McAlister v. Vermont Property and Casualty Insurance Guaranty Assoc.
Annotate this Case
McAlister v. Vermont Property & Casualty Insurance Guaranty Assn. (2004-547);
180 Vt. 203; 908 A.2d 455
2006 VT 85
[Filed 11-Aug-2006]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2006 VT 85
No. 2004-547
Robert K. McAlister Supreme Court
On Appeal from
v. Lamoille Superior Court
Vermont Property and Casualty Insurance November Term, 2005 Guaranty
Association and Robert S. Baska, M.D.
Edward J. Cashman, J.
Colin R. Benjamin of Benjamin, Bookchin, Colburn & Durrell, P.C., Derby,
for Plaintiff-Appellee.
W. Scott O'Connell of Nixon Peabody LLP, Manchester, New Hampshire, and
Joseph C. Tanski and Mark D. Robins, Boston, Massachusetts, for
Defendant-Appellant.
PRESENT: Reiber, C.J., Dooley, Johnson, Skoglund and Burgess, JJ.
¶ 1. BURGESS, J. In this declaratory judgment action, defendant
Vermont Property and Casualty Insurance Guaranty Association ("VPCIGA")
appeals from the superior court's order, on the parties' cross-motions for
summary judgment, that VPCIGA must provide insurance coverage up to
$300,000 to defend and indemnify defendant Dr. Robert S. Baska against
plaintiff's medical malpractice claim. The issue on appeal is whether
plaintiff's claim is a "covered claim" under Vermont's Property and
Casualty Insurance Guaranty Association Act, 8 V.S.A. §§ 3611-3626, which
governs the extent of VPCIGA's obligations to an insured or claimant when
an insurer becomes insolvent. See 8 V.S.A. § 3615. Although we disagree
with the reasoning relied upon by the trial court, we conclude that
plaintiff's claim is a covered claim under the Act. Accordingly, we
affirm.
¶ 2. The relevant undisputed facts may be briefly summarized.
Plaintiff claims he suffered injuries as a result of negligent treatment he
received from Dr. Baska in 1999. From 1992 through 2001, Dr. Baska carried
medical malpractice insurance through PHICO Insurance Company under a
"claims-made" policy, which provided coverage only if the medical incident
from which the claim arose occurred while the policy was in effect and the
claim was made during the policy period. If the policy was cancelled for
any reason, PHICO was required to provide Dr. Baska the option to purchase
an extended reporting period, or "tail," to assure continuity of coverage
for medical incidents that occurred during the time the terminated
claims-made policy was in effect. Dr. Baska's policy was cancelled,
effective August 25, 2001, and Dr. Baska purchased the extended reporting
tail coverage for a one-time premium of $35,512. The extended reporting
period became effective the same day the underlying policy was terminated.
There was no expiration date for the extended reporting period, so that
claims arising from medical incidents that occurred when the claims-made
policy was in effect could be reported any time after the tail reporting
period commenced.
¶ 3. On February 1, 2002, PHICO was determined to be insolvent and
placed into liquidation by order of the Commonwealth Court of Pennsylvania.
The order set a deadline of April 1, 2003 for filing claims with the
liquidator. On July 30, 2002, plaintiff filed a malpractice lawsuit
against Dr. Baska in Lamoille Superior Court and a proof of loss against
PHICO with the Pennsylvania liquidator. VPCIGA declined to defend or
indemnify Dr. Baska in the suit on the grounds that a claim pursuant to
extended reporting coverage must have been filed within thirty days of the
liquidation order to be considered a "covered claim" under the Guaranty
Association Act. Plaintiff then filed this declaratory judgment action to
resolve the dispute over the extent of VPCIGA's obligations.
¶ 4. We begin with a brief discussion of VPCIGA's role under
Vermont's Guaranty Association Act. VPCIGA is a nonprofit, unincorporated
legal entity created by the Act to provide a limited amount of substitute
insurance coverage when an insurer becomes insolvent. 8 V.S.A. §§ 3613,
3615. Membership in the association is compulsory for all insurers writing
policies and transacting business in this state. Id. § 3613. The costs of
satisfying VPCIGA's statutory obligations for insolvent insurers are
distributed among all member insurers. Id. § 3615(a)(3).
¶ 5. To the extent of its statutory obligations, VPCIGA is deemed to
be the insurer on "covered claims" and has "all rights, duties, and
obligations of the insolvent insurer as if the insurer had not become
insolvent." Id. § 3615(a)(2). VPCIGA's obligation is limited to the
insolvent insurer's obligation under the policy from which the claim
arises. Int'l Collection Serv. v. Vt. Prop. & Cas. Ins. Guar. Ass'n, 150
Vt. 630, 631, 555 A.2d 978, 978 (1988); see also 8 V.S.A. § 3612(4)(B)
(defining "[c]overed claim" as "an unpaid claim . . . which arises out of
and is in an amount not in excess of the applicable limits of an insurance
policy to which [the Act] applies"). In addition to certain monetary
limits, the Act provides the following express limitations to VPCIGA's
obligations:
[VPCIGA] shall . . . [b]e obligated to the extent of the covered
claims existing prior to the order of liquidation, arising within
30 days after the order of liquidation, or before the policy
expiration date if less than 30 days after the order of
liquidation, or before the insured replaces the policy or causes
its cancellation, if the insured does so within 30 days of the
determination . . . . In no event shall the association be
obligated to a policyholder or claimant in an amount in excess of
the obligation of the insolvent insurer under the policy from
which the claim arises, nor for any claim filed with the
association after the final date set for the filing of claims
against the liquidator or receiver of the insolvent insurer, nor
in any event after the expiration of three years from the date of
determination of the insolvency of such insurer.
Id. § 3615(a)(1).
¶ 6. VPCIGA argues that under the terms of the extended reporting
tail coverage no claim could exist or arise within thirty days of the order
of liquidation where the claim was not reported until after thirty days
from the order of liquidation had passed. Plaintiff responds that the
purchase of the reporting tail on Dr. Baska's claims-made policy
essentially converted the policy to an "occurrence" policy, where a claim
is deemed to exist or arise at the time of the medical incident, so long as
the medical incident occurred during the policy period, even if the claim
is not reported until after the policy period expired. Under plaintiff's
argument, the thirty-day cutoff in the first sentence of § 3615(a)(1) is
inapplicable in the context of reporting tail coverage where the underlying
claims-made policy has already been cancelled. In such a case, plaintiff
argues, it is the second sentence that governs, allowing a claim to be
filed up until the cutoff date set for filing claims against the
liquidator.
¶ 7. On appeal from a grant of summary judgment, we apply the same
standard as the trial court. Allstate Ins. Co. v. Vose, 2004 VT 121, ¶ 13,
177 Vt. 412, 869 A.2d 97. Summary judgment is appropriate where there are
no material facts in dispute and any party is entitled to judgment as a
matter of law. V.R.C.P. 56(c)(3). Here, the facts are undisputed and the
parties differ over the construction of both the Vermont Guaranty
Association Act and the PHICO insurance contract. As this appeal presents
only questions of law, our review is nondeferential and plenary. Concord
Gen. Mut. Ins. Co. v. Madore, 2005 VT 70, ¶ 9, 178 Vt. 281, 882 A.2d 1152.
I.
¶ 8. The trial court concluded that 8 V.S.A. § 3615(a)(1) was
unclear as to whether the statutory term "order of liquidation" referred to
"the initiation of the liquidation proceeding or its final determination."
The trial court interpreted the Pennsylvania court's February 2, 2002 order
as a "preliminary" order of liquidation, not the "final" one, which the
court stated "came several months later." The trial court did not identify
what it considered to be the "final" order of liquidation, and we cannot
discern what the trial court meant from the record provided. Nevertheless,
we disagree with the trial court's conclusion that "the order of
liquidation" in § 3615(a)(1) is susceptible to more than one
interpretation.
¶ 9. The phrase "order of liquidation" was added to § 3615(a)(1) in
2002, replacing the language "determination of insolvency." 2001, No. 95
(Adj. Sess.), § 2. While it is true that the Guaranty Association Act does
not expressly define "order of liquidation," the same legislative act
amending § 3615 also amended the definition of an "insolvent insurer" in §
3612(5) to mean an insurer "against whom a final order of liquidation has
been entered with a finding of insolvency by a court of competent
jurisdiction in the insurer's state of domicile." 2001, No. 95 (Adj.
Sess.), § 1. Although it appears that the different statutory phrasing of
"final order of liquidation" in § 3612(5) and "the order of liquidation" in
§ 3615(a)(1) may have caused some confusion for the trial court, we find
nothing in the Guaranty Association Act that would lead us to believe the
Legislature was referring to two different orders in these sections.
¶ 10. To the extent that additional clarity of the meaning of "the
order of liquidation" is needed, we find it in the statutory sections
governing liquidation proceedings. As we have often noted, "[i]t is a
well-established canon of statutory construction that statutes relating to
the same subject matter should be construed together and read in pari
materia, if at all possible." Munson v. City of S. Burlington, 162 Vt.
506, 509, 648 A.2d 867, 869 (1994). The liquidation statutes provide that
the Commissioner of the Department of Banking, Insurance, Securities, and
Health Care Administration may petition the superior court for an order of
liquidation, 8 V.S.A. § 7056, or a judicial declaration of insolvency, id.
§ 7057(d). Section 7057, entitled "Liquidation orders" provides that "[a]n
order to liquidate the business of a domestic insurer shall appoint the
commissioner and his or her successors in office liquidator and shall
direct the liquidator forthwith to take possession of the assets of the
insurer and to administer them under the general supervision of the court."
Id. § 7057(a).
¶ 11. Reading these statutory provisions together, we conclude there
can be only one order of liquidation in this case reasonably contemplated
by § 3615-the February 2, 2002 order of the Commonwealth Court of
Pennsylvania, entitled "Order of Liquidation," which, by its terms, asserts
all of the authority described by § 7057(a). (FN1) That order declared
PHICO to be insolvent, appointed the Pennsylvania commissioner liquidator,
and directed the liquidator to take possession of PHICO's property and
business affairs and "to liquidate PHICO." Because we conclude the trial
court's decision is premised on an erroneous statutory interpretation, and
our review is de novo, it is neither necessary nor helpful to our
discussion to consider the remainder of the court's rationale.
II.
¶ 12. We now address whether plaintiff's claim, filed more than
thirty days after the February 2, 2002 order of liquidation but well before
the final date set for filing claims with the liquidator, is a covered
claim under the Guaranty Association Act. As noted above, § 3612(4)(B)
defines a "covered claim" as a claim arising out of an insurance policy
that is subject to the provisions of the Guaranty Association Act. Thus,
VPCIGA has no obligation on a claim unless the insolvent insurer, in the
absence of insolvency, would have been obligated. See Int'l Coll. Serv.,
150 Vt. at 631, 555 A.2d at 978 ("[VPCIGA's] obligation to a policyholder
or claimant is limited to the obligation of the insolvent insurer under the
policy from which the claim arises." (citing 8 V.S.A. § 3612(4)(B))).
Whether VPCIGA is obligated to defend against plaintiff's claim involves a
two-part inquiry. We first turn to the language of the relevant policies
to determine whether plaintiff's claim meets the statutory definition of a
covered claim, and next consider whether § 3615(a) limits the extent of
VPCIGA's coverage of the claim. For the reasons set forth below, we agree
with plaintiff that his claim is a covered claim under the Act and that
neither § 3615(a) nor the policy language of the reporting tail coverage
endorsement required the claim to be reported within thirty days of the
order of liquidation.
¶ 13. This case involves two separate, but interconnected, insurance
policies: the claims-made policy that was in effect from 1992 until it was
terminated in 2001, and the extended reporting tail policy, which became
effective in 2001 upon termination of the claims-made policy. During the
period the claims-made policy was in effect, 1992-2001, PHICO was obligated
to cover a claim only if damages were caused by a medical incident that
occurred during the claims-made policy period and if the claim was reported
to the company while the claims-made policy was in effect. There is no
dispute in this case that if Dr. Baska's claims-made policy expired and he
did not exercise his option to purchase the extended reporting tail,
PHICO's risk would have ended at the time the claims-made policy
terminated.
¶ 14. The extended reporting tail coverage, which became effective
in 2001 upon cancellation of the claims-made policy, covered Dr. Baska for
claims arising from medical incidents that occurred during the underlying
claims-made coverage period, 1992-2001, but were not reported until the
extended reporting coverage began in 2001. As noted above, the extended
reporting coverage has no expiration date and the policy is paid for in
full at the time of purchase. There is no dispute that the medical
incident giving rise to the claim occurred in 1999, during the time the
claims-made policy was in effect, and that the claim was reported in 2002,
after the extended reporting tail coverage was purchased. On these
undisputed facts, we conclude that the claim was covered by the extended
reporting tail policy and satisfies the definition of a covered claim under
8 V.S.A. § 3612(4)(B).
¶ 15. We next consider VPCIGA's contention that § 3615(a), which
obligates VPCIGA on covered claims "existing prior to the order of
liquidation, [or] arising within 30 days after the order of liquidation,"
bars VPCIGA's coverage of this claim. VPCIGA argues that: (1) the
particular policy language of the extended reporting tail coverage
unambiguously conveys that no liability attaches to the insurer for a
medical incident until the claim is reported; and (2) it has no statutory
responsibility to provide coverage because plaintiff's claim was not
reported to the company before or within thirty days after the order of
liquidation.
¶ 16. VPCIGA's argument highlights the similar phrasing pattern
used in the claims-made policy coverage and the extended reporting tail
coverage. The claims-made coverage states that PHICO is obligated to pay
damages caused by a medical incident "which occurs on or after the Initial
Effective Date [of the claims-made policy] . . . , and for which claim is
reported to [PHICO] during the [claims-made] policy period." (Emphasis
added.) The extended reporting tail coverage states that PHICO is
obligated to pay damages caused by a medical incident "which occurs on or
after the Initial Effective Date [of the claims-made policy] . . . and
prior to the [date the reporting tail began] . . . , and for which claim is
reported to [PHICO] on or after the [date the reporting tail began]."
(Emphasis added.) VPCIGA also emphasizes that the tail policy, in its
"General Conditions" states that
[a]n extended reporting period does not extend the policy period
or the scope of coverage provided. Coverage is limited to claims
reported to the Company during the extended reporting period
arising from . . . medical incidents . . . which occur on or after
the Initial Effective Date as stated in the Declarations and prior
to the end of the [claims-made] policy period.
(Emphasis added.)
¶ 17. In construing an insurance contract, we look at all the
provisions of a contract together and view the policy in its entirety.
Suchoski v. Redshaw, 163 Vt. 620, 622, 660 A.2d 290, 292 (1995) (mem.).
While we will not deprive an insurer of an unambiguous provision placed in
the policy for its benefit, we resolve any ambiguity in favor of coverage.
Viles v. Vt. State Colls., 168 Vt. 459, 463, 724 A.2d 448, 451 (1998).
Insurance contracts must be given a "practical, reasonable, and fair
interpretation, consonant with the apparent object and intent of the
parties," and "[s]trained or forced constructions . . . are to be avoided."
Wendell v. Union Mut. Fire Ins. Co., 123 Vt. 294, 297, 187 A.2d 331, 333
(1963). We conclude that VPCIGA's interpretation is inconsistent with the
apparent purpose of the extended reporting tail policy coverage, and we
disagree that the policy language in the reporting tail coverage
unambiguously provides that no claim arises under the policy until the
claim is reported.
¶ 18. The nature and language of this extended reporting tail, for
claims arising from medical incidents that occurred under an already
terminated claims-made policy, demonstrates that the purpose of the
extended reporting tail is to allow unlimited time for a claim to be
reported. The additional policy language upon which VPCIGA
relies-"[c]overage is limited to claims reported to the Company during the
extended reporting period arising from medical incidents . . . which occur
on or after the Initial Effective Date [of the claims-made policy] and
prior to the end of the [claims-made] policy period"-clarifies that the
tail coverage does not extend coverage for medical incidents occurring
beyond the claims-made policy period. Although the coverage descriptions
in the claims-made policy and the extended reporting tail policy employ
similar phraseology, the different functions of the two policies
demonstrate that the language serves different purposes. We recognize the
great significance of a reporting requirement for a claim to exist under a
claims-made policy. In a claims-made policy, a claim must be made before
the policy expires in order for the insured to obtain coverage under the
policy. Once the policyholder purchases an unlimited-duration reporting
tail on a canceled claims-made policy, however, a timely reporting
requirement is no longer essential, and is inconsistent with the purpose of
the extended reporting coverage. Under unlimited reporting tail coverage,
the reporting requirement serves the function of a typical notice
provision.
¶ 19. For the reasons stated above, the time that a claim is
reported pursuant to this reporting tail coverage does not determine
when the claim arises or exists for the purposes of § 3615(a). We
find VPCIGA's suggested interpretation not only impractical and
unreasonable under our well-established principles of contract
interpretation, but also inconsistent with the purposes of the Guaranty
Association Act. As the statute provides, VPCIGA is "deemed the insurer to
the extent of its obligation on the covered claims and to such extent shall
have all the rights, duties, and obligations of the insolvent insurer as if
the insurer had not become insolvent." Id. § 3615(a)(2) (emphasis added).
To construe policy language for the purposes of § 3615(a) that would have
effect only in the case of insolvency is antithetical to the Act.
¶ 20. Our interpretation of the reporting tail policy coverage for
the purposes of § 3615(a) is not only reasonable and practical within the
context of the Guaranty Association Act, it is also consistent with the
statutory provisions governing liquidation proceedings. As we have already
concluded, the statutes governing liquidation proceedings and the guaranty
association's obligations deal with the same subject matter-an insurer's
insolvency-and should be construed in para materia where possible. See
supra, ¶ 10. An examination of the liquidation statute lends additional
context to the significance of the thirty-day provision in § 3615(a)(1),
which, as plaintiff argues, mirrors the provisions in § 7058 of the
Liquidation Proceedings Act. Compare 8 V.S.A. § 7058(a) (providing that
insurance policies shall continue "in force" for the lesser of thirty days
from the order of liquidation, the expiration of the policy coverage, or
the date the insured replaces or terminates the policy), with 8 V.S.A. §
3615(a)(1) (providing that VPCIGA is "obligated to the extent of the
covered claims existing prior to the order of liquidation, arising within
30 days after the order of liquidation, or before the policy expiration
date if less than 30 days after the order of liquidation, or before the
insured replaces the policy or causes its cancellation"). Moreover, the
second sentence of § 3615(a)(1) establishes firm deadlines to ensure
VPCIGA's obligations do not extend beyond the duration of the liquidation
proceedings. See 8 V.S.A. § 3615(a)(1) ("In no event shall the association
be obligated to a policyholder or claimant . . . for any claim filed with
the association after the final date set for the filing of claims against
the liquidator or receiver of the insolvent insurer . . . ."); see also
Lorain County Bd. of Comm'rs v. U.S. Fire Ins. Co., 610 N.E.2d 1061, 1064
(Ohio Ct. App. 1992) (construing a similar statutory scheme and concluding
that "[b]y limiting the period in which claims may be submitted to [the
guaranty association] to the period during which the liquidation
proceedings are still open, the General Assembly has evidently intended to
exclude those insureds whose rights to participate in the liquidation have
lapsed").
¶ 21. The thirty-day period under both statutory sections
contemplates that policies will remain in force after the order of
liquidation for the same period of time, allowing for new occurrences or
incidents, i.e. risks, during that period. In considering the application
of this statutory language to the policy in this case, it is particularly
significant that the claims-made policy had already been terminated in
2001. Dr. Baska did not purchase coverage against future medical incidents
in 2001; he purchased an extension of time to report medical incidents that
occurred during the coverage period of a cancelled policy.
¶ 22. VPCIGA acknowledged at oral argument that the time bar in the
second sentence of § 3615(a)(1) provides finality on VPCIGA's liability for
claims in certain occurrence-based policies, where claims are deemed to
exist at the time of the occurrence but may be reported much later. VPCIGA
argues that while some policies may fit this occurrence-based model, the
reporting tail coverage here is still based in claims-made language,
requiring a claim to be reported before coverage is triggered. (FN2)
Relying on City of Greensboro v. Reserve Ins. Co., 321 S.E.2d 232, 236-37
(N.C. Ct. App. 1984), (FN3) VPCIGA argues that the determination of what is
a covered claim cannot depend on labels alone; instead, the policy must be
examined to discover when the insurer's liability is triggered. The
argument that the reporting tail coverage is couched in claims-made
language that must be given contractual effect fails to consider the
practical distinction between coverage under the claims-made policy and
coverage pursuant to the reporting tail. Our conclusion today is not based
on labels; rather, we have conducted an examination of the policy under
established principles of contract law and statutory construction in
concluding that plaintiff's claim is a covered claim that arose, within the
meaning of § 3615(a), prior to the commencement of the liquidation
proceedings.
Affirmed.
FOR THE COURT:
_______________________________________
Associate Justice
------------------------------------------------------------------------------
Footnotes
FN1. Pennsylvania's statutory section describing "orders of liquidation" is
substantially similar to 8 V.S.A. § 7057. See 40 Pa. Cons. Stat. Ann. §
221.20(c) (West 2006).
FN2. PHICO, in a "notice to policyholder[s]" included with its policy,
generally describes occurrence coverage as "coverage for liability arising
from personal injury or property damage which occurs during the policy
period, no matter when a claim is made." It describes claims-made coverage
as "coverage for liability arising from bodily injury or property damage
caused by a medical incident which occurs on or after the Initial Effective
Date and before the end of the policy period if the claim is first made
during the policy period." We note this language, not because it forms a
part of the policy coverage-the notice expressly states that the
descriptions are merely characteristics of occurrence and claims-made
coverage and "not a policy or a comprehensive analysis"-but because the
parties either compare or contrast the policy language with typical
occurrence coverage in their briefing and arguments. We conclude that the
description in the notice is consistent with the parties' mutual
understanding of what an occurrence policy covers.
We note that plaintiff's argument that the extended reporting tail
coverage serves the functional equivalent of an occurrence policy has been
generally recognized by a number of courts. See e.g., Univ. Health Servs.,
Inc. v. Pa. Prop. & Cas. Ins. Guar. Ass'n, 2005 PA Super. 330, *** 15, 884 A.2d 889 (citing cases and commentary). While this analogy is persuasive
based on the general descriptions of occurrence policies and claims-made
policies with extended reporting tail coverage, our conclusion today is
based on an analysis of this particular insurance contract as well as the
statutory language at issue.
FN3. In City of Greensboro, lawsuits were filed prior to the declaration of
the insurer's insolvency, but the City did not pay the balance of the
claims against it within thirty days of the declaration of insolvency. The
guaranty association argued that the claim did not arise within the
thirty-day period because the policy was one of indemnity, not liability,
and therefore no coverage was triggered until the City actually had to pay.
The plaintiffs argued that liability attached when the suit was filed, and
the court, considering various contractual provisions, agreed. City of
Greensboro, 321 S.E.2d at 236-37.
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