Texas Court Considers Prior Knowledge Condition In D&O Policy

In the recent decision in Deer Oaks Office Park Owners Ass'n v. State Farm Lloyds, 2012 U.S. Dist. LEXIS 19240 (W.D. Tex. Feb. 15, 2012), the United States District Court for the Western District of Texas had occasion to consider a prior knowledge condition in a directors and officers liability policy.

The insured, Office Park, was “an office park condo association which owns, maintains and regulates the 'common areas' between fifteen unconnected office condos” in San Antonio, Texas.  In 2007, it sold one of the condominium units to a doctor who intended to convert the unit for use in his medical practice.  The doctor advised that being able to install an elevator into the unit was an important aspect and condition of his purchase.  After the sale, however, the doctor was unable to obtain a permission from building maintenance to install the elevator.  He subsequently complained to Office Park, and later commenced a lawsuit in Texas state court.

Office Park sought coverage for the suit under the directors and officers coverage of its policy with State Farm Lloyds, effective for claims first made during the period January 30, 2010 to January 30, 2011, which encompassed the period in which the doctor commenced suit.  The policy’s insuring agreement stated that coverage “applies to 'wrongful acts' committed before this optional coverage became effective if the insured had no knowledge of a claim or suit at the effective date of this option and there is no other applicable insurance.”  State Farm Lloyds denied coverage for the suit on the basis that Office Park had knowledge of the doctor’s claim prior to the policy’s inception.  Specifically, State Farm Lloyds relied on a September 23, 2009 letter from the doctor’s attorney that “traced [the doctor’s] multiple complaints about Office Park and attributed monetary losses to Office Park.”  

Office Park argued that the doctor’s letter did not constitute a “claim” or notice of a “claim,” because the letter did not specifically demand any monetary relief.  In support of its position, Office Park pointed out that the State Farm Lloyds policy did not contain a definition of the term “claim,” and that as such, under the Fifth Circuit decision in Int'l Ins. Co. v. RSR Corp., 426 F.3d 281 (5th Cir. 2005), the term “claim” must be narrowly construed as “a demand for money, property, or legal remedy.” Office Park contended that because the doctor’s September 23, 2009 letter did not actually seek monetary relief, it could not constitute a “claim” for the purpose of the policy’s “knowledge of a claim or suit” condition to coverage.

The court disagreed with Office Park’s restrictive reading of RSR Corp., finding that the term “claim” is not limited solely to demands for monetary relief, but instead encompasses any assertion of a legal right.  Such an interpretation, the court explained, ordinarily is favorable to the insured, rather than the insurer, “because the construction gives the insured the right to seek coverage without waiting for the filing of a lawsuit.”  The court went on to conclude that the doctor’s letter qualified as a “claim” because it clearly stated a legal demand for relief and advised of the potential for litigation should an accommodation not be made.  As the court explained:

The only reasonable interpretation of the letter is that [the doctor] asserted a right to hold Office Park liable for all of the costs [he] had spent and lost because of Office Park's acts. The letter's bottom line was: If you do not comply with my demands, I will sue you. Under any construction, the letter constituted a claim.

As such, the court concluded that State Farm Lloyd’s denial of coverage was correct and that it had no duty to defend or indemnify the doctor in connection with the underlying matter.

Massachusetts High Court Awards $22 Million In Bad Faith Damages

In its recent decision in Rhodes v. AIG Domestic Claims, et al., 2012 Mass. LEXIS 28 (Mass. Feb. 10, 2012), the Supreme Judicial Court of Massachusetts, Massachusetts’ highest court, addressed how damages are to be awarded under Massachusetts’ General Law 93A, § 9 (Massachusetts’ consumer protection statute) for an insurer’s failure to effectuate a prompt, fair and equitable settlement with a claimant, both prior to and following a verdict in an underlying lawsuit.

The underlying matter in Rhodes involved an accident between a tractor-trailer leased and operated by the insured, GAF, and a passenger vehicle, causing catastrophic injuries to plaintiff and rendering her a paraplegic.  GAF had $2 million in primary coverage through Zurich and $50 million in excess umbrella coverage through National Union.  AIG Domestic Claims (“AIGDC”) was the entity tasked with handling the claim on behalf of National Union.  Following an initial investigation, GAF’s third-party administrator advised Zurich and AIGDC in writing that liability was clear.  After suit was filed, the same third-party administrator estimated the value of the case to be between $5 million and $10 million.  A year later, after the driver of the truck plead guilty to a criminal charge relating to his operation of the vehicle, plaintiff made a settlement demand of $18.5 million, which was later reduced to $16.5 million.

Zurich tendered its $2 million limit to AIGDC.  Six months prior to trial, AIGDC attended a meeting with defense counsel at which time it was advised that the average settlement value for comparable cases was $6.6 million and the average jury verdict was $9.6 million.  Notwithstanding, just weeks later, an initial settlement offer was made to plaintiffs in the amount of $2 million, representing the value of the Zurich policy.  The Rhodes court noted that following this initial settlement offer, AIGDC engaged in delay tactics to avoid mediating the case until just one month prior to trial.  At the mediation, AIGDC offered $2.75 million, and later offered $3.5 million after plaintiffs countered at $15 million.  The court noted that the AIGDC representative attended the mediation with authority to settle up to $3.75 million, but elected not to make such an offer, even as the damages analysis changed for the worse at the mediation.  Instead, the AIGDC representative left the mediation one hour after making his offer of $3.5 million.  The matter ultimately went to trial, on damages alone (GAF had stipulated to liability), and the jury returned with a verdict, which when combined with interest, totaled $11.3 million. 

GAF immediately moved for a new trial and for an appeal.  Shortly thereafter, plaintiffs sent demand letters to Zurich and AIGDC pursuant to G.L. c. 93A, alleging that the insurers had failed to effect a prompt and equitable settlement.  This statute authorizes an individual to prosecute an action for unfair business practices, including violation of c. 176D, which is Massachusetts’ unfair insurance practices statute.  C. 176D, § 3(9)(f) defines unfair claim settlement practices to include “[f]ailing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.”  AIGDC responded to plaintiffs’ demand letter one month later by offering to settle both the underlying matter and the c. 93A claim for $7 million, which included Zurich’s $2 million.  Zurich separately responded to the plaintiffs by paying an amount just in excess of $2 million.  Plaintiffs and AIGDC thereafter settled the underlying negligence claim for $8.965 million, but with plaintiffs maintaining their right to prosecute their c. 93A claim. 

In a subsequent bench trial on the issue, a Massachusetts trial court found that AIGDC willfully and knowingly breached its duty to make a fair and reasonable offer prior to trial once liability and damages became reasonably clear, but that the evidence established that plaintiffs would not have accepted any such offer, and as such, damages were not available under c. 93A for AIGDC’s preverdict conduct.  The court went on, however, to find that AIGDC engaged in postverdict misconduct by failing to effectuate a prompt and fair settlement after the verdict was returned.  The court specifically found that AIGDC’s offer of $7 million was “not only unreasonable, but insulting.”  The judge awarded plaintiffs loss of use damages for this violation in the amount of $448,250, calculated as the lost interest on the $8.965 million settlement from the date the matter should have settled to the date that it actually did settle.

The case was appealed to the Massachusetts Appeals Court, which held that plaintiffs should have been awarded damages for AIGDC’s preverdict conduct.  On further appellate review, the Massachusetts Supreme Judicial Court (“SJC”) agreed that plaintiffs established a violation of c. 93A with respect to AIGDC’s pretrial conduct by showing that they suffered a loss due to AIGDC’s failure to make a timely, reasonable offer.  Moreover, the SJC held that the lower court erred in considering whether plaintiffs would have accepted such an offer, since such is not a relevant consideration in finding a violation of the statute.  Notwithstanding, the SJC held that it was not necessary to determine plaintiffs’ damages as a result of AIGDC’s pretrial conduct, since plaintiffs could not recover twice for AIGDC’s failure to effectuate a prompt and reasonable settlement.  As such, the SJC focused solely on what damages were available to plaintiffs as a result of AIGDC’s postverdict conduct.

Toward this end, the SJC looked to the language of c. 93A § 9(3), which states that in the event of a violation, the “recovery shall be in the amount of actual damages or twenty-five dollars, whichever is greater; up to three but not less than two time such amount if the court finds that the use of employment of the act or practice was a willful or knowing violation … .”  This language, reasoned the SJC, dictated that the damages available to plaintiffs were the actual value of the verdict, multiplied by no less than two since the lower court concluded that AIGDC’s conduct was willful and knowing.  In other words, the lower court’s “loss of use” analysis, which awarded damages based on lost interest, was not an appropriate methodology for calculating c. 93A damages.  Instead, the SJC concluded that plaintiffs should have been awarded $22 million, representing the underlying $11 million verdict multiplied by two.

In reaching its holding, the SJC rejected AIGDC’s arguments that damages under c. 93A should not be awarded since plaintiffs’ underlying tort injuries did not arise out of AIGDC’s claims handling conduct.  In particular, the SJC rejected AIGDC’s arguments that the statute only applies in the first-party insurance context, or that the judgment against GAF did not arise out of the same transaction or occurrence as the c. 93A claim.  The latter argument, explained the SJC, was a matter of form over substance and not relevant to recovery under the statute.  The SJC further rejected AIGDC’s contention that the multiplied damages aspect of c. 93A was “grossly excessive” and thus violative of the Fourteenth Amendment.  Such an argument, explained the court, ignored the fact that AIGDC’s conduct in failing to effect a prompt settlement despite the clear evidence of liability and damages was “sufficiently reprehensible” and that in any event, the ratio between compensatory damages and punitive damages was not excessive.  The SJC, in passing, acknowledged that “$22 million in c. 93A damages is an enormous sum,” but that “the language and history of … c. 93A leave no option but to calculate the double damages award against AIGDC based on the amount of the underlying tort judgment.”

Texas Court Considers Prior Acts Condition in Professional Liability Policy

In its recent decision in Darwin Select Ins. Co. v. Laminack, 2012 U.S. Dist. LEXIS 15712 (S.D. Tex. Feb. 8, 2012), the United States District Court for the Southern District of Texas had occasion to consider the scope of a prior acts condition in a lawyers’ professional liability policy. 

The insured law firm of Laminack, Pirtle & Martines, L.L.P., and in particular two individual attorneys of the firm, were named as defendants in an underlying legal malpractice action filed in October 2010 arising out of the attorneys’ representation of the plaintiff in an antitrust lawsuit years earlier.  Plaintiff claimed that the attorneys advised him on several occasions that he was not in danger of missing the statute of limitations to file his antitrust lawsuit.  This, however, proved not to be the case.  In 2008, a Texas federal district court dismissed the antitrust action based on the statute of limitations having expired prior to the time suit was filed.  This holding was affirmed by the Fifth Circuit Court of Appeals in 2009. 

The claims made errors and omissions policy at issue incepted in June 2010, some four months prior to the filing of the malpractice action.  The policy stated that coverage was unavailable for any “‘wrongful act’ occurring before the inception date of the Policy if, prior to the inception date, any Insured had a basis to foresee that the Wrongful Act might reasonably be expected to be the basis of a Claim against any Insured.”  The insurer, Darwin, denied coverage to its insureds on the basis that prior to the policy’s June 2010 inception date, the insureds had a reasonable basis to expect that they would be sued as a result of their alleged malpractice.

The court determined, as an initial matter, that there was no question that the insureds were aware of the unfavorable statute of limitations rulings concerning their representation of plaintiff.  The court further determined that applying an objective standard, as required by the language of the prior acts condition (i.e., “reasonably be expected”), as a matter of law, the insureds knew or should have known that they would the subject of a malpractice claim.   As the court explained, “it is inconceivable that two experienced, accomplished attorneys, having received notice that a federal district judge had determined that they filed a lawsuit outside the statute of limitations, would not have a basis to foresee that missing the filing deadline might reasonably be expected to be the subject of a malpractice claim against them.”  As such, the court held as a matter of law that the insureds did not satisfy the policy’s prior acts condition, and as a consequence, the insurer had no duty to defend or indemnify.

4th Circuit Applies Pro Rata Allocation

In its recent decision in Pennsylvania National Mutual Cas. Ins. Co. v. Roberts, 2012 U.S. App. LEXIS 2084 (4^th Cir. Feb. 3, 2012), the United States Court of Appeals for the Fourth Circuit, applying Maryland law, had occasion to consider allocation of loss arising out of a lead paint bodily injury lawsuit.

Plaintiff in the underlying matter was diagnosed with elevated blood lead levels in September 1992, when she was twenty (20) months old.  She continued to exhibit elevated blood levels through August 1995.  Plaintiff’s suit named as a defendant Attsgood, which owned and managed the property where plaintiff lived from the time of her birth through November 1, 1993.  Plaintiff’s complaint also named as a defendant the subsequent property owner, who defaulted.  Attsgood was insured through Penn National under consecutive general liability policies covering the period January 13, 1992 (subsequent to plaintiff’s birth) through January 13, 1994. The underlying suit eventually resulted in an award to plaintiff in the amount of $850,000, and a finding that Attsgood and the subsequent property manager were jointly and severally liable for the amount.

Following the verdict, Penn National sought a declaratory judgment against Attsgood and the plaintiff, arguing that it was responsible only for 22 months of the entire period in which plaintiff was exposed to lead, that period being from January 13, 1992 through November 1993 when Attsgood sold the property. While Attsgood defaulted in the declaratory judgment action, plaintiff contested Penn National’s allocation theory, arguing that in light of the joint and several finding as to both defendants, Penn National should be responsible for paying the entirety of the $850,000 award. The Maryland federal district court rejected plaintiff’s argument.  Instead, applying a continuous trigger theory, the lower court held Penn National was responsible for 24 months (i.e., the full two years of the policies) of the 55 months that plaintiff was exposed to lead conditions (from her January 1991 birth through August 1995 when her blood lead levels normalized). Thus, the court concluded, Penn National was responsible for 24/55 of the underlying award, or $370,600.

On appeal, the Fourth Circuit affirmed the lower court’s ruling that Penn National should not be responsible for paying the entirety of the underlying judgment.  Any other outcome, noted the court, would be contrary to the plain language of Penn National’s policies, which applied to “bodily injury” happening during the respective policy periods.  As the court explained, “the contract does not cover damages Attsgood became legally obligated to pay for injuries that occurred outside of the policy period.”  (Emphasis supplied.)  Moreover, plaintiff’s argument ran contrary to well-established Maryland law applying a pro rata by time on the risk allocation of liability in lead paint liability matters.  Plaintiff argued that these cases should not apply because they did not involve multi-defendant cases. The Fourth Circuit found this distinction “entirely unpersuasive,” concluding that the pro rata methodology stems from the language of the insurance policy, not from the number of defendants involved.  Finally, the court found that as a matter of public policy, it would simply be unfair to saddle Penn National with losses that happened outside the periods of its policies.

While the court agreed that pro rata allocation was proper, it nevertheless concluded that the lower court erred in determining Penn National’s allocated share of the loss.  The court agreed that the trigger period was 55 months, running from plaintiff’s date of birth through the date that her blood lead levels normalized.  The Fourth Circuit held, however, that the proper numerator was not 24 months, but instead 22 months, representing the period of time in which the Attsgood owned the property at which plaintiff resided.  Thus, the court found Penn National responsible for 22/55 of the underlying loss rather than 24/55.

New York Court Addresses Impact of Allowing Insured to Default

In its recent decision in Sunnyside Dev. Co., LLC v. Chartis Specialty Ins. Co., 2012 U.S. Dist. LEXIS 9392 (S.D.N.Y. Jan. 26, 2012), the United States District Court for the Southern District of New York demonstrated the consequences that an insurer faces when allowing an insured to default.

Chartis insured Opsys under a pollution legal liability policy that provided first and third party liability coverage for a property that Opsys leased from Sunnyside in Fremont, California.  Opsys used the premises for research and development in the organic light emitting diode industry.  During the policy term, Opsys filed for Chapter 7 bankruptcy, which triggered a regulatory inspection of Opsys’ facility, which in turn resulted in a Notice of Violation based on “a condition dangerous to human health, property, and the environment by abandoning hazardous materials and hazardous waste.”  As a result, Sunnyside was advised that the property could not be re-occupied until a Closure Order was issued.

Chartis paid certain costs under the policy relating to pollution caused as a result of leaking or ruptured drums within the facility.  Sunnyside nevertheless received permission from the bankruptcy court to commence suit against Opsys, to obtain benefits under the Chartis policy, primarily relating to lost rent resulting from its inability to lease the facility while undergoing remediation.  Sunnyside thereafter commenced suit against Opsys in California, and advised Chartis that it intended to take a default against Opsys if the action was not defended.  For reasons not clear, Chartis did not provide a defense, and Sunnyside eventually obtained a default judgment against Opsys for the $1 million limit of the Chartis policy.

After determining that Chartis received proper notice of the pending default, and had an opportunity to defend the suit, and even had an opportunity to attempt to vacate the default after it had been entered, the court considered the effect of Chartis’ inaction.  Chartis argued that Sunnyside failed to demonstrate that its damages were caused as a result of a “pollution condition,” a term defined in pertinent part as a “leak” or a “release,” but instead were caused as a result of an abandonment or the mere presence of pollutants.   While court agreed that Chartis could raise defenses to its policy’s coverage, since coverage was not technically at issue in Sunnyside’s suit against Opsys, the court nevertheless held that Chartis could not relitigate facts that were decided in Sunnyside’s suit against Opsys.  Thus, the California court’s judgment that there was property damage at the premises resulting from leaking or ruptured drums, and that there was a release of hazardous materials, even if inaccurate, was nevertheless binding on Chartis for the purpose of determining coverage.  As the court explained, “if Chartis wanted to litigate the proximate cause of Sunnyside's damages, it should have intervened in the California Action or moved to set aside the Default Judgment.”

Missouri Court Addresses Owned Property Exclusion

In its recent decision in Clarinet v. Essex Ins. Co., 2012 U.S. Dist. LEXIS 7300 (E.D. Mo. Jan. 23, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether a general liability policy afforded coverage for an insured’s obligation to stabilize and later demolish its own building so as to prevent damage to third-party property. 

The insured, Clarinet, was the owner of a historic building located in St. Louis, Missouri.  The building partially collapsed as a result of a severe windstorm.  The insured undertook efforts to stabilize the building, but it ultimately was determined that the entire building needed to be razed in order to prevent harm to persons and to an adjacent bridge.  It was not until after the demolition was complete that the insured gave notice to Essex that it had incurred costs to stabilize and demolish the building and that it was seeking coverage under its liability policy for such costs.

Essex denied coverage for Clarinet’s stabilization and demolition costs on the basis that there was no property damage resulting from an occurrence.  Specifically, Essex took the position that to constitute an “occurrence,” there must be injury resulting from the insured’s own negligent conduct.  As such, Essex contended, a windstorm cannot qualify as an occurrence.  Essex also denied coverage based on an “owned property exclusion” and an exclusion applicable to vacant buildings.  Finally, it denied coverage based on Clarinet’s failure to have provided notice of occurrence prior to undertaking the stabilization and demolition efforts. 

The court only briefly addressed whether a windstorm can constitute an “occurrence,” noting that there was no guidance under Missouri law as to whether an occurrence must result from the insured’s negligent conduct.  Ultimately, the court resolved coverage on the basis of the policy’s owned property exclusion, applicable to property damage to:

(1)           Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;  (Emphasis supplied.)

Acknowledging a lack of Missouri case law on the issue, the court surveyed case law from throughout the country as to whether the exclusion applies to bar coverage for costs necessary to prevent damage to third-party property.  In Castle Village Owners Corp. v. Greater New York Mutual Ins. Co., 878 N.Y.S.2d 311 (N.Y. 1^st Dep’t 2009), a New York appellate court held that the exclusion may not be enforceable when the insured has a legal obligation to prevent damage to another’s property.  The test in New York, as explained by the court, is whether there is a “nexus between the condition of the insured’s property and the existence of ongoing and immediate harm to the property of others.”  Courts in Michigan and Maryland, on the other hand, apply a more lenient standard, holding that the exclusion does not apply when the insured acts to prevent “imminent harm” to third-party property.  See, Aetna Cas. & Sur. Co. v. Dow Chem. Co., 28 F. Supp. 2d 448 (E.D. Mich. 1998); Aetna Ins. Co. v. Aaron, 685 A.2d 858 (Md. Ct. App. 1996).  Wisconsin courts, however, do not recognize an exception to the exclusion, holding it applicable even when there is imminent risk of damage to third-party property.  See, Watertown Tire Recycles, LLC v. Nortman, 788 N.W.2d 384 (Wis. Ct. App. 2010).  The Clarinet court ultimately decide concluded that Missouri courts, similar to those in Wisconsin, “would likely enforce the ‘owned property’ exclusion according to its plain terms, thereby excluding from coverage costs incurred to mitigate damage to third parties.”  In other words, there is no exception to the exclusion, even if the insured is acting so as to prevent third-party property damage that might otherwise be covered under a general liability policy.

The court found additional support for its conclusion on the basis of the policy’s exclusion applicable to any claims involving vacant buildings.  The policy specifically identified the building at issue as a vacant building.  The court further noted that the insured’s failure to have given notice to Essex of its stabilization and demolition efforts before incurring such costs necessarily prejudiced Essex and constituted an additional basis for noncoverage. 

Mississippi Court Addresses Coverage for Conversion Claim

In its recent decision in Markel American Insurance Company v. Tri-Miss Services, Inc., 2012 U.S. Dist. LEXIS 5850 (S.D. Miss. Jan. 19, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider whether an insured was entitled to a defense under a general liability policy for a lawsuit alleging conversion.

The insured, Tri-Miss, was sued for allegedly purchasing over 13,000 pounds of copper and aluminum that it knew, or should have known, was stolen from plaintiff. The complaint specifically alleged that Tri-Miss demonstrated an intent to exercise dominion over the stolen metals, even after learning that the goods were stolen, thus giving rise to the intentional tort of conversion. Markel denied coverage to Tri-Miss, and subsequently brought suit, seeking a declaration that the underlying matter did not allege and “occurrence” and that coverage was otherwise precluded on the basis of the policy’s “care, custody or control” exclusion.

Tri-State argued that the underlying suit could allege an occurrence if it was determined that its purchase of the stolen property was accidental. The court disagreed, noting that under Mississippi law, conversion is an intentional tort that occurs when “the title of the lawful owner is made known and resisted, or the purchaser exercises dominion and control over the property by use, sale, or possession,” which is what plaintiff alleged in the underlying suit. These elements, explained the court, required intentional conduct from the standpoint of the insured. As such, and because the underlying plaintiff did otherwise not plead any conduct that could be construed as accidental, the court concluded that the suit did not allege an occurrence triggering a duty to defend.

The court also considered the policy exclusion applicable to property damage to “personal property in the care, custody or control of the insured.” The insured argued that the exclusion was ambiguous because the phrase “personal property” was not defined in the policy. Citing to various Mississippi case law and a dictionary definition, however, the court concluded that the phrase should be afforded a broad interpretation as any property other than real property. As such, the court held that the phrase “unambiguously includes the property at the heart” of the underlying suit, and that the exclusion therefore served as a secondary basis for noncoverage.