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First Health Settlement Class v. Chartis Speciality Ins. Co.

Supreme Court of Delaware

March 6, 2015


Submitted December 3, 2014

Case Closed March 25, 2015.

Court Below: Superior Court of the State of Delaware in and for New Castle County. C.A. No. 09C-09-027.

Kevin G. Abrams, Esquire, John M. Seaman, Esquire, (argued), Steve C. Hough, Esquire, Abrams and Bayliss LLP, Wilmington, Delaware; Somer G. Brown, Esquire, (argued), Cox, Cox, Filo, Camel & Wilson LLC, Lake Charles, Louisiana, for Appellant.

Timothy Jay Houseal, Esquire, (argued), Jennifer M. Kinkus, Esquire, William E. Gamgort, Esquire, Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware; Matthew J. Fink, Esquire, (argued),Charles A. Hafner, Esquire, Nicholaides Fink Thorpe Michaelides Sullivan LLP, Chicago, Illinois, for Appellee.

Before STRINE, Chief Justice, HOLLAND, VALIHURA, and VAUGHN, Justices, BOUCHARD,[*] Chancellor, constituting the Court en Banc. STRINE, Chief Justice, dissenting, with BOUCHARD, Chancellor, joining.


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VAUGHN, Justice

Defendant Below/Appellant, The First Health Settlement Class (" The First Health Class" ), appeals from an order of the Superior Court granting partial summary judgment in favor of Plaintiff Below/Appellee, Chartis Specialty Insurance Company (" Chartis" ). The case arises from a class action filed against First Health Group Corporation (" First Health" ) and others in the State of Louisiana. In that action, medical service providers alleged that First Health violated notice provisions contained in a Louisiana statute known as the Preferred Provider Organizations Act.[1] The plaintiff class obtained a judgment against First Health. First

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Health then negotiated and paid a settlement of the judgment.

First Health was insured under an errors and omissions insurance policy issued by Chartis. The policy had a number of exclusions, one of which was an exclusion for " penalties." The issue in this case is whether the amount First Health paid to settle the Louisiana litigation was a " penalty," and, therefore, not a covered loss under the insurance policy. The Superior Court concluded that the amount paid was a " penalty." We have concluded that it was not, and that the policy's exclusion for " penalties" does not apply.


First Health is a provider of medical service plans, including Preferred Provider Organization (" PPO" ) networks. Under the PPO network, First Health had agreements with medical providers in Louisiana in which the medical providers agreed to discount rates regarding certain medical services. First Health also entered into agreements with group workers' compensation payers, such as employers, who utilized First Health's discounted PPO rates when paying for workers' compensation services.

By statute, the State of Louisiana has approved PPO networks and their discounted rates, but has imposed certain statutory requirements. One requirement is that the PPO give notice to a medical provider when a discount is to be applied. The notice provisions of the Louisiana statute can be satisfied in either one of two ways. One way is by issuing a benefit card to a patient that the patient can then present to the medical provider. The other way is by issuing a written notice to the medical provider that a certain group purchaser is a PPO participant.

Failure to comply with the notice requirements subjects a PPO to financial consequences under La. R.S. § 40:2203.1(G), which reads as follows:

Failure to comply with the [notice provisions] of this Section shall subject a group purchaser to damages payable to the provider of double the fair market value of the medical services provided, but in no event less than the greater of fifty dollars per day of noncompliance or two thousand dollars, together with attorney fees to be determined by the court.[2]

In April 2004, a group of Louisiana health care providers brought a class action against First Health and others in Louisiana state court alleging that First Health had failed to comply with the statutory notice provisions. The action was captioned Gunderson v. F.A. Richard & Associates, Inc.[3] (the " Gunderson Litigation" ). The plaintiff class sought damages from First Health under La. R.S. § 40:2203.1(G). As mentioned, the plaintiffs were successful in obtaining a judgment against First Health.

First Health settled the judgment for the amount of $150,500,000, which included attorneys' fees paid to plaintiff class counsel. As part of the settlement, First Health assigned to the plaintiff class its rights under the insurance policy issued by Chartis. The class is now known as The First Health Settlement Class, the Appellant in the instant case.

On September 9, 2009, Executive Risk Specialty Insurance Company (" Executive Risk" ), First Health's primary insurer, filed an action against First Health in the Delaware Superior Court seeking, among

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other things, declaratory relief that any amount paid by First Health to the plaintiff class in the Gunderson Litigation was a penalty under La. R.S. § 40:2203.1(G) and not a covered loss under an insurance policy it had issued to First Health. The Executive Risk policy provided that penalties were excluded from coverage. Executive Risk named as defendants First Health's excess insurers, including Chartis. The First Health Class was subsequently added as a defendant.[4]

The policy that Chartis issued to First Health also excludes penalties. It provides, in pertinent part, as follows:

" Loss" means Defense Expenses and any monetary amount which an Insured is legally obligated to pay as a result of a Claim. Loss shall include, up to the amount listed in ITEM 3(b) of the Declarations (which sum shall be part of and not in addition to the Limit of Liability stated in ITEM 3(a) of the Declarations), any fines assessed, penalties imposed, or punitive, exemplary or multiplied damages awarded in Claims for Antitrust Activity, but only if such fines, penalties or punitive, exemplary or multiplied damages are insurable under applicable law. This paragraph shall be construed under the applicable law most favorable to the insurability of such fines, penalties, and punitive, exemplary or multiplied damages. Loss shall not include:
(1) Except as expressly set forth above, fines, penalties, taxes or multiplied damages . . . .[5]

While the policy initially excluded punitive or exemplary damages from the definition of Loss, an endorsement amended the Loss definition to specifically include coverage for punitive and exemplary damages.

The First Health Class and Chartis filed cross motions for partial summary judgment. On May 7, 2013, the Superior Court issued its opinion finding that the settlement paid by First Health in the Gunderson Litigation was a penalty. It therefore denied The First Health Class' motion and granted Chartis' motion.

When the Superior Court issued its May 7, 2013, opinion, other litigation was occurring in the State of Louisiana in the case of George Raymond Williams M.D. et al., v. SIF Consultants of Louisiana, Inc., et al. (the " Williams Litigation" ). The Williams Litigation, like the class action brought in the Gunderson Litigation, was a class action in which medical providers alleged that a PPO network failed to comply with the notice provisions of Louisiana's Preferred Provider Organizations Act. The plaintiff class sought damages under La. R.S. § 40:2203.1(G).

Executive Risk, the same insurer that filed this declaratory judgment action, was an insurer of a defendant in that case, CorVel Corporation (" CorVel" ). Executive Risk was made a party to the Williams Litigation under La. R.S. § 22:1269, which provides that under certain conditions an " injured person . . . shall have a right of direct action against the insurer within the terms and limits of the policy; and, such action may be brought against the insurer alone." [6] The Executive Risk policy involved in the Williams Litigation also excluded penalties from covered losses.

On July 23, 2011, CorVel agreed to settle the Williams Litigation. Thereafter, the plaintiff class ...

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