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.