by Christopher Graham and Joseph Kelly

Insurance underwriters take heed of the Tenth Circuit’s decision in Carolina Casualty Ins. Co. v. Nanodetex Corp., et al, Case No. 12-2100 (10th Cir. Aug. 19, 2013). If you intend to exclude a specific tort claim from coverage, you should use the exact name of the tort in effect in the state of policy issuance, rather than simply list a generic common law tort name; otherwise you may have coverage you didn’t want. If you’re an insured and your insurer doesn’t cover a specific tort in your state by name, you may have coverage.

The insureds, Nanodetex and two principals, had a judgment against them in New Mexico for malicious abuse of process. The insureds sought coverage under a management liability policy issued by Carolina Casualty. Carolina denied coverage, citing the following exclusion:

The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured: …. …for: …. …invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, libel, slander, mental anguish, humiliation, emotional distress, oral or written publication of defamatory or disparaging material…

“Malicious prosecution” was not defined under the policy.

New Mexico recognized “malicious abuse of process” as a tort in 1998. And that tort “subsumed the traditional causes of action for malicious prosecution and abuse of process.” The exclusion included malicious prosecution, but not malicious abuse of process.

Carolina sued for a declaration that the above exclusion applied. Both sides moved for summary judgment.

The New Mexico Federal District Court sided with Carolina, concluding that “the most reasonable interpretation … and the one most likely in line with the expectations of the parties” is that the term “malicious prosecution” “includes claims brought for malicious abuse of process, and that such claims are therefore excluded from coverage.”

But the Tenth Circuit sided with the insureds, finding that “malicious prosecution” is limited to the traditional tort of the same name:

We think it clear that the term malicious prosecution in the Carolina Policy is a legal term of art that refers to a claim based on substantially the same elements as the traditional tort, regardless of the particular label under which the claim is pleaded. Such an interpretation works in a consistent manner in all jurisdictions in which the policy may operate and preserves the substance of the insurer/insured relationship without regard to semantic distinctions that have no relevance to the protection sought and offered through an insurance policy.

Accordingly, the Carolina Policy’s exclusion for claims of malicious prosecution applies only to a claim that requires proof of essentially the elements required to prove common-law malicious prosecution. Those elements are well-understood. Black’s Law Dictionary states them as “(1) the initiation or continuation of a lawsuit; (2) lack of probable cause; (3) malice; and (4) favorable termination of the lawsuit.”

Because the underlying plaintiffs didn’t need to prove “lack of probable cause” — an element of malicious prosecution — for their malicious abuse of process claims, the malicious prosecution exclusion didn’t apply.

by Christopher Graham and Joseph Kelly

Bethel, et al v. Darwin Select Insurance Company, Case No. 12-3528 (8th Cir. Nov. 18, 2013)(MN law)

This case involves professional liability insurance for title agents and a broadly-worded exclusion for claims against the title agent and it’s employees involving misappropriation of customer funds held in escrow or otherwise. The broad wording that is the first part of the exclusion is common in many professional liability and D&O policy exclusions. Here, as in other cases where plain language is problematic, the insureds try to avoid that language by arguing coverage is “illusory” if coverage is denied and denying coverage is contrary to the insureds’ “reasonable expectation” and impermissible because these insureds are “innocent.” But those creative arguments have limited application; a broadly worded exclusion can be and in this instance was applied.

Zen Title, as agent of United General Title Insurance Company, recorded mortgages, deeds, and mortgage satisfactions and paid related fees; and paid off mortgage loans for United General’s customers in refinancing transactions. For that work, United entrusted Zen with millions of dollars, albeit to be held in segregated escrow accounts.

United Title sued Charles Bethel and Jennifer Frantz — Zen investors and, in Frantz’s case, a Zen bookkeeper and title agent as well — Zen, and others under various liability theories for a “wide-ranging fraudulent scheme to misappropriate the funds entrusted to Zen Title by [United].”

Darwin Select issued a professional liability policy to Zen Title including Bethel and Frantz as Insureds.

Under that policy, Darwin was obligated to defend and indemnify Insureds against any claim for any “[n]egligent act, error, omission, misstatement, misleading statement, neglect or breach of duty … by an Insured, in the performance of or failure to perform Professional Services.”

But the policy’s “Customer Funds Exclusion” barred coverage for “any Claim … based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving … any actual or alleged … loss, disappearance, pilferage or shortage of, or commingling or improper use of, or failure to segregate or safeguard, any client or customer funds, monies, or securities.”

Bethel and Frantz tendered defense of United’s suit to Darwin. Darwin denied coverage based on the Customer Funds Exclusion.

Bethel and Frantz sued Darwin for breach of its duty to defend and bad faith.

The District Court granted Darwin’s summary judgment motion. Bethel and Frantz appealed.

Customer Funds Exclusion

Bethel and Frantz argued that United’s allegations regarding failure to record mortgage instruments were outside the scope of the Customer Funds Exclusion; so Darwin should defend.

Darwin argued that United’s claims “arise out of”, result from, or in some way involve the loss of, or improper use of customer funds; so the Customer Funds Exclusion applies.

The Eighth Circuit noted that “the Minnesota Supreme Court has defined ‘arising out of’ broadly as ‘originating from,’ ‘growing out of,’ or ‘flowing from'”; and “‘but for’ causation, a cause and result relationship, is enough to satisfy the [“arising out of”] provisions of the policy.”

Applying that Minnesota law, the Eighth Circuit sided with Darwin: “all of [United’s] claims flow from, grow out of, or originate in the loss or improper use of [United’s] funds” and United’s ‘complaint explicitly links its allegations regarding the failure to record mortgage instruments to the scheme to misappropriate [United’s] escrowed funds.”

Illusory Coverage

Bethel and Frantz argued that applying the Customer Funds Exclusion to bar coverage would in essence mean coverage was “illusory.” The Eighth Circuit disagreed: “even reading the Customer Fund Exclusion broadly, the Policy covers a wide range of Zen Title’s professional activities.”

Reasonable Expectations Doctrine

Bethel and Frantz argued that under the reasonable expectations doctrine Darwin must defend them even if United’s allegations are within the Customer Funds Exclusion. The Eighth Circuit once again disagreed: the reasonable expectations doctrine applies only to resolve policy wording ambiguities; there were none here. And the customer funds exclusion wasn’t hidden within the policy; it was clearly set forth in the exclusions section of the policy.

Innocent Insured Doctrine

Bethel and Frantz argued that they were “innocent insureds” and shouldn’t lose coverage because of wrongdoing by Zen Title and others. But the Eighth Circuit again disagreed: “application of the Customer Funds Exclusion does not depend on who caused the loss or misuse of customer funds. Instead, it focuses on what gave rise to the claim.” “[T]he plain language of the exclusion makes clear that it applies regardless of whose conduct caused the loss or improper use of customer funds.”

by Christopher Graham and Joseph Kelly

When is a Claim first made within the meaning of a professional liability policy? This is a recurring issue under claims-made policies. And that was the issue in Regency Title Company, LLC v. Westchester Fire Insurance Company, et al, Case No. 4:11-cv-390 (E.D. Tex. Nov. 15, 2013).

This time the controversy involved whether a written demand sent to a third party rather than to the insured, albeit addressing the insured’s alleged misconduct, qualified as a Claim made against the insured. If it did qualify as a Claim, then the insured would have no coverage — because the Claim would have been made before rather than within the policy period, as required for coverage.

Westchester denied coverage for a July 29, 2010 suit against Regency for breach of contract, negligence, conversion and breach of fiduciary duty. Regency then sued Westchester Fire for a declaratory judgment and breach of contract.

Claimant sued Regency within the September 1, 2009-2010 policy period. But Westchester argued that the “Claim” was first made before the policy period, on September 30, 2008 — because claimant filed a complaint on that date with the Texas Department of Insurance alleging the same facts as in the July 29, 2010 suit.

The policy defined “Claim” as including:

“a written demand against any Insured for monetary or non-monetary damages;”

and

“a civil, administrative, or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document.”

Written demand

Regency argued claimant made no written demand before filing suit during the September 1, 2009-2010 policy period; that claimant’s pre-policy period complaint with the Texas Insurance Department wasn’t a “demand against an insured” because it was sent to a third party.

Westchester argued the Insurance Department complaint was a written demand.

The Court sided with Westchester: Claim wasn’t defined as “demand to an insured”, “demand sent to insured”, or “demand on an insured,” but rather as a “demand against any insured.” Claimant’s Insurance Department complaint was a written demand against an insured, namely, Regency — whether sent to Regency or not.

Civil, Administrative, or Regulatory Investigation

Regency argued the Insurance Department didn’t undertake any an “investigation;” the Department characterized its actions as “evaluation” in a letter to Regency; and it did very little, namely review the claimant’s complaint and Regency’s response and suggest claimant seek a private remedy. The Department, moreover, found no violations of Texas insurance laws and wasn’t taking action against Regency.

The Court disagreed. The Department referred to its actions as an “investigation” in certain correspondence. And “a cursory investigation is still an investigation within the plain meaning of the word.”