Bad Faith Liability: Why Not the CAT Fund?

The Superior Court’s recent decision in Birth Center v. St. Paul Insurance Company (See Case Note on page 3 inside), was a positive step in the evolvement of bad faith law in the malpractice arena, but even greater changes are needed.

In Birth Center, the Superior Court held that an insurance carrier cannot insulate itself from a bad faith claim merely by paying the full amount of an excess verdict against one of their policy holders. Why? Because the excess verdict may not be the only harm suffered when the insured is on the receiving end of a huge verdict. In this particular case, the Birth Center claimed additional consequential damages such as harm to its reputation, loss of business and loss of a loan needed to improve their physical facility. A jury’s verdict in the amount of $700,000.00 for such “other” harm was affirmed by the appellate court.

The Birth Center opinion sends a strong message to malpractice carriers that they better be concerned with more than just the size of the verdict when they contemplate the consequences of their settlement decisions. As such, the decision is indeed a step forward in the application of bad faith principles to medical malpractice litigation.

Positive thought it may be, however, a bad faith development that would really impact favorably on medical malpractice litigation, both from the patient’s and the provider’s standpoint, would be the application of bad faith principles to the CAT Fund. As most of you are aware, the Commonwealth Court in its 1988 Finkbiner decision, essentially gave the CAT Fund a “free pass” by declaring that the Fund cannot be sued in bad faith for their unreasonable refusal to settle. The rationale for the decision was that the sine qua non of a bad faith claim –­a contractual or fiduciary relationship between insured and the carrier — does not exist between the Fund and a doctor or hospital. While on can certainly argue that there is, or at least should be, a fiduciary relationship between the two since a physician’s financial fate, to say nothing of his or her professional reputation, is in the hands of the Fund, Finkbiner remains the law, and it continues to provide a protective shield to bad faith claims.

As a result of this circumstance, the most the Fund stands to lose in any given case is the difference between its offer and $1.2 million, plus perhaps some delay damages. Thus, the deterrent effect provided by bad faith liability, namely, the incentive to move away from unreasonable settlement evaluations, is completely absent in Pennsylvania malpractice litigation. And the irony is that the lack of incentive is actually greatest in the most serious cases. For example, in a case that has an objective value of a few million dollars, The Fund may offer only $1 or $1.1 million on the slim hope that the jury will return a lower-than-expected verdict because their “downside” with such strategy is only $100,000. By contrast, they may have more incentive to “move” in a smaller case having a value perhaps of only $400,000.00 since their “downside” is greater.

The impact of the present circumstance on plaintiffs is obvious: It takes more time to settle fewer cases for smaller dollars. But the plaintiffs are not the only ones hurt in the current environment. Think about the policyholders like the Birth Center who actually want their cases settled, who want to move on with their lives, and who do not want their financial futures put at risk. They too are victims, in some instances more acutely so than are the plaintiffs.

This is not to suggest that the individuals running the CAT Fund are unfair or unreasonable. Quite the contrary; they are professionals like you and I who are simply doing their jobs within the parameters of the current law. Indeed, if there was some provision in the law that gave we plaintiffs lawyers a “leg up” in negotiations, we would unquestionably take advantage of it faster than you can say “bandit settlement.”

No, the Fund is not unfair, but they, unlike the other malpractice “players,” have the luxury of operating in an environment largely devoid of legal sanction. Think about it. If the doctors handling the patients, or the lawyer handling their cases, do not practice in accordance with certain professional standards, we all run the risk of legal liability. The same is true for the claims people at PMSLIC, PHICO, MedPro, MIIX, Princeton, etc. It is not a question of fairness, it is about leveling the playing field. If the doctors, the lawyers and the other claims folks suffer the consequences of conduct which is professionally unreasonable, why should the same not be true for the Fund if they unreasonably jeopardize the financial or professional well­being of a doctor?

In sum, I submit there are few changes that could be made in the current law that would have a more direct and immediate impact on the disposition of malpractice claims in Pennsylvania than to overrule Finkbiner, either judicially or legislatively. That is a proposition which, I suspect, would have the concurrence of both the plaintiffs bar and the medical community.