Kentucky Court Holds Professional Liability Insurer Can Pay Limits and Terminate Its Defense Obligation

In its recent decision in Mt. Hawley Ins. Co. v. MESA Med. Grp., PLLC, 2017 U.S. Dist. LEXIS 111949 (E.D. Ky. July 19, 2017), the United States District Court for the Eastern District of Kentucky had occasion to address a provision in a professional liability policy permitting an insurer to “dump” its policy limits and “run” from its defense obligation.

Mt. Hawley insured MESA Medical Group under a medical professional liability policy with a $1 million limit of liability.  By endorsement agreed to by the parties after the policy was initially issued, defense costs were to treated as being outside of the policy’s limit of liability, but the endorsement expressly stated that Mt. Hawley at any time could tender the remaining policy proceeds and thereby terminate any future defense obligation it might have concerning any particular claim.  Notwithstanding this language, MESA Medical Group argued that Mt. Hawley was not permitted to tender its policy limits and avoid a defense in connection with an underlying claim as a matter of Kentucky common law.

In addressing this argument, the court acknowledged that in the absence of specific language to the contrary, an insurer has an ongoing defense obligation, even if policy limits have been exhausted as a result of payment of a judgment, settlement or interpleader.  The court noted, however, that there is no law preventing an insured and insurer from contracting around this general rule.  As such, the court agreed that the specific language of the endorsement permitting Mt. Hawley to tender its policy limits and terminate its defense was enforceable.  The court agreed that in hindsight the endorsement may have been a bad idea for MESA Medical Group, but that “in the absence of coercion or the violation of a public policy,” which the court found lacking on both counts, it was enforceable and that Mt. Hawley could elect to terminate its defense.