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.”

In Szura & Co. v. General Ins. Co., Case No. 12-2505 (6th Cir. Nov. 5, 2013) an insurance agent sued for a declaration that its E&O insurer was obligated to defend the agent in an underlying suit for tortious interference with contract, tortious interference with business relationship, and civil conspiracy. The E&O policy defined “Wrongful Act” as “any actual or alleged negligent act, error or omission.” The E&O insurer successfully argued that there was only coverage for negligent acts and the allegations in the underlying suit against the agent were for intentional conduct. The E&O insurer, thus, had no duty to defend.

For further discussion of this issue in the context of the Szura opinion, here’s an excellent article from Randy Maniloff in “Coverage Opinions”

Tags: E&O, wrongful act, negligent

by Christopher Graham and Joseph Kelly

In Axis Surplus Ins. Co. v. Halo Asset Mgmt, LLC, et al, Case No. 12-cv-2419 (N.D. Tex. Sept. 27, 2013), the Northern District of Texas held AXIS had no duty to defend its mortgage broker insureds (collectively, “Halo”).

Halo was sued in Texas state court for fraudulent inducement, negligent misrepresentation, fraud, breach of fiduciary duty, among other theories, relating to a scheme by Halo to induce the underlying plaintiffs to invest in the purchase of failing residential mortgage notes that Halo would turn into performing loans.

Halo tendered the defense and indemnity of the underlying suit to AXIS under a professional liability policy. AXIS denied coverage and filed this suit seeking a declaration of no duty to defend or indemnify.

At summary judgment, AXIS argued it had no duty to defend because the underlying claims aren’t “Insured Services” as defined in the policy.

The policy defines “Insured Services” in part, as:

Mortgage broker services consisting of counseling, taking of applications, obtaining verifications and appraisals, loan processing and origination services in accordance with lender and investor guidelines and communicating with the borrower and lender. Debt settlement and credit services including arbitration and negotiations; real estate sales and brokerage services. . . .

The court ruled that the underlying allegations “are fundamentally based on [Halo’s] misuse of the [underlying plaintiffs’] invested funds, not in mortgage broker services. Taking the allegations in the petition as true, none of the funds even went to purchase mortgages. The fact that the proposed investment scheme was supposed to involve mortgages does not overshadow the fact that the allegations ultimately stem from fraud and misappropriation of funds.”

AXIS, thus, had no duty to defend.

The court denied AXIS’s motion for summary judgment on the duty to indemnify. Under Texas law, the duty to indemnify is based on the facts proven at trial, not the facts alleged in a complaint. The court stated “[A]n insurer may have a duty to indemnify its insured even if the duty to defend never arises” and that “unlike the duty to defend, which turns on the pleadings, the duty to indemnify is triggered by the actual facts establishing liability in the underlying suit, and whether any damages caused by the insured and later proven at trial are covered by the terms of the policy.”

by Chris Graham and Joseph Kelly

Pelagatti v. Minnesota Lawyers Mutual Ins. Co., Case No. 11-7336 (E.D. Pa. June 26, 2013)

Plaintiff lawyer filed suit against its legal malpractice insurer claiming a breach of the duty to defend and bad faith.

Plaintiff renewed his annual legal malpractice policy from 2003-2010. In response to insurer’s “Firm Information Verification Form” which stated:

“There have been changes to the Firm Name, Schedule of Lawyers or significant changes to the previously submitted application information or the firm is aware of a claim(s) or circumstances that could reasonably result in claims or disciplinary actions that have not been reported to Minnesota Lawyers Mutual. The undersigned will provide immediate written notification on this form or an attachment describing the changes, claims, potential claims and disciplinary actions to Minnesota Lawyers Mutual before accepting the quotation.”

Plaintiff responded by listing his firm’s name change, but didn’t discuss mention any potential claims.

The Policy states:

“WE will pay, subject to OUR limit of liability, all DAMAGES the INSURED may be legally obligated to pay and CLAIM EXPENSE(S), due to any CLAIM, provided that:

(1) the CLAIM arises out of any act, error or omission of the INSURED or a person for whose acts the INSURED is legally responsible;

(2) the act, error, or omission occurred on or after the PRIOR ACTS RETROACTIVE DATE and prior to the expiration date of the POLICY PERIOD;

(3) the CLAIM results from the rendering of or failure to render PROFESSIONAL SERVICES;

(4) the CLAIM is deemed made during the POLICY PERIOD; and

(5) the CLAIM is reported to US during the POLICY PERIOD or within 60 days after the end of the POLICY PERIOD.

The Policy also states that a claim is made when “an INSURED first becomes aware of any act, error or omission by any INSURED which could reasonably support or lead to a demand for damages.”

In July 2006, Tondalia Cliett retained plaintiff for a wrongful death and survivorship action relating to her son’s death on an unsupervised beach the previous month in New Jersey. Plaintiff didn’t advise Cliett that he wasn’t licensed to practice law in New Jersey.

Plaintiff filed suit in New Jersey District Court against against Ocean City, NJ in September 2006. Ocean City moved to dismiss for failure to timely place the city on notice as required by the New Jersey Tort Claims Act (“NJTCA”). Plaintiff filed a motion for leave to file a late notice of claim. The District Court converted the city’s motion to dismiss into a motion for summary judgment and granted it. Plaintiff filed a motion for reconsideration, withdrew that motion, and then appealed to the Third Circuit. The Third Circuit dismissed the appeal as untimely because it was more than 30 days from the district court’s final order. Plaintiff then moved the District Court to reinstate his motion for reconsideration. The District Court denied that motion and stated that plaintiff should’ve filed a new motion but couldn’t now because it would be untimely. The Third Circuit affirmed that denial. Plaintiff, in October 2009, informed Cliett that the appeals didn’t succeed.

In February 2010, Cliett filed a legal malpractice suit against plaintiff alleging negligence for not complying with the NJTCA. Plaintiff notified his legal malpractice insurer which refused to defend because of untimely notice and because notice wasn’t given when plaintiff found out Cliett’s claim was dismissed in 2006 for failure to follow the NJTCA. Cliett was granted summary judgment and plaintiff then filed suit against its insurer.

Defendant moved for summary judgment. Plaintiff argued in pertinent part that its insurer failed to prove that it was prejudiced by plaintiff’s untimely notice. The District Court rejected that argument stating:

“Although Pennsylvania law requires that insurers demonstrate prejudice in order to deny coverage under some types of policies […]”; and

“Whether Plaintiff violated the terms of the Policy by failing to timely report a claim is determined under a hybrid subjective/objective test. [citation omitted]. Defendant must establish two factors in order to satisfy this two-pronged test: (1) that Plaintiff was aware of a given set of facts; and (2) that a reasonable attorney in possession of those facts would have believed that those facts could support or lead to a demand for damages. Id.; see Policy 1. Under this two-pronged approach, the Court “consider[s] the subjective knowledge of the insured and then the objective understanding of a reasonable attorney with that knowledge.” [citation omitted.”

Here, plaintiff’s knowledge of a potential claim when he applied for insurance satisfied the subjective part of the test and the objective part of the test was met because a reasonable attorney would’ve reported the claim in its application.
The District Court thus granted insurer’s motion for summary judgment.

by Chris Graham and Joseph Kelly

Carolina Casualty Ins. Co. v. Gallagher Sharp, Case No. 1:10cv2492 (N.D. Ohio April 16, 2013)

Carolina Casualty’s legal malpractice action arose from an underlying legal malpractice claim. The Insured law firm’s defense counsel negotiated a high-low agreement in the underlying litigation under which the plaintiff could recover at most the remaining policy limits and at worst $100,000 even if there was a defense verdict. The judgment exceeded remaining policy limits and the high-low agreement was found unenforceable. While an appeal was pending, the parties agreed on a second high-low agreement with a low amount of $1.75 million. The Insured prevailed on appeal, but was liable for $1.75 million under the second high-low agreement. Carolina Casualty paid the judgment and sued defense counsel for legal malpractice arguing it would’ve only had to pay $100,000 if the first high-low agreement was enforceable.

The court granted summary judgment to Carolina finding it had standing to sue because privity existed between Carolina and defense counsel prior to the first high-low agreement as their interests were aligned. While the court denied Carolina summary judgment on the issue of breach, the court did grant summary judgment to Carolina on the issue of causation because the second high-low agreement was a foreseeable result of the first unenforceable high-low agreement.

by Christopher J. Graham and Joseph P. Kelly

American Zurich Ins. Co. v. Wilcox and Christopoulus, LLC, et al, Case No. 1-12-0402 (Ill. App. Ct. 1st Dist. Jan. 17, 2013)

Insurer filed suit against insured lawyer and law firm seeking a declaration of no duty to defend. Trial court found no duty to defend lawyer but found a duty to defend the law firm. On appeal, insurer claims it has no duty to defend the law firm because of its “business enterprise” exclusion which provides that there’s no coverage for any claim arising out of “the alleged acts or omissions of any insured * * * for a business enterprise * * * in which any insured has a controlling interest.” Appellate court noted that the underlying complaint against the lawyer and the law firm for civil conspiracy involved allegations of the lawyer’s acts for a business enterprise in which the lawyer had a controlling interest. Appellate court found no duty to defend the law firm because the exclusion above precluded coverage for the law firm because the exclusion applied to all insureds based on the conduct of “any” one insured.