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March 13, 1991


The opinion of the court was delivered by: Haight, District Judge:


In this diversity action presently pitting one medical malpractice insurer against another, the issue relates to the proper allocation of costs incurred in defending malpractice actions. Following extensive discovery, the parties cross-move for summary judgment under Rule 56, Fed.R.Civ.P.


Since the mid-1960's, physicians who are members of the Medical Society of the State of New York ("MSSNY") have received medical malpractice liability insurance coverage from three insurance companies. The initial coverage was furnished by defendant Wausau Insurance Company ("Wausau"). Wausau covered MSSNY members from the inception of the coverage to June 30, 1974. When Wausau stopped writing that coverage, it was succeeded by plaintiff Argonaut Insurance Companies ("Argonaut"), which wrote medical liability insurance for MSSNY members from July 1, 1974, to June 30, 1975. Argonaut then ceased the coverage and was succeeded by defendant Medical Liability Mutual Insurance Company ("MLMIC"). MLMIC commenced its coverage on July 1, 1975. It continues to the present day.

This type of non-overlapping coverage is known in the insurance industry as "end-to-end" coverage. The policies MLMIC issues to covered physicians are annual policies, so that MLMIC maintains the coverage for a particular physician by writing a new policy for that physician at the end of each policy year. For all that appears from the record, this is the industry practice in such insurance policies.

A claim for medical malpractice may arise out of a single diagnosis or treatment, or out of a physician's allegedly negligent treatment of a patient over a number of years (for example, negligent failure to diagnose cancer). This is known as a "continuous treatment" medical malpractice claim. Within the parlance of medical malpractice insurance, a "continuous treatment case" involves allegations of malpractice spanning more than one policy period where there is a single insurer involved. An "end-to-end case" involves allegations of malpractice spanning more than one policy period where there are two or more insurers involved.

By virtue of Argonaut's relatively brief appearance on the stage of medical malpractice coverage for MSSNY physicians, it found itself involved in continuous treatment cases where the plaintiff alleged malpractice beginning during the period of Wausau's coverage, extending through Argonaut's period of coverage, and continuing into MLMIC's coverage. This put Argonaut into relationship with the other two insurance companies in respect of, inter alia, the costs of defending against the action (attorney's fees, investigation expense, and the like). As to a continuing treatment case alleging malpractice beginning during the policy year July 1, 1974 through June 30, 1975 but extending thereafter, Wausau had dropped out of the picture, and Argonaut was in relation only with MLMIC.

A question of obvious mutual concern was how defense costs should be allocated among insurers in end-to-end cases. Until February 1987, Argonaut shared end-to-end defense costs equally with Wausau and MLMIC (or with MLMIC only, if the malpractice claimed did not arise until after Wausau's coverage had ceased). However, in February 1987 Argonaut rethought that allocation, and during that month "put the defendants [Wausau and MLMIC] on notice that it would no longer allocate end-to-end defense costs equally when the policy periods of the respective insurers were unequal." Complaint at ¶ 16. Notwithstanding that notice, the two defendants maintain that Argonaut was bound by prior agreement to allocate defense costs equally, and instructed defense attorneys handling the cases to bill their fees and expenses on an equal basis among the insurance companies concerned. Since February 1987 Argonaut continued to pay on that basis, under protest and with all rights reserved, to avoid the prejudice to itself and its insureds which would result if Argonaut placed defense counsel in the center of a conflict among the insurance companies. Id. at 17. Argonaut commenced this action for declaratory and injunctive relief, and for restitution for defense costs "paid by Argonaut under protest in excess of its pro rata share in end-to-end coverage cases." Complaint, prayer for relief at ¶ (4).

Subsequently Wausau was dismissed from the action by a stipulation of settlement endorsed by the Court on May 1, 1989. Argonaut and MLMIC continued to litigate the issue, culminating in their cross-motions for summary judgment. Given plaintiff's theory as pleaded in the complaint, the malpractice cases forming the basis for this action involve only those cases where the malpractice plaintiff alleges negligence during Argonaut's one-year policy, and also alleges continued treatment and negligence during the period of two or more of the successive annual policies issued by MLMIC. That is because malpractice during the year of Argonaut's coverage and only during the first succeeding year of MLMIC's coverage would, even on Argonaut's theory, result in an even allocation of the costs of defense.

Argonaut's claim is based primarily upon its perception of fairness. MLMIC resists anything other than equal division of the costs of defense on two grounds. First, MLMIC contends that in an exchange of correspondence beginning in 1977, Argonaut agreed to the equal division of defense costs among the insurance companies concerned. Second, MLMIC contends that the provisions in the insurance policies with respect to "other insurance" mandate an equal division of defense costs.

MLMIC's conception of how these defenses relate to each other is not entirely clear. In its main brief, MLMIC argued that "the parties' overall agreement in 1977 and their subsequent case by case agreements supersede the policy provisions . . ." 18 at n. 6. The reply brief states at 2 that if the Court determines that the "other insurance" clause obligates the two insurers to share defense costs equally, then I need not address the question of whether they entered into and are bound by a letter agreement to share defense costs equally.

It seems to me that MLMIC had the issues right the first time. Accordingly I will consider, first, the pertinent exchange of correspondence between the parties; and second, the terms of the policies.

The Correspondence

Turning from the general to the particular, Kipnes dealt with a number of procedures. That portion of his letter most pertinent to the dispute at bar appears in the third paragraph, which I quote in full:

  It is the consensus of opinion among the
  management of Argonaut and Ed Bourbeau of
  Employers Insurance of Wausau that the carrier
  with the greatest exposure should maintain the
  right to designate both the adjustor and the
  attorney and accept responsibility for originating
  the assignment or referral. The other carrier
  would then have the option of participating, on an
  equal basis, in the expenses associated with the
  investigation and defense. In the alternative,
  they may conduct an independent instigation and/or
  assign co-counsel to monitor the defense. The
  relative exposure would be fixed by a
  determination of which carrier provided coverage
  to the insured during the time when the treatment
  or surgery, which is the basis for the claims,
  occurred. In those instances where the exposure is
  not readily definable, the carrier which provided
  coverage to the insured for a preponderance of the
  time in question, would assume this role. The
  assignments would be subject to change if the
  discovery process reveals that the initial
  assessment was incorrect.

Kipnes concluded this pleasant missive with this paragraph:

  Please consider these proposals and suggestions
  and favor us with a response at your earliest
  opportunity. Thank you for your time and
  cooperation in this matter.

Andreotta favored Kipnes with his response in a letter dated November 4, 1977. The first three paragraphs of that letter are pertinent to the present dispute. They read as follows:

  Thank you for your letter of October 24, 1977. As
  you pointed out, it is good to have these
  understandings in writing. We discussed this
  further on Thursday, November 3, 1977 and I would
  like to present in this note to you our agreement
  with the many points presented in your letter.
  Your presentation of the approach to be taken on
  cases involving end-to-end coverage between our
  companies is exactly that which we have discussed
  in the past and we are in full agreement with the
  To insure that there be no misunderstanding of our
  respective positions, I am preparing copies of
  your letter of October 24, and copies of this
  letter, so that all the members of our staff can
  have this ...

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