## Facts

- Dr. Edward R. B. McGee, a New Hampshire physician, held a $15,000 professional liability policy issued by United States Fidelity & Guaranty Company (USF&G).
- The policy promised to indemnify McGee for liability “in consequence of any malpractice, error, or mistake” in the practice of his profession and to defend suits alleging such malpractice, “whether groundless or not.”
- Patient George Hawkins sued McGee in New Hampshire state court after a skin-grafting operation on Hawkins’s burned hand allegedly left the hand in worse condition and required an extended hospitalization.
- Hawkins’s writ asserted (1) a contract claim alleging McGee promised to “cure and heal” and restore the hand (a guarantee of result) and (2) a tort claim alleging negligent performance of the operation.
- USF&G initially undertook McGee’s defense; the litigation progressed through multiple trials and appellate proceedings, with the state-court recovery ultimately treated as based on breach of a special contractual promise to produce a specified result rather than malpractice.
- Before a subsequent trial, McGee settled Hawkins’s claim for $1,400 and incurred fees and costs.
- By the time of settlement, USF&G had notified McGee it would not indemnify liability based on a special contract guaranteeing results because such liability was not “malpractice, error, or mistake” within the policy.
- The policy included conditions barring voluntary settlements without the insurer’s written consent and barring suit against the insurer unless a final judgment had been rendered in the underlying action.
- McGee sued USF&G in federal district court seeking reimbursement of the settlement and litigation expenses; after a bench trial, judgment entered for USF&G, and McGee appealed.

## Issues

1. Whether liability imposed on McGee for breach of a special contract guaranteeing a specific medical result constituted liability “in consequence of any malpractice, error, or mistake” covered by the policy.
2. Whether USF&G, having initially defended McGee in the underlying action, was estopped from denying coverage for the claim as resolved.
3. Whether policy conditions barring voluntary settlements without consent and requiring a final judgment barred McGee’s recovery for a settlement reached without consent and without final judgment.

## Decision

- The First Circuit affirmed judgment for USF&G.
- The court held the policy covered liability for malpractice-type professional fault, not liability resting solely on breach of a special contract guaranteeing a particular result; the underlying recovery and settlement fell outside coverage.
- The court rejected estoppel because USF&G gave notice of its coverage position, McGee had his own counsel, and McGee was not misled or prejudiced into surrendering a coverage defense or litigation control.
- The court further concluded the policy’s settlement and final-judgment conditions supported denial of indemnity where McGee settled without the insurer’s written consent and without obtaining a final judgment.

## Legal Principles

- A professional liability policy limited to “malpractice, error, or mistake” does not indemnify a physician for liability arising from a separate contractual undertaking to guarantee a specific treatment outcome.
- An insurer’s initial defense of an insured does not, by itself, create estoppel to deny coverage absent prejudice to the insured attributable to the insurer’s conduct.
- Policy provisions prohibiting settlement without the insurer’s written consent may bar reimbursement when the insured settles after notice of denial and without consent.
- A “final judgment” condition may bar an insured’s direct action against the insurer when the insured seeks indemnity based on settlement rather than a judgment within the policy’s terms.

## Conclusion

The First Circuit held that the insurer owed no indemnity because the insured physician’s liability, as established in the underlying dispute, was for breach of a special contract guaranteeing results rather than for malpractice, and the insured’s post-disclaimer settlement without consent and without final judgment foreclosed recovery under the policy.


McGee v. United States Fid. & Guar. Co., 53 F.2d 953 (1st Cir. 1931)