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The excess liability insurer for Pottstown Memorial Medical Center has filed suit in federal court accusing the hospital’s umbrella liability insurer of intentionally delaying settlement during the hospital’s appeal of a $78.4 million medical malpractice verdict in an attempt to “spend down” its $20 million policy limit by unnecessarily retaining appellate counsel.

The excess liability insurer alleged that, as a result, it was forced to pay more of the $31.5 million settlement that was eventually reached during the appeal of the verdict than it was actually responsible for.

In Allied World Assurance v. Steadfast Insurance, plaintiff Allied World Assurance Co., Pottstown’s excess liability insurer, filed an April 30 complaint in the U.S. District Court for the Eastern District of Pennsylvania seeking a declaratory judgment that the fees and expenses defendant Steadfast Insurance Co. paid to its counsel during the appeal did not erode the limit of its umbrella liability policy with Pottstown.

In the complaint, Allied alleged that Steadfast retained its own counsel during the appeal of a Philadelphia jury’s $78.4 million verdict in Nicholson-Upsey v. Touey, despite the hospital stating that it wanted to keep its trial defense counsel on appeal.

Despite having no duty to defend the hospital or control the defense, according to the complaint, Steadfast then attempted to claim that any fees and expenses it paid to its counsel in connection with the appeal would lower the limit of its policy with Pottstown.

Allied further alleged in the complaint that Steadfast attempted to delay settlement during the appeal so that it could spend down its policy limit.

The case eventually settled for $31.5 million after the case was briefed but before arguments were held in the Pennsylvania Superior Court, according to the complaint.

But, because Steadfast had claimed its counsel fees and expenses were paid out of its policy limit, Allied alleged it was left having to pay more than its fair share—the difference between Steadfast’s $20 million policy limit and the amount Steadfast actually paid after subtracting attorney fees and costs.

“As a result of Steadfast’s wrongful reduction of its policy limits and its delays in settlement, Allied World was caused to expend sums in connection with the underlying settlement which Allied World otherwise should not have incurred, and did so while expressly denying its obligation to do so and while expressly reserving all of its rights,” the complaint said.

Allied is now seeking a judgment against Steadfast for all defense and indemnity costs, including interest accrued in excess of Steadfast’s policy limit, in Nicholson-Upsey as well as attorney fees and costs incurred in this federal suit, according to the complaint.

In Nicholson-Upsey, Parrys Nicholson-Upsey’s mother, Victoria Upsey, was told her baby had died, but Upsey told the treating obstetrician she was still feeling her baby kick inside of her, according to plaintiffs court papers.

A nurse initially thought the baby was dead after conducting an ultrasound, and defendant obstetrician Dr. Charles V. Touey also thought the baby was dead after conducting an ultrasound, according to the plaintiffs court papers.

When Touey sought a radiologist’s confirmation of his diagnosis of a fetal death, it took 75 minutes for a radiologist ultrasound technician to arrive, according to the plaintiffs court papers. The technician immediately identified that Nicholson-Upsey’s heart was still beating, but by then her placenta had completely been abrupted and she was getting no blood or oxygen from her mother, resulting in brain damage.

A jury rendered a $78.4 million verdict against Pottstown in May 2012, the trial court subsequently entered judgment in that amount and the hospital appealed to the Superior Court, according to court documents.

Allied, citing Pottstown’s appellate brief, alleged in its complaint that the trial judge in Nicholson-Upsey had expressed the opinion several times before trial that the hospital’s liability was clear and that its defense at trial was weak.

“Upon information and belief, the trial court predicted a ‘massive victory for plaintiffs’ and even stated its disbelief that Pottstown’s insurer (Steadfast) was not willing to settle in light of Pottstown’s apparent liability both before and during trial,” Allied said in the complaint.

On appeal, Allied alleged in the complaint, Pottstown retained its trial counsel, but Steadfast, over Pottstown’s objection, also retained counsel and then proceeded to unnecessarily drag out the appeal.

“Without engaging in or even attempting any settlement discussions or negotiations, Steadfast engaged in a lengthy and expensive appellate process to which Steadfast paid significant fees and expenses to Steadfast’s retained defense counsel,” Allied said in its complaint. “Steadfast has wrongly reduced the amount of insurance available under the Steadfast policy based upon the fees and expenses Steadfast paid to its counsel on appeal.”

In addition to seeking a declaratory judgment that Steadfast’s payments to counsel did not reduce its responsibility to pay part of the settlement, Allied has also brought claims for equitable subrogation and quantum meruit, seeking repayment of the portion of the settlement it says should have been covered by Steadfast’s $20 million policy.

“In rendering payments in connection with the underlying settlement which otherwise should have been the sole obligation of Steadfast and upon which Allied World expressly reserved all of its rights, Allied World has conferred a benefit upon Steadfast,” Allied alleged in the complaint. “Under the circumstances, Steadfast’s retention of this benefit without payment to Allied World is inequitable and constitutes an injustice.”

Counsel for Allied, James T. Byrnes IV of Carroll McNulty & Kull in Basking Ridge, N.J., could not be reached for comment at press time.

At press time, according to the federal docket, counsel had not entered an appearance on behalf of Steadfast. A spokesperson for Zurich North America, Steadfast’s parent company, declined to comment on pending litigation.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.