Texas Court Holds Prior Knowledge Exclusion in E&O Policy Inapplicable

In its recent decision in OneBeacon Insurance Company v. T. Wade Welch & Associates, et al., 2012 U.S. Dist. LEXIS 178587 (S.D. Tex. Dec. 18, 2012), the United States District Court for the Southern District of Texas had occasion to consider the application of a prior knowledge exclusion in a professional liability policy.

OneBeacon issued a series of lawyers professional liability policies to the law firm of T. Wade Welch & Associates, the first such policy incepting on December 20, 2006.  Each of the policies contained a prior knowledge exclusion applicable to “any claim arising out of a wrongful act occurring prior to the policy period if, prior to the effective date of the first Lawyers’ Professional Liability Insurance Policy issued by [OneBeacon] to [the Welch Firm] and continuously renewed and maintained in effect to the inception of this policy period … you had a reasonable basis to believe that you had committed a wrongful act, violated a disciplinary rule, or engaged in professional misconduct; [or] you could foresee a claim would be made against you.” 

The T. Wade Welch & Associates firm and various attorneys in the firm (the “Welch Defendants”) were named as respondents in an arbitration brought by a former client, the DISH Network.  The Welch Defendants had been representing DISH in a lawsuit preceding the issuance of the first OneBeacon policy.  DISH’s arbitration petition alleged, among other things, that in 2005, the Welch Defendants failed to respond to discovery, and withheld this error and also withheld other subsequent, but related, events from its client.   This misconduct eventually led to a sanctions motion being made against DISH in February 2007, which the Welch Defendants did not disclose to their client until July 2007, when the sanctions motion against DISH was granted. 

Although the sanctions were awarded while the OneBeacon policies was in effect, OneBeacon argued that the prior knowledge exclusion barred coverage for DISH’s malpractice claim since the Welch Defendants knew prior to December 20, 2006 that it had engaged in professional misconduct.  OneBeacon further contended that the sanctions were part of a series of related wrongful acts predating the inception of the first policy it issued to the Welch firm.  The Welch Defendants argued, on the other hand, that DISH’s damages, and the basis for its malpractice claim, was the July 2007 sanctions order, which occurred while the first OneBeacon policy was in effect.  The Welch Defendants further contended that “any acts or omissions prior to the entry of the February 2007 discovery motion and July 2007 discovery order were readily curable and could not, on their own, support DISH’s [malpractice] claim.”

The court agreed that all of the events described in DISH’s arbitration petition were related, but that they constituted “independent wrongful acts.”  Specifically, the court concluded that the Welch Defendants engaged in separate acts of professional misconduct after the inception of the 2006 OneBeacon policy when they failed to advise DISH about the pending sanctions motion and failed to correct the alleged discovery deficiencies.   In reaching this conclusion, the court rejected OneBeacon’s argument that these acts all related back to misconduct from 2005, which predated the inception of the first OneBeacon policy.   In support of this argument, OneBeacon cited to a long line of cases regarding relationship of claims, such as the seminal decision in Continental Casualty Co. v. Wendt, 205 F.3d 1258 (11^th Cir. 2000).  The court found these decisions distinguishable, explaining:

… these cases do not involved relating independent wrongful acts back to the initial wrongful act so that all wrongful acts fall within a prior knowledge exclusion.  Rather, they all deal with whether alleged wrongful acts are related for limits of liability purposes.  Thus, they are not on point.

The court ruled similarly with respect to OneBeacon’s argument that all pre-policy and post-policy wrongful acts should be “linked together” and thus all considered to have happened prior to the inception of the first policy.  In support of this argument, OneBeacon relied on a “Multiple Insureds, Claims or Claimants” condition stating:

Each wrongful act, in a series of related wrongful acts, will be deemed to have occurred on the date of the first such wrongful act. A series of related wrongful acts includes wrongful acts which are logically or causally connected by common facts, circumstances, situations, events, transactions or decisions and which may involve the same person or organization or class of persons or organizations.

The court concluded that this language was not relevant in considering the application of the prior knowledge exclusion since “the language linking related wrongful acts is in a completely different section of the policies than the exclusions.”  The court agreed that OneBeacon’s argument was reasonable, and “perhaps even more reasonable” than the contrary view espoused by the Welch Defendants, which was that the “Multiple Insureds, Claims or Claimants” provision must be read independently of policy exclusions.  The court nevertheless agreed that the Welch Defendants argument was “not itself unreasonable,” and as such, there were two reasonable interpretations of the policy, which required the court to construe the policy against OneBeacon.  Thus, the court concluded that OneBeacon could not rely on the prior knowledge exclusion to disclaim a duty to defend the wrongful acts that allegedly occurred after the December 20, 2006 inception of the first OneBeacon policy.

Florida Court Holds No Coverage for Related Claims Under E&O Policy

In its recent decision in Zodiac Group v. Axis Surplus Ins. Co., 2012 U.S. Dist. LEXIS 176622 (S.D. Fla. Dec. 13, 2012), the United States District Court for the Southern District of Florida had occasion to consider whether an insured was entitled to coverage under a claims made and reported professional liability policy for a newly filed lawsuit related to a earlier suit filed prior to the policy’s date of inception.

The underlying dispute arose out of a contract between Zodiak and Linda Georgian, whereby Ms. Georgian was hired to endorse Zodiak’s telephone psychic services.   In April 2008, Ms. Georgian brought suit in state court against Zodiak for allegedly continuing to use her name and likeness in their advertising after the endorsement contract terminated.  The suit was dismissed for lack of prosecution in November 2009, but later refiled in federal court in January 2010, albeit with slightly different causes of action.

In September 2008, while the earlier state court suit was pending, Zodiak applied for a professional liability insurance policy from AXIS.  The policy application required Zodiak to identify any pending or prior claims made in the last five years.  In response, Zodiak stated “Former contract celebrity claimed unauthorized use of her name after their [sic] relationship ended. Allegations of invasion of privacy & injunctive relief.”  AXIS subsequently issued a one year claims-made and reported professional liability policy for the period October 2008 through October 2009.  The policy was later renewed for the period October 2009 to October 2010.  Notably, the 09-10 policy provided coverage for wrongful acts committed subsequent to the policy’s March 6, 1998 retroactive date and prior to inception date of the policy, but only if the claim was first made during the policy period, and only if prior to the policy’s date of inception the insured was unaware of circumstances that could give rise to a claim.   Additionally, the policy stated that "[a]ll Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of" either "[t]he date the first of those Claims is made against any Insured," or “[t]he first date the [insurance company] receives the Insured's written notice of the Wrongful Act.” 

Zodiak contended that although the earlier state court was first made prior to the inception date of either policy, the lawsuit later filed in federal court should be considered a claim first made and reported during the 09-10 policy period, and thus covered under that policy.  AXIS countered that the federal court lawsuit involved the same allegations as the previously filed state court lawsuit, and that it light of this relationship should be considered a claim first made prior to the 09-10 policy’s inception date.

Observing that the federal court lawsuit was premised on the same alleged wrongdoing as alleged in the earlier state court lawsuit, the court granted AXIS’ motion to dismiss Zodiak’s complaint.  The court reasoned that the two preconditions for coverage for prior wrongful acts were not satisfied.  First, the federal court lawsuit was not first made during the policy period given its relationship to the state court lawsuit.  Second, Zodiak failed to establish that at the time of the policy’s issuance, it was unaware of circumstances that could give rise to a claim.  On the contrary, its responses in the application indicated otherwise.  As the court explained:

Nor is it true that Zodiac had no knowledge, prior to the policy's inception date, "of a circumstance that could reasonably be expected to lead to the Claim." … That is plainly false because Zodiac in fact disclosed on its application for insurance the underlying dispute with Georgian that later materialized into the federal lawsuit. In response to the question about pending or prior claims, Zodiac wrote that a "[f]ormer contract celebrity claimed unauthorized use of her name after their relationship ended," and that the suit involved "[a]llegations of invasion of privacy & injunctive relief." … Although Zodiac responded "no" to the question about whether it knew of any facts or circumstances that might reasonably result in a future claim being made, that obviously does not lessen its knowledge about the April 2008 state court lawsuit and the circumstances and facts underlying it.

California Court Reaffirms Negligent Professional Advice Not An Occurrence

In its recent decision in Aquarius Well Drilling, Inc. v. American States Insurance Co., 2012 U.S. Dist. LEXIS 172770 (E.D. Cal. Dec. 4, 2012), the United States District Court for the Eastern District of California had occasion to consider whether an insured’s professional negligence constituted an occurrence for the purpose of triggering coverage under a general liability policy.

The insured, Aquarius Well Drilling, was a well drilling and testing company.  In 2007, it was hired by a title company to test a well on a property that was in escrow and pending sale.  The purchasers of the property later brought suit against Aquarius, alleging that the company erred in performing the tests, which resulted in inaccurate information being disclosed regarding the well.   Aquarius’ general liability insurer, American States, denied coverage for the underlying suit on the basis that it did not allege property damage arising out of an occurrence.  Aquarius filed a declaratory judgment action against American States, which was dismissed earlier this year, although the court granted Aquarius leave to file an amended complaint.  Aquarius subsequently filed an amended complaint which American States moved to dismiss on the same grounds; namely, that the underlying suit did not allege an “occurrence.”

Aquarius claimed that its negligence in testing the well was an occurrence, defined in pertinent part as an accident, because it did not intend for the unintended consequences of the well testing, i.e., harm to the underlying plaintiffs.  American States, on the other hand, argued that Aquarius’ testing of the well was intentional, and as such could not be considered an occurrence regardless of the unexpected and unanticipated consequences of its negligence.  In considering the issue, the Eastern District acknowledged that under California law, the term “accident” as used in the standard general liability policy definition of occurrence “refers to the nature of the act giving rise to liability; not the insured's intent to cause harm.”  The only exception to this rule is when “some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.”

Aquarius argued that despite this body of case law, its conduct in testing the well should nevertheless be considered an occurrence because it provided its client with objective information concerning the well, and because it did not offer any opinions as to the condition or future viability of the well.  In other words, Aquarius argued that it was not giving professional advice, and as such, cases addressing whether an insured’s professional services can be an occurrence were distinguishable.  The court did not find this to be a relevant distinction, explaining that the key consideration is whether the insured’s conduct can be considered accidental:

California courts have stated "accident" refers to the nature of the insured's conduct, not his state of mind or to the consequences of the conduct … Thus, whether Aquarius' well testing was done negligently or not, regardless of the unintended consequences, "the insured's conduct alleged to have given rise to claimant's injuries is necessarily non-accidental, not because any 'harm' was intended, but simply because the conduct could not be engaged in by 'accident'."  … Plaintiffs could not have engaged in the well testing by "accident

Thus, the court concluded, the insured’s degree of knowledge concerning its negligence, and the content of its report, were irrelevant.  Instead, because the insured intentionally tested the wells and provided information to its client in its professional capacity, such could not be considered an accident for the purpose of a general liability policy.

Eighth Circuit Addresses Failure of Goods Exclusion

In its recent decision in Westfield Ins. Co. v. Robinson Outdoors, 2012 U.S. App. LEXIS 24642 (8^th Cir. Nov. 30, 2012), the United States Court of Appeals for the Eighth Circuit, applying Minnesota law, had occasion to consider a “failure of goods” exclusion in the context of the advertising injury coverage part under a general liability policy.

The insured, Robinson Outdoors, manufactured and sold hunting-related products that it claimed would mask the human scent.  Consumers brought several class actions against Robinson, claiming that the products did not work as advertised.   Robinson’s general liability insurer, Westfield, denied coverage on the basis of its policy’s exclusion applicable to liability “arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [Robinson's] 'advertisement.”  Westfield was granted summary judgment by the United States District Court for the District of Minnesota, resulting in the appeal to the Eighth Circuit.

On appeal, Robinson asserted that the exclusion was ambiguous.  The Eighth Circuit rejected this argument, noting that neither Robinson nor the court itself could articulate a reasonable basis as to how the failure-to-conform exclusion could be subject to more than one interpretation.   As such, and because the underlying suits pertained to the alleged failure of Robinson’s products to mask the human scent as advertised, the court agreed that the exclusion unambiguously applied.  In so holding, the court also rejected Robinson’s assertion that the exclusion did not apply because at least some of the advertisements identified in the complaints were not related to the products’ ability to mask human scent.  The court rejected this distinction, explaining:

These allegations in the underlying lawsuits highlighted by Robinson merely provide a background to Robinson's misleading marketing tactics, not an individual or separate basis for a claim. The underlying lawsuits allege that Robinson misled consumers into buying hunting clothing that did not perform as it was advertised. The thrust of the consumers' claims was that Robinson sold hunting clothing that was advertised to eliminate human odor, but did not.

Fifth Circuit Holds Negligent Drilling Did Not Result in Property Damage

In its recent decision in PPI Tech. Servs., L.P. v. Liberty Mut. Ins. Co., 2012 U.S. App. LEXIS 24571 (5^thCir. Nov. 29, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider what damages qualify as “property damage” for the purpose of a general liability policy.

The insured, PPI, was hired by a lessor and operator of three oil leases located in Louisiana to oversee the drilling of well on a specified lease. The drilling resulted in a dry hole, which ultimately was filled in and abandoned. It was subsequently determined that PPI drilled the well on the wrong lease. PPI was later named as a defendant in two lawsuits as a result of this incident, both of which were referred to arbitration. In one of the arbitrations, claimants sought $4.2 million for PPI having drilled the well in the wrong location. In the other, claimants sought in excess of $700,000 in delay rentals to maintain the lease. Additionally, and presumably to trigger PPI’s insurance coverage, one of the arbitrations alleged that PPI’s actions caused“property damage” in the form of “physical injury to tangible property, including all resulting loss of use of the property.”

PPI was insured under a general liability policy issued by Liberty Mutual. Liberty’s policy contained a standard general liability definition of “property damage” encompassing:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

Liberty disclaimed coverage to PPI on the basis that the underlying arbitrations did not allege “property damage” resulting from an “occurrence.” Liberty argued that notwithstanding the reference to “property damage”in one of the arbitration petitions, the petition contained no specific allegations of physical injury to tangible property or actual loss of use. PPI argued, on the other hand, that the mere reference to “property damage” was sufficient to trigger a duty to defend.

The court rejected PPI’s contention, stating that it did “not consider mere use of the phrase ‘property damage’ and parroted Policy language as sufficient factual allegation.” Rather, explained the court, a claimant must identify actual property damage rather than simply allege that an insured’s activities resulted in physical injury to tangible property or loss of use thereof. “Hallow” and “cursory” allegations of “property damage” do not rise to the level of an allegation of actual property damage. The court therefore looked to the remaining allegations in the petitions, which it concluded were devoid of any allegations falling within the definition of “property damage,” such as “destruction from penetration or scorching from a blowout or fire,” or even constructive eviction caused to the owner of the lease on which the insured wrongly drilled. As such, and because the underlying petitions did not otherwise allege “loss of use,” the court agreed that there was no allegation of property damage that triggered Liberty’s duty to defend.

California Court Holds Unintentional Conversion Not An Occurrence

In its recent decision in Alco Iron & Metal Co. v. American International Specialty Lines Ins. Co., 2012 U.S. Dist. LEXIS 166692 (N.D. Cal. Nov. 21, 2012), the United States District Court for the Northern District of California had occasion to consider whether an insured’s intentional acts that result in unintentional harms can be considered an “occurrence” for the purpose of a general liability policy.

The insured, Alco Iron & Metal Company, sought coverage for an underlying conversion claim brought by Caicos Investments.The suit alleged that Alco wrongfully entered Caicos’ property, removed its rail spurs, and sold the spurs to a third party as scrap metal. Alco claimed that it engaged in such conduct under the mistaken belief that it had permission to take the rail spurs, such permission having been given by Caicos’ then tenant, Sparetime Supply.In fact, Alco asserted a cross-complaint against Sparetime alleging that Sparetime had represented that it had authority to negotiate the terms of Alco’s use of the property.Alco’s general liability insurer, Chartis, disclaimed coverage to Alco on the basis that Cacios’ lawsuit did not allege an“occurrence” for the purpose of the policy’s property damage coverage part, defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”Chartis also denied coverage under its policy’s personal and advertising injury coverage on the basis that Caicos did not allege “personal injury” based on the offense of “wrongful entry.”

In the ensuing coverage litigation, Alco argued that its otherwise intentional actions should be considered accidental in light of Sparetime’s misrepresentations.In particular, Alco argued that Sparetime’s false representations constituted an “independent and unforeseen happening”that guided Alco’s conduct.Thus, Alco claimed that its actions in entering the property and taking the rail spurs were not intentional, but instead the result of its negligent reliance on Sparetime’s representations.As such, and because it did not intend to cause harm to Caicos, Alco claimed that its conduct satisfied the policy definition of “occurrence.”The court disagreed, citing to a long line of California decisions, such as Fire Ins. Exchange v. Superior Court (Bourguignon), 181 Cal. App. 4^th 388 (Cal. App. 2010), standing for the proposition that an insured’s subjective intent not to cause harm is not a relevant coverage consideration.As the court noted, an insured’s lack of“intent to harm” cannot transform an otherwise volitional act into an accident.

The court also rejected Alco’s contention that Sparetime’s representations constituted an “unexpected, independent and unforeseen circumstance” that otherwise rendered Alco’s actions accidental.The court observed a distinction between “accidental conduct and intentional acts for which the results were not intended.”Where the insured’s intentional actions directly result in an unanticipated harm, then there is no occurrence for the purpose of a general liability policy.By contrast, where an insured’s intentional actions are followed by an unanticipated and injurious act that the insured did not intend, then the injury can be said to result from an “occurrence.”Applying this reasoning, the court concluded that Sparetime’s false representations could not be considered a subsequent intervening event:

Here, the allegations in the underlying complaint were that Alco entered the property, removed the rail spurs, and then sold them as scrap metal.Although it did not intend to harm Caicos and acted under the belief that it was authorized to take these actions, Alco has not offered any material dispute of fact that it was intended to carry out each of these acts in the manner in which they were done and that it accomplished its objective, in taking the metal away and selling it.

In addition to concluding that Alco was not entitled to coverage under the Chartis policy’s property damage coverage, the court also concluded that the underlying complaint did not trigger the policy’s personal injury coverage based on the offense of “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.”Alco argued that “person” in this definition could refer to natural persons and businesses alike.Citing to California state appellate decisions as well as cases from California’s federal courts, the Alco court concluded that in the context of the Chartis policy, “person” could only refer to a natural person and did not include business entities.

Michigan Court Holds Tank Repair Costs Not Covered Under UST Policy

In its recent decision in H & M Petro Mart v. Zurich Am. Ins. Co., 2012 U.S. Dist. LEXIS 163205 (E.D.Mich. Nov, 15, 2012), the United States District Court for the Eastern District of Michigan had occasion to consider the scope of an insurer’s coverage obligations under a storage tank liability policy.

Zurich insured H&M Petro Mart under a Storage Tanks System Third Party Liability and Cleanup Policy, providing environmental cleanup coverage for releases of product from four insured underground storage tanks.  The policy defined “tank” to include “any connected piping, ancillary equipment and containment system that is on, within, or under a 'scheduled location.'”  Further, the policy defined “cleanup costs” as necessary costs related to the “investigation, removal, remediation, neutralization or immobilization of contaminated soil, surface water, groundwater, or other contamination.”  Notably, the policy contained an exclusion applicable to:

L.   any costs for the reconstruction, repair, removal, maintenance, replacement, upgrading, or rebuilding of any "scheduled storage tank system", personal property, fixtures, buildings, or any other improvements and any site enhancement or routine maintenance on, within, or under the "schedule location(s).

H&M reported a release to Zurich in 2009, and Zurich subsequently paid in excess of $190,000 in costs identified as “cleanup costs.”  Zurich, however, disclaimed coverage for certain costs submitted by H&M that related to reinstallation and/or reconstruction of gas pumps, such as installation of new product lines, electrical wire and conduits, reconstruction of a sewer system and canopy drain, installation of dispenser islands and bumper guards, and re-installation and calibration of dispensers.  H&M also sought coverage for costs associated with pouring of 5,800 square feet of concrete on the ground above where the new tanks had been installed.  Zurich determined that such costs were for site enhancement and not properly categorized as remediation costs.

H&M argued in a subsequent declaratory judgment action that the denied costs were integral to the remediation of its site and thus should qualify as “cleanup costs.”  Specifically, H&M argued that in order to effectuate the environmental cleanup required by the state, H&M was required to rip up the concrete at its gas station and remove its tanks, in order to gain access to the contaminated soils.  As such, argued H&M, these items were damaged by the release, and their replacement costs should come within the policy’s coverage.  H&M also argued that it was required to replace certain portions of its tanks and repour the concrete in order to comply with applicable regulations.

The court agreed that while it may have been necessary to remove portions of the tanks and concrete in order to effectuate the remediation, this did not mean that the costs of replacing such items came within the policy’s coverage.   On the contrary, the policy specifically excluded coverage for such items as indicated in exclusion L, which explicitly barred coverage for tank repairs or reconstruction.  The court drew a distinction between costs necessary to effectuate the remediation and costs covered under the policy:

Zurich assumed the costs for cleaning up the soil and groundwater to bring its quality up to standards required by governmental regulations. Zurich satisfied this obligation when MDEQ issued a "closed" designation  to the site. It appears as if the services invoiced may be "necessary" in remediating the contaminated area because excavation of the site was required to treat the surrounding affected area. Inevitably, items on the surface of the location required removal in order to remediate the contamination. Although they may be necessary in order to effectuate remediation, these costs are explicitly excluded in Section IV.L of the Policy.

The court held similarly with respect to repouring concrete at H&M’s station.  The court agreed that while such work was necessary to restore the site to its original condition, Zurich’s policy did not afford coverage for such work.  Rather, Zurich’s coverage obligations were limited to remediating any environmental contamination.   As the court explained, the policy “unambiguously excluded coverage for costs associated with restoring the entire premises back to its original condition.”

Utah Federal Court Holds Pain Pump Claims Not Related

In its recent decision in Columbia Casualty Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah Nov. 14, 2012), the United States District Court for the District of Utah had occasion to consider the concept of “related claims” in the context of claims made products liability policies.

The insurance dispute in SMI Liquidating arose out of defective shoulder pain pumps manufactured by Sorenson Development, which was insured by Columbia Casualty under successive policies.  The first such policy, issued for the period July 1, 2007 through July 1, 2008, had limits of liability of $10 million per claim and in the aggregate, subject to a $25,000 deductible per claim and a $125,000 deductible aggregate.  Notably, the 07-08 policy contained a “related claims” provision that stated, in pertinent part:

If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

The policy defined “related claims” as all claims arising out of the same occurrence or related occurrences.  Further, the policy defined related occurrences as those “that are logically or casually connected by any common fact, circumstance, condition, situation, transaction, event, advice or decision in the design, formulation, manufacturing, distribution, sale, testing, use, operation, maintenance, repair or replacement of your product or your work.”

While the 07-08 policy was in effect, Sorenson was named as a defendant in four lawsuits relating to its pain pumps.  Columbia initially treated these suits as separate claims, each triggering a separate deductible.  Columbia did, however, have internal deliberations between its claim and legal departments as to whether the four suits should be considered related claims triggering only a single deductible. 

Toward the end of the 07-08 policy period, Columbia began the underwriting process for a renewal.  During this process, the Columbia underwriter learned of the pending pain pump claims and became concerned about future claims.  She determined that the renewal would have different deductible terms than the 07-08 policy.  She offered a renewal on the terms that all claims other than shoulder pump claims would be subject to the original $25,000 deductible per claim, with a $125,000 deductible aggregate, but that shoulder pump claims would be subject to a $250,000 deductible per claim, unaggregated.  Sorenson’s risk manager understood  at the time why the renewal would be on different terms and reluctantly agreed to it.  The renewal became effective on July 1, 2008.

Claims continued to be made against Sorenson during the end of the 07-08 policy period and into the 08-09 policy period.  In August 2008, some seven weeks after the 08-09 policy became effective, Columbia’s claim department decided to treat all pending claims as being related and thus covered only under the 07-08 policy.  Notwithstanding its decision, Columbia continued charging Sorenson separate deductibles for each new claim made.  Over the next year, as new claims were made against Sorenson, Columbia issued supplemental correspondence amending the grounds on which Columbia determined that the underlying claims were related.  Thus, whereas Columbia initially took the position that various claims were related because they involved the same pain pump model, this later evolved into the position that any claims involving any pain pump model manufactured by Sorenson were related. 

During a mediation in November 2009, the issue of related claims was brought to a head. Columbia advised that it would be tendering the remaining limits of its 07-08 policy in connection with an upcoming mediation, and that at that point, its coverage obligations would be terminated.  Around the same time, Columbia learned of the fact that it had been charging multiple deductibles instead of a single deductible as it should have in light of its related claims position.  Columbia tried to refund the “erroneously” paid amounts to Sorenson, but Sorenson refused to accept the check.  Columbia subsequently filed a coverage action against Sorenson seeking a declaration that the pain pump claims were related claims covered only under the 07-08 policy, and not covered under the 08-09 policy.

In considering the issue, the court focused primarily on the deductible language contained in the 08-09 policy that specifically distinguished pump claims from non-pump claims.   This deductible scheme, concluded the court, indicated “a clear and unequivocal agreement that shoulder pump claims would be covered, subject to specialized deductibles.”  Columbia’s “related claims” position, observed the court, would negate this express and specific language.  The court further concluded the concept of related claims in the 07-08 policy could be harmonized with coverage for pump claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall within the scope of the related claims’ clause, the parties specifically agreed that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic evidence would have compelled the same holding.  Specifically, the fact that Sorenson and Columbia negotiated the deductible scheme for the 08-09 policy indicated to the court that the parties considered and agreed on the manner in which the 08-09 policy would provide coverage for pain pump claims.  Absent from these negotiations was any discussion that the specialized deductible would apply only if Columbia decided that pump claims made in 08-09 were not related to those made in the 07-08 policy.  In this regard, the court found it “significant that Columbia’s decision to treat all shoulder pump claims as ‘related claims’ under the Year One policy post-dates the effective date of the Year Two policy by over a month.”  Thus, the court concluded that the parties’ contemporaneous communications, at least at the time the 08-09 policy was issued, reflected a mutual understanding that pump claims would be covered under the 08-09 policy.   Columbia’s subsequent decision that the claims would only be covered under the 07-08 policy “fundamentally altered the allocation of risk bargained for by the parties in the Year Two policy and was contrary to the parties’ express intentions at the time of contracting.”

Illinois Federal Court Allows Consideration of Extrinsic Evidence

In its recent decision in Nautilus Ins. Co. v. Ricciardi Dev., LLC, 2012 U.S. Dist. LEXIS 161244 (N.D. Ill. Nov. 9, 2012), the United States District Court for the Northern District of Illinois had occasion to consider when and under what circumstances an insurer can rely on facts extrinsic to a complaint in evaluating whether it has a duty to defend.

The insured, Ricciardi Development was named as a defendant an underlying suit alleging that it negligently owned and maintained an apartment building in Chicago, Illinois, where a roof porch guard rail collapsed, causing plaintiffs to fall to the ground.   Among other things, it was alleged that Ricciardi has work performed on the porch rails that allowed for the accident.  Notably, the complaint alleged that the accident happened on May 24, 2009, and that Ricciardi owned and renovated the building sometime prior to that date.   The complaint did not allege a specific date on which such work was performed.

At the time of the accident, Ricciardi was insured under a general liability policy issued by Nautilus Insurance Company.  By endorsement, the Nautilus policy excluded coverage for bodily injury resulting from Ricciardi’s work completed prior to September 11, 2008 and specifically stated that Nautilus would have no duty to defend any claim alleging bodily injury arising out of Ricciardi’s work, or work completed for Ricciardi, prior to September 11, 2008.  Having learned from its own investigation that Ricciardi only owned the building only from 2000 through 2005, and thus could not have performed work subsequent to 2008, Nautilus filed suit against Ricciardi, seeking a judicial declaration that it had no duty to defend or indemnify on the basis of this exclusion.

On motion for summary judgment, the court agreed that the exclusion was clear and unambiguous, and thus applied to claims against Ricciardi involving work performed by or for it prior to September 11, 2008.  The underlying suit, however, did not allege the date on which various porch repairs were performed.  The court reasoned, therefore, that if it could only consider allegations contained in the underlying complaint, then Nautilus would have a duty to defend, explaining “[b]ecause September 11, 2008, the policy's cut-off date, is prior to May 24, 2009, the complaint alleges a claim that potentially could fall within the policy's coverage.”  The court further reasoned, however, that if it could rely on facts extrinsic to the complaint, then there was no potential for coverage since any work Ricciardi performed with respect to the porch necessarily was completed prior to 2005 when Ricciardi sold the premises.

The court observed the general rule of Illinois law, which is that an insurer may consider only the facts alleged in the underlying complaint in determining a duty to defend.   It noted, however, an exception to this rule applicable when an insurer elects to file a declaratory judgment action regarding its duty to defend.   Under such circumstances, explained the court, Illinois case law generally supports the proposition that consideration of such extrinsic facts is required except when these facts are central to the determination of an issue in the underlying suit.  Looking to these cases, the court concluded that:

… this court can and must consider the undisputed extrinsic evidence set forth by Nautilus—that Ricciardi sold the property on February 22, 2005, and completed the work on the porch and guardrail before then—in determining whether Nautilus has a duty to defend  Ricciardi and Development. There is no basis for concern that considering this evidence would "tend[] to determine an issue crucial to the determination of the underlying [state court] lawsuit." … Indeed, the opposing sides in the underlying suit unanimously agree in this case that Ricciardi sold the property in February 2005 or, at a minimum, that he did not own the property as of September 11, 2008. … If that fact were contested in or significant to the underlying suit, the opposing sides in that suit would not have agreed on that fact here.

Thus, concluding that consideration of extrinsic facts was permissible and that these facts were dispositive of the policy’s exclusion, the court agreed that Nautilus had no duty to defend.

Mississippi Court Holds Insured Gave Untimely Notice of Potential Claim

In its recent decision in Sollek v. Westport Ins. Corp., 2012 U.S. Dist. LEXIS 157649 (S.D. Miss. Nov. 2, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider the conditions precedent to coverage under a claims made and reported policy.

The insured, Vann Leonard, was insured under a legal malpractice policy issued by Westport Insurance Company for the period April 8, 2010 to April 8, 2011.  In 2006, Leonard had been retained by Gilbert Sollek to negotiate a home equity loan and to make the subsequent monthly payments on the loan.  In May 2011, Leonard was arrested for embezzling client funds.  While incarcerated, he failed to make Sollek’s monthly payment.  Sollek learned of this on May 5, 2011 – nearly a month after the policy expired – and he later filed suit against Leonard on May 31, 2011.  Leonard was served with the complaint on June 2, 2011 while he was in jail, and he later faxed a copy of the suit to Westport on June 15, 2011.   At the time, Westport had been defending Leonard in connection with other suits arising out of his alleged embezzlement scheme.  Westport, however, later disclaimed coverage for all such suits, including Sollek’s, on the basis of a criminal acts exclusion in the policy.  Notably, the disclaimer did not address the issue of when Sollek’s claim was first made and reported.  Solleck later brought a declaratory judgment action against Westport challenging the validity of Westport’s disclaimer to Leonard.

Westport moved for summary judgment on the basis that Sollek’s claim was not first made or reported during the policy period as required by the policy’s insuring agreement.  The court began its decision by noting that Mississippi’s Supreme Court had not yet had occasion to interpret a claims made and reported policy.  It nevertheless observed that courts and commentators generally acknowledge that “both the making and reporting of the claim within the specified period” are considered essential elements of coverage under such policies.  The court agreed that Mississippi courts would follow this majority rule.

After concluding that the Westport policy was unambiguous and required the claim to be first made and reported during the policy period, or that notice of potential claim be given during the policy period, the court considered whether these conditions precedent to coverage were satisfied.   Sollek conceded that he had failed to assert a claim against Leonard prior to the expiration of the Westport policy, and as such the date on which the claim was reported to Westport was irrelevant.  He nevertheless argued that Westport received notice of a potential claim during the policy period such that it had a coverage obligation to Leonard for the subsequently made claim.   The Westport policy indeed contained a notice of potential claim provision stating:

[i]f, during the current POLICY PERIOD, any INSURED first becomes aware of a POTENTIAL CLAIM and gives written notice of such POTENTIAL CLAIM to the Company during the current POLICY PERIOD, any CLAIMS subsequently made against any INSURED arising from the POTENTIAL CLAIM shall be considered to have been first made during the POLICY PERIOD the INSURED first became aware of a POTENTIAL CLAIM.

The court found this provision to unambiguously require that the notice of potential claim be given to Westport prior to the policy’s expiration, and that this notice be given to Westport in writing.  The court also observed that the policy’s notice provision, applicable to claims or potential claims, required the insured to report specific information, including a description of the claim and alleged wrongful act, a summary of the relevant facts, potential damages, etc.  The court concluded that because Westport did not receive written notice of a potential claim during the policy period, or the specific information required by the notice provision, the policy was not triggered. 

In so concluding, the court rejected Sollek’s argument that there was “substantial compliance” with the policy’s reporting requirement concerning potential claims since Leonard’s defense counsel, appointed by Westport to defend different lawsuits, had become aware of Sollek’s potential claim during the policy period.  The court did not agree that defense counsel could be considered Westport’s agent for the purpose of giving notice under the policy, and it also observed that there was no evidence that defense counsel had, in fact, learned of Sollek’s potential claim prior to the policy’s expiration.  More significantly, the court rejected the insured’s entire theory of “substantial compliance,” noting that there was no authority to support the “finding that substantial compliance applies with a claims-made and reported policy when the insurer learns of a potential claim but receives no report from the insured” and that any such rule would be contrary to the contractual requirements set forth in the policy.

Sollek argued in the alternative that the doctrines of waiver or estoppel precluded Westport from denying coverage on the basis of when the claim or potential claim was first made and reported, since Westport had failed to identify this coverage defense in its initial disclaimer letter to Leonard.  Citing to various case law from the federal and state level, the court observed that waiver and estoppel cannot be used to expand a policy’s coverage, although an insurer can waive compliance with policy conditions.  While noting it to be a matter of first impression under Mississippi law, the court agreed that the reporting requirements in a claims made and reported policy are inherent to the policy’s scope of coverage and thus cannot be subject to waiver or estoppel, explaining that:

… allowing waiver or estoppel to nullify these requirements would fundamentally change the nature of the insurer's risk. It would likewise expand coverage beyond the scope of the bargain. Neither waiver nor estoppel create coverage in this context.

First Circuit Addresses Scope of Antitrust Exclusion in E&O Policy

In its recent decision in The Saint Consulting Group, Inc. v. Endurance Am. Specialty Ins. Co., 2012 U.S. App. LEXIS 22631 (1^st Cir. Nov. 2, 2012), the United States Court of Appeals for the First Circuit, applying Massachusetts law, had occasion to consider the application of a restraint of trade exclusion in a professional liability policy.

The insured, The Saint Consulting Group (“Saint”), was a real estate consulting firm specializing in land use disputes.  In particular, Saint had developed a specialty in representing grocery stores in their attempts to prohibit or delay Wal-Mart from opening stores in their client’s territories by spurring litigation and regulatory proceedings.  At issue in the insurance coverage dispute were Saint’s efforts to block two Wal-Mart stores from being developed in Illinois.   Underlying plaintiff, Rubloff Development, had purchased two parcels of land it intended sell to Wal-Mart to be used for construction of Wal-Mart and other retail stores.  Saint, acting on behalf of a competing grocery store, undertook efforts to rally local businesses against the Wal-Mart stores.  Saint’s efforts in these regards were led by a single employee, Leigh Mayo, who used a pseudonym while pursuing these efforts, allegedly concocted false stories about the negative the effects of Wal-Mart stores, and concealed the fact that he was a Saint employee working on behalf of a Wal-Mart competitor.

While these anti-Wal-Mart efforts were still proceeding, Leigh Mayo left Saint’s employ, and shortly thereafter sold to Rubloff thousands of internal documents concerning Saint’s efforts to block the Wal-Mart stores.  Upon learning of this, Saint demanded the documents back.  Rubloff shortly thereafter filed suit action against Saint seeking only a judicial declaration that the documents were not privileged and that Rubloff could keep them for future use in a lawsuit.  Rubloff shortly thereafter amended its complaint to seek various forms of injunctive relief concerning other documents in Saint’s possession.   While the court dismissed Rubloff’s claim for injunctive relief, it ultimately declared that Rubloff was entitled to keep the documents.  Just prior to ruling on Rubloff’s claim for declaratory relief, Rubloff filed a second amended complaint that included substantive causes of actions relating to Saint’s efforts to block or delay the Wal-Mart stores.  Specifically, the second amended complaint included causes action of for RICO violations based Saint’s efforts to conceal Mayo’s true identity and employer, conspiracy to restrain trade under the Sherman Act and Illinois Antitrust Act, tortious interference with prospective economic advantage, common law fraud, and conspiracy.  

Saint ultimately was successful in having each of these causes of action dismissed.  It did so, however, without the assistance of its professional liability insurer, Endurance, which had denied coverage to Saint for the original and amended complaints on the basis of a restraint of trade exclusion stating that coverage did not apply:

… to any Claim based upon or arising out of any actual or alleged price fixing, restraint of trade, monopolization or unfair trade practices including actual or alleged violations of the Sherman Anti-Trust Act, the Clayton Act, or any similar provision [of] any state, federal or local statutory law or common law anywhere in the world.

In the subsequent insurance coverage action, the United States District Court for the District of Massachusetts granted Endurance’s motion to dismiss, concluding that the exclusion barred coverage for the causes of action specifically brought under the Sherman Act and the Illinois Antitrust Act, and that it also applied to the other causes of action since each such cause of action arose out of the same alleged restraint of trade.

In considering the matter on appeal, the First Circuit noted that under Massachusetts law, if even one cause of action escaped the restraint of trade exclusion, then Endurance would have an obligation to defend the suit in its entirety.  Beginning first with the amended complaint filed in the underlying action, the court agreed that the causes of action for antitrust violation under federal and state statute were excluded.  “Far more interesting” to the court was whether the RICO causes of action and common law causes of action were excluded, notwithstanding the fact that they were not titled as “restraint of trade” counts.  In considering this issue, the court observed that the exclusion applied to causes of action “based upon or arising out of any actual or alleged . . . restraint of trade.”  The phrase “arising out of,” it noted, is typically afforded a broad construction under Massachusetts law.  With this in mind, the court observed that:

It can hardly be disputed that the factual allegations of the Second Amended Complaint allege a conspiracy to forestall competition through misuse of legal proceedings and through deception. And every count in the Rubloff Action that is not itself described as an antitrust claim depends centrally on the alleged existence of such a scheme.

The court therefore concluded that because the statutory and common law causes of action in the second amended complaint were premised on Saint’s efforts to restrain trade, the exclusion applied to each such cause of action.  In so holding, the court rejected Saint’s argument that its success in the underlying action evidenced the fact that Saint had not engaged in the prohibited conduct.  The court found this argument to be a “non-sequitur,” explaining:

Exclusion N depends not on whether conduct occurred or, if so, whether it was unlawful, but on what the complaint alleged. What was factually alleged in the Second Amended Complaint in no uncertain terms was an anti-competitive scheme and, where the pertinent counts arise out of that alleged scheme, Exclusion N negates coverage.  The exclusion does not depend on whether a successful defense can be advanced: it excludes meritless claims quite as much as ones that may prove successful.

After concluding that Saint was not entitled to coverage for the second amended complaint, the court then sought coverage for the initial complaint concerning only Rubloff’s declaratory judgment action to keep the internal documents sold by Mayo as well as certain injunctive relief.  The court concluded that coverage was unavailable for that complaint, since the dispute over possession of documents did not involve a wrongful act arising out of Saint’s professional services, and thus did not fall within the policy’s insuring agreement.

Eleventh Circuit Affirms Duty to Defend Legionnaires’ Disease Lawsuit

In its recent decision in Westport Ins. Corp. v. VN Hotel Group, 2012 U.S. App. LEXIS 22187 (11^th Cir. Oct. 25, 2012), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether a pollution exclusion and a fungi/bacteria exclusion operated to bar coverage for an underlying wrongful death claim involving Legionnaires' Disease.

The underlying lawsuit involved three individuals staying at a Quality Suites in Florida, all of whom contracted Legionnaires’ Disease while guests.  One of these individuals died while the two others required significant medical attention.  Two lawsuits were brought against VN Hotels, as the owner and operator of the Quality Suites.  The suits alleged that the plaintiffs contracted the disease as a result of exposure to legionella bacteria contained in shower water in their own rooms, or from steam generated by the hotels’ outdoor spa.  The plaintiffs later conceded, however, that the source of the bacteria was from the hotel’s outdoor spa.  VN Hotels tendered its defense to its general liability insurer, Westport Insurance.

Westport brought a coverage action against VN Hotels, seeking a declaratory judgment that its policy’s pollution exclusion and fungi/bacteria exclusion precluded a finding of coverage.  The pollution exclusion applied to:

"Bodily injury" . . . arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

                                                * * *

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste . . . .

Additionally, the policy’s fungi/bacteria exclusion applied to:

"Bodily injury" . . . which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. 

The fungi/bacteria exclusion, however, also contained an exception applicable to:

This exclusion does not apply to any 'fungi' or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.

On motion for summary judgment, the Middle District of Florida found in favor of VN Hotels, concluding that bacteria is not a “pollutant” for the purpose of the pollution exclusion.  The district court further held that the bacteria exclusion was inapplicable since the bacteria was not “within” a structure, and that in any event, the exception applied as the bacteria was contained in a good or product intended for bodily consumption.

On appeal, the Eleventh Circuit agreed with the lower court’s logic that bacteria did not qualify as a pollutant, at least under Westport’s policy, as such a ruling would render meaningless the policy’s fungi/bacteria exclusion.  Turning to the issue of the policy’s exclusion for bacteria, the Eleventh Circuit found persuasive the lower court’s reasoning that an outdoor spa is not clearly part of the hotel’s “structure,” which the court agreed must be defined narrowly, explaining:

In this Policy, the term "building" modifies the term "structure" and shows that "structure" is to be narrowly construed …  Thus, we, like the district court, conclude that an outdoor spa would not qualify as a "structure" for purposes of the exclusion.

Importantly for insurers and insureds alike, neither the district court nor the Eleventh Circuit held the bacteria exclusion unenforceable.  Rather, the two holdings appear limited to the language of the exclusion – requiring the bacteria to be on or within a building or structure – and the unique facts involved.  Further, other Florida courts, including the Eleventh Circuit, have held that similar claims are barred by the pollution exclusion.  See, e.g., Markel Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, No. 8:09-cv-2427-T-27TGW (M.D. Fla. Mar. 9, 2011), aff’d, 2011 U.S. App. LEXIS 16552 (holding that pollution exclusion applied to bacterial infection caused by millings from roadwork); First Specialty Ins. Corp. v. GRS Mgmt. Assocs., 2009 U.S. Dist. LEXIS 72708 (S.D. Fla. Aug. 17, 2009) (concluding virus in swimming pool excluded by pollution exclusion); Nova Cas. Co. v. Waserstein, 424 F. Supp. 2d 1325 (S.D. Fla. 2006).

Florida Court Holds E&O Insurer Has Duty to Defend Civil Conspiracy Claim

In its recent decision in Philadelphia Indem. Ins. Co. v. Hamic, 2012 U.S. Dist. LEXIS 150067 (M.D. Fla. Oct. 18, 2012), the United States District Court for the Middle District of Florida had occasion to consider whether a legal malpractice insurer has a duty to defend a civil conspiracy claim.

The insured law firm of Hamic, Jones, Hamic & Sturwold, P.A., and an individual member of the firm, were sued for alleged civil conspiracy to commit malicious prosecution, extortion and other harms.  The complaint was subsequently amended to include a malicious prosecution claim only against the individual attorney, and the Middle District of Florida held on summary judgment that the malicious prosecution claim triggered Philadelphia Indemnity Company’s duty to defend the entire suit.  Philadelphia moved for reconsideration solely on the issue of whether it had a duty to defend the Hamic law firm, against which a claim for malicious prosecution had not been asserted.  In other words, Philadelphia sought a ruling that a civil conspiracy claim, in and of itself, did not trigger its policy’s coverage.

In support of this argument, Philadelphia relied on case law in the general liability context standing for the proposition that claims for intentional torts are not covered.  The court acknowledged that most, but not all, claims of intentional torts are not insured under a general liability policy.  The court distinguished typical professional liability policies from general liability policies, finding that professional liability policies typically do provide coverage for intentional torts unless specifically excluded.  It further noted that Philadelphia’s policy did not contain an intentional acts exclusion and therefore provided coverage for intentional torts, although “not specifically malicious prosecution or conspiracies.”

With this in mind, the court considered the nature of a claim for civil conspiracy, the gist of which, it explained, is not the conspiracy itself, but instead the civil wrong accomplished by the conspiracy.  In this case, the “civil wrong” giving rise to the underlying plaintiff’s claim was alleged malicious prosecution, which the court had previously concluded on summary judgment was covered under Philadelphia’s policy.   The court therefore held that the civil conspiracy claim necessarily was covered, explaining that:

Because malicious prosecution falls within the coverage of the policy at issue under the facts as alleged in this case, there is also coverage for the conspiracy to commit malicious prosecution. The tort of civil conspiracy does not require a finding of specific intent to harm the plaintiff or to extract an intended result. Essentially the intent to commit the tort does not also mandate an intent to do the harm that resulted, which was an arrest. Based on these principles, Philadelphia owes a duty to defend the insureds on the claim of conspiracy.