Utica National Ins. co. of Texas v. American Indemnity Co.

In late 1991 and early 1992, an association of anesthesiologists (the insured) had both a professional liability insurer and a commercial general liability (CGL) insurer (Utica). At that time, the insured employed a scrub technician (Thomas) who stole fentanyl, an anesthetic, and using a syringe, injected himself with the drug directly from the glass ampules in which it was stored in the insured’s office. With the same syringe, he then injected saline solution back into the ampules to hide his theft. Thomas was infected with Hepatitis C, and his use of the contaminated syringe infected the ampules. Thomas’s crime was discovered, and he was sentenced to prison. A number of patients received fentanyl injections, however, before discovery of Thomas’s actions, and they subsequently tested positive for Hepatitis C. These patients brought suit against the insured, inter alia, for (1) negligence in failing to properly secure anesthesia narcotics and (2) exposing the patients to contaminated medication. The insured’s professional liability insurer assumed defense of the case, but soon became insolvent. The Texas Property and Casualty Insurance Guaranty Association (TPCIGA) assumed defense and tendered the suit to the insured’s CGL insurer at the time of the litigation (American).

American denied coverage since its policy was not in effect at the time of the infection. TPCIGA tendered defense to Utica, but Utica denied coverage pointing to the policy exclusion for injuries due to rendition of professional services. Without participation from Utica, American then agreed to assist TPCIGA in settling the claims for approximately $1 million.

American and TPCIGA ultimately proceeded against Utica for defense and settlement costs. All three parties moved for summary judgment. The trial court granted American and TPCIGA’s motion holding that Utica breached its obligation to defend as well as holding that Utica’s professional services exclusion did not preclude coverage of the claims. Thus, Utica was liable for the full costs of the settlement, together with attorney’s fees and pre- and post-judgment interest. The court of appeals affirmed.

The Texas Supreme Court held the policy language could reasonably be read to preclude coverage only when the plaintiff’s injury is caused by the breach of a professional standard of care. The Court agreed with Utica that the policy excluded coverage for injuries due to the rendition of professional services; however, the Court observed the policy also contained exclusions employing the phrase arising out of. The Court noted arising out of means a causal connection whereas due to required a direct or proximate causation.

Utica argued the professional services exclusion required only a but for causation to exclude harm related to the provision of professional services, i.e., the securing of the fentanyl. The Court felt such an interpretation would create a gaping hole in the insured’s coverage. The Court further observed that Utica chose to insure a physician’s association and knew the association’s primary purpose was to provide professional services. The Court therefore concluded that "in most situations, the association’s potential liability could at least arguably be traced back to its professional services in some manner." Thus, the Court held Utica had a duty to defend the insured.

The Court held, however, that as a matter of law, the indemnity question could only be decided upon a factual resolution of whether the plaintiff’s infection was caused by the doctors’ breach of a professional standard of care, and accordingly, the Court remanded the matter to the trial court. The Court provided some guidance for the trial court: the plaintiffs alleged both professional and general liability. If the fact-finder determined the infection was caused by a breach of a professional standard of care, i.e., the infection was caused by the doctors’ negligent administration of the fentanyl, then Utica would have no duty to indemnify. If, however, the professional services were rendered with due care, then Utica’s policy exclusion would not apply.

Justice Enoch issued a terse dissent arguing that the Court’s opinion immaterially focuses on the distinction between the policy phrases due to and arising out of. In Justice Enoch’s opinion, the only injury suffered by the plaintiffs, i.e., contracting Hepatitis C, could not have occurred except through the anesthesiologists rendering professional services. He stated, "I cannot think of a more direct tie of liability for ‘bodily injury’ to the ‘manner in which the services were performed’ than by anesthesiologists administering tainted anesthesia to patients."