$18 million verdict: order to compel ins. co. to arbitrate void.

CASE ON POINT: Royal Indem. Co v. Chicago Hospital, 865 N.E.2d 317 (2007)--IL

CASE FACTS: CHRPP is an Illinois trust that was established in 1978 by a group of Chicago-area non-profit community hospitals pursuant to the Illinois Religious and Charitable Risk Pooling Trust Act as a charitable

risk pooling trust to provide self-funded coverage of malpractice liabilities to its member hospitals. Under the trust agreement, several Chicago hospitals combine their individual assets to share the risks and burdens of self-insurance against potential medical malpractice claims. The trust agreement, which is at the center of the controversy, was entered into by the participating hospitals, one of which is Palos Community Hospital (Palos), the trustees, who are either officers, directors or full-time employees of one of the participating hospitals, and the independent corporate fiduciary, which is the Continental Illinois National Bank and Trust Company of Chicago or any other recognized independent bank appointed by the trustees as an excess and surplus claims insurance carrier that provided medical professional liability coverage in excess of the primary liability coverage provided to Palos under the trust agreement. The excess insurance coverage provide by Royal was $5 million in excess of the $5 million layer provided by CHRPP. A medical malpractice suit was filed against Palos, two of its physicians, and members of its staff regarding the delivery and care of an infant born on March 5, 1985. That action, known as "The Donahue Action," alleged that as a proximate result of the actions of Palos, its physicians, and employees, the infant, Daniel Donahue, suffered "severe and permanent disabilities including, but not limited to, brain damage, blindness, severe lack of gross motor function control, and daily seizures, requiring daily professional care." Pursuant to the trust agreement CHRPP retained counsel to represent Palos and its agents in the Donahue action. After counsel reviewed the case, counsel concluded that the hospital's liability exposure would likely exceed CHRPP's $5 million primary coverage. Counsel's recommendation was to settle within that amount before trial. Once trial commenced, the attorney for the Donahue matter refused to settle within the primary coverage layer. Before a verdict was rendered, a settlement agreement was reached in the amount of $18 million, and CHRPP became liable for its entire $5 million layer of primary liability coverage, Royal became liable for its entire $5 million layer of excess liability coverage, and the remaining $8 million was paid by another excess carrier which provided second layer excess coverage to Palos for liabilities exceeding $10 million. On April 6, 2006, Royal filed suit alleging CHRPP breached its good-faith duty to settle the Donahue suit. Specifically, Royal alleged that CHRPP was made aware that its exposure was likely to exceed its $5 million layer of coverage, and that CHRPP knew or should have known that the matter could have been settled within that layer but refused to do so. In response, CHRPP filed a motion to compel arbitration of the complaint on the grounds that Royal's excess policy was a "following form" policy in that it adopted and incorporated the terms of the underlying coverage, i.e., the trust agreement which established Palos' $5 million self-insured coverage with CHRPP. The trial court granted the motion to compel arbitration. Royal Timely filed its notice of interlocutory appeal.

COURT'S OPINION: The Appellate Court of Illinois reversed the judgment of the lower court, which had ordered arbitration. The court held, inter alia, that the trial court erred in granting the motion to compel arbitration. Accordingly, the court reversed and remanded the case back to the trial court for further proceedings consistent with its opinion. The court ruled that the issue was whether Royal agreed by the express terms of its excess policy that it was to be bound by the arbitration clause contained in the trust agreement. The court concluded that this question was one for a court to decide, not an arbitrator!

LEGAL COMMENTARY: The court found that Royal's language in its excess policy applied solely to coverage and did not constitute an agreement or expression of its intent to be bound by the arbitration clause contained in the trust agreement. The court further found that Royal's identification of the underlying policy as the trust agreement was not a clear and unequivocal expression of its intent to incorporate the entire agreement and that, therefore, as a nonsignatory to the arbitration agreement, it could not be compelled to arbitrate its claim against CHRPP pursuant to that agreement. The general rule is that whether or not particular disputes are arbitrable under a contractual arbitration clause are questions for courts to decide as a matter of contract law and interpretation. All the more significant was the fact that Royal was not a signatory to the arbitration agreement.

Meet the Editor & Publisher: A. David Tammelleo, JD, is a nationally recognized authority on health care law. Practicing law for over 40 years, he concentrates in health care law with the Rhode Island firm of A. David Tammelleo & Associates. He has presented seminars on medical, nursing and hospital law throughout the United States. In addition to his writings as Editor of Medical Law's, Nursing Law's & Hospital Law's Regan Reports, his legal articles have been published in the most prestigious health law journals. A prolific writer, his thousands of articles, as well as his achievements as an attorney and lecturer, have won him recognition in Martindale-Hubbell's Bar Register of Preeminent Lawyers, Marquis Who's Who in American Law, Who's Who in America and Who's Who in the World.