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Appalachian Regional Healthcare v. Cunningham

Supreme Court of Virginia

November 22, 2017

APPALACHIAN REGIONAL HEALTHCARE, ET AL.
v.
JACQUELINE K. CUNNINGHAM, COMMISSIONER OF INSURANCE, ET AL.

         FROM THE STATE CORPORATION COMMISSION

          OPINION

          D. ARTHUR KELSEY JUSTICE

         The State Corporation Commission ("SCC") denied claims filed by a group of Kentucky hospitals (the "Hospitals") requesting reimbursement for $439, 375.20 in legal fees and costs from Reciprocal of America ("ROA"), an insolvent insurer. The Hospitals appeal, arguing that certain agreements constituting an assumption reinsurance transaction provided a contractual basis for the claims and that the SCC erred in concluding otherwise. We disagree and affirm.

         I.

         In the late 1970s and early 1980s, a group of Kentucky hospitals created two self-insured Trusts - the Compensation Hospital Association Trust ("CHAT") and the Kentucky Hospital Association Trust ("KHAT") (collectively, the "Trusts").[1] See 1 J.A. at 422. CHAT provided workers' compensation and employers' liability coverage to the Hospitals and other healthcare providers. KHAT provided professional liability and general liability coverage to the Hospitals and other healthcare providers. The Hospitals were member insureds of CHAT and KHAT.

          A. The Merger

         In 1997, CHAT and KHAT each entered into "Master Agreements" with ROA that merged both Trusts into ROA as the surviving entity. See id. at 66-105, 112-50. The parties[2]executed the Master Agreements and related agreements as part of a holistic transaction and, thus, accepted that the agreements should be construed together. See id. at 101, 146 (incorporating exhibits into the Master Agreements).[3] The Master Agreements also stipulated that the "provisions of this Agreement were negotiated by the parties hereto and such Agreement shall be deemed to have been drafted by all of the parties hereto, " id., thereby seeking to avoid the application of the contra proferentem canon of construction.[4]

         Accompanying each of the Master Agreements was an "Indemnification Agreement" in which ROA agreed to indemnify the Trusts for certain kinds of liabilities and expenses. See id. at 334-40, 342-48. In the Indemnification Agreements, ROA agreed

to indemnify and hold harmless [each Trust] and its member-insureds from any and all Damages arising out of or in connection with the Business, the Assumed Liabilities, the conveyance and delivery of the Transferred Assets, or any related transactions, provided no such indemnification shall be provided for any and all Damages of such member-insureds relating to their obligations under their respective policies of insurance issued by [ROA]. The indemnification by [ROA] . . . shall include reasonable costs and expenses (including fees and expenses of [each Trust's] or any of its member-insured's counsel) in defending itself against any claim Damages arising from or in connection with the Damages.

Id. at 336, 344 (quoted verbatim in pertinent part). Several of the terms in these Indemnification Agreements had contractually defined meanings:

■ "Damages" meant "any liability, expense, cost or obligation, however incurred or characterized, assumed by [ROA] as provided for in this Agreement." Id. (emphasis added).
■ "Assumed Liabilities" included "all obligations" of the Trusts "in connection with [their] Business except for the Excluded Liabilities." Id. The Master Agreements clarified that ROA agreed "to assume and become responsible for all of the Assumed Liabilities at the Closing Date." Id. at 72, 118; see also id. at 176-81 ("Agreement of Assumption").
■ "Business" was defined according to "the meaning set forth in the Recitals, " which described the Trusts' pre-merger self-insurance business. Id. at 335-36, 343-44.

         Because both Trusts were wholly merged into ROA, they had no separate legal existence after the merger. Neither Trust continued to conduct its pre-merger self-insurance business. The liabilities that ROA assumed included the business liabilities of the Trusts prior to the merger. In that context, the Indemnification Agreements expressly addressed legal fees. ROA agreed to indemnify the Trusts for fees and associated costs that the Trusts or any of their member insureds incurred "in defending [themselves] against any claim Damages arising from or in connection with the Damages." Id. at 336, 344.

          B. ROA in Receivership

         In 2003, the Circuit Court of the City of Richmond placed the financially troubled ROA into receivership and appointed the SCC as the Receiver, the Commissioner of Insurance as the Deputy Receiver, and a Special Deputy Receiver. The SCC later found ROA to be insolvent and ordered its liquidation. During the liquidation process, the Hospitals became involved in two separate judicial proceedings.

         The Deputy Receiver initiated the first case ("the Virginia litigation") by filing an application with the SCC requesting authorization for ROA to continue paying workers' compensation claims that ROA had assumed from various self-insured trusts and group self-insurance associations, including CHAT and KHAT. See id. at 579. He filed the application because various state guaranty associations, including the Kentucky Insurance Guaranty Association ("KIGA"), had denied or were likely to deny guaranty fund coverage for these claims. See id.

         The Hospitals joined the Virginia litigation in support of the Deputy Receiver, appearing as the "Kentucky Claimants" or the "Claimants" throughout this litigation and the receivership proceedings. See id. at 2-22, 380 & n.25, 382, 384, 586 & n.25, 588, 590; 2 id. at 667-68, 700-20, 768-69 nn.30-31, 938 n.25. After the Hearing Examiner issued his report in the Virginia litigation, the SCC adopted most of his findings, including his conclusion that "[t]he Assumed Claims constitute 'claims of other policyholders arising out of insurance contracts' pursuant to [Code ยง 38.2-1509(B)(1)(ii)]" and that the claims were therefore ...


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