Fourth Circuit Holds Staffing Agency Nurse to be Hospital Employee for Purposes of Liability Insurance

by Poyner Spruill LLP

Poyner Spruill LLP

Is a nurse employed by a staffing agency and temporarily assigned to work at a hospital considered an “employee” of the hospital and therefore entitled to coverage under the hospital’s liability insurance policy?

In litigation between a Maryland hospital’s insurer and the insurer for the hospital’s staffing agency, the federal Fourth Circuit Court of Appeals held last month that the wording of the hospital’s insurance policy was not ambiguous and covered staffing agency employees if they qualified as hospital “employees” under the right-to-control test. (A link to the court’s opinion in the case can be found here) This result was somewhat at odds with the terms of the staffing agreement between the hospital and staffing agency, which expressly allocated responsibility for such claims to the agency. Although here the federal court applied Maryland law because the insurance contract was entered into in that state, the same court could arguably reach the same conclusion if a North Carolina contract were at issue. North Carolina case law similarly holds that when terms of a contact are plain and unambiguous, the court cannot look beyond the terms of the contract to determine the intentions of the parties.

Staffing Agreement. Laurel Regional Hospital (Hospital) in Laurel, Maryland, entered into a staffing agreement with Favorite Healthcare Staffing (Agency) for the Agency to provide nurses and other health care practitioners to the Hospital. Under the staffing agreement, the Agency practitioners remained employees of the Agency, not the Hospital, and the Agency agreed to be liable for its employees’ actions instead of the Hospital. However, the Hospital was responsible for orienting Agency practitioners to their job responsibilities and all policies and procedures necessary to meet Hospital performance standards. The Hospital had the right to reassign Agency practitioners to different areas of the hospital and to immediately terminate any practitioner who refused to move. The Hospital also had the right to dismiss any Agency practitioner at any time it determined the practitioner was unsatisfactory, or if an Agency practitioner refused to comply with Hospital directions. The Hospital dictated and directed the type of care to be provided to patients by either direct Hospital employees or by Agency practitioners assigned to the Hospital. No Agency staff supervised the Agency’s practitioners on site at the Hospital or provided medical care instructions to the practitioners.

Liability Coverage. The Agency and its employees, including practitioners placed at various medical facilities, were insured under a professional liability insurance policy issued by Interstate Fire and Casualty Company (Interstate). The Hospital was issued a liability policy (Policy) by Dimensions Assurance Ltd., an insurance company wholly owned by the parent company of the Hospital (Dimensions). The Policy covered the Hospital and other persons or entities who met its definitions of “protected person.” The section of the Policy entitled “Hospital Professional Liability,” under the heading of “Worker,” stated that the Hospital’s “present and former employees, students and authorized volunteer workers are protected persons while working for [the Hospital] . . . within the scope of their duties.” There was no exception from this coverage for agency contractors in the Professional Liability section. While the General Liability portion of the Policy had similar language, that section expressly excluded from the definition of “protected persons” “[p]ersons working for [the Hospital] on a per diem, agency or contract basis.” Otherwise, the Policy did not define “employee,” nor did it reference or incorporate the staffing agreement.

Litigation. In the underlying medical malpractice action, a former patient sued the Hospital and several of its doctors and nurses, including Nurse Cryer who had been placed by the Agency at the Hospital. The Hospital’s insurer, Dimensions, refused to defend Cryer, and Interstate undertook her defense, settling the case against her for $2.5 million and incurring nearly $500,000 in defense costs. In the present federal litigation between the two insurance companies, the Agency’s insurer (Interstate) alleged that under the terms of the Policy, Nurse Cryer qualified as an employee of the Hospital and was thus a “protected person” entitled to coverage by the Policy. Because the Dimension Policy was primary and the coverage by the Interstate policy was excess in cases where there was other valid insurance, Interstate alleged that Dimensions was responsible for the entire amount of the settlement and defense costs. The U.S. District Court for the District at Maryland, relying on the staffing agreement, held that Agency practitioners were not employees within the meaning of the Policy and granted summary judgment in favor of Dimensions. Interstate appealed.

On appeal, the Fourth Circuit Court of Appeals vacated the District Court opinion granting summary judgment for Dimensions and remanded the case to the lower court for proceedings consistent with the Court of Appeals’ opinion. The Court of Appeals examined the language of the Policy and found that the term “employee” in the Professional Liability section was not ambiguous, and the common and ordinary meaning of “employee” incorporated the right-to-control test, citing Black’s Law Dictionary and Maryland case law. The fact that the Professional Liability section of the Policy did not exclude agency or contractors, but the General Liability section excluded such workers, further convinced the court that the Professional Liability section of the Policy covered Agency contractors. Because the record showed that the Hospital had a high degree of control over Nurse Cryer, the court held that Dimensions had an independent obligation to provide coverage for those workers without regard to how they may be classified under the staffing agreement.

The court noted that the staffing agreement provided that Nurse Cryer was an employee of the Agency and the Agency would be liable for her negligent acts. However, the Hospital and Agency were not parties to the present litigation, and any indemnification between those parties was not before the court. The court held that although a staffing agreement between the contracting agency and a hospital may allocate liability between the parties, such an agreement is not enforceable under Maryland law against Dimension, Interstate or Nurse Cryer, who were not parties to the staffing agreement. Nor does such a staffing agreement determine the scope of an entirely separate insurance contract issued by Dimensions to the Hospital, whose clear, unambiguous language must be given its ordinary and usual meaning.

Conclusion. This result undoubtedly came as an unwelcome surprise to the Hospital and its insurer. Although decided by the Fourth Circuit under Maryland law, the court potentially could have reached the same result under North Carolina law on these facts. Arrangements with staffing agencies and other contractor arrangements are a necessity for many hospitals today to ensure proper workforce. This Fourth Circuit opinion provides yet another reminder of the need for hospital compliance programs to evaluate all staffing arrangements in order to protect against various legal risks and assure proper handling of liability insurance coverage.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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