Coverage dispute over unlicensed psychologist proceeds

Where the carrier sought a declaration it had no duty to defend multiple underlying suits arising out of the insured’s retention of an unlicensed psychologist to treat patients because of misrepresentations made in the application, that claim could proceed. However, additional coverage claims were held in abeyance because they had the potential to create unnecessary “entanglement” between the state and federal courts.

Background

Medical Mutual Insurance Company of North Carolina, or MMIC, seeks a declaration that it owes no duty to defend or indemnify Joni Johnson and her practice, Pediatric Partners for Attention and Learning Inc., or PP4AL, against four lawsuits filed against them in the Circuit Court for Stafford County, arising out of defendants’ employment of Sharonda Avery, an unlicensed psychologist who treated multiple patients. 

The plaintiffs suing Johnson and PP4AL in Virginia state court are defendants in this case. Defendants urge the court to abstain from issuing a declaratory judgment, arguing that it would risk interference with the underlying state court proceedings.

Analysis

The Fourth Circuit held that district courts considering whether to stay a declaratory judgment action should consider four factors. The first factor looks to the strength of the state’s interest in having the issues raised in the federal declaratory action decided in the state courts. In this case, none of MMIC’s claims are novel or legally complex. They involve “relatively straightforward” issues of insurance contract interpretation. Accordingly, the state’s “authoritative voice” is simply not needed to lend additional clarity to the legal questions before the court.

The second factor, which focuses on whether the state court can resolve the issues more efficiently, also does not favor abstention. MMIC’s complaint raises several “issues and facts” that are not raised in the four underlying state court proceedings. MMIC is not a party to these state court proceedings, and so insurance coverage issues are unlikely to arise. In fact, there exists some doubt as to whether MMIC can join in the underlying state court actions to protect its interests.

As for the third factor, whether the presence of “overlapping issues of fact or law” might create unnecessary “entanglement” between the state and federal courts, upon careful review, the court concludes that at least one of MMIC’s requests for declaratory relief presents no “overlapping issues of fact or law” that will create unnecessary “entanglement” between the state and federal courts. 

In Count One, MMIC seeks a declaration that it “has no duty to defend or indemnify Johnson or PP4AL in the underlying lawsuits due to materially false statements on the policy applications.” To that end, Johnson represented to MMIC that zero “Psychotherapists” and two “Licensed Professional Counselors” worked at PP4AL. Whether these representations were true when made may be ascertained without interfering, precluding, entangling or preempting the underlying state court actions. This narrow inquiry would not necessarily create “issues of estoppel regarding the factual findings of the State Court.”

The same principle applies to Johnson’s agreement, as a condition of the policy’s   ongoing validity, to notify MMIC “as soon as practicable and in writing, of . . . the addition or deletion of any [psychotherapist or licensed clinical social worker] to or from the Medical Practice.” MMIC alleges that it never received a notice from Johnson pertaining to Avery. All that is left to determine, then, is whether Avery was a “psychotherapist” under the meaning of the policy’s language. This inquiry also does not implicate the underlying state court cases. 

The same is not true, however, for the other declaratory relief that MMIC seeks. Granting MMIC’s request relief in Counts Two, Three and Four would require the court to consider “overlapping issues of fact or law,” with the potential to create unnecessary “entanglement” between the state and federal courts.

Finally, the fourth factor, which asks whether MMIC’s federal action is a product of forum-shopping, does not favor abstention. There is scant evidence of “procedural fencing.” MMIC “filed this action to resolve questions that are traditionally resolved in declaratory judgment actions, and it did so under standard diversity jurisdiction.” Moreover, as explained above, there is some doubt as to whether MMIC is capable of joining the underlying state court actions. That leaves this district as the only avenue for relief available to MMIC.

Defendants’ motion to dismiss denied as to Count One; held in abeyance as to the remaining Counts. 

Medical Mutual Insurance Company of North Carolina v. Johnson, Case No. 1:19-cv-1601, Nov. 24, 2020. EDVA at Alexandria (O’Grady). VLW 020-3-579. 18 pp.