Evanston Insurance Company v. Agape Senior Primary Care, Inc , 636 F. App'x 871 ( 2016 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2268
EVANSTON INSURANCE COMPANY,
Plaintiff - Appellant,
v.
AGAPE SENIOR PRIMARY CARE, INC.; SCOTT MIDDLETON; FLOYD
CRIBBS; KEZIA NIXON,
Defendants - Appellees,
and
VICKIE WATTS, as Personal Representative of the Estate of
Dorothy Jones; MEREDITH WOFFORD; DORA ELIZABETH HANNA, by
and through her Personal Representative, King C. Hanna, Jr.,
and on behalf of a Class of Individuals Similarly Situated;
AGAPE SENIOR, LLC; JACKSON & COKER LOCUM TENENS, LLC, a/k/a
Jackson and Coker; LAFAY WALKER, as Personal Representative
of the Estate of Martha Sellers Blackwelder; AMANDA CURTIS;
PRESTON WAYNE CHANDLER, as Personal Representative of the
Estate of Mildred Louise Chandler, deceased; PATTY LARIMORE,
as Personal Representative of the Estate of Annie Larimore,
deceased; THE ESTATE OF CLARICE POTTER; AGAPE NURSING &
REHABILITATION, INC.; AGAPE ASSISTED LIVING, INC.; AGAPE
COMMUNITY HOSPICE, INC.; CAROLINAS COMMUNITY HOSPICE, INC.,
Defendants.
Appeal from the United States District Court for the District of
South Carolina, at Columbia. Joseph F. Anderson, Jr., Senior
District Judge. (3:13-cv-00655-JFA)
Argued: October 28, 2015 Decided: January 15, 2016
Before NIEMEYER and MOTZ, Circuit Judges, and M. Hannah LAUCK,
United States District Judge for the Eastern District of
Virginia, sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: Paul Lindsey Fields, Jr., FIELDS HOWELL, Atlanta,
Georgia, for Appellant. Shaun C. Blake, ROGERS LEWIS JACKSON
MANN & QUINN, LLC, Columbia, South Carolina, for Appellees. ON
BRIEF: Gregory L. Mast, FIELDS HOWELL, Atlanta, Georgia, for
Appellant. Jenkins M. Mann, ROGERS LEWIS JACKSON MANN & QUINN,
LLC, Columbia, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
In 2012, Evanston Insurance Company issued a renewed
Professional Liability Insurance Policy to Agape Senior Primary
Care, Inc. and certain of its employees, doctors, and nurse
practitioners, including Kezia Nixon and Dr. Floyd Cribbs
(collectively, “Agape”). Unbeknownst to any other employee at
Agape, Ernest Osei Addo had stolen Dr. Arthur Kennedy’s
identity, and was fraudulently practicing medicine as an Agape
“physician” ostensibly insured by Evanston. Once Addo’s deceit
was uncovered, Evanston sought to rescind the policy as to all
participants based on Addo’s fraudulent conduct and false
statements on his insurance application.
Evanston and Agape sought a declaration from the United
States District Court for the District of South Carolina as to
whether the fraudulent misrepresentations on an application for
medical malpractice insurance by one person who masqueraded as a
board-certified doctor, fooling employers and patients alike,
should vitiate coverage for all other innocent insureds,
including the medical entity that employed him and its
employees. For the reasons that follow, we affirm the district
court conclusion that South Carolina law and its principles of
equity demand that coverage for the innocent co-insureds remain
in place.
3
I.
In the declaratory judgment action, both parties moved for
summary judgment, largely agreeing as to the facts. Agape
employs physicians and nurse practitioners, sending them to
nursing homes and assisted living facilities with the Agape
name. Agape uses an “integration of services” model that
requires each patient to be treated by multiple physicians and
nurse practitioners.
Sometime around February 2012, Agape hired a man who held
himself out to be Dr. Arthur Kennedy, a South Carolina board
certified physician. Neither Agape nor any of its employees
knew that “Kennedy” was actually Ernest Osei Addo, who was not a
South Carolina board-certified physician. Addo had stolen the
identity of Dr. Kennedy, a former friend of Addo who was out of
the country during Addo’s fraudulent conduct at Agape. Using
Dr. Kennedy’s identity, Addo had obtained a South Carolina
driver’s license with his own photo and previously had gained
employment as a physician with the South Carolina Department of
Mental Health.
In August 2012, approximately six months after hiring Addo,
Agape learned of the fraud after police arrested Addo and
notified Agape of Addo’s true identity. A federal court in
South Carolina sentenced Addo to two years of imprisonment
following his conviction for aggravated identity theft in 2014.
4
All parties agree that Addo fraudulently portrayed himself as
Dr. Kennedy and that Addo’s conduct was dishonest, illegal, and
intentional.
Prior to Addo’s criminal conviction, in 2011, Evanston
issued Physicians, Surgeons, Dentists and Podiatrists
Professional Liability Insurance Policy No. MM-820866 for the
policy period August 1, 2011 to August 1, 2012 (the “First
Policy”). On February 11, 2012, Addo filled out an individual
application for insurance through Evanston, representing himself
to be Dr. Kennedy and board-certified in family medicine.
Evanston had no other information regarding “Kennedy” except the
application. After receiving Addo’s application, Evanston
issued Endorsement 10-10, adding “Kennedy” to the First Policy
and charging an additional $4,000 premium for “Kennedy.”
On July 15, 2012, all applicants, including the individual
physicians, Addo, and Agape, submitted separate renewal
applications. Thereafter, Evanston issued Policy No. MM-822351
(the “Renewal Policy”) for the period from August 1, 2012 to
August 1, 2013. Had Addo’s identity been disclosed, Evanston
would not have issued Endorsement 10-10 or the Renewal Policy.
The First Policy and the Renewal Policy were identical in
relevant part, with the exception of the addition of Kennedy’s
name to the list of insured physicians to the Renewal Policy.
The Policies provided for two different coverages: “Coverage A:
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Individual Liability Coverage” (“Coverage A”) and “Coverage B:
Association, Corporation or Partnership Liability Coverage”
(“Coverage B”). Coverage A related to a list of individual
physicians, each of whom applied for insurance separately.
Coverage B applied to Agape and certain of its employees.
Three lawsuits have been filed against Agape that
potentially relate to the declaratory judgment case on appeal. 1
Evanston currently defends Agape in the lawsuits, all of which
proceed in South Carolina Courts of Common Pleas. 2
1 Other entities have given notice of intent to file suit or
sent letters suggesting they might sue.
2 The relevant suits are:
(1) The Hanna Class Action Lawsuit: This class action
lawsuit was filed against Agape, Scott Middleton, Agape’s CEO,
and Jackson & Coker Locum Tenens, LLC (“Jackson”) in the Court
of Common Pleas for Richland County, South Carolina. Jackson
operates as a physician recruitment and staffing agency and
recommended Addo’s employment to Agape. Defendants removed the
action to the United States District Court for the District of
South Carolina, Columbia Division. Hanna v. Agape Sr. LLC, No.
3:12cv2872 (D.S.C. filed Oct. 4, 2012) (Anderson, J.).
In February 2014, the Hanna plaintiffs filed their first
amended complaint raising eight causes of action for negligent
conduct stemming from Agape and Middleton’s hiring of Addo. The
lawsuit does not allege medical malpractice by any doctors other
than Addo. The district court remanded the action to state
court before a second amended complaint was filed in the Class
Action Lawsuit. Hanna, No. 3:12cv2872 (D.S.C. Jan. 20, 2015)
(order granting motion to remand) (Anderson, J.).
(2) The Larimore Lawsuit: The Larimore estate filed a
complaint against Agape, two nursing homes, and Dr. Cribbs. The
complaint contains two counts of medical malpractice and
(Continued)
6
After the filing of the Class Action Lawsuit, Evanston
brought a separate declaratory action against Agape in the
United States District Court for the District of South Carolina,
Columbia Division. 3 Evanston sought a “determination as to
whether it has a duty to defend and/or indemnify the parties who
have been named in underlying lawsuits (both filed and unfiled)
against [Agape].” Evanston filed a motion for summary judgment,
seeking a ruling “that the [Renewal Policy] does not afford
coverage for the underlying suits and that [Evanston] is not
required to defend or indemnify.” Agape filed a cross-motion
for summary judgment, requesting a ruling “that the [Renewal
Policy] does afford coverage for the claims made in the
underlying actions.”
The district court issued its amended order on the cross
motions for summary judgment in October 2014. The district
court noted that the Supreme Court of South Carolina held in
McCracken v. Gov’t Emps. Ins. Co., 325 S.E.2d 62, 64 (S.C.
highlights poor care by Dr. Cribbs, Addo, and Nurse
Practitioners Nixon and Tonja Gantt.
(3) The Curtis Lawsuit: In August 2013, Amanda Curtis
filed suit against Agape and Jackson. The complaint alleges
assault and battery; defamation, libel, and slander; and,
negligence based on Agape’s hiring and retention of Addo, who
treated Ms. Curtis.
3 Judge Anderson presided over both the Class Action Lawsuit
and the present case.
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1985), that “in the absence of any statute or specific policy
language denying coverage to a co-insured for the arson of
another co-insured, the innocent co-insured shall be entitled to
recover his or her share of the insurance proceeds.” McCracken,
325 S.E.2d at 64. Without express guidance from the Supreme
Court of South Carolina as to whether the innocent co-insured
doctrine applied outside of the arson context, or whether the
fraudulent application by one insured voided the contract ab
initio as to others, the district court addressed this novel
circumstance within the bounds of what would be South Carolina
law. Private Mortg. Inv. Servs., Inc. v. Hotel and Club
Assocs., Inc., 296 F.3d 308, 312 (4th Cir. 2002) (citation
omitted); Brendle v. Gen. Tire & Rubber Co., 505 F.2d 243, 245
(4th Cir. 1974).
The court ruled that the Renewal Policy was void as to Addo
because of his fraudulent misrepresentations. The court did not
“impute” Addo’s conduct to Agape, finding that (1) Addo applied
separately for the Policies and Agape had no knowledge of his
fraud; (2) the Renewal Policy demonstrated an intent to provide
separate insurance coverage for the “co-insureds” and thus the
Renewal Policy was not void ab initio; (3) Exclusion A did not
bar coverage of the other named insureds for malpractice or
personal injury committed in violation of any law or ordinance
unless it was committed by or at the direction of “the Insured”;
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(4) Endorsement 5, read in conjunction with Endorsement 7, was
ambiguous and should be construed to afford the maximum
coverage, meaning that not only were the named physicians and
nurses covered by the Renewal Policy but also any employee or
volunteer; (5) the Renewal Policy did not provide Agape coverage
for its own negligent acts; and, (6) the “Medical Director
Exclusion” barred coverage for any insured while acting as
medical director, but the exclusion could not be applied to a
specific case without more factual development. 4 Evanston filed
the present appeal.
II.
This Court reviews a district court's grant of summary
judgment de novo. Roe v. Doe, 28 F.3d 404, 406 (4th Cir. 1994).
Summary judgment should be granted if, after reviewing all the
pleadings, depositions, affidavits, and other documents
submitted by the parties, the Court finds that the moving party
is entitled to judgment as a matter of law. Id. at 406–07
(citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986);
Celotex Corp. v. Catrett, 477 U.S. 317 (1986)). In evaluating
the evidence, the court must draw all reasonable inferences in
favor of the non-moving party. Id. at 407. “Similarly, in our
de novo review, this court must draw all reasonable inferences
4 Evanston did not challenge this ruling on appeal.
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in favor of the appellant.” Id. (citing United States v.
Diebold, Inc., 369 U.S. 654, 655 (1962)).
The Supreme Court of South Carolina applies the “general
rules of contract construction” to construe insurance policies.
B.L.G. Enters., Inc. v. First Fin. Ins. Co., 514 S.E.2d 327, 330
(S.C. 1999) (citations omitted). “Ambiguous or conflicting
terms in an insurance policy must be construed liberally in
favor of the insured and strictly against the insurer.”
Williams v. Gov’t Empls. Ins. Co. (GEICO), 762 S.E.2d 705, 710
(S.C. 2014) (quoting Diamond State Ins. Co. v. Homestead Indus.,
Inc., 456 S.E.2d 912, 915 (S.C. 1995)).
A common general contract principle “allows an injured
party to void a contract when that party’s assent to the bargain
is induced by the fraudulent or material misrepresentation of
the other contracting party, and the injured party relied on the
misrepresentation in question.” Robert H. Jerry, II & Douglas
R. Richmond, Understanding Insurance Law, 738 (5th ed. 2012).
Some states, including South Carolina, statutorily modify the
traditional contract principle in the insurance context by
requiring the insured party to have intended to defraud the
insurance company. Id.; see, e.g., S.C. Code § 38-71-40
(requiring intent to defraud in order to rescind accident and
health insurance policies).
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“Rescission is an equitable remedy that attempts to undo a
contract from the beginning as if the contract had never
existed.” ZAN, LLC v. Ripley Cove, LLC, 751 S.E.2d 664, 669
(S.C. 2013) (citation omitted). In order to completely rescind
a contract, the plaintiff must show a breach that is “so
substantial and fundamental as to defeat the purpose of the
contract.” Id. Thus, “[r]escission will not be granted for a
minor or casual breach of a contract, but only for those
breaches which defeat the object of the contracting parties.”
Id. (citations omitted).
III.
A.
Evanston contends that the innocent co-insured doctrine
does not apply, and that “principles of general contract law
regarding fraudulent procurement support rescission of the
entire policy.” We disagree. South Carolina law and principles
of equity weigh in favor of allowing coverage for the innocent
co-insured parties, who are the individual doctors, nurses, and
Agape. South Carolina law disfavors rescission against the
insured. In particular, under South Carolina law, three factors
tip the equity scales in favor of Agape: (1) as the insurer and
drafter, Evanston could have included forfeiture language in the
policy; (2) neither Agape nor any of its employees had any
knowledge of Addo’s fraud, rendering them “innocent” under South
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Carolina law; and, (3) the public interest would not be served
through rescission.
South Carolina construes insurance policies “liberally in
favor of the insured and strictly against the insurer.” USAA
Prop. and Cas. Ins. Co. v. Clegg, 661 S.E.2d 791, 797 (S.C.
2008) (citation omitted). In the face of an action for
rescission, the Supreme Court of South Carolina repeatedly
confirms that “[f]orfeitures of insurance contracts are not
favored.” Puckett v. State Farm Gen. Ins. Co., 444 S.E.2d 523,
524 (S.C. 1994); Johnson v. S. State Ins. Co., 341 S.E.2d 793,
794 (S.C. 1986); Small v. Coastal States Life Ins. Co., 128
S.E.2d 175, 177 (S.C. 1962).
Within this context, the Court addresses the issues in this
case. First, the Supreme Court of South Carolina in McCracken
noted that insurers, as drafters of insurance policies, can
include express policy language supporting their position to
rescind for the intentional misrepresentation of any applicant.
325 S.E.2d at 64. In McCracken, the South Carolina Supreme
Court held that an innocent wife could recover insurance
proceeds notwithstanding her husband’s arson of their home.
Id.; see also Nationwide Mut. Ins. Co. v. Comm’l Bank, 479
S.E.2d 524, 527 (S.C. Ct. App. 1996) (distinguishing McCracken
because of its emphasis on the absence of language denying
payment when insured engaged in fraud). Evanston, as the
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insurer and drafter, could easily have included provisions
limiting coverage in the face of fraud by one discrete
applicant. It did not do so. The district court correctly
noted that South Carolina and other states emphasize the
existence of such provisions, when they are present, in order to
limit coverage. See Evanston Ins. Co. v. Watts, 52 F. Supp. 3d
761, 769 (D.S.C. 2014) (citing K & W Builders, Inc. v. Merchs. &
Bus. Men’s Mut. Ins. Co., 495 S.E.2d 473, 477 (Va. 1998); S.C.
Farm Bureau Mut. Ins. Co. v. Kelly, 547 S.E.2d 871, 876 (S.C.
Ct. App. 2001)).
Second, given the reasoning articulated in McCracken, the
district court did not err in its forecast that South Carolina
would extend the innocent co-insured doctrine beyond the context
of arson and into other areas of insurance. McCracken looked to
the parties’ respective responsibility for bad acts, explicitly
rejecting a requirement that the court look to the relative
obligations of the parties. Instead, the court adopted the
innocent co-insured doctrine that examines the liabilities of
the parties for the fraudulent act. See McCracken, 325 S.E.2d
at 63–64. South Carolina statutory law reinforces the view that
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the insured usually must exhibit some fault in order to support
vitiation of an insurance policy. 5
Finally, public policy considerations—appropriate to weigh
in this equitable action—reinforce that the district court
arrived at the proper outcome under South Carolina law. Equity
cannot demand that the actions of one corrupt applicant, who
conned Agape and Evanston alike, deprive the innocent insureds
of the benefit of their contract. Agape and its employees
separately applied for medical malpractice insurance in good
faith, and they would be left without such insurance through no
fault of their own. Evanston accepted individual premiums as to
each insured and seemingly spread the risk accordingly.
Further, and perhaps more important in an equitable
determination, rescission would leave the public essentially
unprotected on matters of medical malpractice brought against
5
Under South Carolina statutory law, an accident or health
insurance policy is not void ab initio despite a material
misrepresentation made in the application unless “the false
statement was made with actual intent to deceive or unless it
materially affected either the acceptance of the risk or the
hazard assumed by the insurer.” S.C. Code § 38-71-40. South
Carolina common law places the burden on the insurer to show, by
clear and convincing evidence, that: (1) the statements made on
the application were untrue; (2) the applicant knew the
statements were false; (3) the statements were material to the
risk; (4) the insurer relied on the false statements; and, (5)
the statements were made with the intent to deceive and defraud
the company. Lanham v. Blue Cross & Blue Shield of S.C., Inc.,
563 S.E.2d 331, 334 (S.C. 2002).
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every other Agape employee. See First Am. Title Ins. Co. v.
Lawson, 827 A.2d 230, 240 (N.J. 2003).
The district court faced a novel application of the
innocent co-insured doctrine otherwise employed by South
Carolina courts. For the reasons stated above, the district
court did not err when it concluded that South Carolina would
not allow rescission under the facts of this case. Accordingly,
the Court will affirm the district court’s holding that the
Renewal Policy is not void ab initio.
B.
Evanston next argues that, if the Renewal Policy is not
void ab initio, the district court erred in allowing coverage of
claims for “administrative failures,” as opposed to limiting
coverage to claims for “medical malpractice or personal injury.” 6
Evanston fundamentally misunderstands the district court’s
decision.
The district court plainly held that the policy provided
coverage to Agape “for the acts and omissions of all Coverage A
Named Insureds and Coverage B Named Insureds, to the extent such
individuals were acting within the scope of their duties on
behalf of [Agape.]” Nowhere did the district court’s decision
6No party disputes that “Dr. Kennedy” and Addo, whose name
appears nowhere on the insurance policy, lack coverage.
15
extend such coverage to Agape for its own administrative
failures. Indeed, the district court observed, albeit in a
footnote, that the policy did not “provide coverage to [Agape]
for any of its own negligent acts.” A reading of this
malpractice policy to exclude coverage for Agape’s own negligent
administrative acts such as negligent hiring and retention is
not in error. Accordingly, the Court affirms the district
court’s interpretation of its finding of coverage under the
policy.
Evanston further asserts that the district court improperly
construed Exclusion A, which states:
This policy does not apply to:
A. any Malpractice or Personal Injury committed in
violation of any law or ordinance; to any Claim based
upon or arising out of any dishonest, fraudulent,
criminal, malicious, knowingly, wrongful, deliberate,
or intentional acts, errors or omissions committed by
or at the direction of the Insured . . . .
Additional exclusions, lettered B through S, followed Exclusion
A. Evanston avers that the district court failed to apply this
exclusion and instead allowed coverage for claims against Named
Insureds arising from the acts and omissions of Addo. Evanston
again misinterprets the district court’s decision.
The district court correctly concluded that “all other
Coverage A Named Insureds are entitled to coverage, to the
extent a claim exists that would trigger their coverage under
16
the [Renewal Policy].” As discussed above, the phrase “all
other Coverage A Named Insureds” does not include Addo or
Kennedy. The district court noted that coverage extended only
to claims arising from “the acts and omissions of all Coverage A
Named Insureds and Coverage B Named Insureds, to the extent such
individuals were acting within the scope of their duties on
behalf of [Agape.]” In sum, the district court did not hold
that coverage extends to claims arising from Addo’s acts and
omissions. 7 Accordingly, the Court affirms the district court’s
interpretation of Exclusion A.
Finally, Evanston argues that the district court failed to
apply its rulings to each individual lawsuit and potential
lawsuit presented to the court, contending that the district
court’s order has caused more disputes. “It is well settled
that an insurer's duty to defend is based on the allegations of
the underlying complaint.” B.L.G. Enters., 514 S.E.2d at 330.
“In examining the complaint, a court must look beyond the labels
describing the acts to the acts themselves which form the basis
of the claim against the insurer.” Collins Holding Corp. v.
Wausau Underwriters Ins. Co., 666 S.E.2d 897, 899 (S.C. 2008).
7Indeed, Agape conceded that, as a result of Exclusion A,
it lacks coverage “for a claim where the sole basis of liability
against [Agape] is vicarious liability for the actions or
omissions of Addo.”
17
The record shows the existence of three filed lawsuits:
the Class Action Lawsuit, the Larimore Lawsuit, and the Curtis
Lawsuit. However, none of the parties in interest in these
suits were brought before the district court. See A.S. Abell
Co. v. Chell, 412 F.2d 712, 717 (4th Cir. 1969) (noting that the
district court may withhold declaratory relief for nonjoinder of
interested parties). Accordingly, the district court did not
err when it made no declarations regarding a duty to defend
against lawsuits not properly before it.
IV.
For the foregoing reasons, the district court correctly
interpreted the policy and committed no error when it applied
the innocent co-insured doctrine to the novel circumstances of
this case. South Carolina law and principles of equity demand
that fraudulent misrepresentations on an application for medical
malpractice insurance by a person posing as a doctor should not
vitiate the insurance policy as to his or her innocent employer
and fellow employees.
Accordingly, the judgment of the district court is
AFFIRMED.
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