coastal States Life Ins. Co., 128 S.E.2d 175, 177 (S.C. 1962). Within this context, the Court addresses the issues in this case. noted First, the Supreme Court of South Carolina in McCracken that include insurers, express as policy drafters language of insurance supporting policies, their position can to rescind for the intentional misrepresentation of any applicant. 325 S.E.2d at 64. Court held proceeds Id.; see that In McCracken, the South Carolina Supreme an innocent notwithstanding also Nationwide her wife could husband’s Mut. Ins. recover arson of v. Comm’l Co. insurance their home. Bank, 479 S.E.2d 524, 527 (S.C. Ct. App. 1996) (distinguishing McCracken because of its payment when emphasis insured on engaged the in 12 absence fraud). of language Evanston, denying as the insurer and limiting drafter, coverage could in the easily face of have included fraud by provisions one discrete applicant. It did not do so. The district court correctly noted South other that Carolina and states emphasize the existence of such provisions, when they are present, in order to limit coverage. See Evanston Ins. Co. v. Watts, 52 F. Supp. 3d 761, 769 (D.S.C. 2014) (citing K & W Builders, Inc. v. Merchs. & Bus. Men’s Mut. Ins. Co., 495 S.E.2d 473, 477 (Va. 1998); S.C. Farm Bureau Mut. Ins. Co. v. Kelly, 547 S.E.2d 871, 876 (S.C. Ct. App. 2001)). Second, given the reasoning articulated in McCracken, the district court did not err in its forecast that South Carolina would extend the innocent co-insured doctrine beyond the context of arson and into other areas of insurance. McCracken looked to the parties’ respective responsibility for bad acts, explicitly rejecting a obligations requirement of the that parties. the court Instead, look the to court the relative adopted the innocent co-insured doctrine that examines the liabilities of the parties for the fraudulent act. at 63–64. See McCracken, 325 S.E.2d South Carolina statutory law reinforces the view that 13 the insured usually must exhibit some fault in order to support vitiation of an insurance policy. 5 Finally, public policy considerations—appropriate to weigh in this equitable action—reinforce that the district arrived at the proper outcome under South Carolina law. court Equity cannot demand that the actions of one corrupt applicant, who conned Agape and Evanston alike, deprive the innocent insureds of the benefit separately of applied their for contract. medical Agape malpractice and its insurance employees in good faith, and they would be left without such insurance through no fault of their own. Evanston accepted individual premiums as to each seemingly insured Further, and determination, and perhaps rescission spread more the risk accordingly. important would in leave public the an equitable essentially unprotected on matters of medical malpractice brought against 5 Under South Carolina statutory law, an accident or health insurance policy is not void ab initio despite a material misrepresentation made in the application unless “the false statement was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer.” S.C. Code § 38-71-40. South Carolina common law places the burden on the insurer to show, by clear and convincing evidence, that: (1) the statements made on the application were untrue; (2) the applicant knew the statements were false; (3) the statements were material to the risk; (4) the insurer relied on the false statements; and, (5) the statements were made with the intent to deceive and defraud the company. Lanham v. Blue Cross & Blue Shield of S.C., Inc., 563 S.E.2d 331, 334 (S.C. 2002). 14 every other Agape employee. See First Am. Title Ins. Co. v. Lawson, 827 A.2d 230, 240 (N.J. 2003). The innocent Carolina district court co-insured courts. faced doctrine For the a novel otherwise reasons stated application employed above, of by the the South district court did not err when it concluded that South Carolina would not allow rescission under the facts of this case. the Court will affirm the district court’s Accordingly, holding that the Renewal Policy is not void ab initio. B. Evanston next argues that, if the Renewal Policy is not void ab initio, the district court erred in allowing coverage of claims for “administrative failures,” as opposed to limiting coverage to claims for “medical malpractice or personal injury.” 6 Evanston fundamentally misunderstands the district court’s decision. The district court plainly held that the policy provided coverage to Agape “for the acts and omissions of all Coverage A Named Insureds and Coverage B Named Insureds, to the extent such individuals were acting behalf of [Agape.]” within the scope of their duties on Nowhere did the district court’s decision 6 No party disputes that “Dr. Kennedy” and Addo, whose name appears nowhere on the insurance policy, lack coverage. 15 extend such failures. coverage Indeed, to the Agape for district its court own administrative observed, albeit in a footnote, that the policy did not “provide coverage to [Agape] for any of its own negligent acts.” A reading of this malpractice policy to exclude coverage for Agape’s own negligent administrative acts such as negligent hiring and retention is not in court’s error. Accordingly, interpretation of the its Court finding affirms of the coverage district under the policy. Evanston further asserts that the district court improperly construed Exclusion A, which states: This policy does not apply to: A. any Malpractice or Personal Injury committed in violation of any law or ordinance; to any Claim based upon or arising out of any dishonest, fraudulent, criminal, malicious, knowingly, wrongful, deliberate, or intentional acts, errors or omissions committed by or at the direction of the Insured . . . . Additional exclusions, lettered B through S, followed Exclusion A. Evanston avers that the district court failed to apply this exclusion and instead allowed coverage for claims against Named Insureds arising from the acts and omissions of Addo. Evanston again misinterprets the district court’s decision. The Coverage district court A Insureds Named correctly are concluded entitled to that “all coverage, other to the extent a claim exists that would trigger their coverage under 16 the [Renewal other Policy].” Coverage Kennedy. A As Named discussed Insureds” above, does not the phrase include “all Addo or The district court noted that coverage extended only to claims arising from “the acts and omissions of all Coverage A Named Insureds and Coverage B Named Insureds, to the extent such individuals were acting behalf of [Agape.]” within the scope of their duties on In sum, the district court did not hold that coverage extends to claims arising from Addo’s acts and omissions. 7 Accordingly, the Court affirms the district court’s interpretation of Exclusion A. Finally, Evanston argues that the district court failed to apply its rulings to each individual lawsuit and potential lawsuit presented to the court, contending that the district court’s order has caused more disputes. “It is well settled that an insurer's duty to defend is based on the allegations of the underlying complaint.” B.L.G. Enters., 514 S.E.2d at 330. “In examining the complaint, a court must look beyond the labels describing the acts to the acts themselves which form the basis of the claim against the insurer.” Collins Holding Corp. v. Wausau Underwriters Ins. Co., 666 S.E.2d 897, 899 (S.C. 2008). 7 Indeed, Agape conceded that, as a result of Exclusion A, it lacks coverage “for a claim where the sole basis of liability against [Agape] is vicarious liability for the actions or omissions of Addo.” 17 The record shows the existence of three filed lawsuits: the Class Action Lawsuit, the Larimore Lawsuit, and the Curtis Lawsuit. However, none of the parties in interest in these suits were brought before the district court. See A.S. Abell Co. v. Chell, 412 F.2d 712, 717 (4th Cir. 1969) (noting that the district court may withhold declaratory relief for nonjoinder of interested parties). Accordingly, the district court did not err when it made no declarations regarding a duty to defend against lawsuits not properly before it. IV. For the foregoing reasons, the district court correctly interpreted the policy and committed no error when it applied the innocent co-insured doctrine to the novel circumstances of this case. South Carolina law and principles of equity demand that fraudulent misrepresentations on an application for medical malpractice insurance by a person posing as a doctor should not vitiate the insurance policy as to his or her innocent employer and fellow employees. Accordingly, the judgment of the district court is AFFIRMED. 18

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