Settlement Issues in Medical Malpractice Cases: Finding Credit Where Credit Is Due

By Kevin Miller

This fall, two Illinois courts of appeal issued decisions in medical negligence cases that closely examine the relationships between defendants and each party’s individual interests that arise at the time of settlement. Each case has something to offer those who monitor or defend professional liability cases.

In Marion Hospital Corporation v. Sterling Emergency Services of Illinois, Inc., the indemnity rights of a hospital which had settled an apparent agency claim were at issue. Years before the claim arose, Marion Hospital and Sterling Emergency Services agreed that Sterling would staff the hospital’s emergency department with physicians and physician assistants. In 2003, a patient was seen in Marion’s emergency department by a physician assistant employed by Sterling. The patient was discharged from the department, collapsed at home and died. After suit was brought, the hospital settled all claims against it for $180,000. The release wisely apportioned one-half of the settlement to the claim of the hospital’s own negligence, and one-half of the settlement to the claim against the hospital for the apparent agency of the non-hospital employed physician assistant. Thereafter, the hospital filed suit against Sterling for the amounts it had paid to the patient’s attorney on the agency claim.

Sterling defended the action, claiming that it too had settled with the patient’s estate, and cited the general rule that a settlement made in good faith extinguishes any claim against the settling tortfeasor from other parties for contribution.

The Appellate Court, Fifth District, ruled that the hospital’s claim was legally sufficient. The court reversed the dismissal of the hospital’s lawsuit, allowing the hospital to pursue its claim against Sterling. In so doing, the court drew a distinction between contribution and indemnity.

Contribution allows apportionment of settlements based on fault principles. That is, if a settling party paid more than its pro rata share of liability, it may seek contribution from others to achieve an equitable spread of the cost of settlement based on each party’s responsibility for damages or injury.

Indemnity, on the other hand, is not based on fault principles, but is based on contract. In general terms, it is an obligation of one party to make good a loss of damages incurred by another. Indemnity shifts the entire responsibility for payment from one party who has been compelled to pay to another who is actually at fault.

Healthcare entities like hospitals are frequently sued for the acts of medical providers who are not their employees. The theory in such a case is one of apparent agency: it appeared to the injured patient (and the patient’s attorney!) that the hospital employed the negligent physician, and therefore the courts allow suit against this “apparent employer.” This case instructs that when a hospital pays settlement money to a claimant under such circumstances, the hospital may recover from the true employer that money paid, pursuant to an indemnity theory.

In Thornton v. Garcini, the Illinois Supreme Court decided another issue dealing with settlements in medical malpractice cases. The question presented was whether a non-settling defendant who eventually lost his case at trial would be entitled to a set-off of the verdict against him by the amount paid by another defendant who had settled prior to trial.

In Thornton, the plaintiff’s child was stillborn. The plaintiff filed suit against the hospital and the obstetrician. The claim was one of negligent infliction of emotional distress. During childbirth, the baby presented in breach presentation. Before the obstetrician arrived at the hospital, the baby was partially delivered, with its head becoming stuck inside the mother while the rest of the baby’s body was outside the mother. The infant died when the hospital nurses were unable to deliver it. After the hospital telephoned the obstetrician to inform him of the stillbirth, the doctor arrived one hour and 10 minutes later, taking time first to take a shower before coming to the hospital. During the 70-minute period, the plaintiff mother remained on the delivery table with her infant partially delivered.

The hospital settled for $170,000 prior to trial. The case proceeded only against the obstetrician as a defendant, who eventually lost the case, with a jury rendering a verdict of $700,000. The obstetrician asked the court to enter judgment in the amount of $530,000, i.e., the full amount of the verdict less the amount paid by the hospital for the same injury.

The trial court and the Illinois Supreme Court held that while the obstetrician may have been entitled to a set-off in an amount equal to that paid by the settling hospital, the obstetrician here had waived his right to such a set-off. How? The obstetrician’s attorney did not file a counter-claim against the plaintiff seeking a set-off after the co-defendant hospital settled. The court explained, “A defendant is required to raise a claim for a set-off in the pleadings to give the plaintiff notice and an opportunity to defend against the claim.”

Thornton’s requirement of the filing of a counter-claim against a plaintiff in order to preserve the right to a set-off raises a number of questions for those who monitor professional liability claims. Settlements can occur suddenly, before, during, or even after trial, so when should a defendant file a counter-claim for set-off? Should a defendant who expects to proceed to trial routinely file a counter-claim at the outset of litigation along with its answer as a cautionary matter? Undoubtedly, some insurers will prefer to act on the side of caution and request their attorneys to do so. Others, for fear of sending a signal to the plaintiff that the defense is weak, will want to avoid the filing of an anticipatory counter-claim that could signal to the plaintiff that settlements are contemplated.

Regardless of the approach, Thornton v. Garcini demonstrates that in order to preserve a right of set-off, a counter-claim is clearly required at the time the defense learns of an actual settlement.

Originally published in the Spring 2010 edition of Quinn Quarterly.