Medical Records v. American Empire

• Court: Court of Appeals for the First Circuit
• Decided: April 30, 1998
• Docket: 97-2145
• Status: Published

Opinion

USCA1 Opinion

United States Court of Appeals

For the First Circuit

                                 No. 97-2145



                MEDICAL RECORDS ASSOCIATES, INC.,



                      Plaintiff, Appellant,



                                v.



         AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY,



                       Defendant, Appellee.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. Richard Stearns, U.S. District Judge]


Before



 Lynch, Circuit Judge,

Coffin and Bownes, Senior Circuit Judges.


Thomas C. Regan for appellant.

     James F. Kavanaugh, Jr. with whom James Gray Wagner was on brief for appellee.


April 30, 1998


COFFIN, Senior Circuit Judge.  This diversity case requires us

to determine whether setting fees for copies of medical records is,

under Massachusetts law, part of the "professional service"

provided by a medical records processing company, thus putting it

within the coverage of a professional errors and omissions

insurance policy.  The appellee, American Empire Surplus Lines

Insurance Co. (American Empire), refused to defend and indemnify

the appellant, Medical Records Associates, Inc. (MRA), in

connection with a claim of overcharging.  The district court

concluded that the insurer acted properly because its policy does

not cover billing practices.  We agree, and therefore affirm the

dismissal of Medical Records' case.

                          I. Background

     Appellant MRA is a medical records processing business.  It

contracts with Massachusetts hospitals and medical centers to carry

out the medical facilities' statutory obligation to provide

patients or their attorneys with copies of the patients' medical

records upon request.  See Mass. Gen. L. ch. 111,  70, 70E(g). 

MRA charges a fee, which is paid by the recipient of the records. 

     In August 1993, MRA received a demand letter on behalf of the

law firm Lubin & Meyer, P.C., and others similarly situated,

claiming that MRA had overcharged for copies and also may have

included improper charges on its bills, in violation of Mass. Gen.

L. ch. 93A and other state statutes.  MRA referred the claim to

American Empire, with whom it had an errors & omissions (E & O)

policy providing defense and indemnification for claims based on

the company's professional activities.  American Empire declined

coverage based on several policy exclusions, and MRA thereafter

settled the case for an unspecified sum.  The company then demanded

that American Empire reimburse attorney's fees and settlement

costs, but the insurer again refused.  This breach of contract

action followed.

     The district court concluded that the Lubin & Meyer claim fell

outside the coverage provided by the American Empire policy because

the alleged overbilling was not part of MRA's professional service

as a medical records processing company.  It viewed billing as a

"ministerial act," or "routine aftereffect," associated with, but

not part of, the professional service performed by MRA.  It

therefore granted American Empire's motion to dismiss the

complaint.  MRA subsequently filed this appeal.  Our review of a

grant of dismissal is plenary.  See Beddall v. State Street Bank &

Trust Co., 137 F.3d 12, 16 (1st Cir. 1998).

                          II. Discussion

     A professional errors and omissions insurance policy provides

limited coverage, usually as a supplement to a general

comprehensive liability (CGL) policy, for conduct undertaken in

performing or rendering professional acts or services.  See, e.g.,

Jefferson Ins. Co. v. National Union Fire Ins. Co., 42 Mass. App.

94, 677 N.E.2d 225 (1997); American Int'l Bank v. Fidelity &

Deposit Co., 49 Cal. App.4th 1558, 1574 (1996) ("the insurer who

issues a policy for errors and omissions insures against a far

different risk than that insured against" under a comprehensive

general liability policy).  See also J. Appleman, 7A Insurance Law

and Practice  4504.01, at 310 (1979) ("An errors-and-omissions

policy is professional-liability insurance providing a specialized

and limited type of coverage as compared to comprehensive insurance

. . .")  Whether the American Empire policy provides coverage is

determined by comparing the allegations of the underlying claim --

in this case, those contained in the Lubin & Meyer demand letter --

with the policy provisions.  See Sterilite Corp. v. Continental

Cas. Co., 17 Mass. App. 316, 318, 458 N.E.2d 338, 340 (1983).  The

duty to defend arises if those allegations are "reasonably

susceptible" of an interpretation that they state a covered claim,

see id., but there is no duty to defend or indemnify if the

allegations fall "expressly outside" the policy provisions, seeTimpson v. Transamerica Ins. Co., 41 Mass. App. 344, 347, 669

N.E.2d 1092, 1095 (1996).

     The policy at issue here states that American Empire's duty to

defend attaches when a suit alleges "damages from, or connected

with negligent acts, errors, omissions" within the scope of the

policy's coverage.  The nature of the insurance afforded by the

policy is described in the indemnity provision, which states that

the insurer will cover:

     Loss which the Insured shall become legally obligated to

     pay . . . by reason of any actual or alleged negligent

     act, error or omission committed in the rendering or

     failure to render the Professional Services stated in the

     Declarations.



The Declarations attachment identifies the professional services as

"Medical Records Processor," but contains no elaboration of that

term.

     The policy thus requires American Empire to provide a defense

and coverage for any claim that MRA improperly "render[ed] or

fail[ed] to render the Professional Services" of a medical records

processor.  The question for us is whether the conduct that is the

subject of the demand letter -- fee-setting and billing -- is among

those services.  Guided by the relevant cases and, as the caselaw

directs, "ordinary experience and common sense," see Jefferson

Ins., 42 Mass. App. at 102, 677 N.E.2d at 231 (citing Roe v.

Federal Ins. Co., 412 Mass. 43, 49, 587 N.E.2d 214, 217 (1992)), we

conclude that it is not.

     A widely accepted description of the coverage provided by a

professional E & O policy, framed by the Nebraska Supreme Court and

endorsed repeatedly by Massachusetts courts, limits the scope of

such policies to activity involving "specialized" knowledge or

skill:

     The term "professional" in the context used in the policy

     provision means something more than mere proficiency in

     the performance of a task and implies intellectual skill

     as contrasted with that used in an occupation for

     production or sale of commodities.  A "professional" act

     or service is one arising out of a vocation, calling,

     occupation, or employment involving specialized

     knowledge, labor, or skill, and the labor or skill

     involved is predominantly mental or intellectual, rather

     than physical or manual . . . . In determining whether a

     particular act is of a professional nature or a

     "professional service" we must look not to the title or

     character of the party performing the act, but to the act

     itself.



Marx v. Hartford Acc. & Indem. Co., 183 Neb. 12, 13, 157 N.W.2d

870, 872 (1968), quoted in Roe, 412 Mass. at 48, 587 N.E.2d at 217

(noting that this standard has been "widely accepted").  Thus, even

tasks performed by a professional are not covered if they are

"ordinary" activities "achievable by those lacking the relevant

professional training and expertise," Jefferson Ins., 42 Mass. App.

at 100, 677 N.E.2d at 230.

     In Jefferson Ins., the alleged negligent conduct involved

delay by the insured company's ambulance in responding to a medical

emergency.  The court concluded that the basis for the delay --

miscommunication between the ambulance company's radio dispatcher

and the ambulance attendants about an address -- did not constitute

professional services.  The court explained:

     It was rather in the nature of nonspecialized, clerical

     or administrative activity requiring neither special

     learning, intellectual skill, nor professional judgment. 

     Nothing in the record suggests that specialized training,

     skill, or knowledge, beyond the normal intelligence of

     the ordinary prudent person, is required: to receive

     messages from the police, to relay those messages or

     otherwise supply ambulances with the information

     necessary for emergency medical technicians to render

     emergency services, to follow directions, or to locate

     and drive to specified addresses.  To the contrary,

     ordinary experience and common sense . . . indicate that

     such activities require only the everyday, practical

     abilities of the average adult, not the art of the adept.



Id. at 102, 677 N.E.2d at 231.  In another of the few Massachusetts

cases tackling the "professional services" issue, Camp Dresser &

McKee, Inc. v. Home Ins. Co., 30 Mass. App. 318, 324-25, 568 N.E.2d

631, 635 (1991), the inquiry concerned the failure of a consulting

company to warn employees working on a project of certain job

hazards.  In deciding that an exclusion in a CGL policy for damages

arising out of professional services did not apply, the court

concluded that the challenged activities properly were viewed as

"management tasks" of a nonprofessional nature.  In Roe, too,

application of the Marx standard led to a holding that the

challenged conduct was nonprofessional; a dental malpractice policy

was found inapplicable to damages caused by a dentist's improper

sexual relationship with a patient.  412 Mass. at 49, 587 N.E.2d at

218.

     These cases do not paint an unwavering line of demarcation

between "professional" and "nonprofessional" activities.  While the

conduct in Roe was entirely outside the provision of dental

services, in both Jefferson and Camp Dresser, the alleged

negligence occurred during the performance -- or non-performance --

of tasks that are "inherent in the practice of the insured's

profession," see USM Corp. v. First State Ins. Co., 420 Mass. 865,

867, 652 N.E.2d 613, 614 (1995).  In those cases, it was the

unskilled nature of the specific task -- not the absence of a

professional endeavor -- that rendered the professional services

exclusion inapplicable.  It is perhaps of some significance that

the latter two cases involved exclusions to CGL policies --

removing professional services from the policies' otherwise

comprehensive coverage -- rather than professional E & O policies,

in light of the well established canon that insurance policies are

to be construed in favor of the insured, see Hazen Paper Co. v.

United States Fid. & Guar. Co., 407 Mass. 689, 700, 555 NE.2d 576,

583 (1990); Charles Dowd Box Co. v. Fireman's Fund Ins. Co., 351

Mass. 113, 119-20, 218 N.E.2d 64, 68 (1966).  A court applying that

maxim might well be inclined to find certain conduct to be both

covered by a professional E & O policy but not excluded by a CGL

policy's professional liability exclusion.

     We think the bottom line, however, is that "professional

services" as covered by an E & O policy in Massachusetts embrace

those activities that distinguish a particular occupation from

other occupations -- as evidenced by the need for specialized

learning or training -- and from the ordinary activities of life

and business.  In this case, MRA has made a valiant effort to

depict its fee-setting activity as an integral part of the service

it provides to medical patients and their representatives.  Because

MRA is required by statute to charge a "reasonable" fee for the

copies it provides, and because a high cost for copies could impact

the statutorily guaranteed patient access to records, MRA makes the

argument that billing is a crucial component of its professional

activity -- distinguishing it in that respect from other types of

businesses.

     Accepting the premise that MRA's billing practices are

distinctively important because of the public policy concerns

reflected by the state laws governing them does not, however, lead

inevitably to the conclusion that they fall within the category of

professional services.  Simply because a task is regulated does not

make it "professional."  And, while knowing how to access a

patient's file, determining whether a medical file is complete, and

judging who is a proper recipient of medical records are activities

that reasonably may be viewed to require particularized knowledge,

we fail to see how setting a price for photocopies and producing

accurate invoices are other than generic business practices.  

     In addition, at oral argument on appeal, MRA acknowledged that

the hospitals could have chosen to meet their statutory obligation

of providing access to patient records by paying Medical Records

directly, rather than imposing the cost on the requestors.  And,

before the district court, Medical Records conceded that "it could

retrieve, copy and provide medical records without billing for the

service."  These assertions reinforce our view that the billing is

most sensibly seen as either a separate service provided by Medical

Records for the hospitals or, as the district court found, an

incidental part of the business -- but not the profession -- of

medical records processing.  As in most other businesses, the bill

is an effect of the service provided, not part of the service

itself.

     MRA suggests that characterizing the fee-setting component of

its business as non-professional, because it does not satisfy the

standard of "special learning acquired through considerable

rigorous intellectual training," see Roe, 412 Mass. at 49, 587

N.E.2d at 217, would lead to exclusion of all of its services since

any error committed by MRA could be traced to a ministerial act,

e.g., searching the wrong hospital's records, omitting an important

report from a medical record, or retrieving the wrong patient's

file.  The upshot, says MRA, is that a professional E & O policy

such as the one it paid for would be worthless to a medical records

business.

     We disagree that classifying some of MRA's work as

nonprofessional would cast all of it into that category.  For

example, in an age when privacy concerns are fundamental, judgments

about who may have access to medical information are both

significant and, it seems to us, not always easily made.  The

ability to make such decisions arguably depends on "special

learning" and "intellectual skill," and the risks associated with

release of records to unauthorized individuals appear substantial. 

Even if some aspects of record-processing, such as the copying of

files or setting of fees, are deemed ministerial or "ordinary,"

that characterization does not negate the professional nature of

its core functions.

     Also unavailing is MRA's reliance on two attorney's fee cases,

Continental Cas. Co. v. Cole, 809 F.2d 891 (D.C. Cir. 1987), and

Lyons v. American Home Assur. Co., 354 N.W.2d 892 (Minn. 1984),

neither of which involved a dispute over the amount charged for a

professional service.  In Cole, a referring attorney filed suit for

breach of contract and fiduciary duty against a law firm that had

not, as promised, obtained his consent to a settlement, and did not

share the fees it received.  In Lyons, partners of a lawyer, Lyons,

sued, inter alia, for breach of fiduciary duty when Lyons forewent,

without consulting them, a one-third contingency fee in favor of a

smaller amount.  Both cases, therefore, were attorney vs. attorney

actions involving judgments in dealing with clients, not client

disputes centering on the administrative procedures of setting fees

or generating invoices.

     MRA also relies heavily on Jefferson Ins. Co., 42 Mass. App.

at 94, 677 N.E.2d at 225, in which both a CGL insurer and an E & O

insurer claimed the other was responsible for covering their common

insured, an ambulance company.  The allegedly negligent conduct was

the delay in arriving at the home of a stricken individual who

later died; the delay, as noted above, resulted from

miscommunication of an address.  The trial court allocated the loss

solely to the E & O insurer, ruling that the CGL policy's

professional services exclusion relieved that insurer of

responsibility.  On appeal, the only issue raised was whether the

CGL policy also covered the loss.  The appeals court held that it

did, concluding that "the negligent conduct complained of did not

constitute professional services," id. at 101-102, 677 N.E.2d at

230-31, and thus was not within the professional liability

exclusion.  Because there was no appeal from the ruling that the

exclusion for professional services applied, the odd result was

that both insurers were held liable.

     MRA argues that Jefferson supports its position because the

professional liability policy there was deemed applicable even

though the alleged negligent conduct did not involve medical

services or any activity or treatment typically thought of as

"professional."  Other than at that superficial level, however,

Jefferson provides little support for MRA.  First, the appeals

court never considered whether the E & O policy provided coverage

for the dispatcher/driver miscommunication, as the E & O insurer's

liability was not challenged on appeal.  Second, although the

appeals court did explicitly recognize that the two policies

overlapped in coverage in the circumstances of that case, see id.at 103 n.18, 677 N.E.2d at 231 n.18, it did not interpret the E &

O policy.  Rather, it noted the trial judge's reliance on

deposition testimony from the E & O insurer's underwriting manager

that the policy covered "any employee acting within the scope of

his duties," and the judge's view that "the essential injury

alleged in the complaint arose out of the failure to render

(timely) emergency care services."  Id. at 97 n.9, 677 N.E.2d at

228 n.9.  The E & O insurer's concession of coverage therefore

played a significant role in Jefferson. 

     Third, on the continuum of professional services, we think an

ambulance company's failure to find the correct address quickly is

much closer to the core of the emergency care profession than fee-

setting is to the central function of the medical records

profession.  Indeed, setting a price for services and sending bills

are functions of every business, and not ones inherent in the

processing of medical records.

     In sum, we are persuaded that the district court properly

found that the allegedly improper conduct challenged in the Lubin

& Meyer letter is not within the coverage of MRA's E & O policy. 

The judgment of the district court is therefore AFFIRMED.