Providence Health & Services v. Certain Underwriters at Lloyd's London

• Court: District Court, W.D. Washington
• Decided: February 19, 2020
• Docket: 2:18-cv-00495
• Status: Unknown

Opinion

6 UNITED STATES DISTRICT COURT 7 WESTERN DISTRICT OF WASHINGTON 8 AT SEATTLE

9 PROVIDENCE HEALTH AND SERVICES, Case No. C18-495RSM 10 a Washington non-profit corporation; and 11 SWEDISH HEALTH SERVICES, a ORDER GRANTING PLAINTIFFS’ Washington non-profit corporation, MOTION FOR PARTIAL SUMMARY 12 JUDGMENT 13 Plaintiffs,

14 v.

15 CERTAIN UNDERWRITERS AT LLOYD'S 16 LONDON, SYNDICATE 2623/623 (BEAZLEY); and FEDERAL INSURANCE 17 COMPANY,

18 Defendants. 19 I. INTRODUCTION 20 This is an insurance-coverage dispute arising from an $18 million arbitration award for 21 22 the wrongful termination of Dr. David Newell, a neurosurgeon working for Plaintiffs Swedish 23 Health Services and Providence Health Services. The arbitrator found that Plaintiffs violated 24 the Washington Law Against Discrimination (“WLAD”) and breached an employment contract 25 with Dr. Newell. Defendant insurers denied coverage, leading to this action. 26 Plaintiffs now moves for Partial Summary Judgment on one or more of Defendants’ 27 28 affirmative defenses. Dkt. #84. Plaintiffs ask the Court to rule: “(1) the breach of contract exclusion [in the insurance policies] does not preclude coverage for any portion of the 1 2 arbitration award; or (2) even if Dr. Newell’s pure contractual claims are excluded by the 3 Policies, the Insurers cannot allocate any portion of the award to such claims because 4 Providence’s entire liability can be attributed to his claim for retaliation in violation of the 5 WLAD.” Id. at 3. For the reasons stated below, the Court GRANTS Plaintiffs’ Motion. 6 II. BACKGROUND1 7 8 Plaintiff Providence Health and Services is a Washington non-profit corporation 9 headquartered in Renton. Dkt. #38, ¶ 3. It operates hospitals and other clinics in Washington, 10 Alaska, California, Montana, and Oregon. Id. Plaintiff Swedish Health Services is also a 11 Washington non-profit corporation. Id. at ¶ 5. Swedish is a subsidiary of Western 12 13 HealthConnect, which is an affiliate of Providence. Id. Swedish operates hospitals and clinics 14 in Western Washington. Swedish is an insured under Providence’s insurance policies. See Dkt. 15 #38-1 at 67 and 78 (defining Insureds to include Insured Organization and defining Insured 16 Organization to include Subsidiaries). 17 A. Facts of Underlying Claim 18 19 Dr. David Newell is a neurosurgeon and co-founder of the Swedish Neuroscience 20 Institute (“SNI”). The terms of his employment were established in a “Physician Employment 21 Agreement” (“Agreement”). Dkt. #85 (“Bhatia Decl.”), ¶ 2. The Agreement commenced on 22 June 1, 2012, ran for one year, and automatically renewed for successive one-year terms, unless 23 one party or the other terminated the Agreement according to its terms. Id. 24 25 The Agreement required Dr. Newell to immediately report if he became the subject of 26 “any criminal investigation.” Id. The Agreement allowed Swedish to terminate his 27

28 1 Ruling on these limited issues does not require a full recitation of the facts. The following facts are generally agreed to by the Parties. employment upon written notice and without opportunity to cure if Dr. Newell breached that 1 2 obligation. Id. Either party could also terminate the Agreement “without cause upon 180 days 3 prior written notice.” Id. 4 In August of 2015 Dr. Newell reported to Plaintiffs that he was being discriminated 5 against on the basis of age. See Dkt #38-4 (Dr. Newell’s demand for arbitration); Dkt. #39-1 6 Ex. C; Dkt. #39-1 Ex. J; Dkt #84 at 4. Swedish launched an internal investigation. Dkt. #39-1 7 8 at 110. In July of 2016, while that investigation was ongoing, Dr. Newell was arrested and 9 charged with a single count of “sexual exploitation or patronizing a prostitute” in violation of 10 Seattle Municipal Code section 12A.10.040. Dkt. #84 at 5; Dkt #39-1 at 111. Despite Dr. 11 Newell’s contractual obligation to report such criminal investigations to Swedish, he did not do 12 13 so. Instead, Swedish learned of the arrest several months later from a State Medical Quality 14 Assurance Commission letter. Id. 15 On September 20, 2016, Swedish terminated Dr. Newell’s employment on grounds that 16 his failure to report the arrest and the ensuing criminal investigation was a breach of his 17 employment contract. Id. at 112. 18 19 On February 21, 2017, Dr. Newell invoked the arbitration clause in his employment 20 agreement. He asserted nine causes of action: (1) breach of contract; (2) breach of the implied 21 covenant of good faith and fair dealing; (3) wrongful termination in violation of public policy; 22 (4) tortious interference with contract and business expectancy; (5) violation of the Washington 23 Consumer Protection Act; (6) discrimination in violation WLAD and the Age Discrimination in 24 25 Employment Act (“ADEA”); (7) retaliation in violation of the WLAD, ADEA, and Title VII of 26 the federal Civil Rights Act; (8) violation of the Washington Privacy Act; and (9) invasion of 27 privacy. Dkt. #38-4 at 7–11. 28 On August 18, 2017, Judge Paris Kallas rendered her initial arbitration award, stating: 1 2 Having reviewed the evidence, testimony presented at the hearing, and counsels’ argument, I find in favor of Claimant on the 3 following causes of action: breach of contract; breach of implied covenant of good faith and fair dealing; and retaliation in violation 4 of WLAD. Accordingly, I issue the following award in favor of the 5 Claimant and against Respondents, jointly and severally:

6 1. Lost Earnings: $16,500,000

7 2. Emotional Distress: $1,000,000 8 3. Reasonable attorneys’ fees, costs, and expenses (WLAD 9 Claims), in an amount to be determined based on submissions of the parties. The parties are directed to meet 10 and confer to establish a briefing schedule. 11 Respondents are directed to pay the damages identified herein 12 within 30 calendar days of this award. 13 Dkt. #39-1 at 79. A supplemental award was later issued covering Dr. Newell’s attorneys’ fees, 14 costs, and expenses. 15 16 Plaintiffs unsuccessfully challenged the result, including an appeal to the Washington 17 Court of Appeals. See Newell v. Providence Health & Servs., 2019 Wash. App. LEXIS 1647 18 (June 24, 2019). Plaintiffs paid the judgment, and the underlying matter is now concluded. 19 B. Policy Language 20 The first Policy at issue is Beazley One Management Liability Insurance Policy for 21 22 Healthcare Organizations No. W14646150301. Dkt. #39-1 at 2. The Beazley Policy covers 23 loss resulting from a claim for a “Wrongful Act,” defined to mean: “Inappropriate Employment 24 Conduct, Discrimination, Harassment and/or Retaliation by any of the Insureds against an 25 Insured Person ….” Id. at 46. “Inappropriate Employment Conduct,” is defined to include, inter 26 alia: “actual or constructive termination of an employment relationship in a manner which is 27 28 alleged to have been against the law or wrongful,” and “actual or alleged breach of any oral, 1 2 written or implied employment contract or contractual obligation”. Id. at 44 and 21. 3 “Retaliation” is defined to mean: “any actual or alleged Discrimination, Harassment, 4 and/or Inappropriate Employment Conduct against an Employee on account of such 5 Employee’s exercise or attempted exercise of rights protected by law, refusal to violate any law, 6 disclosure or threat to disclose to a superior or to any governmental agency alleged violations of 7 8 the law, or on account of the Employee having assisted or testified in or cooperated with a 9 proceeding or investigation regarding alleged violations of law.” Id. at 45. 10 So far, breach of an employment contract appears to be covered by this Policy. 11 However, a subsequent exclusion states: “The Underwriters shall not be liable to make any 12 13 payment for Loss in connection with or resulting from any Claim.… for breach of an express 14 written employment agreement, or under any policy or procedure providing for payment in the 15 event of separation from employment unless such liability would have attached in the absence 16 of such contract or agreement; provided that this Exclusion shall not apply to Defense Costs 17 incurred in connection with such Claim… Id. at 47. 18 19 This Policy also has a section on allocation stating in part: 20 If both Loss covered by this Policy, and non-covered loss are incurred, either because the Claim made against the Insured 21 includes both covered and non-covered matters, or because a 22 Claim is made against both the Insured and others not insured under this Policy, then…. Settlements, judgments, verdicts and 23 awards shall be allocated between covered Loss and non-covered loss based upon the relative legal and financial exposures of, and 24 the relative benefits obtained in connection with the resolution of 25 the Claim as between the Insureds’ or non-Insureds’ exposure to non-covered loss, and the Insureds’ exposure to covered Loss. In 26 making such allocation determination, the Insureds and Underwriters agree to use their best efforts to determine a fair and 27 proper allocation…. 28 Id. at 37. 1 2 Providence is also covered under a Directors and Officers Excess Liability policy issued 3 by Defendant Federal (“Federal Policy”). Dkt. #38-2 at 141, 161. This policy provides a $10 4 million liability limit in excess of the Beazley Policy. Id. at 141. The Federal Policy “follows 5 form” to the Beazley Policy, meaning it incorporates the terms of the latter policy “except as 6 otherwise provided” in the Federal Policy’s own terms. See id. at 157. 7 8 C. Procedural History 9 By letter dated August 28, 2017, Providence notified Beazley and Federal that an 10 arbitration award over $17 million had been entered against them.2 Dkt #38-8. The letter stated 11 that Dr. Newell’s counsel had initially demanded arbitration on February 22, 2017, and that the 12 13 Hearing took place from July 31 through August 4, 2017. Id. This was the first notification 14 Beazley received concerning the underlying Newell Claim. 15 On February 23, 2018, Beazley issued a letter denying coverage for the Newell claim. 16 Dkt. #38-6. The primary stated reason for declining coverage was that “Providence and 17 Swedish did not promptly notify” Beazley of Dr. Newell’s claim. Id. at 2. 18 19 This litigation was filed in King County Superior Court on March 5 and removed here 20 on April 4, 2018. Dkt. #1. Defendants answered on April 25, 2018. Dkts. #27 and #28. 21 Beazley’s Answer contains the following affirmative defense at issue in this Motion: 22 (Breach of Express Written Employment Agreement 23 Exclusion). Plaintiffs’ claims against Underwriters are precluded in whole or part by Section III.G of the Beazley Policy’s EPL 24 Clause, which provides: “The Underwriters shall not be liable to 25 make any payment for Loss in connection with or resulting from any Claim … for breach of an express written employment 26 agreement, or under any policy or procedure providing for payment in the event of separation from employment unless such 27 liability would have attached in the absence of such contract or 28 2 Plaintiffs state that, including attorney fees, the total amount of the award is now $18,185,178.84. Dkt. #37 at 6. agreement; provided, that this Exclusion shall not apply to Defense 1 Costs incurred in connection with such Claim[.]” 2 Dkt. #28 at 11. 3 Federal’s Answer contains the following affirmative defense: “The claims may be 4 5 subject to the exclusion for breach of a written employment agreement.” Dkt. #27 at 7. 6 III. DISCUSSION 7 A. Legal Standard 8 Summary judgment is appropriate where “the movant shows that there is no genuine 9 dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. 10 11 R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). Material facts are 12 those which might affect the outcome of the suit under governing law. Anderson, 477 U.S. at 13 248. In ruling on summary judgment, a court does not weigh evidence to determine the truth of 14 the matter, but “only determine[s] whether there is a genuine issue for trial.” Crane v. Conoco, 15 16 Inc., 41 F.3d 547, 549 (9th Cir. 1994) (citing Federal Deposit Ins. Corp. v. O’Melveny & 17 Meyers, 969 F.2d 744, 747 (9th Cir. 1992)). 18 On a motion for summary judgment, the court views the evidence and draws inferences 19 in the light most favorable to the non-moving party. Anderson, 477 U.S. at 255; Sullivan v. U.S. 20 Dep't of the Navy, 365 F.3d 827, 832 (9th Cir. 2004). The Court must draw all reasonable 21 22 inferences in favor of the non-moving party. See O’Melveny & Meyers, 969 F.2d at 747, rev’d 23 on other grounds, 512 U.S. 79 (1994). However, the nonmoving party must make a “sufficient 24 showing on an essential element of her case with respect to which she has the burden of proof” 25 to survive summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). 26 Under Washington law, interpretation of an insurance contract is a question of law. 27 28 Overton v. Consol. Ins. Co., 145 Wn.2d 417, 424, 38 P.3d 322 (2002). When interpreting an insurance policy under Washington law, courts consider the policy” as a whole” and give it a 1 2 “fair, reasonable and sensible construction as would be given to the contract by the average 3 person purchasing insurance.” X2 Biosystems, Inc. v. Fed. Ins. Co., 656 Fed. Appx. 864, 865 4 (9th Cir. 2016) (quoting Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 110 P.3d 733, 5 737 (2005)). 6 B. Analysis 7 8 Defendants base the affirmative defenses at issue on the Policy exclusion stating “[t]he 9 Underwriters shall not be liable to make any payment for Loss in connection with or resulting 10 from any Claim: … G. for breach of an express written employment agreement, or under any 11 policy or procedure providing for payment in the event of separation from employment unless 12 13 such liability would have attached in the absence of such contract or agreement; provided 14 that this Exclusion shall not apply to Defense Costs incurred in connection with such Claim… 15 Dkt. #39-1 at 47 (emphasis added). Under Washington law, Defendants bear the burden of 16 showing that this exclusion applies. Mut. of Enumclaw Ins. v. T & G Const., Inc., 165 Wn.2d 17 255, 268, 199 P.3d 376 (2008). 18 19 Plaintiffs argue that liability would attach here even in the absence of the employment 20 Agreement. Given the nature of Judge Kallas’s ruling and the record of Dr. Newell’s WLAD- 21 based complaints, the Court agrees. Judge Kallas clearly found Plaintiffs liable for violating the 22 WLAD in addition to breaching a contract. See id. at 79. She awarded damages for lost 23 earnings and emotional distress without breaking these down into damages caused by breach of 24 25 contract or violation of the WLAD. The WLAD provides an independent tort remedy for both 26 types of damages, and others.3 Although it is true—as argued by Defendants—that the matter 27

28 3 Under the WLAD, any person injured by an act in violation of the statute is entitled to recover “actual damages… together with the cost of suit including reasonable attorneys’ fees,” as well as other appropriate remedies. RCW would likely not have gone to arbitration absent the employment Agreement, this does not mean 1 2 that the entire arbitration award liability arises solely from the employment Agreement. There 3 is no basis to say that the alleged retaliation in violation of the WLAD, an apparently equal 4 source of the liability, would not have been found by a judge or jury outside of arbitration.4 5 Given a fair, reasonable and sensible construction of the Policy language, Defendants have 6 failed to meet their burden of showing that this exclusion applies. 7 8 Defendants contend that certain damages awarded by Judge Kallas can be allocated to 9 the excluded contractual claims, or should have been allocated by Plaintiffs at some earlier 10 point. Dkt. #88 at 10; Dkt #89 at 9. The Court finds that allocation is not possible now given 11 the wording of Judge Kallas’s award. However, even if the Court were to force Plaintiffs to 12 13 attempt to allocate damages, Plaintiffs are correct that Washington case law precludes allocation 14 of damages to a non-covered claim where, as here, the damages in question were recoverable 15 both under a covered theory and an uncovered theory. Dkt. #84 at 12-13 (citing In re Feature 16 Realty Litig., 634 F. Supp. 2d 1163, 1173 (E.D. Wash. 2007) (if no “element of damage is 17 solely attributable to the non-covered cause of action, there is no reasonable basis for 18 19 allocation”); Pub. Util. Dist. No. 1 of Klickitat Cty. v. Int’l Ins., 124 Wn.2d 789, 810, 881 P.2d 20 1020 (1994) (“the damages arising from both the noncovered claims and the covered claims are 21 the same and cannot be separated or allocated”)). The Court notes that any remaining questions 22 about what Plaintiffs should have done in arbitration or at the outset of the dispute with Dr. 23 Newell are intertwined with the question of actual prejudice to Defendants caused by Plaintiffs’ 24 25 delay in providing notice, an issue not before the Court at this time. See Dkt. #61.

26 49.60.030(2). The Court agrees with Plaintiffs that the WLAD provided Dr. Newell with a tort remedy for lost earnings and emotional distress. See Clipse v. Commercial Driver Servs., Inc., 189 Wn. App. 776, 797, 358 P.3d 27 464 (2015). 4 Defendant Federal also contends that there would have been no employment relationship absent the employment 28 Agreement, and thus no liability under the WLAD. Dkt. #89 at 12. There is no factual basis for this assertion; it is possible for employment relationships to exist without employment agreements. IV. CONCLUSION 1 2 Having reviewed the relevant briefing, attached declarations, and the remainder of the 3 record, the Court hereby finds and ORDERS: 4 1) Plaintiffs’ Motion for Partial Summary Judgment, Dkt. #84, is GRANTED as set 5 forth above. 6 DATED this 19 day of February 2020. 7 8 A 9 10 RICARDO S. MARTINEZ CHIEF UNITED STATES DISTRICT JUDGE 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28