PIE Mut. Ins. Co. v. Ohio Ins. Guar. Assn.

OPINIONS OF THE SUPREME COURT OF OHIO

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PIE Mutual Insurance Company, Appellant, v. Ohio Insurance

Guaranty Association, Appellee; Physicians Insurance Company of

Ohio, Appellant.

[Cite as PIE Mut. Ins. Co. v. Ohio Ins. Guar. Assn. (1993),

Ohio St.3d .]

Insurance -- R.C. Chapter 3955 -- Purpose of Ohio Insurance

Guaranty Association Act -- OIGA provides insurance

coverage, when -- Insurance carrier that has settled an

action with insured not entitled to seek payment from OIGA

for pro-rata share of settlement amount on basis of

common-law subrogation principles -- Former R.C.

3955.01(B)(2), construed.

1. The Ohio Insurance Guaranty Association Act, R.C. Chapter

3955, was designed to protect insureds and third-party

claimants from a potentially catastrophic loss due to

the insolvency of a member insurer. To this end, OIGA

assumes the place of the insolvent insurance carrier

for liability purposes only and provides insurance

coverage when no other insurance is available to

compensate valid claims.

2. An insurance carrier which has settled an action with the

insured or third-party claimant is not entitled to

seek payment from OIGA for a pro-rata share of the

settlement amount on the basis of common-law

subrogation principles. (Former R.C. 3955.01[B][2],

construed.)

(Nos. 91-2392 and 91-2399 -- Submitted January 20, 1993 --

Decided May 12, 1993.)

Appeals from the Court of Appeals for Franklin County,

Nos. 91AP-184 and 91AP-206.

This case arises from a settled medical malpractice action

filed by Marilyn H. Archer and James C. Archer against Anthony

Chila, D.O., and his employer, the Ohio University Osteopathic

Medical Center ("OUOMC") on April 27, 1988. Dr. Chila provided

care to Mrs. Archer from November 9, 1982 through January 29,

1987 for complaints concerning her right shoulder. It was

alleged that Dr. Chila failed to perform an x-ray examination

on Mrs. Archer's right shoulder on the initial office visit and

all subsequent office visits, resulting in a delay in diagnosis

of a malignant chondrosarcoma. This delay resulted in severe

and disabling injuries to Mrs. Archer that required extensive

surgery. The tumor of which Mrs. Archer complained ruptured

the humerus sometime between four and nine months prior to

discovery of the tumor in February 1987 by another physician.

If the tumor had been diagnosed in an earlier phase, there

would have been less extensive resection of the bone and less

residual disability.

Throughout the duration of Dr. Chila's treatment of Mrs.

Archer, he and OUOMC were insured successively by three

separate medical malpractice insurance companies. Defendant-

appellant Physicians Insurance Company of Ohio ("PICO")

provided coverage from November 9, 1982 to June 1, 1983;

Professional Mutual Insurance Company ("PMIC") provided

coverage from June 1, 1983 to May 23, 1986; and plaintiff-

appellant PIE Mutual Insurance Company ("PIE") provided

coverage from May 23, 1986 to January 29, 1987.

Defendant-appellee, the Ohio Insurance Guaranty

Association ("OIGA"), entered the underlying medical

malpractice litigation after PMIC was declared to be an

insolvent insurer.1 OIGA retained counsel and joined in the

defense of Dr. Chila and OUOMC with counsel retained by PICO

and PIE. All three counsel participated in every aspect of the

medical malpractice case, including extensive discovery, case

evaluation and trial strategy. Settlement negotiations were

thereafter commenced. On June 3, 1989, counsel for OIGA

notified counsel for PICO and PIE that OIGA would not

participate in settlement negotiations until the limits of the

PICO and PIE policies had been exhausted. Approximately two

weeks later, on June 19, 1989, the litigation with the Archers

was settled for approximately $690,000. PICO and PIE

contributed $300,000 each, while OUOMC contributed

approximately $90,000.

On June 18, 1990, PIE filed an action against OIGA, PICO

and OUOMC seeking a declaration of the respective rights and

responsibilities of the various parties with regard to the

settlement of the medical malpractice action. PIE claimed that

PICO and/or OIGA was legally obligated to reimburse PIE for the

$300,000 contribution PIE made to the settlement of the

Archers' claim. In response to PIE's complaint, PICO filed a

counterclaim against PIE and a cross-claim against OIGA. In

its cross-claim, PICO sought a declaration that OIGA was

responsible to contribute to the settlement.

On January 15, 1991, the court of common pleas granted

OIGA's previously filed motion to dismiss both PIE's complaint

and PICO's cross-claim pursuant to Civ.R. 12(B)(6). The court

of appeals consolidated the appeals of PIE and PICO and

affirmed the trial court's judgment.

The cause is now before this court pursuant to the

allowance of motions to certify the record.

Jacobson, Maynard, Tuschman & Kalur Co., L.P.A., Gayle E.

Arnold and Karen L. Clouse, for appellant PIE Mutual Insurance

Company.

Vorys, Sater, Seymour & Pease and F. James Foley, for

appellee.

Hammond & Willard and Gary W. Hammond, for appellant

Physicians Insurance Company of Ohio.

Moyer, C.J. This case presents for our consideration the

extent of OIGA's liability under R.C. Chapter 3955.2 The

central issue is whether OIGA is required to reimburse two

insurance carriers for a pro-rata share of amounts the insurers

paid to settle a medical malpractice action.

I

At the outset, it is important to recognize the General

Assembly's purpose behind the enactment of R.C. Chapter 3955,

the Ohio Insurance Guaranty Association Act (the "Act"). To

this effect, former R.C. 3955.03 specifically stated:

"The purposes of sections 3955.01 to 3955.20, inclusive,

of the Revised Code are to provide a mechanism for the payment

of covered claims under certain insurance policies, avoid

excessive delay in payment and financial loss to claimants or

policyholders because of the insolvency of an insurer, assist

in the detection and prevention of insurer insolvencies, and

provide an association to assess the cost of such protection

among insurers." (Emphasis added.)

The Act was designed to guard against potentially

catastrophic loss to persons who are entitled to rely on the

existence of an insurance policy and the solvency of the

company issuing the policy -- the insureds and persons who have

claims against insureds. OIGA, a nonprofit unincorporated

association, was therefore created to provide a means to

compensate insureds or third-party claimants when an insurance

company is unable to meet its obligations. Upon a

determination that an insolvent insurer exists, OIGA assumes

that insurer's obligations to insureds or third-party claimants

while being empowered with all of the insurer's rights in that

regard. Former R.C. 3955.08(A)(2) and (4). OIGA thereby

assumes the place of the insolvent insurance carrier for

liability purposes only and provides insurance coverage when no

other insurance is available to compensate valid claims.

Former R.C. 3955.08 and 3955.13. However, not all claims

covered under the insolvent insurer's policy are payable by

OIGA. As a creature of statute, OIGA is restricted by the

terms of the enabling legislation to pay only "covered

claim[s]" as defined in former R.C. 3955.01(B):

"'Covered claim' means an unpaid claim, including one for

unearned premiums, which arises out of and is within the

coverage of an insurance policy to which sections 3955.01 to

3955.20 of the Revised Code apply, when issued by an insurer

which becomes an insolvent insurer on or after the effective

date of this act, and the claimant or insured is a resident of

this state at the time of the insured event or the property

from which the claim arises is permanently located in this

state.

"'Covered claim' does not include any amount:

"(1) In excess of three hundred thousand dollars on any

claim;

"(2) Due any reinsurer, insurer, insurance pool, or

underwriting association through subrogation; provided, that

when such reinsurer, insurer, insurance pool, or underwriting

association has paid a claim and thereby becomes subrogated to

the amount of that claim, such subrogated claim may be asserted

only against the receiver of the insolvent insurer and in no

event against the insured of the insolvent insurer." (Emphasis

added.)

The trial court correctly analyzed the statutory scheme

set forth in R.C. Chapter 3955 in concluding that PIE and PICO

do not have "covered claims." R.C. 3955.01(B) sets forth two

requirements before OIGA can be called upon to pay claims of an

insolvent insurance carrier. First, the individual seeking

relief from OIGA must possess an unpaid claim. An unpaid claim

is one which arose from an insured event and has yet to be

satisfied either by the insolvent carrier or by OIGA. The

second requirement limits the class of individuals who may seek

relief from OIGA.3 Under a liability policy of insurance, only

the insolvent carrier's insured or one who has been injured by

that insured (i.e., a third-party claimant) may require OIGA to

pay a covered claim.

It is obvious that the only relevant claim under R.C.

3955.01(B) is the one held by the Archers as third-party

claimants regarding the medical malpractice insurance policies

issued by PIE and PICO -- and that claim has been converted

from an unpaid claim to a paid claim through settlement. R.C.

Chapter 3955 was designed to protect insureds and third-party

claimants, like the Archers, from the insolvency of an

insurer. The monies reserved in the OIGA fund are clearly not

for the protection of insurance companies. Since neither PIE

nor PICO is an insured or third-party claimant (i.e., victim of

tortfeasor) under an insurance policy, OIGA has no obligations

under R.C. 3955.01(B).

PIE and PICO are pursuing what is more properly

characterized a subrogation cause of action. In their

declaratory judgment action, the insurers sought a binding

judicial determination that they may seek reimbursement from

OIGA for any amount paid by them in excess of their respective

proportionate share of liability for the damages sustained by

the Archers. Essentially, appellants sought a determination of

their equitable subrogation rights against OIGA. "In a broad

sense, one person is subrogated to certain rights of another

person where he is substituted in the place of such other

person so that he succeeds to those rights of the other

person." State v. Jones (1980), 61 Ohio St.2d 99, 100-101, 15

O.O.3d 132, 133, 399 N.E.2d 1215, 1216-1217. To be entitled to

the right of subrogation, the person who pays money to satisfy

the obligation must be under some duty or necessity in order to

protect himself from loss; the right cannot extend to a mere

volunteer. "Subrogation is allowed only in favor of one who

has been obliged to pay the debt of another, and not in favor

of one who pays a debt in the performance of his own primary

obligation." Maryland Cas. Co. v. Gough (1946), 146 Ohio St.

305, 32 O.O. 365, 65 N.E.2d 858, paragraph three of the

syllabus.

As is readily apparent from the language of R.C.

3955.01(B)(2), the statutory provision specifically excludes

from the definition of "covered claim" amounts claimed by

insurance companies through common-law subrogation principles.

PICO, however, interprets R.C. 3955.01(B)(2) to mean that a

subrogation claim is not a "covered claim" if, and only if, the

subrogated party can assert that claim against the receiver of

the insolvent carrier. Since PICO cannot obtain reimbursement

from PMIC's receiver, PICO urges this court to hold that the

statutory bar does not apply. We disagree. There is no reason

to conclude that the Act intended a subrogated insurer which is

somehow precluded from filing a claim against a fellow

insurer's receiver to be given greater rights to the funds held

by OIGA than a subrogated insurer which is not so precluded.

Such an exception to OIGA's limited liability on "covered

claims" would be inconsistent with the expressed purpose of the

Act to protect only insureds and third-party claimants from

financial ruin due to the insolvency of an insurer. The only

recourse the appellants have is to assert their subrogated

claims against PMIC's receiver.

Accordingly, we hold that an insurance carrier which has

settled an action with the insured or third-party claimant is

not entitled to seek payment from OIGA for a pro-rata share of

the settlement amount on the basis of common-law subrogation

principles. The subrogated claims of PIE and PICO were

therefore properly dismissed by the trial court.

II

We next proceed to address the appellant insurers'

arguments that OIGA acted in bad faith during the performance

of its statutory duties. The appellants maintain that OIGA's

wrongful refusal to participate in settlement discussions and

then contribute to the negotiated settlement amount entitles

PIE and PICO to bring an action seeking reimbursement from OIGA

despite the language of R.C. 3955.01(B)(2). The insurers'

argument, which is apparently based upon equitable estoppel

grounds, is unpersuasive and we find no basis for such a

bad-faith claim.

OIGA premised its refusal to contribute to the settlement

of the Archers' claim on former R.C. 3955.13(A), which provided

as follows:

"Any person having a covered claim upon which recovery is

also presently possible under an insurance policy written by

another insurer shall be required first to exhaust his rights

under such other policy. Any amount payable on a covered claim

under sections 3955.01 to 3955.20, inclusive, of the Revised

Code shall be reduced by the amount of such recovery."

(Emphasis added.)

After reviewing the applicability of R.C. 3955.13(A) to

the facts of the case, the trial court agreed with OIGA's

earlier determination that the statutory provision prohibited

OIGA from funding any settlement. Since, at the time of

settlement, all other applicable sources of insurance had not

been exhausted, the trial court ruled that R.C. 3955.13(A)

barred OIGA from contributing to the Archer settlement. The

court of appeals held that even assuming, arguendo, that no

other insurance existed within the meaning of R.C. 3955.13(A),

PIE and PICO incurred no prejudice as a result of the trial

court's determination. The court of appeals found that PIE and

PICO either "contributed money to settle Archers' claim to

protect an interest and therefore seek recovery from OIGA based

upon subrogation rights, for which the statute precludes

recovery, or they voluntarily assumed payments they were not

legally obligated to make, for which equity provides no relief."

As previously discussed, OIGA's purpose is to prevent an

insurer's insolvency from causing devastating loss to insureds

or third-party claimants. The General Assembly's intent that

OIGA was created for a very limited purpose is expressed in the

language of R.C. Chapter 3955. In addition to the covered

claim restriction of R.C. 3955.01(B), and also in keeping with

its responsibility to guard against unnecessary depletion of

its funds, OIGA is obligated to refuse payment where another

applicable source of insurance coverage exists. Under the

terms of R.C. 3955.13(A), OIGA steps in as a source of

insurance coverage only when all other possible sources of

insurance recovery are exhausted.

Despite Ohio law to the contrary, PIE and PICO argue that

OIGA breached a duty of good faith to them by failing to pay

the Archers' covered claim. Appellants charge that other

insurance, within the meaning of R.C. 3955.13(A), did not

exist. They maintain that since no other insurance coverage

existed during the time in which PMIC provided coverage to Dr.

Chila and OUOMC, OIGA (as successor to PMIC) was not entitled

to rely on R.C. 3955.13(A). Appellants thereby urge this court

to find that Marilyn Archer's injuries were divisible, i.e.,

the injuries were capable of being traced to (and, therefore,

attributable to) a specific policy period. Since damages are

capable of being apportioned among the separate periods of

consecutive nonoverlapping medical malpractice insurance

coverages, the appellants believe they are entitled to recover

amounts OIGA should have contributed to the settlement.

The fallacy of appellants' argument that other insurance

coverage did not exist is that divisibility of Marilyn Archer's

injures has not been established due to the settlement of the

underlying medical malpractice action. There has been no

factual determination as to when Dr. Chila's misdiagnosis

proximately resulted in the injuries complained of.4 In Pang

v. Minch (1990), 53 Ohio St.3d 186, 559 N.E.2d 1313, we adopted

2 Restatement of the Law 2d, Torts (1965), Section 433B(2) in

paragraph six of the syllabus, which provides as follows:

"Where the tortious conduct of two or more actors has

combined to bring about harm to the plaintiff, and one or more

of the actorss seeks to limit his liability on the ground that

the harm is capable of apportionment among them, the burden of

proof as to the apportionment is upon each such actor."

Accordingly, had the defendants in the underlying

negligence action (PICO, OIGA and PIE) chosen to limit their

liability on the ground that the harm was capable of being

apportioned among them, the defendants would bear the burden of

establishing the divisibility of the harm. OIGA could be

liable (and then only up to $300,000) if it were established in

the underlying action that the negligent acts which led to the

Archers' damages were committed exclusively during the PMIC

coverage period. See R.C. 3955.01(B)(1). In the case at bar,

however, PIE and PICO abandoned their rights under Pang by not

litigating the apportionment of damages and instead settling

the Archers' action.

In summary, although appellants may frame their action in

other terms, they are actually seeking recovery through

subrogation principles. R.C. 3955.01(B)(2) explicitly and

unequivocally prohibits OIGA from making payments to insurers

on the basis of a subrogated law claim. Regardless how this

claim may arise, no recourse against OIGA's funds may be had.

Moreover, it can be argued that OIGA is statutorily immune

from lawsuits, such as those in the instant case, where a party

claims damages due to OIGA's failure to properly perform its

powers and duties as stated in R.C. 3955.08. Former R.C.

3955.18, which was enacted contemporaneously with the General

Assembly's creation of OIGA in R.C. Chapter 3955, reads as

follows:

"There shall be no liability on the part of and no cause

of action of any nature shall arise against any member insurer,

the Ohio insurance guaranty association or its agents or

employees, the board of directors, or the superintendent of

insurance or his representatives for any action taken by them

in the performance of their powers and duties under sections

3955.01 to 3955.20, inclusive, of the Revised Code." (Emphasis

added.)

R.C. 3955.18 would therefore bar an insured or third-party

claimant from holding OIGA liable for damages caused by OIGA's

failure to properly identify, settle or pay a covered claim.

While the insured or third-party claimant is entitled to

judicial relief necessary to force OIGA to perform its

statutory duties, no action seeking damages can be maintained

against the association. Accordingly, PIE and PICO (who, as

insurers, are not even entitled to the protections of R.C.

Chapter 3955) cannot likewise hold OIGA liable for bad-faith

refusal to settle a covered claim.

For the foregoing reasons, we hold that neither PIE nor

PICO can seek to recover from OIGA a pro-rata share of the

settlement amount. The judgment of the court of appeals is,

therefore, affirmed.

Judgment affirmed.

A.W. Sweeney, Douglas, Resnick and F.E. Sweeney, JJ.,

concur.

Wright and Pfeifer, JJ., dissent.

FOOTNOTES:

1 On October 9, 1987, PMIC was declared insolvent by the

state of Missouri. Accordingly, as is required by R.C. Chapter

3955, OIGA assumed PMIC's rights, duties, and obligations.

(R.C. 3955.08[A][2].)

2 We note that R.C. Chapter 3955 was amended effective

October 26, 1989 (143 Ohio Laws, Part II, 2253). The changes

appear to be minor and do not relate to this case.

3 Reading R.C. 3955.03 together with R.C. 3955.01(B), it

appears that the General Assembly intended for the Act to

protect policyholders only if they are also insureds.

4 For instance, it is the contention of PICO that, while

there may have been negligence (misdiagnosis) by Dr. Chila

during the first period of coverage afforded by PICO, the

malignancy had not appreciably advanced until coverage by PMIC

commenced. That is, the malignancy did not rupture the bone

necessitating the resection until after PICO ceased coverage.

It is equally unsurprising that PIE maintains that Dr.

Chila's failure to properly diagnose the malignant tumor during

PIE's short coverage period did not proximately cause the

injuries Marilyn Archer suffered. Had Dr. Chila diagnosed the

real cause of her discomfort on the very first office visit

during the PIE coverage period, PIE believes that Archer's

injuries would have been no worse.