In Admiral Ins. Co. v. Superior Court (No. D072267, filed 11/21/17, ord. pub. 12/12/17), a California appeals court held that an application question about prior knowledge of facts that could give rise to a “malpractice claim” did not create a triable issue of fact over policy interpretation where the policy only provided coverage on the condition that, prior to inception, no insured knew, nor could reasonably foresee, that a “professional incident” might give rise to a claim.

Admiral provided claims-made professional liability insurance to a company matching surrogates and egg donors with infertile families. The policy provided coverage for claims made during the policy period arising from a “professional incident ... provided that prior to the inception date of the policy, no insured knew, nor could have reasonably foreseen, that the professional incident might result in a claim.”

Before Admiral was on the risk, a couple utilized the insured’s services to locate an egg donor and a surrogate. The surrogate had a baby who developed a retinoblastoma, a rare cancer of the eye. In June 2012, the couple retained counsel who sent the insured letters citing Code of Civil Procedure section 364 and stating an intent to file a complaint alleging “negligent and unprofessional ... conduct, while in the performance of professional duties, intentionally or recklessly causing physical and emotional harm” and for “medical negligence and lack of informed consent.”

On receiving the letters, the insured consulted with its insurance broker. Interpreting the letters as something less than an actual “claim,” and concerned about a possible increase in premiums, it decided not to notify its current insurer. In October 2012, the insured applied to Admiral for a new business policy. The application asked whether the applicant was “aware of any act, error, omission, fact, circumstance, or records request from any attorney which may result in a malpractice claim or suit?” The company responded, “No.” Nor was there any other disclosure to Admiral, which issued the policy.

The policy covered “damages caused by a professional incident ... for which a claim is first made against the insured during the policy period.” “Professional incident” was defined as “a negligent act, error or omission in the rendering of or failure to render professional services by the insured.” And Admiral was obligated to pay only if “prior to the inception date of the policy, no insured knew, nor could have reasonably foreseen, that the professional incident might result in a claim.”

The couple’s lawsuit followed in March 2013. Admiral denied coverage and moved for summary judgment in the resulting bad faith lawsuit on the ground that prior to the inception of the policy the insured knew or reasonably could have foreseen that the services it provided to the couple might result in a claim. Admiral also asserted material misrepresentation in the application.

The insured argued that there was a fact question because the application was “wholly inappropriate for the kind of business” it operated, emphasizing that it was not a licensed health care provider and did not employ doctors, nurses, or other health care professionals. The trial court agreed, finding triable issues of fact about Admiral’s reliance on an application form that was designed for “medical laboratories, medical imaging centers and blood plasmapheresis centers.” The court found a disputed fact question whether the insured could truthfully answer “no” to the question whether it was aware of anything that might result in a malpractice claim, since it was not a health care provider that rendered professional medical services. The court also found an issue of fact “as to whether Admiral could rely on the ‘prior notice’ condition to deny coverage.”

The appeals court reversed. First, the court stated the rule that interpretation of a written contract, such as an insurance policy, is generally a question of law for the court unless the foundational extrinsic evidence is in conflict. And “here, although the parties ‘dispute the inferences to be drawn from [the] extrinsic evidence, the evidentiary facts themselves are not in conflict.’ [] With no conflict in the foundational extrinsic evidence, it is left to the court to decide the question of law by determining the meaning of the contract in light of the undisputed evidence and the objectively reasonable expectations of the insured.”

The appeals court said that although the insured was probably truthful in arguing that it was unaware of the basis for a “malpractice claim,” since it was admittedly not a healthcare provider, “the application form and the responses to the questions on it are largely a red herring because the policy (i.e., the parties’ agreement) itself explains there is no coverage for a claim arising from a ‘professional incident’ if, prior to the inception of the policy, the insured ‘knew’ or ‘could have reasonably foreseen, that the professional incident might result in a claim.’”

The court rejected an argument that the application’s use of the term “malpractice claim” provided the “context” for interpreting the policy because “[t]he ultimate question, however, is whether the document and surrounding context will support a meaning to which the language of the instrument is reasonably susceptible.” But the court held that the insured failed to offer a reasonable meaning for the language of the policy:

“The ‘prior notice’ provision is an integral part of the insuring agreement itself. It specifies there is no coverage if the insured knew or reasonably could have foreseen that the professional incident might result in a claim.... The policy provides coverage for amounts the insured is required to pay as damages ‘caused by a professional incident.’ If ‘professional incident’ were construed to mean ‘medical malpractice,’ [the insured] (which is concededly not a licensed health care provider) would have no coverage for anything. Such a result would be inconsistent with the reasonable expectations of all the parties....

Here, the undisputed facts demonstrate that [the insured] had notice prior to the inception of the policy that [the couple] intended to file a lawsuit for breach of contract and negligence. Even if there was some confusion as to whether [they] properly labeled their claim as a ‘medical negligence’ action or invoked the appropriate code section, the policy only requires that the insured be able to foresee that a claim ‘might’ be made. Counsel's June 2012 letters provided indisputable notice to [the insured] that its professional services rendered to [the couple] ‘might result in a claim.’ Accordingly, by the clear terms of the policy, there was no coverage.”

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