Tibble v. Am. Physicians Capital, Inc., No. 306944, 2014 WL 5462573 (Mich. Ct. App. Oct. 28, 2014).

The Michigan Court of Appeals holds that although the trial court erred when it defined “bad faith” for the jury, the court’s error did not require reversal because the applicable law regarding bad faith was adequately presented.

American Physicians Capital, Inc. (“AP Capital”) provided medical malpractice insurance coverage to emergency room physician Robert Prodinger, a member of Battle Creek Emergency Physicians, P.C. (“BCEP”).  The AP Capital policy had a policy limit of $300,000.  Following the death of Daniel Symons, a patient treated under Prodinger’s supervision, the Symons Estate brought a wrongful death action against Prodinger and BCEP.  AP Capital provided a defense to both defendants.  The case went to trial and the jury rendered a verdict of $1.3 million in favor of the Symons Estate.  Shortly after the trial concluded, both Prodinger and BCEP filed for bankruptcy.     

Following the verdict in the wrongful death action, the bankruptcy trustees for Prodinger and BCEP sued AP Capital for bad faith for failing to settle with the Symons Estate prior to trial and sought to recover the amount of the excess judgment.  The Symons Estate had initially proffered a $1.2 million settlement demand, but later agreed to settle for $295,000.  Throughout the course of discovery in the underlying action, Prodinger had maintained that there had been no violation of the standard of care and repeatedly expressed a desire to go to trial.  Prior to trial, however, Prodinger and BCEP wrote a letter to defense counsel that authorized AP Capital to settle the case within policy limits.  Neither defense counsel nor the senior claims representative from AP Capital viewed this letter as a “demand” to settle.  Prodinger and BCEP argued that AP Capital essentially “rolled the dice” at trial because it knew that even though a jury verdict would likely exceed $1 million, its policy limits were $300,000.  The jury in the bad faith action found that AP Capital had acted in bad faith in failing to negotiate a settlement after the Symons Estate made a demand within policy limits.

AP Capital appealed to the Court of Appeals of Michigan challenging the trial court’s jury instruction on bad faith and the calculation of bad faith damages.  First, AP Capital argued that the trial court erred by failing to include the words “arbitrary” and “intentional” in the definition of bad faith it provided to the jury.  The Court of Appeals noted that the Michigan Supreme Court had previously defined “bad faith” for jury instruction purposes as “arbitrary, reckless, indifferent, or intentional disregard of the interests of the person owed a duty.”  Accordingly, the trial court indeed erred when it denied AP Capital’s request to include the words “arbitrary” and “intentional” in the definition of bad faith.  However, the Court of Appeals’ review of the trial court’s other instructions, as well as the expert testimony offered at trial, led the Court to conclude that the trial court’s error did not require reversal.  Rather, because the jury was not led to believe that bad faith equates to mere negligence, the Court of Appeals reasoned that the applicable law was adequately and fairly presented to the jury. 

AP Capital next appealed the trial court’s calculation of bad faith damages.  AP Capital argued that, because Prodinger and BCEP’s obligation to pay the Symons Estate’s judgment was eliminated in the Chapter 7 bankruptcies, Prodinger and BCEP were not damaged by AP Capital’s failure to settle the case.  The Court of Appeals agreed with AP Capital in part, reasoning that if a debtor has been discharged from an excess judgment and no assets from the debtor were used to pay part of the excess judgment, the debtor has not suffered damages.  However, the Court rejected the adoption of a bright-line rule barring the recovery of excess judgment damages by every insured that files for bankruptcy.  Instead, the Court of Appeals concluded that the proper measure of damages in a bad faith action where the insured files for bankruptcy is an amount equal to the debtor’s assets that are collected by the trustee of the bankruptcy estate.  Because the debt of a corporation survives bankruptcy, the Court further reasoned that in bad faith actions where the insured is a corporation that has filed for bankruptcy, an order in favor of the insured should include provisions stating that: 1) the insurer is liable for the amount of the corporation’s assets that were collected by the bankruptcy trustee; and 2) the insurer remains subject to liability for the remaining amount of the excess judgment, and should the corporation ever resume operations and acquire assets, the insurer must pay an amount toward the excess judgment equal to the corporation’s assets.