MEDICAL MUTUAL LIABILITY INS. SOCIETY OF MD. v. Azzato

MOTZ, Judge. The question presented in this case is whether a physician’s medical malpractice insurer must provide coverage for injuries arising from the physician’s distribution of cocaine and other controlled drugs to a patient when a Health Claims Arbitration panel has concluded that this distribution constituted malpractice. Because the medical malpractice policy provides an exclusion for injuries arising out of a criminal act, which this distribution of illegal drugs plainly was, we vacate the order of the Circuit Court for Montgomery County granting judgment for the physician and against the insurer. (i) This insurance coverage dispute arises out of a malpractice action filed against Dr. Nicholas M. Azzato, appellee, by his former patient, Regina Warsaw, and her husband, Lewis Warsaw.

Dr. Azzato, a plastic surgeon, performed a number of surgical procedures on Mrs. Warsaw from 1984 through 1986. In 1984, he operated on her right nostril, and on January 21, 1986, he performed a similar operation on her left nostril. He testified that on each occasion he packed the affected nostril with a combination of Pontocaine and pharmaceutical cocaine to “anesthetize the nose and shrink the blood vessels down so there is less bleeding.” Mrs. Warsaw claims he only packed her nose after the first operation; in any event, no one suggested that these procedures or medications were in any way inappropriate. Shortly after her operation on the left nostril, however, Mrs. Warsaw heard Dr. Azzato and one of his nurses discuss some “pharmaceutical cocaine” that was in the office and she asked Dr. Azzato “a lot of questions” about ⁶³⁵ it.

According to Mrs. Warsaw, “[a]t that point, he pulled a vial out of his coat ... and he had this little ivory spoon” and he offered her some cocaine. From that time on, Mrs. Warsaw began coming to Dr. Azzato’s office, and then to his home, on a routine basis to obtain drugs — first, just cocaine, and then a host of other drugs, including seconal and morphine. As she told him after a few weeks, she had been addicted to PCP, speed and other drugs from 1973 through 1977 but was detoxified in 1977 and drug free until 1986 when she was given cocaine by Dr. Azzato. Nevertheless, Dr. Azzato continued to provide Mrs. Warsaw with drugs.

She testified that he indicated that the drugs might help premenstrual syndrome (“PMS”) and other medical problems. Within the next few months, Dr. Azzato and Mrs. Warsaw began a personal relationship, in which they, inter alia, engaged in frequent (“hundreds of times”) recreational drug use together; on occasion Mrs. Warsaw used “bags of drugs” provided by Dr. Azzato. During this period, Mrs. Warsaw continued to be Dr. Azzato’s patient; indeed, he performed a minor surgical procedure on her in August, 1986, and a breast augmentation in September, 1986. In November, 1986, Mrs. Warsaw was admitted to the Psychiatric Institute for her mental and drug related problems.

After six weeks of treatment, she was discharged from that hospital; a week after discharge, she again obtained drugs from Dr. Azzato. In April, 1987, she was admitted to Suburban Hospital as psychotic and near death from drug abuse. Ultimately, she was discharged from Suburban and after one final episode of drug use with Dr. Azzato, in May, 1987, she has had no further drug use or contact with Dr. Azzato. On April 21, 1987, Dr. Azzato was arrested for illegal possession and distribution of valium, seconal, and cocaine.

He pled guilty to two counts of violation of the controlled substance statute with respect to distribution of valium. Dr. Azzato was sentenced to a short period of incarceration in the Montgomery County Pre-release Center and is pres ⁶³⁶ ently on probation under the jurisdiction of the Montgomery County Department of Parole and Probation. He has been suspended from medical practice by the Commission on Medical Discipline. On July 7, 1987, Mr. and Mrs. Warsaw filed a malpractice claim against Dr. Azzato with the Health Claims Arbitration Office.

Dr. Azzato requested that his insurer, appellant, Medical Mutual Liability Insurance Society of Maryland (“Medical Mutual”), undertake his defense and provide coverage for this claim. Medical Mutual refused to do so. Dr. Azzato retained other counsel to represent him. After a two day hearing, on May 5, 1989, a Health Claims Arbitration panel issued a decision finding Dr. Azzato liable to Mrs. Warsaw for $31,000 in past medical expenses and $104,000 in noneconomic damages and liable to Mr. Warsaw for $25,000 for loss of consortium, for a total award of $160,-000.

On August 29, 1989, this award was confirmed by the Circuit Court for Montgomery County. On March 21, 1992, Dr. Azzato, for the use of Mr. and Mrs. Warsaw and their attorney, filed the present coverage action, alleging breach of contract and negligence by Medical Mutual for failing to provide him coverage. Dr. Azzato asked that Medical Mutual be required to pay him $160,000, the amount of the judgment owed to the Warsaws, plus post-confirmation interest. The complaint did not seek reimbursement for Dr. Azzato’s costs in defending the malpractice action.

The parties filed cross motions for summary judgment. After hearing argument from counsel for both sides, on February 26, 1992, the circuit court granted summary judgment in favor of Dr. Azzato and against Medical Mutual in the amount of $160,000 1 and post-judg ⁶³⁷ ment interest. The court declined to award pre-judgment interest. On appeal, Medical Mutual makes two arguments: 1.

Medical Mutual’s policy forbids recovery in this case, since it unambiguously excludes coverage for injuries arising out of criminal activities. 2. Medical Mutual is not precluded [by the arbitration award] from raising its policy defenses. Dr. Azzato cross appeals, asserting that he is entitled to interest from August 29, 1989, the date of the confirmation of the arbitration award. (n) Dr. Azzato was covered for liability arising out of medical malpractice under two professional liability insurance policies issued by Medical Mutual.

Both policies provide that Medical Mutual “will pay ... all sums” that Dr. Azzato “shall become legally obligated to pay as damages” because of “injury arising out of a medical incident” or “due to personal injury.” Both policies then specifically exclude from this coverage injuries arising out of criminal acts performed by the insured. The first policy, covering the period from July 31, 1985 to July 31,1986, provides that coverage does not apply to injury arising out of any dishonest, fraudulent, criminal or malicious act or omission of any Insured. The second policy, covering the period from July 31, 1986 to July 31, 1987, provides that coverage does not apply to injury arising out of the performance by any named Insured of a criminal act. The Court of Appeals has held similar language in a professional liability insurance policy to be unambiguous and to exclude coverage for losses resulting from criminal acts.

Aragona v. St. Paul Fire & Marine Ins. Co., 281 Md. ⁶³⁸ 371, 378 A.2d 1346 (1977). In that case, the Aragonas sued a lawyer for vicarious liability because of his partner’s misappropriation of their funds and for his own negligence in failing to uncover the misappropriation; they recovered on both grounds. The Aragonas then sought to recover the amount of their judgment from the lawyer’s malpractice insurer.

In its policy, the insurance carrier had promised to pay all sums which the Insured shall become legally obligated to pay as damages arising out of the performance of professional services for others in the Insured’s capacity as a lawyer and caused by the Insured or any other person for whose acts the Insured is legally liable. 281 Md. at 372 , 378 A.2d 1346 . The policy, however, excluded coverage for “any dishonest, fraudulent, criminal or malicious act or omission of the Insured, any partner or employee.” Id. The Aragonas argued inter alia that these policy provisions were “ambiguous” and so “must be strictly construed against the insurer, and ... in favor of the policyholder.” 281 Md. at 374 , 378 A.2d 1346 . The Court of Appeals held the exclusion unambiguous: “[w]e see no ambiguity in this language.” Id. at 375, 378 A.2d 1346 .

After rejecting the Aragona’s remaining argument (an argument not made or applicable here) the Court concluded: We think the parties intended, from the language used in the insurance contract construed as a whole, that any loss which resulted from any dishonest or criminal act ... was excluded from coverage, and that the exclusionary clause of the policy was all-encompassing in this respect. 281 Md. at 379 , 378 A.2d 1346 . In its very short oral remarks, the court below stated that “there is an ambiguity in the policy.” In light of the Court of Appeals’s clear holding in Aragona , Dr. Azzato disavows any argument that the policy is ambiguous. Instead, he claims that his case “is clearly distinguishable” from Aragona because “there is a significant factual difference,” i.e., “[h]ere, unlike Aragona , there was nothing ‘criminal’ in ⁶³⁹ what Dr. Azzato was doing except for the false prescriptions for valium which he wrote in April of 1987, for which he was arrested and subsequently pled guilty.” Thus, Dr. Azzato asserts that his distribution of drugs to Mrs. Warsaw on “hundreds” of occasions during the year prior to April, 1987, was not criminal activity. He is wrong.

His admitted, frequent distribution to Mrs. Warsaw of drugs that were “controlled dangerous substances,” as defined in Art. 27, § 277(f), for “recreational,” rather than medicinal, purposes was clearly criminal activity in violation of several provisions of the Maryland Controlled Dangerous Substance Act. See Art. 27, § 287(a) and § 288(c). In sum, contrary to Dr. Azzato’s assertions, it is just as clear here, as it was in Aragona , that the complained-of activity was criminal. Nor do any of the cases upon which Dr. Azzato relies aid his cause.

Many of them do not even involve a determination of insurance coverage. Instead, they simply hold that improper conduct by a health care provider, like Dr. Azzato, can constitute malpractice or professional negligence. See e.g., Figueiredo-Torres v. Nickel, 321 Md. 642 , 584 A.2d 69 (1991); Los Alamos Medical Center v. Coe, 58 N.M. 686 , 275 P.2d 175, 178 (1954); McCarroll v. Reed, 679 P.2d 851, 854 (Okla.App.1983); Ballenger v. Crowell,