Paperwork error leaves hospital without insurance and forced to defend malpractice suit on its own
May 1, 2016
By Damian D. Capozzola, Esq.
The Law Offices of Damian D. Capozzola
Jamie Terrence, RN
President and Founder, Healthcare Risk Services
Former Director of Risk Management Services (2004-2013)
California Hospital Medical Center
David Vassalli, 2016 JD Candidate
Pepperdine University School of Law
News: In 2008, a woman went to a hospital seeking treatment for weight and size reduction. A physician recommended a form of mesotherapy, which is a non-surgical technique to dissolve fat tissues through injections. Neither the treatment nor some of the drugs used in administering the therapy were approved by the Food and Drug Administration (FDA). Between 2008 and 2009, the mesotherapy and the injections involved with it were administered by a physician at a location other than the hospital. The woman allegedly developed painful and infected sores on her body from the mesotherapy and filed a malpractice action against the physician and the hospital that employed him. The woman alleged that the physician failed to inform her the treatment was experimental and not approved by the FDA and that the hospital that employed him was liable for his conduct. The woman’s lawsuit requested $50,000 in compensation for her injuries. As is the case when hospitals and physicians are facing malpractice litigation, the hospital turned to its insurance company to defend the suit and provide coverage for the resulting liability. However, the insurance company refused to defend the hospital and asserted that the insurance forms contained misrepresentations that invalidated the insurance policy. The hospital argued that the policy used confusing language that the hospital did not technically violate by administering the mesotherapy injections away from the hospital. The insurance company then obtained a court order against the hospital declaring that the insurance policy was invalidated and that the physician’s conduct was imputed to the hospital because that’s where medical treatment began. The hospital is now without funded legal representation or liability coverage for the still-pending medical malpractice action for the woman’s injuries caused by the mesotherapy injections.
Background: A woman visited a hospital seeking treatment for weight and size reduction in 2008. A physician at the hospital recommended mesotherapy, which aims to dissolve fatty tissues in the stomach. Mesotherapy involves a series of injections, and the treatment itself and drugs used are not approved by the FDA. From November 2008 to July 2009, the woman received the mesotherapy and injections from the physician at a location other than the hospital. At no point were the injections administered at the hospital. According to court documents, the woman developed “painful, infected, blister-like granulomas,” which were similar to open sores, on her body. As a result of her injuries, the woman filed a malpractice lawsuit against the physician who recommended and administered the mesotherapy injections and the hospital that employed him. The woman particularly alleged that the physician failed to inform her the treatment was experimental and not approved by the FDA, that the hospital was liable for employing the physician, and that her injuries entitled her to $50,000 in compensation.
The hospital did what nearly all businesses and professional service providers do when facing litigation for negligence, which is seek representation and shelter from direct financial liability from their insurance providers. However, the insurance company in this case refused to defend the hospital on the grounds that the insurance policy was invalid due to misrepresentations made by the hospital on the insurance forms. The initial paperwork asked whether the hospital’s employees use drugs for weight reduction, if the practice includes weight reduction by methods other than diet or exercise, if the practice “dispenses drugs or injections” for weight control, and whether experimental procedures would be used. All of these questions on the form were answered in the negative. The hospital argued that the policy used confusing language regarding exactly what “use” of injections meant and the distinction between “weight reduction” and “size reduction,” and that size reduction therapy performed outside of the hospital should not invalidate the contract.
The court agreed with the insurance company and ordered that the insurance policy is not valid because of the misrepresentations made by the hospital, and it said the insurance company is not required to represent the hospital or cover the financial liability arising from the incident. The court went on to say that the physician’s behavior was imputed to the hospital because the events giving rise to the injections began at the hospital. The hospital appealed these decisions and lost the appeal on the same grounds. As a result of the paperwork being inaccurate and the outcomes of the surrounding litigation, the hospital must now fund its own legal representation and pay any damages that result from the woman’s pending medical malpractice action.
What this means to you: This case demonstrates the utmost diligence with which insurance-related matters must be handled and how a few minor errors can leave hospitals and physicians without insurance when facing medical malpractice liability. All hospitals, medical centers, physicians, and healthcare providers should be fully aware of the exact terms of their insurance policies and make sure they are in compliance with their policies. If there is any uncertainty at any stage of the insurance process regarding exactly what conduct is covered by insurance or what the terms in the policy mean, an attorney should be consulted.
In this case, the hospital argued it did not fully understand the language in the insurance policy and that it believed it was acting in accordance with the policy, and therefore, the misrepresentations were unintentional and insignificant. However, the court rejected that argument and explained that because insurance policy terms and prices are guided by assessing the financial risk of covering a practice, any misrepresentation is significant and it does not matter that the mistake was unintentional. The strict approach taken to interpreting insurance policies in this manner is unfavorable to the practitioners in this case. The reality that a minor error in filling out the forms can leave a provider paying to defend against a lawsuit, and the award from that lawsuit, demonstrates the need to ensure physicians, hospitals, and all other providers operating under an insurance policy fully understand, update, and review their insurance policies to ensure they are in compliance at all times.
This case also illustrates the scope of activity that an employer can be held liable for regarding the conduct of its employee-physician. While states have varying approaches to the exact lines of when an employer is liable for the conduct of its employees, or even whether a physician can be a hospital employee at all, a common thread is that an employer is typically liable for the conduct of an employee, as opposed to a private contractor, when the employee’s conduct giving rise to the lawsuit is inside the scope of employment.
Another common thread for holding an employer liable is when the employee acts in a manner that represents to the patient that the physician’s actions are one and the same as the employer’s. In this case, there was no dispute as to whether the physician who caused the alleged harm was an employee of the hospital, but rather the issue was whether the conduct that took place at a location other than the hospital was outside the scope of his employment or could be imputed to the hospital.
To establish that the conduct of the physician was imputed to the hospital in this case, the court pointed to the facts that the treatment first was recommended at the hospital, the physician never informed the patient he was working in any individual capacity, and the woman likely relied on the good reputation of the hospital in accepting treatment at a location other than the hospital. Accordingly, and despite the hospital arguing this conduct is not that of the hospital because it took place at a location other than the hospital, the hospital is liable for its employee’s conduct and will have to defend against and pay the damages of the ongoing lawsuit.
This precedent is controlling in the jurisdiction of the Seventh Circuit of the United States Court of Appeals, which includes Illinois, Indiana, and Michigan, and closely mirrors all other jurisdictions. The exact contours of when employees are acting inside the scope of their employment can vary depending on jurisdiction and should be known by healthcare employers in consultation with qualified counsel.
Nevertheless, this case demonstrates that an employer can be liable for its employee when the conduct begins in the healthcare facility, the patient is not informed that the physician is acting independently, and the patient relies on the reputation of the facility in accepting individual treatment from an employee. Bearing this in mind, healthcare facilities seeking to avoid liability for certain employee conduct should take steps to inform their patients of the relationships between the patient’s physician and the healthcare facility, explain to employees that they must inform clients when they are no longer providing treatment backed by the healthcare facility, and retain all documents showing that the patient has been made aware the physician providing care is not an employee of the hospital or that certain conduct is outside the scope of employment. Employment agreements also might contain indemnification clauses through which the employee (and/or the employee’s independent insurance) indemnifies the facility against any breaches.
Case No. 14-1791 (Seventh Circuit. March 4, 2016)
In 2008, a woman went to a hospital seeking treatment for weight and size reduction. A physician recommended a form of mesotherapy, which is a non-surgical technique to dissolve fat tissues through injections.
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