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Capitol Specialty Insurance Corp. v. Big Sky Diagnostic Imaging, LLC

United States District Court, D. Montana, Billings Division

January 30, 2019

CAPITOL SPECIALTY INSURANCE CORPORATION, Plaintiff,
v.
BIG SKY DIAGNOSTIC IMAGING, LLC, Defendant.

          FINDINGS AND RECOMMENDATIONS OF U.S. MAGISTRATE JUDGE

          TIMOTHY J. CAVAN UNITED STATES MAGISTRATE JUDGE.

         Plaintiff Capitol Specialty Insurance Corporation (“Capitol Specialty”) brings this action seeking a declaratory judgment that it had no duty to defend Defendant Big Sky Diagnostic Imaging, LLC (“Big Sky”) in an underlying lawsuit, and that it is entitled to reimbursement of defense costs. (Doc. 1.)

         Presently before the Court are the parties' cross-motions for summary judgment.[1] (Docs. 21, 26.) The motions have been referred to the undersigned under 28 U.S.C. § 636(b)(1)(B), and are fully briefed and ripe for the Court's review. (Docs. 29, 34, 41.)

         Having considered the parties' submissions, the Court RECOMMENDS Capitol Specialty's motion be GRANTED and that Big Sky's motion be DENIED.

         I. FACTUAL BACKGROUND[2]

         This case concerns whether Capitol Specialty had a duty to defend Big Sky against a malpractice claim arising from Big Sky's alleged failure to properly diagnose breast cancer during a patient's annual mammogram.

         For several years, Patricia Harby had annual mammograms at Big Sky. (Doc. 30 at ¶ 12.) In 2013, Ms. Harby underwent her annual mammogram at Big Sky on September 9 (id. at ¶ 12.b.), and a bilateral breast ultrasound on September 12. (Doc. 35 at ¶ 19.b.) Dr. Jesse Cole, M.D. informed Ms. Harby that the ultrasound examination did not reveal any abnormal findings and that she should not be concerned. (Id. at ¶ 19.d.)

         After conducting Ms. Harby's mammogram and ultrasound, Big Sky lost its American College of Radiology accreditation for mammography. (Doc. 30 at ¶ 13.) On June 12, 2014, Ms. Harby received a certified letter from Big Sky advising her that the mammogram she underwent on September 9, 2013 did not meet the Mammography Quality Standards Act, and the results of the imaging were unreliable. (Id. at ¶ 12.c.) Ms. Hardy returned to Big Sky for repeat testing, which revealed that Ms. Harby had breast cancer. (Id. at ¶ 12.d.)

         Following the loss of accreditation, Big Sky's existing liability insurer chose not to renew Big Sky's insurance coverage, starting in the fall of 2014. (Doc. 30 at ¶ 14.) Therefore, Big Sky obtained a healthcare organization professional liability policy through Capitol Specialty, effective on August 22, 2014. (Id. at ¶ 1; Doc. 35 at ¶ 1.) The policy was effective for one year. Big Sky purchased subsequent liability policies from Capitol Specialty in August 2015 and August 2016.

         On September 4, 2015, Ms. Harby and her husband, Greg Harby, filed an Application for Review of Claim with the Montana Medical Legal Panel (“MMLP”). (Docs. 22-2 at 1-15; 30 at ¶ 4.) The Application form required the Harbys to identify the “Health Care Providers Against Whom Claim is Made.” (Doc. 22-2 at 1.) The Harbys named “Jesse Cole, M.D., ” “David Chamberlain, M.D., Medical Director Big Sky Diagnostic Imaging, LLC, ” and “Big Sky Diagnostic Imaging, LLC.” (Id.; Doc. 30 at ¶ 5.) The Application included a “Statement of Incident” that alleged, among other things, negligence on the part of Dr. Cole and Big Sky in failing to diagnose Ms. Harby's cancer. (Doc 22-2.)

         Shortly thereafter, the Harbys submitted an Amended Application for Review of Claim to the MMLP on September 11, 2015. (Docs. 30 at ¶ 7; 22-3.) The Amended MMLP Application removed Big Sky from the section of the form for “Health Care Providers Against Whom Claim is Made” and added it the section for “Other Necessary and Proper Parties Not Designated Health Care Providers.” (Docs. 30 at ¶¶ 8-9; 22-3 at 1.) No other substantive changes were made; the factual allegations in the Amended Application were identical to those in the initial Application. (Docs. 22-2; 22-3.)

         On August 10, 2016, Dr. Cole, on behalf of Big Sky, signed an Application for a Policy with Capitol Specialty for the subsequent year. (Doc. 30 at ¶ 15.) Dr. Cole represented that Big Sky was not “aware of any actual or alleged fact, circumstance, situation, error or omission, which can reasonably be expected to result in a Claim, suit or proceeding being made against” Big Sky. (Id.; Doc. 22-7 at 4.)

         On September 14, 2016, the Harbys filed a Complaint against Dr. Cole and Big Sky in Montana's Second Judicial District Court, Silver-Bow County. (Doc. 30 at ¶ 17.) The Complaint made the same substantive allegations as those contained in the Application filed with the MMLA. (Id. at ¶ 18.)

         Big Sky submitted the claim to Capitol Specialty on October 28, 2016. (Doc. 30 at ¶ 19.) On April 27, 2017, Capitol Specialty accepted the defense of Big Sky in the underlying lawsuit, under a reservation of rights. (Doc. 30 at ¶ 20.) All claims against Big Sky in the underlying lawsuit were ultimately dismissed with prejudice on March 9, 2018. (Doc. 30 at ¶ 21.)

         II. THE POLICIES

         The effective dates and termination dates of the Capitol Specialty policies issued to Big Sky were:

2014 Policy: August 22, 2014 - August 22, 2015
2015 Policy: August 22, 2015 - August 22, 2016
2016 Policy: August 22, 2016 - August 22, 2017

(Doc. 10 at ¶¶ 5-7.)

         The policies were “claims-made” policies, which provided coverage only for claims made against Big Sky and reported to Capitol Specialty during the policy period.[3] Specifically, the polices provided:

THIS INSURING AGREEMENT PROVIDES CLAIMS-MADE AND REPORTED COVERAGE. “CLAIMS” MUST FIRST BE MADE AGAINST THE INSURED AND REPORTED TO U.S. DURING THE POLICY PERIOD UNLESS AN EXTENDED REPORTING PERIOD APPLIES.
(Doc. 22-1 at 3.)
In addition, the policies specified that:
If, during the Policy Period or any Extended Reporting Period, any Claim for an Incident is first made against any Insured, as a condition precedent to its right to any coverage under this Policy, the Insured shall give Us written notice of such Claim as soon as practicable thereafter, but in no event later than: (1) sixty days after the Expiration Date or earlier cancellation date of this Policy. . .”

(Id. at 19.)

The policies defined a “Claim” as follows:
a demand which seeks damages, any circumstance which is likely to result in a demand for damages, or a Suit. Claim does not include a request for medical records, a Patient Incident report, a variance report, or any other report made for loss prevention purposes, a subpoena for documents, an investigation brought solely by or on behalf of any governmental agency, or a demand or action seeking solely non-monetary or injunctive relief.
(Id. at 9.)
Further, the policies excluded coverage for any:
Incident that happened before the Retroactive Date if applicable, or after the Retroactive Date if, on the Inception Date of this Policy, the Insured knew, had been told, should have known or had notified a prior insurer or administrator of any other risk transfer instrument that such Incident may result in a Claim.
(Id. at 18.)

         Capitol Specialty had knowledge of Big Sky's loss of mammography accreditation. Therefore, the policies also incorporated a “mammogram exclusion, ” which excluded “[a]ll claims arising from any Mammograms performed by or on ...


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