The Doctors Co. v. Women's Healthcare Assocs. ( 2013 )

Present: All the Justices
THE DOCTORS COMPANY
OPINION BY
v. Record No. 120702 JUSTICE LEROY F. MILLETTE, JR.
April 18, 2013
WOMEN'S HEALTHCARE ASSOCIATES,
INC., ET AL.
FROM THE CIRCUIT COURT OF LOUDOUN COUNTY
Burke McCahill, Judge
This appeal arises from a declaratory judgment action in
which The Doctors Company (TDC), a professional liability
insurance company, sought a determination that its coverage of
policyholder Women's Healthcare Associates (WHA) did not apply
to a pending breach of contract action brought by the Davidson
family against WHA. The pending breach of contract action
relates to WHA's participation in the Virginia Birth-Related
Neurological Injury Compensation Act, Code § 38.2-5000 et seq.
(the "Birth Injury Fund"). For the reasons stated herein, we
affirm the holding of the circuit court finding that the policy
covers the claim alleged by the Davidsons in their complaint
against WHA.
I. Facts and Proceedings
The Birth Injury Fund is a statutory structure creating a
no-fault source of compensation for families whose children
suffer birth-related neurological injuries when delivered by a
participating physician or hospital. Code § 38.2-5000 et seq.
Physicians or hospitals voluntarily pay into the fund, which
operates in lieu of civil suits for medical malpractice. Code
§ 38.2-5002. Physicians and hospitals are required to give
written notification to their obstetrical patients of their
participation or non-participation in the fund. Code § 38.2-
5004.1.
The case at bar stems from an underlying breach of contract
action by the Davidson family against WHA, which is not
currently before this Court but integral to these proceedings.
The Davidsons allege that, on December 27, 2006, they entered
into an express contract in which WHA agreed
to provide obstetrical care and pre-natal management
of her pregnancy. . .; to provide her with management
of her ultimate labor and delivery of that child; to
participate in the Virginia Birth-Related Neurological
Injury Compensation Program ("Birth Injury Fund"); and
to inform her if they ceased participating in the
Birth Injury Fund. Such services and contractual
obligations of WHA, through its employee-agents,
continued through at least May 17, 2007, and the
birth[.] In exchange for such services and
contractual obligations, Michele Davidson agreed to
consent to treatment, tender payment on behalf of
herself and [the baby], and waive future malpractice
claims which might arise from a birth-related
neurological injury to [the baby].
The Davidsons then allege that, after they entered into this
contract in part in reliance on WHA's participation in the Birth
Injury Fund, WHA materially breached the contract by failing to
pay into the fund as represented to the Davidsons; that their
child suffered an otherwise compensable injury under the fund
when delivered; and that, due to the breach, the Davidsons were
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not able to receive compensation under the fund. The Davidsons'
complaint includes a copy of WHA's written notification of its
participation in the fund, acknowledged as received by Michele
Davidson, as evidence that such representation was part of the
contract. Although WHA had participated in the fund in the
past, it is undisputed that WHA was not paying into the Birth
Injury Fund at either the time of the notification or at the
time of the birth of the Davidsons' son, a child alleged to have
been born with quadriplegic cerebral palsy and static
encephalopathy. It is likewise undisputed that WHA never
notified the Davidsons of its non-participation during this time
period. As a result of WHA's non-participation, the Davidsons
could not file a claim with the Commonwealth under the Birth
Injury Fund, and instead filed a complaint against WHA setting
forth several related counts of breach of contract and breach of
fiduciary duty. After initial motions before the circuit court,
only two breach of contract counts, one on behalf of Michele
Davidson and one on behalf of her husband, Nathan Davidson,
remain at issue between the Davidsons and WHA.
The action before this Court is a separate declaratory
judgment action in which WHA's professional liability insurance
company, TDC, seeks to establish that the pending breach of
contract action is not covered under the TDC insurance policy
held by WHA. TDC's policy with WHA generally states that it
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provides coverage for "those sums that the [insured] becomes
legally obligated to pay as damages for Claims covered by this
Policy resulting from . . . Professional Services rendered."
(Emphasis in original.) In the policy's "Definitions" section,
a "Claim" is defined as "a demand for payment of damages or for
services arising from a Professional Services Incident . . . not
otherwise excluded by the terms and conditions of this Policy."
(Emphasis in original.) One such exclusion is "[l]iability
arising out of any . . . violation of any statute." TDC argued
below that the alleged liability does not stem from professional
services and is therefore not covered under the policy. In the
alternative, TDC also argued that the liability arising from the
inaccurate notification was in violation of a state statute
requiring notification of participation in the Birth Injury Fund
and therefore excluded from coverage under the language of the
policy.
The circuit court found in favor of WHA and the Davidsons,
and TDC now appeals to this Court. Only the Davidsons filed a
brief in opposition.
II. Discussion
A. Standard of Review
The material facts before the Court are undisputed. The
issues before the Court concern the interpretation and
application of terms of the insurance contract to those
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undisputed facts. We therefore review these questions of law de
novo. Virginia Farm Bureau Mut. Ins. Co. v. Williams, 278 Va.
75, 80, 677 S.E.2d 299, 302 (2009).
B. Whether the Breach of Contract Claims are Covered as
"Professional Services"
The initial question is whether the claim falls under the
scope of "Section II: What Liability Is Covered," subsection b:
"Coverage B – Entity Professional Liability." The section
states that TDC "will pay on behalf of the [insured] those sums
that it becomes legally obligated to pay as damages for Claims
covered by this Policy resulting from . . . Professional
Services rendered by a Protected Party for whose acts or
omissions the [insured] is legally responsible." (Emphasis in
original.)
In addition, Section VII of the policy provides the
following definitions to define the scope of these terms:
a. Claim means a demand for payment of damages or for
services arising from a Professional Services
Incident . . . that is not otherwise excluded by the
terms and conditions of this Policy.
. . . .
l. Professional Services means the diagnosis,
treatment, care, or consultation, regarding a
patient's medical condition.
. . . .
m. Professional Services Incident means the
performance of or failure to perform Professional
Services . . . by:
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1. a Healthcare Professional, when acting within
the scope of his or her specialty and
training[.]
(Emphasis in original.)
TDC takes the position that the alleged breach, injury, and
damages resulted from a misrepresentation in a contract, which
is not within the scope of a provider's specialty and training,
and therefore lacked a causal nexus with professional services
rendered. TDC acknowledges that there were professional
services employed in the birth of the child. TDC argues,
however, that the breach was the misrepresentation and the
injury and damages sustained were incurred due to a lack of
compensation under the fund based on the contractual
misrepresentation, not "resulting from" the professional service
itself as would be alleged in a tort action.
The Davidsons argue that the lack of compensation cannot be
severed from the professional services because one of the
elements required for compensation under the fund, in addition
to a qualifying birth injury, is that the child must have been
delivered by a participating professional service provider or in
a participating hospital. The Davidsons therefore contend that
the injury would not have been possible without the rendering of
professional services, and so the claim is one "arising from"
professional services.
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The parties point to separate portions of the Policy to
support their respective arguments. TDC argues that a plain-
language reading of the term "resulting from" professional
services, as stated in Section II(b) describing the coverage
under the policy, requires a direct nexus, and that a
contractual misrepresentation that is out of the scope of the
doctor's professional training lacks this nexus. The Davidsons
respond that the operative language defining a covered claim is
clarified by the "Definitions" of Section VII to include any
claim "arising from" professional services and not otherwise
excluded by the policy.
The Court is left to resolve this apparent conflict. TDC
has conceded that the use of different language in the drafting
of the contract was not accidental and that "arising from" has a
broader definition than "resulting from." We have said that
"when considering the meaning of any part of a contract, we will
construe the contract as a whole." Cappo Mgmt. V, Inc. v.
Britt, 282 Va. 33, 37, 711 S.E.2d 209, 211 (2011) (quoting
Lansdowne Dev. Co. v. Xerox Realty Corp., 257 Va. 392, 401, 514,
S.E.2d 157, 161 (1999)); see Vega v. Chattan Assocs., Inc., 246
Va. 196, 199, 435 S.E.2d 142, 143 (1993). As a result, despite
TDC's urging that we should apply a plain-language reading of
the term "resulting from," we are obligated to consider both
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phrases and resolve the ambiguity that arises from their
presence in the same contract.
We have consistently held that "[i]n the event of an
ambiguity in the written contract, such ambiguity must be
construed against the drafter of the agreement." Cappo Mgmt.,
282 Va. at 37, 711 S.E.2d at 211 (quoting Martin & Martin, Inc.
v. Bradley Enters., Inc., 256 Va. 288, 291, 504 S.E.2d 849, 851
(1998)) (alteration in original); see Mahoney v. NationsBank of
Va., 249 Va. 216, 222, 455 S.E.2d 5, 9 (1995); Winn v. Aleda
Constr. Co., 227 Va. 304, 307, 315 S.E.2d 193, 195 (1984). This
document, therefore, must be construed against TDC, using the
broader construction attributable to "arising from."
Employing this broader construction thus permits a less
direct nexus between the professional services rendered and the
damages incurred, although such nexus must still be present. We
conclude that, using the common understanding of the language,
the term "arising from" is sufficient to include the
professional services rendered in the birth of the Davidsons'
child, as the rendering of such services would have been
required to receive a payment from the Birth Injury Fund and
therefore to recover damages in the underlying suit.
While not looking at this precise issue, the Fourth Circuit
has had occasion to consider the definition of "professional
services" in a professional liability insurance contract
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construed under Virginia law, and its conclusion reinforces
today's decision. See St. Paul Fire & Marine Ins. Co. v.
Jacobson, 48 F.3d 778, 782 (4th Cir. 1995). The Court stated
that, "in determining whether an insured physician has engaged
in a professional service, courts must look at the nature of the
insured's act or the service provided which gave rise to the
damages complained of." Id. There, as in this case, the
provider's actions included both acts that would be construed as
professional services and others that would not, and the parties
disagreed on "which . . . acts one must look to in determining
whether the suit arose from professional services." Id. The
Fourth Circuit held that, because "[t]he act complained of in
the instant civil action[] necessarily included [a] medical
act," the act was a professional service under the terms of the
policy. Id.
In the case at bar, the alleged breach — non-participation
in the Birth Injury Fund at the time of delivery — and resulting
damages could not have occurred without the professional medical
services provided, i.e., the delivery of the child by WHA. The
delivery of the child by WHA was as necessary an element in the
chain of causation as WHA's failure to participate in the fund
as represented; in the absence of either, the Davidsons could
not be owed compensation under the fund and there could be no
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damages. We thus affirm the ruling of the circuit court as to
this issue.
C. Whether the liability "ar[ose] out of any . . . violation
of any statute."
Section VI of the policy, styled "Exclusions," states that
TDC "will not pay any damages arising from, or defend against,
any of the following: . . . f. Liability arising out of any:
. . . 3. violation of any statute, code, ordinance, or
regulation." (Emphasis added.)
Arguing that WHA's misrepresentation of its participation
was in violation of Code § 38.2-5004.1, which requires
disclosure of participation status to patients, TDC disclaims
any obligation to pay. TDC argues that the Court should apply
the plain meaning of the phrase "arising out of," and that,
because the liability arises out of actions that also violate
Code § 38.2-5004.1, the claim should be excluded from coverage
under the policy.
The Davidsons agree that a plain-language reading is
appropriate, but argue that such a reading requires the Court to
consider from where the liability itself arises. In this case,
they argue, the liability is not based on a violation of the
statute, although one may have occurred, but rather on the
breach of WHA's contractual obligation to participate in the
Birth Injury Fund as claimed in the amended complaint.
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Thus, the Court is once again asked to construe the term
"arising" in the context of this insurance policy. Unlike the
first question, however, which required the Court to choose
between the narrower term ("resulting from") and the broader
term ("arising from"), the parties here both correctly
acknowledge that, under Virginia law, a plain meaning
application is appropriate. See Bentley Funding Group, L.L.C.
v. SK&R Group, L.L.C., 269 Va. 315, 329, 609 S.E.2d 49, 56
(2005) ("When contract terms are clear and unambiguous, we must
construe those terms according to their plain meaning."
(quoting Lansdowne, 257 Va. at 400, 514 S.E.2d at 161)); accord,
Bridgestone/Firestone, Inc. v. Prince William Square Assocs.,
250 Va. 402, 407, 463 S.E.2d 661, 664 (1995).
Here, we conclude that a plain reading of the contract
requires that the Court direct its attention to the elements
necessary for liability, as pled in the action brought by the
Davidsons against WHA. Consistent with our interpretation of
the similar term "arising from" in Part II.B., while there need
not be a direct causal nexus between the statutory violation and
the liability, there must be a sufficient nexus between them to
consider the liability to be "arising out of" the statutory
violation in order for the claim to be exempt.
We therefore consider the allegations within the well-
established framework of breach of contract claims: a legally
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enforceable obligation between the defendant and plaintiff,
breached by defendant, which proximately caused damages to the
plaintiff. Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610,
614 (2004). Here, liability would thus arise out of a finding
that a contract existed between WHA and the Davidsons that
included a legal obligation to participate in the Birth Injury
Fund, that WHA materially breached the contract by failing to
participate in the fund, and that this breach proximately caused
the damages – the lack of compensation from the fund – when the
Davidsons' child was delivered by this provider and suffered an
injury otherwise compensable by the fund.
The alleged liability arises specifically out of WHA's
failure to participate after a promise of participation — that
is, failure to act in accordance with the terms of the express
contract when performing its services — not its failure to
accurately notify of participation, which is the act alleged to
be in violation of the statute. Thus, WHA would be equally
liable for breach of the contract if it were indeed a
participant in the Birth Injury Fund at the time of the
notification but not at the birth, thereby complying with the
statute but denying the child coverage. Furthermore, WHA would
be in no way liable if it had not been a participant at the time
of the notification but began paying into the fund in Mrs.
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Davidson's eighth month of pregnancy, therefore having violated
the statute but resulting in no damages to the Davidsons.
The Davidsons will have to prove at trial that the promise
of participation was a material aspect of WHA's performance of
the contract and that it was breached. Nonetheless, the fact
that the breach is in part evidenced by a written notification
reflecting the misrepresentation of its participation status at
the alleged initiation of the contract does not bear upon the
liability. The statute has no private cause of action, and the
misrepresentation in the notification is incidental to the
breach of contract action. The performance of the alleged
contract included WHA's promise of participation in the fund.
Thus, using even the broad and common meaning of the term,
the alleged liability is "arising out of" the elements of the
breach of the contract, not a violation of the statute. None of
these elements – the lack of participation months after a
representation of participation, the delivery of the baby, and
alleged resulting lack of coverage – arise out of a violation of
the statute. Interpreting "arising out of" to include any
overlap with statutory law, even when that law affords no cause
of action and is not necessary to the elements of the cause of
action, would be outside the scope of the common usage of the
term. We therefore affirm the ruling of the circuit court as to
this issue.
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III. Conclusion
TDC concedes that in this instance its duty to defend and
duty to indemnify are one and the same: TDC has a duty to
defend that which would be indemnified under the policy.
Because the underlying action is covered by the insurance
policy, it must both defend and indemnify WHA in the underlying
breach of contract action.
For the aforementioned reasons, we affirm the holding of
the circuit court.
Affirmed.
JUSTICE POWELL, with whom JUSTICE McCLANAHAN joins, dissenting.
In my opinion, the majority ignores the fact that the
Davidsons specifically allege that the basis of their breach of
contract claim is the misrepresentation, which, in turn, is a
violation of Code § 38.2-5004.1. Therefore, I must respectfully
dissent.
According to the majority, “[t]he alleged liability arises
specifically out of WHA’s failure to participate after a promise
of participation - that is, failure to act in accordance to the
terms of the express contract when performing its services, not
its failure to accurately notify of participation, which is the
act alleged to be in violation of the statute.” In their
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complaint, however, the Davidsons repeatedly reference the
failure to notify as the material breach that serves as the
basis for the present action. Indeed, in Count I of their
complaint, the Davidsons specifically state:
As of at least January 1, 2007, Defendant
WHA was not participating in the Birth
Injury Fund. Under the terms of the
contract and the laws of Virginia, WHA was
required to notify Plaintiff Michelle
Davidson that it did not participate in the
Birth Injury Fund. . . . At no time prior to
Baby Grant’s birth did WHA notify Plaintiff
Michele Davidson that it did not participate
in the Birth Injury Fund. WHA’s failure to
notify Plaintiff Michele Davidson
constituted a material breach of its
contract with Plaintiff Michele
Davidson[.] . . . Had Defendants fulfilled
their obligations under the contract,
Plaintiff Michele Davidson would have sought
medical treatment from an obstetrician who
did participate in the Birth Injury Fund.
(Emphasis added.)
Similarly, the Davidsons repeatedly state that, “[h]ad WHA
informed Plaintiff Michele Davidson that they did not
participate in the Birth Injury Fund, then Plaintiff Michele
Davidson would not have entered into a contract for WHA’s
services.” (Emphasis added.) The clear implication here is
that it was the misrepresentation that formed the basis of their
breach of contract claim. Were it not for the
misrepresentation, the Davidsons affirmatively state that they
would have taken their business elsewhere.
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Conspicuously, the only document produced by the Davidsons
in support of their allegations directly rebuts the majority’s
claim. The “Notice to Obstetrical Patients” states that WHA
“does . . . participate in the Virginia Birth-Related
Neurological Injury Compensation Program.” As the Notice is
written in the present tense, the only inference that can be
drawn is that WHA was misrepresenting its participation in the
Birth Injury Fund, not that it was promising to participate in
the Birth Injury Fund.
Thus, in my opinion, the entire basis of the majority’s
holding is belied by the plain language of the Davidsons’
complaint. Therefore, I would hold that the liability alleged
by the Davidsons arises out of WHA’s failure to accurately
notify - in violation of Code § 38.2-5004.1- and therefore the
Exclusions provisions apply.
Furthermore, I agree with the majority that our focus must
be on the elements necessary for liability in a breach of
contract action. As this Court has repeatedly recognized:
The elements of a breach of contract action
are (1) a legally enforceable obligation of
a defendant to a plaintiff; (2) the
defendant's violation or breach of that
obligation; and (3) injury or damage to the
plaintiff caused by the breach of
obligation.
Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610, 614 (2004)
(citations omitted).
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However, application of these elements to the present case
clearly demonstrates that liability arises from WHA’s violation
of Code § 38.2-5004.1. As evidenced by the “Notice to
Obstetrical Patients,” the legally enforceable obligation
created by the alleged contract between the parties is only
WHA’s statutorily mandated obligation to inform the Davidsons of
its participation or non-participation in the Birth Injury Fund.
The breach of that obligation came when WHA violated Code
§ 38.2-5004.1 and misrepresented its participation in the Birth
Injury Fund. Finally, the injury or damage to the Davidsons was
their inability to collect from the Birth Injury Fund as a
result. Notably, the Davidsons assert that WHA’s express
communication of its participation, which forms the basis for
their breach of contract claim, was through the notification
required by Code § 38.2-5004.1. Clearly, if WHA had not
violated the statute, there would have been no
misrepresentation, and thus, no breach of contract.
As I previously noted, in bringing this action, the
Davidsons specifically relied upon WHA’s violation of “the laws
of Virginia.” Indeed, even the majority recognizes that the
elements include “the lack of participation months after a
representation of participation” - in other words the lack of
participation after a misrepresentation. Thus, the “promise” at
the heart of the majority’s claimed promise to participate is
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the misrepresentation by WHA, which was in violation of the
statute. Therefore, it is inconceivable that the violation of
the statute is merely “incidental” to the breach of contract
when it serves as the very basis for the underlying action.
Furthermore, the majority’s narrow application of the
phrase “arising out of” with regard to the Exclusions provisions
is inconsistent with its broad application of the phrase
“arising from” with regard to Professional Services. As the
majority explained, a broad construction of the phrase “permits
a less direct nexus between the professional services rendered
and the damages incurred, although such nexus must still be
present.” 1 Employing the same broad application to the
Exclusions provisions would require a holding that also permits
a less direct nexus between the violation of the statute and the
breach of contract, although such nexus must still be present.
Thus, even though the majority has deemed the direct
relationship between the breach of contract and the violation of
the statute as merely “incidental,” it is clear that such a
relationship would be sufficient to exclude the claim from
1
“In the insurance context ‘arising out of’ is broader than
‘caused by,’ and ordinarily means ‘originating from,’ ‘having
its origin in,’ ‘growing out of,’ ‘flowing from,’ or ‘incident
to or having connection with.’” Trex Co. v. ExxonMobil Oil
Corp., 234 F. Supp. 2d 572, 576 (E.D. Va. 2002) (applying Virginia
law) (quoting St. Paul Fire & Marine Ins. Co. v. Insurance Co.
of North America, 501 F. Supp. 136, 138 (W.D. Va. 1980) (applying
Virginia law)).
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coverage under the broad application espoused by the majority
with regard to Professional Services. 2
It is further worth noting that, under the majority’s
logic, we look only to how the claim is styled and ignore the
actual basis of that claim. Such an approach is destined to
lead to unreasonable results, such as those in this case: a
medical malpractice insurer having to defend a breach of
contract claim that does not require the victim to prove that
any malpractice actually occurred. Furthermore, the majority
ignores the unintended consequences of its actions. As this is
a breach of contract claim, it is not subject to limitations on
recovery that apply to medical malpractice claims. See Code §
8.01-581.15. Thus, not only is The Doctors Company required to
defend a claim that does not require the Davidsons to actually
prove malpractice, it could be potentially liable for $4
million, more than twice the total amount it would be liable for
in a medical malpractice claim under Code § 8.01-581.15.
For these reasons, I would reverse the decision of the
trial court and grant the declaratory judgment sought by The
Doctors Company.
2
I recognize that the majority uses the term “claim” rather
than liability. However, the term “claim,” as defined in
Section VII of the policy “means a demand for payment of
damages . . . arising from a Professional Services
Incident . . . that is not otherwise excluded by the terms and
conditions of this Policy.” Thus, the term “claim” in this
context is clearly synonymous with liability.
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