251 W.Va. 180
W. Va. Ct. App.2024Background
- West Virginia Mutual Insurance Co. (Mutual) issued a professional liability policy (retroactive to 7/1/1994) covering Dr. Steven Matulis with $1M per-incident / $3M aggregate limits; policy contained exclusions for sexual acts/activities, criminal acts, and intentional/reckless/malicious acts, plus a $25,000 Broad Form Administrative Defense endorsement (30‑day notice requirement).
- Beginning in 2016 multiple former patients sued Matulis and his employer alleging either digital vaginal exams (DVEs) or breast touching during sedated procedures; suits were consolidated for discovery and pretrial matters; Mutual defended some claims under a reservation of rights and denied others.
- Mutual filed a declaratory judgment action seeking no duty to defend/indemnify; Matulis counterclaimed for breach of contract, Hayseeds attorney fees, and damages after being criminally convicted (breast‑fondling count) and losing license/hospital privileges.
- The circuit court held Mutual had a duty to defend broadly, excluded evidence of Matulis’ sexual misconduct at the Hayseeds trial, and awarded Matulis breach damages, prejudgment interest, and Hayseeds attorney fees (total judgment ≈ $1.47M).
- On appeal the ICA (majority) analyzed duty‑to‑defend by complaint‑by‑complaint: it affirmed duty to defend in several suits alleging plausible medical‑purpose DVEs or lack of informed consent, reversed/no‑duty in complaints that were essentially sexual misconduct (e.g., breast fondling), vacated parts of the fee and damages awards, and remanded for further findings and recalculation.
Issues
| Issue | Mutual's Argument | Matulis' Argument | Held |
|---|---|---|---|
| Duty to defend under policy (intentional/sexual/criminal exclusions and definitions of “medical incident”/“professional services”) | No duty: complaints plead intentional sexual misconduct or criminal acts that trigger exclusions and are not medical services | Duty exists: many complaints plead negligence/medical malpractice alternatively (DVEs could be medically indicated); insurer must defend plausible covered claims | Duty to defend only for complaints that plausibly allege non‑frivolous medical negligence/DVEs; no duty for complaints that are essentially sexual misconduct (breast fondling) or otherwise indisputably criminal; affirm in part and reverse in part on coverage determinations |
| Recoverability of attorney fees as breach damages (criminal defense, coverage disputes, unrelated carrier litigation, asset‑protection) | Not recoverable: policy excludes criminal defense and breach damages should be limited to fees defending covered civil claims; fees for other matters (criminal, unrelated declaratory suits, asset protection) are not contract damages | Recoverable as part of ‘‘common defense’’ or because work aided covered defense; Hayseeds fees cover vindication-related work | Criminal defense, unrelated‑carrier litigation, and asset‑protection/bankruptcy fees are not recoverable as breach damages; circuit court must eliminate duplicative or nonrecoverable entries and recalculate |
| Broad Form Administrative Defense endorsement (timeliness of notice; whether sexual‑misconduct admin claims are covered) | No coverage: insured failed to give required 30‑day notice; insured may not have been covered when notice given; endorsement excludes personal injury from sexual misconduct | Coverage: notice was timely or effectively provided by third parties; endorsement language may cover administrative proceedings alleging sexual misconduct | Circuit court failed to make necessary factual findings on who gave notice, timeliness, reasonableness, and prejudice; remand required to resolve notice and prejudice issues and insurer’s other defenses |
| Evidentiary rulings, Hayseeds fee award, net economic loss, and prejudgment interest calculation | Exclusion of all sexual‑misconduct evidence proper to isolate coverage liability; jury could decide damages without unrelated events; fee award and interest calculations were proper | Mutual should have been able to show sexual misconduct and related administrative/criminal proceedings to rebut distress and fee claims; net economic loss unsupported by evidence of market value at time of 2017 sale | Court abused discretion by broadly excluding evidence of sexual misconduct and related administrative/criminal events; Hayseeds fee award must be parsed to remove nonrecoverable/time not tied to vindicating coverage; net economic loss award vacated for lack of evidence of property value at time of sale; court may compute prejudgment interest (arithmetic) on remand |
Key Cases Cited
- Horace Mann Ins. Co. v. Leeber, 180 W. Va. 375, 376 S.E.2d 581 (W. Va. 1988) (intentional‑injury exclusion bars duty to defend when complaint is essentially sexual misconduct)
- Smith v. Animal Urgent Care, Inc., 208 W. Va. 664, 542 S.E.2d 827 (W. Va. 2000) (negligence‑type allegations cannot overcome intentional‑acts exclusion where complaint is essentially sexual harassment/assault)
- W. Va. Fire & Cas. Co. v. Stanley, 216 W. Va. 40, 602 S.E.2d 483 (W. Va. 2004) (intentional sexual abuse allegations are not covered despite some negligence language)
- Aetna Cas. & Sur. Co. v. Pitrolo, 176 W. Va. 190, 342 S.E.2d 156 (W. Va. 1986) (insured who substantially prevails may recover attorney fees and certain damages)
- Farmers & Mechanics Mut. Fire Ins. Co. v. Hutzler, 191 W. Va. 559, 447 S.E.2d 22 (W. Va. 1994) (insurer must look beyond pleadings and make reasonable inquiry into facts for duty‑to‑defend analysis)
- Colonial Ins. Co. v. Barrett, 208 W. Va. 706, 542 S.E.2d 869 (W. Va. 2000) (notice to insurer may be satisfied by timely notice from third party; factors govern late‑notice inquiry)
- Travelers Indem. Co. v. U.S. Silica, 237 W. Va. 540, 788 S.E.2d 286 (W. Va. 2015) (two‑step rule for late notice: insured must show reasonableness of delay before insurer must prove prejudice)
- Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73 (W. Va. 1986) (standards for awarding attorney fees and damages when insured prevails against insurer)