No Coverage Under a Claims-Made Policy for Former Employee Even When Insured Alleged to be Vicariously Liable

Applying Illinois law, a state appellate court has held that a former employee of an insured does not qualify as an insured under a professional liability claims-made policy for acts committed while employed by the insured because the former employee was not expressly named as an insured in the policy.  Illinois Ins. Guaranty Fund v. Chicago Ins. Co., No. 5-14-0033 (Ill. App. Ct. Dec. 12, 2014).  The appellate court also determined that Section 546 of the Illinois Insurance Code does not apply because there is no “other insurance” and that the insurer is not estopped from denying coverage because the estoppel doctrine applies only when an insurer has breached its duty to defend. 

The insurer issued a claims-made policy to a medical practice.  The insured medical practice and one of its former employees were named as defendants in a malpractice suit alleging that the former employee committed malpractice while he was employed by the insured and that the insured was vicariously liable.  Upon leaving the insured medical practice, the former employee obtained his own professional liability insurance that provided prior acts coverage for liability for conduct while the former employee was employed by the insured.  The former employee’s insurer provided the former employee a defense in the malpractice suit until that insurer went into liquidation, at which time the state insurance fund assumed the defense.  The fund then demanded that the medical practice’s insurer assume the defense of its former employee.  The insurer denied the fund’s request and coverage litigation ensued.  The lower court granted the fund’s motion for summary judgment, holding that the insurer had a duty to defend the former employee.

In reversing the lower court’s decision, the appellate court determined that the former employee was not an “insured” under the policy.  The court noted that the policy named two current employees as insureds and attached a schedule of additional named insureds that did not include the former employee.  The court held that the policy’s insuring agreement was not ambiguous and that the allegations of vicarious liability against the insured medical practice for the former employee’s actions did not implicate the insuring agreement because the agreement expressly stated that payments would be made on behalf of “insureds,” and the former employee did not qualify as an “insured.”  According to the court, the policy’s coverage did not extend coverage under the policy to other persons for whom the insured may be legally responsible.

The appellate court also determined that Section 546 of the Illinois Insurance Code, which requires other insurance policies to be exhausted first before the fund is obligated to pay any amounts, did not apply because the policy does not constitute “other insurance.”  Finally, the appellate court found that the insurer was not estopped from denying coverage because “the estoppel doctrine applies only where an insurer has breached its duty to defend.”