Professional liability insurer had duty to defend and provide independent counsel for sexual misconduct claim.

A district court for the Northern District of Illinois, applying Illinois law, held allegations of sexual misconduct against a psychiatrist trigged a professional liability insurer’s duty defend.  According to the court, the allegations constituted negligence in the performance of professional services and amounted to bodily injury.  The court also held that the presence of a non-covered punitive damage claim created a conflict of interest, and thus, ruled that the insured was entitled to independent counsel.

Professional Solutions Insurance Company (“PSIC”) sought a declaration that it has no duty to defend Dale Giolas, M.D., a psychiatrist, in an Illinois state court lawsuit brought by his former patient, Staci Ferguson, for alleged improper sexual activity.  The PSIC policy provided coverage for “[b]odily injury, sickness, disease or death sustained by any one person” caused by “[a]ny negligent omission, act or error in the providing of Professional Services.”  PSIC argued that the policy did not provide coverage for the Ferguson lawsuit for two reasons: (1) the underlying complaint did not allege negligence in the performance of professional services and (2) the underlying complaint did not allege bodily injury.  According to Giolas, a sexual misconduct exclusion and exception in the policy provided coverage until a final adjudication in the underlying action established that sexual misconduct actually occurred; however, the court did not address the exclusion or exception because PSIC did not argue that the exclusion applied.

While the court did agree with PSIC that the underlying complaint did not assert a negligence claim, it found that “when considering whether an insurance company has a duty to defend, a court ‘should not simply look to the particular legal theories pursued by the claimant in the underlying action, but must focus on the allegedly tortious conduct on which the lawsuit is based.’”  According to the court, “[t]he crux of this coverage dispute is whether improper sexual activity with a patient can constitute medical negligence in the field of psychiatry.”  The court found that, as noted by the Illinois Supreme Court, the mishandling of the phenomenon of transference can be considered malpractice or gross negligence.  Thus, Giolas’ failure to handle transference properly may have constituted an error of professional skill in the treatment of Ferguson’s psychiatric conditions, and therefore, the sexual misconduct alleged in the underlying complaint potentially fell within the coverage of PSIC’s policy.  The court also held that the underlying complaint alleged bodily injury, noting that it included a claim for battery with damages of $750,000.  Further, the court found that the term “bodily injury” included injuries from sexual abuse.  Therefore, the court concluded that PSIC had a duty to defend.

Another issue before the court was whether PSIC had an irreparable conflict which required it to provide Giolas with independent counsel.  Under Illinois law, “[w]here there is an ‘insurmountable conflict’ between insured and insurer, the insurer does not have a right to control the insured’s defense.”  The court found it persuasive that the policy excluded coverage for the punitive damages sought in the underlying complaint and the fact that the policy’s sexual misconduct exception could place the insured and the insurer in conflict if there is a factual finding of sexual misconduct.  Ultimately, the court found that PSIC waived any argument in opposition by failing to address the independent counsel issue. Thus, the court held that Giolas was entitled to independent counsel.  Prof’l Solution Ins. Co. v. Dale Giolas, M.D., No. 16 C 9868 (N.D. Ill. Nov. 8, 2017).