Reported / Citable
Background
HealthTrackRx Indiana, an infectious-disease laboratory-testing provider, sought coverage under a policy that its parent company purchased from RSUI Indemnity. After HealthTrackRx received two regulatory claims in 2023, RSUI agreed to defend it and consented to its choice of counsel but maintained that defense costs were subject to both a $250,000 retention and a $250,000 regulatory-claim liability limit.
HealthTrackRx sued for declaratory relief, breach of contract, and breach of the covenant of good faith and fair dealing. The parties agreed to litigate the declaratory-judgment claim first through cross-motions for judgment on the pleadings. A magistrate judge recommended finding that defense expenses were covered “Loss” subject to the retention, while declining to decide whether those expenses reduced the $250,000 liability limit. Both sides objected.
The Court’s Holding
Applying Indiana law under the policy’s choice-of-law provision, the district court held that the regulatory endorsement’s definition of “Loss” includes defense expenses. The endorsement amended rather than replaced the directors-and-officers coverage section’s definition of “Loss,” and its nonexclusive list of covered amounts did not remove defense expenses from that definition.
The court also held that defense expenses arising from regulatory claims are subject to the $250,000 retention, rejecting HealthTrackRx’s request for first-dollar defense coverage. But it did not decide whether defense expenses erode the separate $250,000 regulatory-claim liability limit. Because the limit provision referred to claims against “all Insured’s,” the court found that the apparent punctuation error required fuller briefing before the language could be classified as unambiguous, ambiguous, or unintelligible. It therefore granted RSUI’s motion in part and denied it in part, denied HealthTrackRx’s motion, and returned that issue to the magistrate judge for further consideration.
Key Takeaways
- Defense expenses incurred in responding to regulatory claims qualify as covered “Loss” under the policy.
- Those defense expenses are subject to the policy’s $250,000 retention, so HealthTrackRx is not entitled to first-dollar defense coverage.
- The court left unresolved whether defense expenses reduce the $250,000 regulatory-claim liability limit and directed further briefing on the provision’s apparent drafting error.
Why It Matters
The decision illustrates that an endorsement’s nonexclusive list of covered losses does not necessarily displace a broader policy definition, particularly when the endorsement states that other policy terms remain unchanged. It also shows that a duty to defend may be contractually subject to a retention when the policy expressly applies that retention to defense expenses.
The ruling is not a final determination of the full coverage dispute. The amount of coverage potentially available above the retention remains unsettled because the court deferred the policy-limit question, and HealthTrackRx’s breach-of-contract and bad-faith claims remain for the litigation’s second phase.