Eleventh Circuit Allows Consideration of Extrinsic Evidence

In its recent decision in American Safety Indemnity Co. v. T.H. Taylor, 2013 U.S. App. LEXIS 5072 (11^th Cir. March 14, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, had occasion to consider when and under what circumstances an insurer can rely on extrinsic evidence in determining whether a duty to defend is triggered.

American Safety insured T.H. Taylor under a commercial general liability policy.  T.H. Taylor had been hired as a general contractor to construct a residential home.  Prior to completion of the project, with approximately 20% of the project yet to be completed, the owners suspended construction.  As of that time, T.H. Taylor had been paid nearly the full value of the original budget.  T.H. Taylor and the owners were sued in several underlying lien actions filed by subcontractors and suppliers in Alabama state court.  In these suits, the owners asserted a cross-claim against T.H. Taylor, alleging a cause of action for fraud.  Specifically, the owners alleged that T.H. Taylor intentionally misrepresented the status of the construction project as well as how much the subcontractors and suppliers had been paid.  The cross-claim specifically alleged that T.H. Taylor made these representations, knowing them to be false, for the purpose of receiving an advance on a construction loan.

The state court dismissed the owners’ cross-claims on the basis of a provision in the construction contract requiring all disputes to be arbitrated.  The owners later commenced an arbitration proceeding against T.H. Taylor, but in doing so, the arbitration petition did not allege any specific causes of action, nor did it contain the specific assertions regarding T.H. Taylor’s intent to deceive.  Instead, the petition alleged only that T.H. Taylor presented requests for payment in an amount not equal to the work that actually had been performed.  American Safety took the position that the specific assertions in the cross-claims filed in state court precluded any finding of an “occurrence,” and that as such, it had no duty to defend.  T.H. Taylor, on the other hand, argued that American Safety could not look beyond the arbitration petition in determining whether it had a duty to defend.

The United States District Court for the Middle District of Alabama held in favor of American Safety, and on appeal, the Eleventh Circuit agreed.  The court noted that Alabama law requires that in determining a duty to defend, an insurer cannot rely solely on the theories of liability pled by a plaintiff, but instead must consider the specific factual assertions in a complaint.  If these factual assertions “could reasonably support a legal theory of recovery that is an insured risk under the policy, the insurer has a duty to defend the claim.”  The court further noted, however, that T.H. Taylor’s arbitration proceeding contained no specific legal theories or specific detail concerning the operative facts.  Under such circumstances, observed the court, Alabama law permits an insurer to look beyond the pleadings to examine other available evidence in determining a duty to defend.  As such, the court concluded that it was permissible for American Safety to have relied on the facts alleged in the underlying cross-claim in determining a duty to defend:

The principal determinant in a duty-to-defend inquiry is the state of the pleadings in the underlying litigation, and here, those pleadings did not cease to exist simply because of a change of forum from the state court to private arbitration. The arbitration proceeding was ordered by the court and was ancillary to the state court litigation. It constituted a continuation of the same dispute between the same parties arising out of the same facts. Additionally, even if the arbitration complaint is viewed as somehow displacing the owner's cross claim as well as the claims made by the plaintiffs in the state court litigation, such that the arbitration complaint became the principal pleading driving the duty-to-defend issue, those underlying pleadings in the state court would still be admissible evidence with respect to the proper interpretation to be made of the non-specific complaint in arbitration.

As such, and having agreed that the allegations in the cross-claims supporting a conclusion of intentional rather than accidental conduct, the Eleventh Circuit agreed that American Safety had no duty to defend.