by Christopher Graham and Joseph Kelly

Consumers Ins. Co. v. James River Ins. Co., et al, Case No. 12-03303-CV-S-JTM (W.D. Mo. Jan. 14, 2014)

This case involves an insured’s failure to timely report a claim under D&O (US Specialty) and E&O (Houston Casualty) policies. Both policies required notice “as soon as practicable” after Claim is made. The E&O policy also required notice no later than 60 days following the policy period. The insured was an insurer that should have known better. Prejudice from the delayed notice to the insurer was irrelevant.

The underlying case against the insured insurance company was a Missouri garnishment action, including a bad faith cross-claim. Dahmer sued the insurer’s insured, Hutchinson, for serious injuries allegedly caused when Hutchinson’s vehicle struck him. Dahmer’s wife also sued. They made a limits demand in July 2007 on the insurer. But it denied coverage. Then they obtained an uncontested $2.7 million judgment against Hutchinson.

Thereafter they filed a garnishment action against Hutchinson and the insurer. The trial court granted the insurer a summary judgment based on a “salvage operations” exclusion. But the appellate court in 2010 reversed. On remand, Hutchinson cross-claimed against his insurer for bad faith. In late November 2010, Hutchinson made a demand on his insurer for $3.5 million, the judgment against him plus interest.

As of the November 2010 demand, the insurer had in effect a claims-made insurance company E&O policy, effective February 16, 2010 to February 16, 2011. It limited coverage to claims made for “wrongful acts” first committed on or after February 16, 2010. And it provided:

As a condition precedent to any right to payment in respect to any Claim, the Insured must give the Underwriter written notice of such Claim, with full details, as soon as practicable after the Claim is first made but in no event later than sixty (60) days after the end of the Policy Period. A Claim is first made when an Insured first receives notice of the filing of a complaint, notice of charges, a formal investigative order or similar document or by the return of an indictment against an Insured or when an Insured first receives the written demand or notice that constitutes a Claim under [another definition].

Beginning February 16, 2005, the insurer also had five claims-made insurance company D&O policies, each for a one year term, with the last expiring February 16, 2010. Those policies provided: “The Insureds must, as a condition precedent to the obligations of the Insurer under this Policy, give written notice, including full details, to the Insurer of any Claim as soon as practicable after it is made.” Claim included “any oral or written demand, including demand for non-monetary relief” or “any civil proceeding commenced by service of a complaint or similar pleading.”

When the Dahmers filed their garnishment action, the insurer didn’t notify its D&O and E&O insurers. When thereafter Hutchinson made his November 2010 demand for $3.5 million, the insurer didn’t notify them either.

Seven months after the E&O policy expired, by November 29, 2011 letter, insurer by its broker first notified the E&O insurer’s claims administrator (HCC Global Financial Products) of the Dahmers’ garnishment action. The notice referenced only the E&O policy.

Fifteen months after Hutchinson’s $3.5 million demand on insurer, by February 22, 2012 letter, insurer’s counsel notified the D&O insurer through its claims administrator of the Dahmers’ garnishment action including Hutchinson’s bad faith cross-claim. This letter referenced only the D&O policy. The D&O and E&O insurers had the same claims administrator, HCC.

After the E&O and D&O insurers denied coverage, insurer sued them for a declaration that they must provide coverage. But this Court, applying Tennessee law, held the E&O and D&O insurers were entitled to a judgment as a matter of law. The Court strictly enforced the E&O policy’s requirement of notice no later than 60 days following policy expiration; notice seven months after expiration wasn’t what the policy required. It also found the insurer’s 15-month delay in notifying the D&O insurer after Hutchinson’s $3.5 million demand was not notice “as soon as practicable,” given the absence of “extenuating circumstances” providing excuse or explanation. Prejudice to the E&O and D&O insurers wasn’t discussed and didn’t factor in the decision. Nor did it matter that the D&O and E&O insurers had the same claims administrator, at least because the notices were specific in identifying which policy was the subject of the notice.

In explaining its decision about the D&O policies, the Court stated:

[I]t has long been the law in Tennessee that “notice provisions of an insurance policy are valid conditions precedent to coverage, and in the absence of notice as required, no coverage is afforded.”

Moral of story for insureds and brokers: Always, always, give notice promptly to insurers; consider the issue any time something like a claim comes to you. Otherwise you may have no coverage. This has been a recurring theme on this blog lately.

Tags: Tennessee, insurance, D&O, E&O, notice

by Christopher Graham and Joseph Kelly

Grubaugh v. Central Progressive Bank (E.D. La. Dec. 18, 2013 Dec. 17, 2013)

This is a case where a Court strictly enforced the reporting requirement of a claims-made policy and barred an injured party’s direct action right because of the insured’s failure to timely report a claim.

Customer claimed two bank employees, namely, his mother and sister, stole over $70,000 from his account. In June and July, 2008, he sent complaint letters to the FDIC and Louisiana bank regulator. Customer asked the FDIC to “help me get my money back from the bank for the forged checks, unauthorized debit memos, unauthorized payment of bills that do not belong to me, [and] unauthorized disbursement of my social security checks.” In his complaint to the Louisiana regulator, customer stated that the relief he sought was “having my money returned to me and having someone that can do that from [the bank] contact me.” The two regulators notified the bank promptly thereafter.

The bank had a claims-made D&O/bankers professional liability policy, effective from February 1, 2007 through November 15, 2009, and issued by Executive Risk. “Claim” under the D&O coverage section included, among other things, “a written demand for monetary damages . . . against an Insured Person for a Wrongful Act” as well as “a formal civil administrative or civil regulatory proceeding commenced by the filing of a notice of charges or other similar document or by the entry of a formal order of investigation or similar document . . . against an Insured Person for a Wrongful Act.” The policy also provided that a “Claim will be deemed to have first been made when such claim is commenced as set forth in this definition or, in the case of a written demand, when such demand is received by an Insured.” Under the BPL coverage section, the Claim definition varied slightly, in that a Claim as otherwise defined must be brought “by or on behalf of a Customer against an Insured for a Wrongful Act.”

The policy provided further that:

the Insured shall, as a condition precedent to exercising any right to coverage under this Coverage Section, give to the Company written notice of a Claim as soon as practicable, but in no event later than […] sixty (60) days after the date on which any insured first becomes aware that the Claim has been made.

Notice requirements such as the one above are in all types of liability policies, but in occurrence policies they generally are for reporting an occurrence and a suit. For claims-made policies, they are for reporting a Claim, but sometimes the deadline isn’t absolute or it’s for a set period such as 90 days following the Policy Period, and there’s separate wording for reporting a circumstance that may lead to a future Claim. The bank’s policy had a rather short 60 day absolute reporting deadline.

But the bank didn’t notify the insurer that it received customer’s complaint letters within 60 days of receiving them from regulators. Nearly a year thereafter, the customer sued the bank, unnamed bank officers, employees and others, and unnamed liability insurers for breach of contract and negligence. The bank notified its insurer promptly. That was the insurer’s first notice of customer’s allegations.

Over two years later, after the bank failed, customer filed an amended complaint, naming as additional defendants, the bank’s holding company, the FDIC as the bank’s receiver and, under Louisiana’s Direct Action statute, the D&O/BPL insurer. Louisiana is one of several states having a statute permitting an alleged injured party to sue an insurer and its insured simultaneously.

But the Court entered summary judgment for the insurer: the injured customer’s Direct Action rights were no greater than the rights of the insureds, who had no coverage. Customer’s mid-2008 complaints with banking regulators were Claims as defined by the policy, triggering the insured bank’s reporting obligation within 60 days of learning of them; the bank, by waiting about a year to notify the insurer, had no coverage and neither did customer.

According to the Court, customer’s complaints to regulators, which were forwarded to the bank, “could be considered a ‘written demand for monetary damages’ . . . .” “Black’s Law Dictionary defines a demand as the ‘assertion of a legal or procedural right.'” “[T]here is no requirement that [the customer] submit the demand directly to [the bank] and/or [holding company]. Rather, in the case of the D&O coverage section, the demand need only be made against [them] and received by [them], which is exactly what happened here. [Customer] demanded from [bank] what he alleges is legally due to him, and that demand was received by [the bank]. Further, under the BPL Coverage Section, the demand may be made by or on behalf of [the customer]. In this case, the FDIC and the OFI submitted [customer’s] demand on his behalf, thus a claim was made.”

In addition:

[The bank’s] duty to notify [the insurer] was triggered on July 11, 2008 for the FDIC complaint and July 22, 2008 for the [Louisiana regulator’s] complaint, long before [the insurer] received notice of the claim in July 2009 and long after the sixty day reporting period had elapsed. By breaching this requirement, [the bank] failed to comply with a condition precedent of the Policy and coverage was never triggered.

The bank had no coverage; so neither did the “injured” customer. Whether the insurer was prejudiced by the untimely reporting didn’t factor into the Court’s decision; it’s not even mentioned. Numerous decisions in fact strictly enforce reporting requirements in claims-made policies without regard to prejudice. See, e.g., U.S. v. A.C. Strip, 868 F.2d 181 (6th Cir. 1989); Pantropic Power Prods v. Fireman’s Fund Ins. Co., 141 F.Supp.2d 1366 (S.D.Fla. 2001).

The Court also rejected the customer’s waiver and estoppel argument, concluding “there is no evidence that [the insurer] ever took any other steps that were contrary to their intent to deny coverage.”

Moral of story for brokers, risk managers, and insureds: Promptly report to the insurer anything that smells like a Claim or potential Claim, even if you’re not sure about it’s nature. You have nothing to lose and the consequences of failing to report can be no coverage. Perhaps the bank employees receiving the regulators’ notice didn’t take the customer “complaints” seriously, particularly as they involved “theft” by the customer’s mom and sister. The bank did take things seriously when it was sued, much later – but by then it was too late. You might also consider a policy with a more-insured friendly notice provision.

Moral of the story for “injured parties” and their counsel: Your ability to collect may be only as good as your target defendant’s insurance. When your target fails to provide timely notice to the insurer, you may have no way to collect. To avoid this scenario, plaintiffs’ counsel will advise the target to provide it’s insurer notice promptly or, if possible, also will put the insurer on notice directly.

Moral of the story for insurers: A specific reporting requirement in a claims-made policy often will be strictly enforced, regardless of whether the insurer was prejudiced by delay. That scenario frequently isn’t the case for occurrence-type liability policies.

Tags: Louisiana, D&O, professional liability, direct action, notice

by Christopher Graham and Joseph Kelly

Two recent decisions impose severe consequences upon insurers that breach a duty to defend. A New York case, K2 Investment Group, LLC, et al v. American Guarantee & Liability Ins. Co, 21 N.Y.3d 384 (2013), involved a legal malpractice insurance policy. A Missouri case, Columbia Casualty Company v. Hiar Holdings, LLC, No. SC93026 (Mo. Aug. 13, 2013), involved a CGL policy. But the decisions are important for all duty-to-defend insurers in those states, regardless of the policy-type.

Under the New York K2 decision, an insurer wrongfully disclaiming a duty to defend, must indemnify its insured for any resulting judgment even if policy exclusions otherwise negate coverage. Lenders had sued an entity and its owners to collect on a debt, but then also sued an attorney/owner for legal malpractice, alleging that, as lenders’ counsel, the attorney failed to record a mortgage securing the debt. The legal malpractice insurer refused to defend the attorney/owner, citing exclusions for a “Claim based upon or arising out of, in whole or in part . . . D. the Insured’s capacity or status as: 1. an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise . . . E. the alleged acts or omissions by any Insured . . . for any business enterprise . . . in which any Insured has a Controlling Interest.” The insurer thereafter also refused to settle for $450,000, well under the $2 million policy limit. The trial court in the malpractice and collection case then entered a default judgment against the attorney on the malpractice claim, for over the $2 million policy limit.

Lenders, as the insured attorney’s assignee, sued the insurer for breach of contract and bad faith. The New York Court of Appeals affirmed a judgment holding the insurer liable for the entire default judgment. It explained that “by breaching its duty to defend [its insured, the insurer] lost its right to rely on these exclusions in litigation over its indemnity obligation.”

Under the Hiar Holdings decision from Missouri, an insurer that wrongfully refuses to defend its insured is liable for all damages flowing from the breach, even exceeding the policy limits. The CGL insurer refused to defend and then settle a class action against its insured alleging violations of the Telephone Consumer Protection Act involving junk faxes. The insured with court approval settled with the class for $5 million, well over the $2 million CGL policy limit. The class then sued the CGL insurer under a garnishment statute, with the insurer counterclaiming for a declaratory judgment. The Court affirmed a judgment against the insurer for the entire $5 million settlement, finding the insurer breached its duty to defend claims alleging both property damage and advertising injury under the policy.

The New York and Missouri decisions are somewhat similar to what Illinois courts have been doing for quite some time. In Illinois, an insurer that fails to defend under a reservation of rights or bring a declaratory action is estopped from raising coverage defenses to an indemnity obligation, where it has breached a duty to defend. Doe v. Illinois State Medical Inter-Insurance Exchange, 599 N.E.2d 983 (1st Dist. 1992).

The insurer in the New York decision is seeking further review. So stay tuned. But these decisions are a red-flag for any insurer that caution is in order when declining a defense obligation in New York, Missouri, and Illinois.

Tags: New York, Missouri, Illinois, legal malpractice insurance, professional liability insurance, duty to defend, estoppel

by Christopher Graham and Joseph Kelly

Zurich American Ins. Co. v. Diamond Title of Sarasota, Inc., Case No. 8:10-cv-383-T-30 AEP (M.D. Fla. Dec. 4, 2013) addresses a common question-type in professional liability insurance applications — namely, did the applicant or prospective insured “know of any circumstances, acts, errors or omissions that could result in a professional liability claim against the Applicant?” Similar questions are in some D&O policy applications.

Rotolo, Diamond Title’s owner and President, answered “No” to the question, although involved in a mortgage fraud. Later, she pled guilty to related crimes.

JLO sued Diamond Title during the policy period for negligence in releasing escrow funds, but not fraud. Zurich then sued Diamond Title to rescind its professional liability policy, joining JLO to bind it to any judgment.

Like the insurance code of many states, Florida’s Code provides that “a misrepresentation in an application for insurance may prevent recovery under the policy if the misrepresentation was material to either the acceptance of risk or the hazard assumed by the insurer.” Fla. Stat. § 627.409.

The Court concluded the undisputed material facts established as a matter of law that Rotolo made a misrepresentation material to acceptance of the risk and the hazard assumed; so Zurich was entitled to summary judgment.

The Court rejected defendants’ argument that there was no misrepresentation. Citing the policy’s professional services definition and dishonesty exclusion, defendants argued in essence that because criminal mortgage fraud couldn’t result in a covered professional liability claim, Rotolo while knowing of mortgage fraud had no knowledge of acts that could result in professional liability claims. But according to the Court: “Rotolo was not relieved of her duty in the application to report acts that could result in a professional liability claim simply because the Policy may not have covered those acts.”

The Court also rejected defendants’ argument that the application wording altered Florida law, by requiring proof that Rotolo’s misrepresentation was intentional. The following “supporting” application wording said no such thing:

THE DISCOVERY OF ANY FRAUD, INTENTIONAL CONCEALMENT, OR MISREPRESENTATION OF MATERIAL FACT WILL RENDER THIS POLICY, IF ISSUED, VOID AT INCEPTION.

The Court also rejected defendants’ argument that Zurich failed to prove materiality. Contrary to defendants’ argument, it was immaterial that Zurich did not conduct the policy’s underwriting and immaterial that the underwriter’s affidavit referenced no underwriting guidelines. As the Court explained:

The Court does not need an underwriter or guidelines to appreciate how not knowing Rotolo and her employee had been committing mortgage fraud in excess of five years left Zurich unable to adequately estimate the nature of risk in issuing the Policy. [Citation omitted]. As previously discussed, many of these acts could have resulted in claims against the Policy. An objective insurer may not have issued a policy at all. Certainly a policy would not have been issued under the same terms and pricing knowing that Diamond Title was engaged in an ongoing scheme to commit mortgage fraud.

Tags: Florida, E&O, rescission, material misrepresentation

by Christopher Graham and Joseph Kelly

Adopted by the Supreme Court in 1988, the “fraud on the market” doctrine allows plaintiffs in securities cases to bring a class action without alleging reliance on false statements regarding securities. Much has been written about the Supreme Court’s grant of certiorari in Halliburton v. Erica John Fund and the future of the “fraud on the market” doctrine in securities class actions. The Supreme Court in Halliburton is expected to decide whether “fraud on the market” should continue. As explained by Kevin LaCroix in the D&O Diary and by Douglas W. Greene in D&O Discourse the impact of the Supreme Court’s ruling — expected in mid-2014 — on D&O claims for securities class actions could be significant.

by Christopher Graham and Joseph Kelly

William B. Kessler Memorial Hospital, Case No. A-2201-12T3 (Sup. Ct. N.J. Nov. 15, 2013)

Does a management liability policy require an insurer to defend an IRS claim for alleged failure to pay employment taxes, where “taxes,” “fines,” and “penalties” are exceptions from the definition of “Loss”? Not this one, according to this court.

The IRS claimed the insured hospital failed to pay what was owed for employment taxes for withholding and otherwise under the hospital’s quarterly Form 941. It demanded payment from the hospital and its trustees personally.

The policy included a duty to defend, providing: “The Insurer shall have the right and the duty to defend any Claim regardless of whether any of the allegations are groundless, false, or fraudulent.” Claim included “… any Insured Person Claim . . . .” “Insured Person Claim” included certain written demands, civil and criminal proceedings, and administrative and regulatory proceedings. “Loss” wasn’t incorporated into the “Insured Person Claim” definition, but it was used within the policy’s insuring agreement.

The insureds argued in essence that the “duty to defend any Claim” meant even a Claim for unpaid taxes and related penalties, for which the insurer had no indemnity obligation. In rejecting the insureds’ arguments, the court explained:

Plaintiffs’ main argument is that because North River’s definition of “Insured Person Claim” does not specifically refer to its definition of “Loss,” North River’s promise to “defend any Claim” must be honored notwithstanding that taxes and penalties are policy exclusions. In other words, even though North River might not be obliged to indemnify plaintiffs if they were ultimately made responsible for the section 941 taxes, plaintiffs were, nonetheless, entitled to have their defense costs paid for under the policy because the Internal Revenue Service was asserting an “Insured Person Claim.”

We are not persuaded by this overly-simplistic and literal interpretation of the policy. The notion advanced by plaintiffs would require North River to provide a defense against any and all claims lodged against its insureds, regardless of whether the claim embraced a covered risk. This novel interpretation is contrary to our settled jurisprudence with respect to liability policies, and not supported by principles of interpretation applied to insurance policies in general.

…

Plaintiffs’ potential exposure to the Internal Revenue Service’s effort to impose responsibility for section 941 liabilities is undoubtedly either a tax or a penalty. It is also clear that the policy excludes coverage for fines, penalties, or taxes. Nevertheless, plaintiffs argue that an Insured Person Claim and a Loss are two separate terms and provisions in the policy. They point to Section VI “General Conditions” as creating an independent duty to defend, regardless of whether the loss is contemplated by the policy. This fragmentary approach stands in contradistinction to our obligation to “interpret the policy as written and avoid writing a better policy for the insured.”

Tags: Duty to defend, loss, fines, penalties, taxes

by Christopher Graham and Joseph Kelly

Singletary v. Beazley Insurance Co., Case No. 2:13-cv-1142 (D. S.C. Nov. 5, 2013)

D&O insurance, as far as insurers are concerned, isn’t a means for insureds to transfer liability for contract obligations to their insurers. D&O policies frequently include exclusions for contractual liability. Wording varies. And the exclusions are frequently litigated, as you’ll see from earlier posts to this blog.

Beazley, the D&O insurer here, addressed contractual liability through an exception to the definition of Loss — for “damages representing amounts allegedly owed under an express written contract, including a guarantee or obligation to make payments.” The issue was whether the insured’s $500,000 repayment to the Social Security Administration fell within that exception to the Loss definition. This Federal District Court concluded that it did.

The insured, Family Assistance Management Services, was required to repay that amount as a result of a claim by the Social Security Administration. The Administration appointed Family Assistance as “representative payee” for social security and supplemental security income beneficiaries. “A representative payee is appointed by the [Administration] only after the commissioner conducts an investigation of the person or entity to determine that such appointment is in the interest of the individual due the [Social Security] benefits.”

Family Assistance’s former employee embezzled funds intended for those beneficiaries. The Administration found Family Assistance “did not adequately have controls over the receipt and disbursement of Social Security and Supplemental Security Income benefits” and, “as a result, the funds of beneficiaries were at at risk for improper safekeeping and use.”

So why did the $500,000 repayment qualify as for “damages representing amounts allegedly owed under an express written contract . . . ?” Family Assistance’s arrangement with the Social Security Administration was subject to a “Form SSA-11” which “includes a term requiring that the representative payee [(Family Assistance)] ‘[r]eimburse the amount of any loss suffered by any claimant due to misuse of Social Security or SSI funds by me/my organization.'” The Form SSA-11 was an express written contract. The $500,000 was damages representing amounts allegedly owed under that contract.

Tags: D&O, loss, contract exclusion

by Christopher Graham and Joseph Kelly

Quellos Group LLC v. Federal Ins. Co., et al, Case No. 68478-7-1 (Court of Appeals, Washington Nov. 12, 2013)

An insured with an $80 million loss takes a $5 million hair-cut off a $10 million limit in settling with a primary insurer and, as a result, is left with no excess coverage for $70 million in additional losses. Settling with the primary insurer for less than limits, thus, backfired.

The insured, Quellos Group — an investment firm — created a tax shelter for clients to offset capital gains with losses. But the shelter ran afoul of IRS’s rules, leading Quellos to pay a $35 million settlement and incur $45 million in defense fees.

The insured’s first excess policy from Federal with a $10 million limit provided that coverage “shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit.”

It’s second excess policy from Indian Harbor with a $20 million limit provided that it “will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder.”

The appeals court, in affirming summary judgment for the excess insurers, explained:

[T]he plain and unambiguous language of the excess insurance policies unambiguously states how the underlying insurance is exhausted. The policies require the underlying insurer to pay the full amount of its limits of liability before excess coverage is triggered. [The primary insurer] paid only approximately one-half of the $10 million policy limits and continued to dispute whether Quellos was entitled to coverage under the 2004-2005 policy for defense and other costs related to [the tax shelter.]

and

Because the exhaustion language in the Federal and Indian Harbor excess insurance policies is clear and unambiguous, we must enforce it as written, and affirm summary judgment dismissal of the lawsuit against Federal and Indian Harbor.

It didn’t matter that the insured paid the $5 million the primary insured didn’t pay, so that the insured’s and primary insurer’s combined payments totaled $10 million, the full amount of the primary policy. The excess policies’ wording required that the primary insurer actually pay its $10 million primary limit before any excess coverage would attach.

The Court also rejected the insured’s arguments that: (1) “only after” in the excess policies’ insuring agreements made exhaustion a condition, shifting the proof burden to the excess carriers to show prejudice; and (2) enforcement of the exhuastion language would violate public policy.

Tags: D&O, underlying, excess, exhaustion

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

Sirius XM Radio, Inc. v. XL Specialty Insurance Co., et al, Case Nos. 650831/2013, 002 (Sup. N.Y. Cty. Nov. 7, 2013)

An insured timely notified its D&O insurer of one Claim, but then failed to notify that insurer timely of four others involving the same “Interrelated Wrongful Acts.” Did the insured’s timely notice of the first of five Claims involving the same Interrelated Wrongful Acts mean the Insured had no obligation to provide the insurer notice of the four subsequent Claims? Maybe.

XL received a notice of circumstance for the first of five suits relating to Sirius’s merger with XM Satellite Radio and mismanagement after the merger. XL claimed it didn’t receive a notice of the first suit, but for XL’s motion to dismiss the Court assumed XL did receive notice. XL denied coverage for four subsequent suits, claiming it didn’t receive notice of them and that Sirius didn’t get XL’s approval before incurring defense costs for them.

Sirius sued, and XL moved to dismiss.

XL issued a “Management Liability and Company Reimbursement Policy” providing:

“VI. GENERAL CONDITIONS

(A) NOTICE. (1) As a condition precedent to any right to payment under this Policy with respect to any Claim, the Insured shall give written notice to the Insurer of any Claim as soon as practicable after it is first made. . . .

(B) INTERRELATED CLAIMS. All Claims arising from the same Interrelated Wrongful Acts shall be deemed to have been made at the earliest of the time at which the earliest such Claim is made or deemed to have been made pursuant to GENERAL CONDITIONS (A)(1) above or GENERAL CONDITIONS (A)(2), if applicable.”

“Claim” includes “any civil proceeding in a court of law or equity, or arbitration.”

Additionally, “[n]o Insured may incur any Defense Expenses … without the Insurer’s consent, such consent not to be unreasonably withheld.”

Sirius argued that separate notice of the four subsequent suits was unnecessary because those suits and the first suit, for which notice was timely, arose from the same Interrelated Wrongful Acts and, thus, should be treated as a single Claim.

XL argued that the “Interrelated Claims provision determines when a Claim is deemed made against an Insured– it has absolutely no bearing on the XL policy’s separate notice requirement.”

The court rejected XL’s argument, stating:

“At this pre-answer stage of the case, it suffices to say that XL’s parsing of section VI (B), as merely stating that, ‘if timely notice of a Claim is given, that Claim will be treated as having been made in the policy period in which a previous notice of circumstance (or Claim) had been given’ (XL, reply, p. 12) is far from compelling. XL ignores the clause upon which Sirius relies, ‘[a]ll Claims arising from the same Interrelated Wrongful Acts shall be deemed to constitute a single Claim.’ At oral argument, too, counsel for XL ignored that clause, arguing that section VI (B) does not modify the requirement of prompt notice in section VI (A) (1), because § VI (A) (1) refers to ‘any Claim’ in the singular, while section VI (B) initially refers to ‘[a]ll Claims,’ in the plural.

Whether the deemed date of the later Claim relieves the Insured of the obligation to give notice each time a later Claim is made is not sufficiently clear from the words of Policy §§ VI (A) (1) and VI (B) to require dismissal of the complaint on the basis of documentary evidence under CPLR 3211 (a)(1) (see Goshen v Mutual Life Ins. Co. of N. Y., 98 NY2d 314, 326 [2002]; Morpheus Capital Advisors LLC v UBS AG, 105 AD3d 145, 148 [1st Dept 2013]).”

Sirius could have avoided any issue by providing notice of each subsequent suit timely to the D&O insurer. Ordinarily that’s what happens. It’s not clear why Sirius didn’t do so. The D&O policy wording at issue here is common. So we have at least one court suggesting a rewrite is in order–so there’s no question that an insured is expected to provide the insurer timely notice of each separate suit, where suits involve the same Interrelated Wrongful Acts as an earlier suit.

Tags: D&O, notice, interrelated