Appalachian Regional Healthcare v. Cunningham
806 S.E.2d 380
Va.2017Background
- In 1997 two Kentucky self-insured hospital trusts (CHAT and KHAT) executed Master Agreements and Indemnification Agreements merging into Reciprocal of America (ROA), under which ROA assumed the trusts’ pre-merger liabilities.
- The Indemnification Agreements stated ROA would indemnify the trusts and their member-insureds for "Damages" (defined as liabilities, expenses, costs or obligations assumed by ROA) and expressly included "reasonable costs and expenses (including fees and expenses of ... counsel) in defending itself against any claim Damages arising from or in connection with the Damages."
- ROA went into receivership and liquidation in 2003; the Hospitals participated in (a) a receivership-related Virginia proceeding supporting the Deputy Receiver and (b) a Kentucky suit seeking guaranty association coverage (KIGA).
- After prevailing or advancing their interests in those proceedings, the Hospitals claimed $439,375.20 in legal fees from the Special Deputy Receiver under the Indemnification Agreements; the Receiver denied the claims and the SCC granted summary judgment for the Receiver.
- The SCC and the Virginia Supreme Court concluded the indemnity language did not obligate ROA to reimburse fees for the Virginia and Kentucky litigation because those fees were not liabilities that ROA had assumed from the trusts at merger.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Indemnification Agreements require ROA to pay Hospitals' legal fees from the Virginia and Kentucky proceedings | Hospitals: the agreements indemnify member-insureds for counsel fees incurred in "defending... against any claim"—their participation defended their status and rights as policyholders, so fees are covered | Receiver/ROA: indemnity covers only liabilities "assumed by ROA" from the trusts; Hospitals’ litigation fees were not pre-merger liabilities and thus were not assumed | Court: indemnity limited to "Damages" assumed by ROA; litigation fees at issue were not assumed pre-merger liabilities, so ROA not obligated to reimburse |
| Whether the indemnity clause is ambiguous (triggering contra proferentem or insured-favoring rules) | Hospitals: clause should be construed for insureds; broader reading covers their fees | Receiver: parties negotiated agreements and included mutual drafting clause; language is unambiguous so contra proferentem does not apply | Court: clause unambiguous; interpret by plain meaning; insured-favoring canon inapplicable |
| Whether Hospitals’ participation in receivership/declaratory litigation constitutes "defending... against any claim" | Hospitals: their actions were defensive to avoid paying underlying claims or losing coverage—thus within "defending" | Receiver: "defending against any claim" means defending against claims asserted against them, not asserting claims or protecting status; Hospitals were asserting/making claims | Court: plain meaning is defending against a claim brought by someone else; Hospitals’ suits were not that and fall outside indemnity |
| Whether the agreements should be read to impose indemnity for contingencies of ROA insolvency (e.g., pursuit of guaranty coverage) | Hospitals: reading should include fees spent securing guaranty coverage or receivership priority | Receiver: parties did not contract to shift post-merger insolvency litigation costs; such a change would require explicit language | Court: cannot rewrite unambiguous contract to supply such a contingency; absent explicit provision, no indemnity for those fees |
Key Cases Cited
- Babcock & Wilcox Co. v. Areva NP, Inc., 292 Va. 165 (2016) (unambiguous contract language is enforced according to plain meaning)
- Colonial Am. Life Ins. v. Commissioner, 491 U.S. 244 (1989) (describing assumption reinsurance where an assuming insurer steps into the ceding company’s shoes)
- Hartford Fire Ins. v. California, 509 U.S. 764 (1993) (discussing effect of assumption reinsurance and insurers’ liabilities)
- TravCo Ins. v. Ward, 284 Va. 547 (2012) (integrated agreements executed contemporaneously are construed together)
- Merit Life Ins. v. Commissioner, 853 F.2d 1435 (2d Cir. 1988) (assumption agreements characterized and their tax/functional consequences discussed)