Bell v. Slezak

812 A.2d 566, 571 Pa. 333, 2002 Pa. LEXIS 2759

• Court: Supreme Court of Pennsylvania
• Decided: December 19, 2002
• Docket: 77 WAP 2001
• Status: Published

Opinions

OPINION

Chief Justice ZAPPALA.

This appeal presents multiple, foundational questions concerning the application of provisions of the Pennsylvania Property and Casualty Insurance Guaranty Association Act in a setting involving the insolvency of a former medical malpractice insurance carrier.

In late 1992, Appellants, Shirley L. and Thomas P. Bell, commenced a civil action asserting claims against Appellees, Joseph A. Slezak, M.D. and his professional corporation (collectively, “Dr. Slezak”), and others. The central averments of the complaint alleged medical malpractice on the part of Appellees during the course of Mrs. Bell’s treatment for abdominal conditions. In settlement negotiations supervised by the common pleas court, the parties consummated an agreement pursuant to which the Bells would receive $500,000 in exchange for a joint tortfeasor release. Of this amount, $200,000 represented the limits of a policy of malpractice insurance which Dr. Slezak maintained with PIC Insurance Group (“PIC”), and $300,000 was to be the responsibility of the Pennsylvania Medical Professional Liability Catastrophe Fund (the “CAT Fund”).¹ Although PIC was not a party to the agreement, Dr. Slezak’s agreement was made with the clear understanding that the policy limits would be furnished by the carrier. Prior, to the disbursement of settlement funds, however, the Commonwealth Court issued an order placing PIC in liquidation in accordance with the liquidation provisions of the Insurance Department Act, 40 P.S. §§ 221.1-221.63. Such order triggered certain statutory obligations on the part of Pennsylvania Property and Casualty Insurance Guaranty Association (“PPCIGA” or “the Association”), pursuant to the Pennsylvania Property and Casualty Insurance Guaranty Association Act,² which are a primary subject of this appeal.

As a result of the insolvency, PIC failed to tender its portion of the settlement proceeds. Although PPCIGA’s statutory obligations include payment of certain covered claims arising out of the insolvency of property and casualty insurers, see 40 P.S. § 991.1803(b)(1), it, too, refused to provide the $200,000; it claimed that under the non-duplication of recovery provision of the PPCIGA Act, 40 P.S. § 991.1817(a), which prescribes that “[a]ny amount payable on a covered claim under this act shall be reduced by the amount of any recovery under other insurance,”³ it was entitled to offset medical expenses paid by the Bells’ health insurer, Capital Blue Cross and Blue Shield. Further, since such payments exceeded $200,000 and thus also the limits of the underlying PIC policy, PPCIGA took the position that any obligation on its part to make payment was extinguished.

The Bells filed a petition to enforce the settlement, seeking the $200,000 payment and contending that Dr. Slezak was responsible in the event that PPCIGA did not contribute the funds. Dr. Slezak opposed the petition, emphasizing PIC’s contemplated role in terms of funding the settlement, which he contended was assumed by PPCIGA per its enabling statute. He contended that PPCIGA’s entitlement to invoke the non-duplication of recovery provision in the present circumstances was an open issue pending before the Commonwealth Court, and that enforcement of the settlement agreement against him would be inequitable since, inter alia, he had tendered all required premiums to PIC and the CAT Fund and was an “innocent victim” of the circumstances resulting in PIC’s liquidation.

In granting relief on the Bells’ petition, the common pleas court noted, preliminarily, that PIC was neither a named party to the Bells’ civil action nor referenced in the correspondence reflecting the parties’ settlement. The court then applied conventional contract principles to conclude that the agreement was a valid one and remained fully enforceable after PIC’s insolvency. Thus, although acknowledging the parties’ awareness of PIC’s involvement as Dr. Slezak’s insurer, the common pleas court simply did not deem this awareness to be material to its disposition of the petition, particularly where the parties had not memorialized an intention that Dr. Slezak should be relieved of his obligation to present the settlement funds in the event that his insurer became insolvent. In effectively weighing the circumstances of the case in view of the express policy of the PPCIGA statute, the court explained as follows:

The defense ... argues that the statute’s purpose of avoiding financial loss to the policyholder as a result of the insolvency of an insurer would be frustrated if the statutory provisions did not apply to the settlement agreement. However, in a situation where either an innocent claimant or an innocent policyholder stands to suffer a financial loss as a result of the insolvency of an insurer, it is the policyholder that should bear the loss. The plaintiff had no relationship with the now insolvent insurer and had no reason in the preparation of the settlement agreement, to attempt to protect themselves from the insolvency of the insurer. The result referred to must occur in order to protect at least one member of the protected class (claimants and policyholders) from suffering any financial loss. In this way the public policy expressed in the statute of attempting to protect claimants from financial loss as a result of the insolvency of an insurer will be carried out.

Trial court opinion at 12-13. Additionally, since the Bells were non-parties with respect to the contractual relationship between Dr. Slezak and PIC, the common pleas court expressed doubt as to whether the Bells were “claimants” for purposes of PPCIGA, such that the non-duplication of recovery provision was even implicated by virtue of their health insurance recovery. See 40 P.S. § 991.1817(a).

On Dr. Slezak’s appeal, an en banc Superior Court considered the matter in conjunction with two other cases involving overlapping issues, Panea v. Isdaner, No. 3677 Phila. 1998, and Baker v. Myers, No. 642 E.D. 1999, and reversed. See Panea v. Isdaner, 773 A.2d 782 (Pa.Super.2001). Rejecting the common pleas court’s (and the Bells’) reliance on ordinary contract principles as controlling, the majority indicated that such approach “ignore[s] the economic realities of litigation and the interplay of insurance coverage in the settlement process.” See id. at 789. In this regard, the majority focused on the position of defendant-physicians vis-a-vis the insolvent malpractice insurance carrier, explaining:

No one disputes the fact that the settlement agreements established the defendants’ liability; however, to the extent the defendants’ liability is covered by insurance the insurer is ultimately obligated to pay. It cannot logically be denied that all the parties anticipated that insurance would cover payment of the settlement amounts. The defendants all paid premiums for their malpractice insurance and expected to have coverage in the event of a claim. Thus, the defendant doctors are also victims of the insurers’ insolvency. In recognition of the harm occasioned by insurance companies becoming insolvent the legislature saw fit to fashion a remedy by enacting this [PPCIGA] Act.

Panea, 773 A.2d at 789. In assessing the available remedy, the Superior Court majority accepted that, although they were not parties in relation to Dr. Slezak’s insurance contract with PIC, the Bells nevertheless maintained a “covered claim” for purposes of the non-duplication of recovery provision. See id. at 789-90. Further, the majority adopted Dr. Slezak’s characterization of himself as a victim of PIC’s insolvency and therefore believed that, as a policy matter, he should benefit from the protective umbrella of the non-duplication of recovery provision, along with PPCIGA. See id. at 789 (indicating that “defendants are merely asserting a statutory right to either limit or extinguish their obligations to pay on the claims”). The majority thus referred to the Bells’ right to payment under the settlement agreement as “nothing more than a claim against an insolvent insurer by virtue of having a claim against a tortfeasor who was insured by that insurer.” Id. Furthermore, in these regards, the majority opined that the PPCIGA Act provides a clear and adequate remedy for a loss due to the insolvency of a property and casualty insurer, noting that statutory remedies are favored over common law ones. See id. at 789 (citing 1 Pa.C.S. § 1504). The Superior Court majority noted that the changed circumstances necessitating PPCIGA’s involvement might provide a basis for rescinding the settlement, but emphasized that the parties had not chosen to pursue such course. See id. at 789 n. 3.⁴

The majority then returned specifically to the question of whether, in light of the application of the non-duplication of recovery provision, the insured of the insolvent insurer may be held personally responsible for the amount of the offset, concluding that “the legislative intent of the Act precludes such an anomalous result.” Id. at 791; see also id. at 792 (“To find the doctors personally liable for the offset amount would contravene one of the stated purposes of the Act, which is ‘to avoid financial loss to ... policyholders as a result of the insolvency of an insurer.’ ”) (quoting 40 P.S. § 991.1801(1)). The majority examined and rejected the Bells’ argument (and the common pleas court’s conclusion) that, as between an innocent injured and a tortfeasor, any loss should reside with the tortfeasor, concluding that there simply was no loss in the present circumstances, since, by definition, the non-duplication of recovery provision applies only in instances in which the claimant has already received a recovery. See id. at 791 (“In fact it is not the plaintiffs who bear the loss, rather, if any loss can be said to have occurred, it is the solvent insurers who paid plaintiffs’ claims under the other source of insurance, which the Act requires to be exhausted first.”). While the Superior Court majority recognized the need to consider the potential subrogation interest on the part of Capital Blue Cross and Blue Shield in this assessment, it reasoned that such interest was foreclosed as it was derivative of the Bells’ and, under the majority holding, the Bells would not recover the medical expenses from Dr. Slezak. See id. at 791-92. Finally, the majority cited Burke v. Valley Lines, Inc., 421 Pa.Super. 362, 617 A.2d 1335 (1992), in which the Superior Court previously had determined that the imposition of financial loss directly on the insured tortfeasor would contravene the purpose of PPCIGA’s predecessor enactment. See Panea, 773 A2d at 792.

In this appeal, the parties set forth the same arguments that were made before the Superior Court. Thus, we must determine the General Assembly’s intent in promulgating the various provisions of the PPCIGA Act to which the parties attribute disparate meanings. Since the facts are largely undisputed and the issues before us are primarily questions of law, our review is plenary. Phillips v. A-Best Products, 542 Pa. 124, 665 A.2d 1167, 1170 (1995).

As the Superior Court has explained, PPCIGA is a statutory unincorporated association vested with remedial obligations in circumstances in which licensed property and casualty insurers are deemed insolvent. See 40 P.S. §§ 991.1801 (describing PPCIGA’s purposes as including “[provision of] a means for the payment of covered claims under certain property and casualty insurance policies, [avoidance of] excessive delay in the payment of such claims and [avoidance of] financial loss to claimants or policyholders as a result of the insolvency of an insurer”), id. at 991.1803. See generally Sands v. PIGA 283 Pa.Super. 217, 221, 423 A.2d 1224, 1226 (1980) (discussing the PPCIGA Act’s predecessor statute). PPCIGA obtains funding to satisfy claims obligations of insolvent insurers by collecting monies from all insurance companies that write property and casualty insurance in the Commonwealth. See 40 P.S. § 991.1803(b)(3), 991.1808. Under the circumstances arising from PIC’s insolvency, PPCIGA would ordinarily assume payment of an insolvent insurer’s obligations arising from claims made under the insurance policies of its insureds, see 40 P.S. § 991.1803(b)(1), subject to limitations embodied in the PPCIGA Act. See, e.g., 40 P.S. § 991.1803(b)(1)(B) (establishing a $300,000 “per claimant” cap on PPCIGA’s obligation to pay a covered claim). Under the Act, PPCIGA is also “deemed the insurer to the extent of the obligation on the covered claims and to such extent shall have all rights, duties, and obligations of the insolvent insurer as if the insurer had not become insolvent.” See 40 P.S. § 991.1803(b)(2). See generally Donegal Mut. Ins. Co. v. Long, 528 Pa. 295, 300-01, 597 A.2d 1124, 1127 (1991); Matusz v. Safeguard Mut. Ins. Co., 340 Pa.Super. 116, 118-19, 489 A.2d 868, 870 (1985). Accordingly, PPCIGA assumes certain legal defense obligations in connection with claims against insureds of insolvent insurers. See 40 P.S. § 991.1803(b)(1).

The PPCIGA Act and its predecessor were derived from a model, uniform law. See Sands, 283 Pa.Super. at 221, 423 A.2d at 1226. Significantly, particularly as applied in the areas of exhaustion and non-duplication of recovery, the model law frequently has been described as being plagued by multiple ambiguities and apparent inconsistencies. See,, e.g., New Hampshire Ins. Guar. Ass’n v. Pitco Frialator, Inc., 142 N.H. 573, 705 A.2d 1190, 1192-93 (1998).⁵ For example, the non-duplication provision under review has been construed differently in many jurisdictions. Compare, e.g., Piteo, 705 A.2d at 1193 (concluding that both an insured and a third-party plaintiff are “claimants” for purposes of a non-duplication of recovery provision), with Insurance Comm’r v. Property and Cas. Ins. Corp., 313 Md. 518, 546 A.2d 458, 463-64 (1988) (holding that only insureds are claimants). Its operation is obviously most straightforward in instances in which the claimant and the insured are the same person or entity, for example, where an insured driver has a claim against his insurer, which becomes insolvent. In such circumstances, the nonduplication provision will generally operate to restore the insured to the position he would have been in' absent his insurer’s insolvency, shifting any loss to solvent insurers. See generally Note, Insurance Company Insolvencies and Insurance Guaranty Funds: A Look at the Nonduplication of Recovery Clause, 74 Iowa L.Rev. 927 (May 1989). The application is somewhat more complex, however, where the asserted claimant and the policyholder are different persons (or entities) with potentially conflicting interests.

In considering such paradigms, we begin with a central aspect of the non-duplication of recovery provision, namely, the concept of a “covered claim.” The PPCIGA Act defines a covered claim as, inter alia:

an unpaid claim, including one for unearned premiums, submitted by a claimant, which arises out of and is within the coverage and is subject to the applicable limits of an insurance policy to which this article applies issued by an insurer if such insurer becomes an insolvent insurer after the effective date of this article....

40 P.S. § 991.1802(1).⁶ In cases involving multiple tiers of potential claimants, controversy arises concerning which may be deemed to possess “covered claims.” In the medical malpractice setting, therefore, a threshold issue is whether the term refers to the insured-physician’s potential claim against PPCIGA pursuant to its policy with an insolvent malpractice carrier, or to a claim brought by the patient-plaintiff against the physician, such as the case here. Jurisdictions are divided concerning this question. See supra. Having surveyed the approaches, however, we are persuaded by the assessment of the New Hampshire Supreme Court in Piteo, 705 A.2d at 1190, in which the court determined that the term “covered claim” refers to both the first- and third-party claims. See id. at 1193. In so holding, the court cited to multiple instances in which the state guaranty enactment referred to “claimants or policyholders,” and “the claimant or the insured” within operative provisions, thus suggesting that the terms were not intended by the legislature to be wholly coextensive. See Piteo, 705 A.2d at 1193 (“A construction of the statute that equated ‘claimant’ with ‘insured’ or ‘policyholder’ would contravene the fundamental principles that all of the words of a statute must be given effect and that the legislature is presumed not to have used superfluous or redundant words.”).

The Pennsylvania statute not only mirrors New Hampshire’s in its proximate, disjunctive references to policyholders and claimants, 40 P.S. § 991.1801(1) (“claimants or policyholders”), 991.1802 (“claimant or insured”), 991.1816 (“insured or claimant”), but it also plainly contemplates that both first- and third-party claimants may possess covered claims. For example, the PPCIGA Act includes within the definition of “covered claim” claims for unearned premiums, see 40 P.S. § 991.1802, which obviously are reposited in insureds. Further, the statute expressly excludes from such definition “any first-party claim by an insured whose net worth exceeds [$25,000,000],” id., thus suggesting, by negative implication, that insureds outside this category will at least in some circumstances have covered claims. The enactment also makes explicit reference to third-party claims, 40 P.S. § 991.1817, conveying the General Assembly’s appreciation of the significance of the relevant distinction and the desirability of express differentiation between first- and third-party claims where differential treatment is intended. Of additional import, the cognizance of third-party claims is consistent with the broad definition of “covered claim” and the remedial purposes of the legislation. See generally H.K. Porter Co. v. PIGA, 75 F.3d 137, 141-42 (3d Cir.1996).⁷

Having determined that both first-party and third-party claimants may possess “covered claims” for purposes of the Act, we next consider the nature of PPCIGA’s obligations in relation to the Bells’ claim since it is their claim for funding of the settlement that is at issue here.

In this regard, initially, we note our agreement with the Superior Court that the Bells are not entitled to direct funding of the settlement from Dr. Slezak and that to so conclude “ignore[s] the economic realities of litigation and the interplay of insurance coverage in the settlement process.” Panea v. Isdaner, 773 A.2d at 789. Additionally, as set forth earlier, the court aptly noted that “it cannot logically be denied that all the parties anticipated that insurance would cover payment of the settlement amounts,” and that “[i]n recognition of the harm occasioned by insurance companies becoming insolvent the legislature saw fit to fashion a remedy by enacting this [PPCIGA] Act.” Id. Thus, in our view, the Bells’ only source of funding for the settlement was by virtue of their third-party covered claim. Accordingly, we turn to the language of the Act regarding PPCIGA’s obligation to pay “covered claims.”

One of the specific purposes of the PPCIGA Act is to “provide a means for the payment of covered claims under certain property and casualty insurance policies....” 40 P.S. § 991.1801(1) (emphasis added). Additionally, one of the enumerated powers and duties of PPCIGA is “[t]o be obligated to pay covered claims existing prior [to] the determination of insolvency....” 40 P.S. § 991-1803(b)(l). Thus, once a party is found to possess a covered claim for purposes of the Act, such as the Bells, it is then the obligation and duty of PPCIGA to pay such claim unless the PPCIGA Act provides a basis for the Association not being obligated on such claim. Here, it is the non-duplication of recovery provision that PPCIGA claims provides such a basis.

We recognize that PPCIGA possesses all rights of the insolvent insurer as if that insurer had not become insolvent. 40 P.S. § 991.1803(b)(2). Moreover, we are aware that in Pennsylvania, a third party to an insurance contract possessing a claim against the insured has no general right of action against the insurer. Folmar v. Shaffer, 232 Pa.Super. 22, 24, 332 A.2d 821, 823 (1974) (“The law is settled that ‘in the absence of a statute or a policy provision on which such right may be predicated, a person may not maintain a suit directly against the insurer to recover on a judgment rendered against the insured.’ ” (citations omitted)). Therefore, in ordinary circumstances, absent a statutory basis, an insurer would have no obligation to pay third-party claims as such. As noted, however, the PPCIGA Act specifically provides the statutory basis for third-party beneficiary claims such as the Bells as the Act specifically contemplates third-party beneficiaries as claimants thereunder.

Having concluded that the Bells possess a covered claim pursuant to the Act and that there is a statutory basis for PPCIGA’s obligation on such claim, we now turn to the non-duplication of recovery provision of the Act to determine if PPCIGA may offset the claim. This provision' states, in relevant part:

(a) Any person having a claim under an insurance policy shall be required to exhaust first his right under such policy. For purposes of this section, a claim under an insurance policy shall include a claim under any kind of insurance, whether it is a first-party or third-party claim, and shall include, without limitation, accident and health insurance, workers’ compensation, Blue Cross and Blue Shield and all other coverages except for policies of an insolvent insurer. Any amount payable on a covered claim under this act shall be reduced by the amount of any recovery under other insurance.

40 P.S. § 991.1817(a).

Pursuant to this provision, PPCIGA is entitled to offset its obligation to pay the Bells’ covered claim by “the amount of any recovery under other insurance,” which the Bells received. Here, the Bells received payments in excess of $200,000 by their medical health insurer, Capital Blue Cross and Blue Shield. Thus, as the Bells received an amount greater than the limits of Dr. Slezak’s insurance policy with PIC Insurance Group, which was $200,000, PPCIGA’s obligation for payment on the Bells’ covered claim was extinguished.

This result is consistent with the stated purpose of the Act, which is to avoid financial loss to claimants and policyholders as a result of the insolvency of an insurer. 40 P.S. § 991.1801(1). Moreover, as observed by the Superior Court, “if any loss can be said to have occurred, it is the solvent insurers who paid plaintiffs’ claims under the other source of insurance, which the Act requires to be exhausted first.” Panea v. Isdaner, 773 A.2d at 791. As the court correctly points out

The Act clearly attempts to protect both policyholders and those with claims against policyholders from the consequences of the insolvency of the insurer by establishing an association, the sole purpose of which is to compensate those who have claims which have not been paid because the insurance company is insolvent. The association is funded by assessing a fee against all member insurers, and every insurer is required to be a member as a condition of its authority to write property and casualty policies. 40 P.S. §§ 991.1803(a), (b)(3), and 991.1808. In this manner, the risk of loss due to the insolvency of any one insurer is spread out over all member insurance companies and their policyholders. Id. at § 991.1810. In effect, every time PPCIGA pays a claim, every member insurance company is paying part of the claim. The Act therefore seeks to lessen the financial burden on the insurance industry by preventing duplication of recovery.

Id. at 790.⁸

Thus, as the Bells’ only source of funding for the settlement entered with Dr. Slezak is by way of the PPCIGA Act and, as PPCIGA’s obligation in this regard was extinguished by application of the non-duplication of recovery provision found in the Act, we affirm the Superior Court’s decision.

Justice EAKIN did not participate in the consideration or decision of this case. Justice SAYLOR files a dissenting opinion in which Justice NIGRO joins.

1 . In relation to the settlement, the CAT Fund served as a non-party statutory excess carrier pursuant to the Healthcare Services Malpractice Act, 40 P.S. §§ 1301.101-1301.1006 (superseded). See 40 P.S. § 1301.701(d) (superseded).

2 . Act of December 12, 1994, P.L. 1005, No. 137 § 1 (as amended, 40 P.S. §§ 991.1801-991.1820) (the “PPCIGA Act”). This legislation superseded the former Pennsylvania Insurance Guaranty Association Act, Act of Nov. 25, 1970, P.L. 716, No. 232 (as amended 40 P.S. §§ 1701.101-1701.605), which was the enabling legislation for PPCIGA's predecessor, the Pennsylvania Insurance Guaranty Association ("PIGA”).

3 . The full text of the non-duplication of recovery provision is as follows:

Any person having a claim under an insurance policy shall be required to exhaust first his right under such policy. For purposes of this section, a claim under an insurance policy shall include a claim under any kind of insurance, whether it is a first-party or third-party claim, and shall include, without limitation, accident and health insurance, worker’s compensation, Blue Cross and Blue Shield and all other coverages except for policies of an insolvent insurer. Any amount payable on a covered claim under this act shall be reduced by the amount of any recovery under other insurance.

4 . In a concurring opinion, Judge Del Sole expressed his view that rescission is indeed a remedy available to a plaintiff faced with a reduction in payment following settlement on the basis of the non-duplication of recovery provision. See Panea, 773 A.2d at 797 (Del Sole, concurring).

5 . See also Rhode Island Insurers' Insolvency Fund v. Benoit, 723 A.2d 303, 307 (R.I.1999) ("we agree with the jurisdictions that have held that '[t]he language is ambiguous if not contradictory,' [and] that 'the interrelationship of the clauses and phrases is confusing' " (citations omitted)); Cimini v. Nevada Ins. Guar. Ass’n, 112 Nev. 442, 915 P.2d 279, 282 (1996) (describing a guaranty act exhaustion clause as "neither a model of clarity nor an exemplar of the draftsman's craft”) (quoting Arizona Property & Cas. Ins. Guaranty Fund v. Herder, 156 Ariz. 203, 751 P.2d 519, 523 (1988)); International Collection Sen. v. Vermont Property & Cas. Ins., 150 Vt. 630, 555 A.2d 978, 980 (1988); Washington Ins. Guaranty Ass'n v. McKinstry Co., 56 Wash.App. 545, 784 P.2d 190, 194 (1990).

6 . The term "claimant" is not specifically defined under the Act.

7 . Recently, in Main Line Health, Inc. v. Pennsylvania Med. Prof'l Liab. Catastrophe Fund, 738 A.2d 66 (Pa.Cmwlth.1999), off d per curiam, 566 Pa. 4, 777 A.2d 1048 (2001), the Commonwealth Court rejected the position that insureds of the insolvent insurer are claimants under the Act. See id. at 70; see also Pennsylvania Osteopathic Med. Ass’n v. Foster, 134 Pa.Cmwlth. 368, 381, 579 A.2d 989, 995-96 (1990). Nevertheless, this Court’s per curiam affirmance of Main Line did not constitute approval of the Commonwealth Court's reasoning. See Commonwealth v. Tilghman, 543 Pa. 578, 589-90, 673 A.2d 898, 903-04 (1996).

8 . As noted previously, the Superior Court considered the potential subrogation interest of the Bells’ health insurance carrier Capital Blue Cross and Blue Shield in this regard and concluded that such interest was foreclosed as it was derivative of the Bells’ interest. The court noted that a subrogee has no greater rights than those held by the subrogor, thus, the subrogee is limited to recovering in subrogation the amount received by the subrogor relative to the claim paid by the subrogee. Panea v. Isdaner, 773 A.2d at 791 (citing Allstate Ins. Co. v. Clarke, 364 Pa.Super. 196, 527 A.2d 1021, 1024 (1987)).