No Pay, No Indemnity: Assignment-Only Settlement Does Not Trigger Coverage

In ISMIE Mutual Insurance Co. v. Pergament, an Illinois appellate court reaffirmed a core principle of professional liability insurance: indemnity is not triggered unless the insured becomes legally obligated to pay damages. The court held that where a doctor assigned his policy rights to a claimant but was expressly relieved of any payment obligation, the insurer had no duty to indemnify.

Background

The case arose from a claim against a geneticist for alleged negligent medical advice following a misdiagnosis of a rare genetic disorder. The insurer acknowledged the claim but reserved its rights regarding coverage. Two years later, the insured settled the claim by assigning his policy rights to the claimant. Crucially, the settlement agreement provided that the insured would pay nothing towards the resolution of the claim.

Following the assignment, the claimant pursued recovery from the insurer directly. In response, the insurer sought declaratory relief. The trial court ruled in favour of the insurer, and the appellate court upheld the decision.

Key Policy Language and Arguments

The professional liability policy stated that the insurer would pay "sums the insured becomes legally obligated to pay as damages" arising from a claim for covered professional services. The claimant argued that the assignment and release should not preclude indemnity under the policy. In response, the insurer maintained that no indemnity obligation ever arose because the insured was never legally required to pay any amount under the settlement. The insurer further argued that the indemnity trigger could not be expanded beyond the plain wording of the policy.

The Appellate Court's Decision

The appellate court applied a strict interpretation of the policy language. It found that the insured never became "legally obligated to pay" any damages due to the express release of liability in the settlement agreement. Because the obligation to pay was a necessary condition for indemnity, and that condition was never met, the court concluded that the insurer had no duty to indemnify.

Takeaway

An insured must be legally obligated to pay damages for indemnity to apply under a professional liability policy. A settlement that assigns policy rights but expressly relieves the insured of financial liability does not trigger indemnity.

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