Tuesday, May 22, 2012

Second Circuit Affirms Duty to Defend Under Professional Liability Policy

In its recent decision in Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2012 U.S. App. LEXIS 9888 (2d Cir. May 17, 2012), the United States Court of Appeals for the Second Circuit had occasion to consider whether a professional liability carrier had a duty to defend its insured in connection with several underlying lawsuits relating to mismanagement of a workers’ compensation trust.

The underlying suits were brought by former members of the New York Healthcare Facilities Workers' Compensation Trust (the “Trust”), comprised of nursing homes, health care agencies, and hospitals required under New York law to maintain workers’ compensation insurance for their employees or to participate in a self-insured plan.  Certain members brought several lawsuits, in New York state court, against Hamilton Wharton Group, Inc. (and its owner) relating to Hamilton’s management of the Trust.  The suits alleged, among other things, that Hamilton failed to exercise due diligence and/or mismanaged the Trust.  The suits alleged causes of action for negligence, as well as breach of fiduciary duty, breach of contract, and fraud. 

Westport, as Hamilton’s professional liability carrier, took the position that the suits did not trigger Hamilton’s coverage, primarily on the basis that the suits did not arise out of “professional services,” defined by its policy as “the insured's activities for others as a managing general insurance agent, general insurance agent, insurance agent, or insurance broker.”  Thus, Westport argued, the policy’s coverage was limited to the insured’s professional services involving “issuing, procuring, renewing, or processing of insurance products to third-party clients,” and did not encompass Hamilton’s administration of a  workers’ compensation trust.  Westport nevertheless agreed to defend Hamilton in connection with the underlying suits, and brought suit against Hamilton in federal district court seeking a declaration that it had no duty to defend or indemnify Hamilton in the underlying suits.

Prior to taking any discovery, Hamilton moved for summary judgment on the basis that the Westport’s lawsuit was premature.  Hamilton also sought summary judgment as to Westport’s duty to defend the underlying suits.   Westport argued that the underlying complaints did not allege a wrongful act in connection with Hamilton’s performance of insurance procurement services, or at the very least, there was an issue of fact that precluded summary judgment. In a 2011 decision, the Southern District of New York held that Hamilton was entitled to a defense since there was a reasonable possibility that the underlying lawsuit implicated the insured’s professional services, as that term was defined.  Westport Ins. Corp. v. Hamilton Wharton Group, Inc., 2011 U.S. Dist. LEXIS 20535 (S.D.N.Y. Feb. 23, 2011).  The lower court further agreed that Westport’s lawsuit relating to the duty to indemnify should be dismissed on the basis that it was premature.

On appeal, the Second Circuit agreed that the underlying complaints at least had the potential to involve the insured’s professional services, explaining:

Here, the claims asserted against Westport may rationally be said to fall within the Policy's coverage. The "professional services" contemplated by the Policy encompass at least some of the activities alleged in the State Actions, which included, inter alia, allegations that the Defendants were negligent in handling their funds by: continuing to sign up new participants to join the trust; failing to hire an accountant; offering unwarranted discounts to trust members; failing to implement safety audits; and failing to conduct payroll audits.

Thus, the Second Circuit, as did the Southern District of New York, at least implicitly interpreted the policy’s definition of “professional services” in a broader fashion than did Westport.  The Second Circuit further held that the lower court’s ruling concerning prematurity of the duty to indemnify was correct, as the “State Actions have numerous unresolved issues in common, including whether the Defendants were negligent or breached fiduciary or contractual obligations.”

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