The opinion of the court was delivered by: STANTON
This is a suit by one insurance company, Vigilant Insurance Company ("Vigilant") against another, Employers Insurance Company of Wausau ("Employers") to obtain contribution towards amounts paid by Vigilant to settle two lawsuits brought by former patients against Dr. Leonard ("Leonard"), whom each company insured at successive times for the same malpractice risks.
Leonard was a psychiatrist practicing in New York. In August through November 1977, Leonard was a defendant in separate suits for malpractice, brought by Patricia O'Rourke Osborne ("Osborne") and Ellen Posmantier ("Posmantier"), each of whom complained, through the same counsel, that he had engaged in sexual activities with her while treating her professionally.
Employers was Leonard's malpractice carrier from January 1, 1970 through June 30, 1973; Vigilant was his carrier from July 1, 1973 to May 1, 1978. Each policy, in relevant part, provided essentially identical coverage. Vigilant's policy covered
"[i]njury arising out of the rendering of or failure to render, professional services by the individual insured, . . . performed in the practice of the individual insured's profession . . ."
Similarly, Employer's policy covered
"injury or death resulting from rendering or failing to render, . . . professional services by the insured, . . . performed in the practice of the insured's profession . . ."
In keeping with the well-understood rule that the duty to defend is broader than the duty to indemnify, Vigilant and Employers equally shared the cost of defending the actions against Leonard and provided Leonard with the services of a seasoned trial lawyer, George Kehayas, Esq. ("Kehayas"). Regarding the duty to indemnify, however, Employers informed Vigilant and Leonard on February 6, 1978 that it would not indemnify Leonard for his sexual conduct with Osborne and Posmantier; Employers adhered to that position throughout.
After reviewing Osborne's deposition and determining that it identified no sexual acts as occurring within its policy period, Vigilant informed Employers on April 30, 1982 that it would no longer defend or indemnify Leonard in the Osborne case. Despite this disclaimer, however, Vigilant did continue to share with Employers the cost for Leonard's defense of the action. On November 3, 1982, after being informed by Kehayas that Osborne's trial testimony did implicate Vigilant's policy period, Vigilant withdrew its disclaimer (see below).
The Osborne case came to trial first, with three significant developments described below: the evidence came in very badly for Leonard, Osborne testified to sexual contact with Leonard during the Vigilant policy period (thus bringing Vigilant back into the case) and Leonard proved to be of so little assistance to his own defense that Employers was ultimately provoked into disclaiming coverage because of his alleged noncooperation.
Because Leonard had taken the position (although he did not testify at her trial) that he had no sexual contact with Osborne, the trial judge allowed evidence of his acts with other patients, since the jury might from that evidence conclude he had acted similarly with Osborne. Such material was damaging enough to the defense, but there was worse: one witness testified that Leonard had made sexual advances towards her when she was 14 years old. Kehayas concluded, with good reason, that the effect upon the jury was such that a punitively large verdict could be expected.
Osborne testified, for the first time, to an act of sexual intercourse between herself and Leonard occurring after July 1, 1973, during the Vigilant policy period. Apparently she was convincing about both the act and its date, relating it to the "primal therapy" during which it took place. When this testimony was reported to Vigilant, Vigilant revoked its previous disclaimer of coverage and advised Kehayas that Vigilant was rejoining the defense of the case.
Meanwhile, Leonard was proving a difficult client. He had strong and unrealistic views about how the cases should be defended or settled, he was demanding and arbitrary with respect to reimbursement of his travel expenses and he announced that he would no longer come to Kehayas' office to discuss the cases, but was returning to Florida where he would be available by telephone and that Kehayas should "use the nonappearance approach" in defending the case. Although aware of the possibility of an "absent witness" charge, Kehayas believed Leonard would be a poor witness in any event and did not plan to call him to testify. However, Leonard's return to Florida was the last straw for Employers. Through separate counsel, Employers announced to Kehayas and to the court that it was disclaiming all further responsibility towards Leonard, because of his noncooperation.
With matters in that posture, Kehayas and Vigilant, without informing or consulting Employers, settled both the Osborne and Posmantier cases. With considerable effort and under exigent circumstances, Kehayas effected the settlement of the Osborne case for $100,000 and the simultaneous settlement (when plaintiff's counsel refused to negotiate them separately) of the Posmantier case for $150,000. Both parties hereto agree the settlements were reasonable in amount, and it is undisputed that the jury verdict in each case might well have gone much higher.
In the present suit, Employers resists Vigilant's demand that it contribute half of the total of $250,000 which Vigilant paid on Leonard's behalf to settle the two cases.
There are essentially four issues presented. The first is whether the policy language, directed towards professional malpractice, covers Leonard's sexual activities with his patients. The second is whether Employers validly disclaimed coverage, upon its assertion of Leonard's noncooperation. The third is, assuming policy coverage and an ineffectual disclaimer by Employers, whether Employers must contribute to the ...