In Westfield Insurance Co. v. Orthopedic and Sports Medicine Center of Northern Indiana, Inc. (N.D. Ind. Mar. 28, 2017), an Indiana federal court held an insurer had no duty to defend or indemnify its insured against over scores of malpractice and negligence claims that allegedly caused a meningitis outbreak. The district court concluded that, under the subject CGL and umbrella policies, the underlying claims did not involve an “occurrence” and, further, professional services exclusions precluded coverage entirely.
As background, NECC manufactured a preservative-free methylprednisolone acetate (MPA), an epidural steroid administered by injection for pain management. Orthopedic and Sports Medicine Center of Northern Indiana (OSMC) and its affiliate ASC Surgical Ventures (ASC) purchased the MPA from NECC to treat patients with back pain. However, contaminated MPA ordered and administered by OSMC caused a multistate outbreak of fungal meningitis and other injuries. The patients injected with the MPA suffered from bodily injury or death, which caused them, or their representatives (the individual defendants), to file suit against OSMC, ASC, and certain OSMC Physicians (the OSMC defendants). They generally alleged that the OSMC defendants were negligent in selecting and continuing to deal with NECC.
Westfield Insurance issued two relevant insurance policies to OSMC, a CGL policy and an umbrella policy. The CGL policy contained a Services Furnished By Health Care Providers Exclusion that applied to the insureds’ rendering of or failure to render medical services or treatments or any health or therapeutic service or treatment, as well as the furnishing or dispensing of drugs. The umbrella policy contained a professional services exclusion that applied to the rendering or failure to render any professional service, including medical treatment or health or therapeutic service treatment. Westfield rejected the OSMC defendants’ tender of defense and initiated the subject declaratory judgment action. Notably, the OSMC defendants did not oppose Westfield’s motion for summary judgment, although the individual defendants did.
Westfield initially contended that the underlying lawsuits’ allegations of negligence did not involve an “occurrence,” i.e., an accident, and involved a professional error or omission. In response, the individual defendants contended that the injuries constituted an accident because they were “unexpected” and “without intention” by the OSMC Defendants. The district court sided with Westfield, finding that a lack of intentional wrongdoing did not convert a business error into an “accident.” Therefore, even if the OSMC defendants were negligent in their selection of NECC as a supplier, and in managing that supplier relationship, that was a professional error or omission and not an “accident” or “occurrence.”
Additionally, Westfield contended that the CGL policy’s health care exclusion and the umbrella policy’s professional services exclusion barred coverage. The district court agreed. It reasoned first that the efficient and predominant cause of the individual defendants’ injuries was the injection of the contaminated MPA into the patients’ bodies, especially since the underlying lawsuits did not allege an injury separate or independent from that caused by the injection of the contaminated MPA. The district court was nonplussed by the argument that the OSMC defendants’ negligent selection of NECC as a supplier of the MPA was a non-excluded cause of the individual defendants’ injuries. According to the district court, the individual defendants’ “creative pleading” could not escape the reality that the “immediate and efficient cause of” their injuries was the injection of the contaminated MPA. The district court also rejected the individual defendants’ argument that the term “treatment” in the exclusions could be ambiguous. In determining that the underlying lawsuits involved medical treatment, the district court found compelling that the patients signed consent forms before receiving their MPA injections.
In holding that the umbrella policy’s professional services exclusion applied to the allegations regarding the OSMC defendants’ selection of NECC as their supplier of MPA and their management of that relationship, the district court reasoned that this was reasonably related to the medical service of administering the injections to the patients, which required “professional knowledge, skill, experience, and/or training.” The district court found compelling that ASC, in particular, through its board of directors made a decision to switch from administering preservative-based MPA to preservative-free MPA and through its pharmacist consultants vetted NECC as a supplier of medications. Therefore, the district court granted summary judgment in favor of Westfield.
This decision is important for insurance practitioners, as it illustrates how courts both analyze an “occurrence” and apply “professional services” exclusions in the health care context. It is challenging today to determine with precision the parameters of health care companies’ business operations. But, given the ever-changing nature of the industry, the challenge grows. And, the challenge is especially important for insurers that need to determine the exact risks they intend to insure. Nonetheless, this decision reminds that a tightly-worded exclusion can overcome creative pleading.