Connecticut High Court Clarifies Aggregate Limit and Number of SIRs Under Professional Liability Policy

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On January 28, 2014, the Supreme Court of Connecticut, in Lexington Ins. Co. v. Lexington Healthcare Group, Inc., 311 Conn. 29, addressed three issues that define the extent of coverage available under a medical professional liability policy. The court concluded that each claimant triggered a separate limit; an aggregate limit for professional lines claims applied; and a retention for each medical incident applied.

The opinion examines the terms of a policy issued by Lexington Insurance Co. (Lexington) to Lexington Healthcare Group (LHCG), the operator of residential health care centers, which provided both general and professional liability coverages. A resident at one of LHCG’s centers set a fire in the center, injuring several residents, some fatally. The resulting injury and death claims created disputes between the facility and its professional liability insurer as to single or separate medical incidents, aggregate limits and self-insured retentions.

Number of Medical Incidents

The number-of-medical-incidents issue rested on the professional liability policy’s Limits of Insurance section, which stated that: “All claims arising from continuous, related, or repeated medical incidents shall be treated as arising out of one medical incident.”

The insurer urged that “related” referred to all claims by all 13 plaintiffs collectively. The court compared the express policy language to the factual allegations and rejected the insurer’s position. Summarizing decisions on the issue from other jurisdictions, the court acknowledged that the term could contemplate, on the one hand, “different but connected services” delivered to a particular individual defendant, or, on the other hand, “similar or related services” delivered to a number of individual defendants.

The court observed that the individual claimants pled different allegations of negligence and damages based on each resident’s proximity to the fire. It concluded that:

the phrase related medical incidents does not clearly and unambiguously encompass incidents in which multiple losses are suffered by multiple people, when each loss has been caused by a unique set of negligent acts, errors or omissions by the insured, even though there may be a common precipitating factor.

On this reasoning, the court concluded that a separate medical incident coverage limit applied to each plaintiff’s claim.

Aggregate Limit for Professional Liability Coverage

The insurer was more successful in its position that the trial court erred by finding that a $10 million “Aggregate Policy Limit” superseded the $1 million “Aggregate Limit” for professional liability coverage listed in the policy declarations. The Connecticut Supreme Court agreed with the insurer that only $1 million of professional liability coverage was available for the individual defendants’ claims.

The court began its analysis by quoting the limits as stated on the declarations page. Under the heading “LIMITS OF INSURANCE,” the declarations stated:

(a) Healthcare Professional Liability

Aggregate Limit $1,000,000

Each Medical Incident $500,000 …

(b) Healthcare General Liability

Aggregate Limit $1,000,000

Each Occurrence Limit $500,000 …

The court held that endorsements to the policy did not render the $1,000,000 aggregate professional liability limit inapplicable. The court rejected the trial court’s reference to an endorsement advising of a $10 million aggregate policy limit as between the professional liability coverage and general liability coverage.

The court agreed with Lexington that the trial court improperly equated the terms “aggregate limit” and “aggregate policy limit,” observing that when different terms are employed within the same writing, different meanings are intended. Applying the ordinary meaning of the words in this provision, the court first considered the term “aggregate policy limit” and found that it “clearly conveys that the amount specified, $10 million, is the maximum amount of insurance available under the entire policy when claims for both general liability and professional liability coverage, at all insured locations, are combined.” In contrast, the court observed that “aggregate limit” means the “total amount available for professional liability coverage only, at a particular location.”

The Self-Insured Retention

By way of cross-appeal, the individual claimants challenged the trial court’s application of the policy’s self-insured retention endorsement. The claimants presented a “drop down” argument, asserting that the trial court erred in finding that the insurer’s obligation for each medical incident arises only after damages caused by that medical incident exceed $250,000. The individual claimants claimed alternatively that, even if the per “medical incident” limit applied after a particular claim exceeds $250,000, the policy language required the insurer to pay $500,000 per medical incident, not that amount as reduced by the $250,000 retention. The court disagreed with the individual claimants’ drop-down argument, concluding that the insurer was not obligated for the first $250,000 in damages for each claim.

The court agreed, however, that a full $500,000 limit for each medical incident applied to each claim. The court rested its full-limit holding on the specific policy language and observed that the retention endorsement did not provide, “as it easily could have,” that the insurer’s limits were reduced “by the amount of claims made within the Self Insured Retention” or by “the amount of the Self Insured Retention.” The endorsement instead stated that the limits will be reduced “by the payment of damages and expenses paid within the Self Insured Retentions.” (Emphasis added.) Under this language, the court held, “the triggering factor for a reduction in liability limits is the insured's actual fulfillment of its obligation to pay the self-insured retention.” Here, where the insured was actually unable to pay the separate retentions, the court concluded the language did not require reduction of each $500,000 medical incident limit by a corresponding $250,000 retention.

The court’s decision provides valuable lessons to insurers and insureds alike. While the decision continues the trend of siding with insureds where policy language does not directly address the facts alleged, it also departs from holdings readily finding ambiguity when interpreting self-insured retentions in policies that are the product of negotiated insurance programs. Courts scrutinize self-insured retentions verbatim, as they serve commercial risk transfer needs, to ensure that the parties are held to their agreement.