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Homeland Insurance Company of New York (“Homeland”) sued Clinical Pathology Laboratories, Inc. (“CPL”) and CPL’s parent company, Sonic Healthcare USA, Inc. (“Sonic USA”) (collectively, the “Defendants”) for a declaration that it has no obligation to indemnify defendants for defending a number of medical malpractice suits brought against them in Ireland in Homeland Insurance Company Of New York v. Clinical Pathology Laboratories, Inc. and Sonic Healthcare USACIVIL No. 1-20-CV-783-RP, United States District Court, WD Texas, Austin Division (July 19, 2022)
CPL is an Austin, Texas-based provider of medical laboratory services. CPL and Sonic USA are subsidiaries of Sonic Healthcare Limited (“Sonic”), a global healthcare company headquartered in Sydney, Australia. Sonic also owns Sonic Healthcare (Ireland) Limited (“Sonic Ireland”) and MedLab Pathology (“MedLab”), both of which are Irish providers of medical laboratory services.
On June 30, 2013, Homeland issued a medical facility and provider professional liability, general liability and workers’ compensation policy to Sonic USA and CPL for the policy period June 30, 2013 through June 30, 2014. (the “2014 Policy”). The 2014 policy covered certain malpractice and personal injury claims. The parties renewed the 2014 policy for the period 2015-2016. Notably, the 2014 and 2015 policies only covered claims made in the United States, its territories or Canada.
In August 2015, the family of a woman (“Ms. OI”) who died after developing cervical cancer filed a negligence action in Ireland against CPL, Sonic USA and other entities, based on alleged misread smear slides. After CPL was served with the lawsuit, it filed an insurance claim with Homeland. On 7 July 2016, Homeland denied the claim because the 2014 policy did not cover lawsuits filed in Ireland.
To close the gap in coverage
When the defendants became aware of their gap in coverage, they sought to secure worldwide coverage from Homeland beginning with the 2016-17 policy period so that if similar claims arose in the future, they would be covered. Homeland agreed to provide such coverage. On August 30, 2016, the parties executed a Worldwide Territory Endorsement (“WTE”) (Endorsement No. 12, Policy No. MFL-004062-0616) to the 2016 Policy, which extended coverage to claims brought against Defendants “outside the United States of America” , enters into force on 30 June 2016.
Homeland claims it agreed to the expanded coverage only after requiring the defendants to agree to certain “guarantees” in a letter dated July 27, 2016, written by Stephen Shumpert, then president and director of CPL and Sonic USA: s managing director and director who promised where there were no pending claims.
Homeland issued the same WTE to Defendants’ 2017 Policy, which was effective June 30, 2017 through June 30, 2018.
In August 2018, the family of “Ms. S” filed a negligence lawsuit in Ireland against MedLab based on an alleged misread smear slide. Sonic Ireland and CPL were added as defendants in May 2019. CPL settled the case in October 2019. MedLab and Sonic Ireland contributed not to the settlement On July 10, 2020, Homeland dismissed CPL’s claim on the grounds that: (1) the 2016 and 2017 policies’ prior knowledge and prior notice exclusions precluded coverage because MedLab had provided notice of Ms. S’s claim to MedLab’s insurer, Vero Insurance Company , 2016; and (2) the 2016 letter was inaccurate and contained misrepresentations.
On July 24, 2020, Homeland sued CPL, Sonic USA, Sonic Ireland, Sonic Limited, and MedLab, seeking a declaratory judgment that “there is no coverage for Ms. S’s claim under the primary policy or the excess policy” based on prior knowledge and exclusions from advance notice, and because the letter from 2016 was incorrect.
Since the purpose of insurance is to protect the insured against unknown or random risks, chance is an inherent requirement of all risk insurance. The doctrine of fortuity exempts insurers from covering certain conduct that the insured engaged in before purchasing the policy. Under the doctrine, an insured cannot obtain coverage for something that has already begun and that one knows (or should have known) has begun. The doctrine of fortuity excludes coverage for known or ongoing losses. A “known injury” is one that the insured knew had occurred before the insured entered into the insurance contract. An ongoing loss is an ongoing progressive loss of which the insured is, or should be, aware when the policy is purchased.
The fortuity doctrine does not require an insured to have specific, actual knowledge of the loss. Instead, the doctrine excludes coverage when the insured is or should be aware of an ongoing progressive or known loss when the policy is purchased. In addition, it has been recognized that the known damage doctrine does not apply if the insurer also knew the circumstances on which it bases the defense. The insurer bears the burden of establishing that the coincidence doctrine bars coverage.
The fortuity doctrine is an affirmative defense
In recent years, the fortuity doctrine’s known loss and loss-in-progress rules have become potent affirmative defenses in coverage disputes that carriers have turned to with increasing frequency.
The doctrine is rooted in fraud prevention; because insurance policies are designed to insure against chance, fraud occurs when an insurance policy is misused to insure a certainty. Fraud is an affirmative defense under Texas law. For these reasons, the court concluded that the fortuity doctrine is an affirmative defense under Texas law.
Homeland waived the defense
Based on the specific facts of this case, the Court finds that Homeland’s delay in raising the coincidence defense constitutes unfair surprise. Homeland did not seek, and was not granted, leave to assert the coincidence doctrine defense.
Homeland nonetheless waived it because it did not assert the coincidence doctrine until its response to defendants’ motion for summary judgment.
The randomness issue is just one of many issues presented to the court and resolved through the recommendations of the Magistrate Judge. The District Judge can accept or reject the recommendations in the Magistrate Judge’s lengthy opinion. Since there is a need for chance at the heart of the policy and as a recognized unwritten exception in every policy, it appears that the judge was wrong to conclude that asserting the defense too late is an “unfair surprise” to the defendant insureds because they the insured should have known that chance is always an unwritten exclusion and therefore cannot be surprised, fairly or unfairly. Because almost every answer to a pleading contains an affirmative defense of failure to state a pleading, the coincidence defense was asserted. It is always there and cannot be hidden.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud for insurers and policyholders alike. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and email@example.com.
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