January 20, 2014

A hospital commenced an action in diversity against the insurer, alleging misrepresentation with regard to certificate of liability insurance. This case is Multicare Health System v. Lexington Insurance Company, 22013 WL 4532248.

Medical Staffing Networking contracted with Multicare Health System to provide the hospital with temporary nursing staff. Pursuant to that contract, Medical Staffing gave the hospital a certificate of liability insurance issued on behalf of Lexington Insurance Company. The certificate stated that Medical Staffing had a professional liability insurance policy that provided up to $5 million of coverage; however, it did not point out that the professional liability policy was subject to a $1 million self-insured retention (SIR).

The hospital became liable for a $785,000 malpractice award that resulted from a lawsuit against a Medical Staffing nurse on contract with the hospital. The award was within Medical Staffing's SIR but Medical Staffing went bankrupt and did not pay it. The hospital then sued Lexington, alleging that the failure to include the $1 million SIR on the certificate was a material misrepresentation on which the hospital relied to its detriment. The district court found in favor of the insurer and this appeal followed.

The Court of Appeals, Ninth Circuit, noted that under Washington law, a defendant is liable for negligent misrepresentation when it makes an affirmative misrepresentation, or negligently fails to disclose information when it has a duty to do so. In this instance, the court found that the complaint did not contain sufficient facts to state a claim for affirmative misrepresentation. It does not claim that any information contained in the certificate is false; it simply alleges that the SIR should have been included and was not.

Furthermore, the court did not find any fact in the complaint stating a claim for negligent failure to disclose information. Under Washington law, a duty to disclose information arises if imposed by a fiduciary relationship or other similar relationship of trust or confidence or if necessary to prevent a partial or ambiguous statement of facts from being misleading. In this situation, the defendants were not in a fiduciary or quasi-fiduciary relationship with the hospital; in fact, there was no relationship at all. Lexington issued a certificate of insurance to Medical Staffing, not the hospital, and Medical Staffing gave the certificate to the hospital as proof that it had insurance. The complaint alleges no facts indicating that including the SIR on the certificate was necessary to prevent a partial statement of facts from being misleading.

The court concluded that it did not believe that the Washington Supreme Court would find a duty to disclose a SIR amount on a certificate that summarizes insurance policies and does not contain a column for retention or deductible amounts. After all, if the defendants had a duty to disclose retentions, exclusions, and all policy terms that a third party could conceivably rely upon when issuing a certificate of insurance, certificates would essentially be transformed into copies of insurance policies and would lose their value as succinct statements of the existence of insurance.

The hospital then argued that if it were allowed leave to amend the complaint, it would claim that the insurer mad an affirmative misrepresentation because it should have put Medical Staffing's professional liability policy into the excess/umbrella liability row on the certificate. This row includes a blank for retention amounts and the hospital claimed that the insurers should have used this blank to state that the professional liability policy was subject to a $1 million SIR. However, the court of appeals dismissed this argument by saying that excess and umbrella policies provide layers of coverage on top of the first layer and the SIR is not a first layer of insurance.

The ruling of the district court was affirmed.

 

Editor' Note: The Ninth Circuit Court of Appeals confirms the point that a certificate of insurance is issued as a matter of information only and to inform the recipient thereof that insurance has been obtained. The certificate of insurance is not the equivalent of an insurance policy and so, items such as SIRs need not be noted in the certificate.