by Christopher Graham and Joseph Kelly

If you’re a regular reader you may recall our March 2014 post here about a shipbuilder the United States Coast Guard sued under the False Claims Act and common law. Builder converted old cutters into new ones, but there supposedly were serious structural defects. Coast Guard was not happy. And it sued.

Several years earlier, Coast Guard and builder tolled the statute of limitations for Coast Guard’s claims, Coast Guard wouldn’t have to sue then.

When Coast Guard sued, builder sought coverage under the claims-made management liability policy in effect then. But that was long after the tolling agreement and when Coast Guard’s claims were first made. Insurer denied coverage, claiming Coast Guard’s claim was first made before policy inception; and since it was a claims-made policy, there was no coverage.

The court in XL Specialty Ins. Co. v. Bollinger Shipyards, et al, Case No. 12-2071, (E.D. La. Jan 3, 2014) granted a summary judgment for insurer as detailed in our March 2014 post. But conspicuously absent from its opinion was any reference to any policy in effect as of the tolling agreement, when claim was first made.

Well, the mystery about whether there was a policy then was recently solved. In XL Specialty Ins. Co. v. Bollinger Shipyards, Case No. 12-2071 (E.D. La. Mar. 13, 2014), the court addressed builder’s motion for relief from summary judgment. There was a policy effective when claim was first made, as of the tolling agreement. But builder didn’t sue under that policy until after the court held it couldn’t recover under the policy effective when the Coast Guard sued builder. Having waited until after summary judgment for insurer, it was too late for builder to sue under the policy effective when claim was first made, said the court. Presumably there was a reporting requirement, which may have been an issue even if builder was permitted sue. But the court didn’t have to address that issue.

Builder also argued that as a claim made “between the [policy’s] Continuity Date and the end of the D&O Policy,” Coast Guard’s suit was covered. But coverage was conditioned upon a claim first made within the March 1, 2011 to March 1, 2012 policy period, as the court explained. And the claim was first made long before then.

The Continuity Date or “pending or prior date” also doesn’t change the claims-made requirement. The Continuity Date instead controls application of an exclusion for Loss in connection with a Claim “alleging, arising out of, based upon or attributable to” litigation or administrative or regulatory proceedings or investigations pending or prior as of the Continuity Date.

Builder also argued the “Discovery Clause,” triggered by policy cancellation or non-renewal, meant there was coverage for Coast Guard’s claim. But the Discovery Period was merely an additional period for a claim to be made following the Policy Period, for Wrongful Acts before then. And as the court explained, there was no Discovery Period applicable here because insurer neither cancelled nor non-renewed any policy, a condition for availability of the Discovery Period. Plus “the claim giving rise to the underlying suit was first made before the policy period, so the Discovery Period could not affect whether that claim is covered.”

Builder could have avoided this whole mess by providing notice to the management liability insurer when the tolling agreement was about to be signed and claim was first made. This is a recurring problem as we’ve seen in other posts such as here. Is it that lawyers advising about issues such as tolling or the underling cases don’t think about the insurance or assume someone else has or that the insured has the responsibility and needs no advice? Are the brokers not educating their clients sufficiently about the importance of prompt reporting? Why do insureds miss this requirement so frequently? We don’t have the answers. But it continues to be a problem.

Tags: Louisiana, D&O, tolling agreement, management liability policy, private company D&O policy, directors and officers liability policy, executive liability policy, claim, policy period, discovery period, prior and pending exclusion, continuity date, pending or prior date, claims-made policy

by Christopher Graham and Joseph Kelly

The story: Today’s story comes from potato land. So to whet your appetite, our photo is an Idaho baking potato, rather than another boring state map. So let the story begin:

You’re an insurance underwriter. And you issue an extended professional liability policy to a bank. It’s a package policy including executive liability, company reimbursement, professional, lender, and securities liability, EPL, fiduciary, trust department, and other insuring agreements.

Under “lender liability” coverage, your company “will pay on behalf of the company, loss that is the result of a claim for lending wrongful act first made during the policy period or during the extended reporting period, if exercised.”

“Lending wrongful acts” means:

any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the company concerning an extension of credit, an actual or alleged failure or refusal by the company to extend credit; or an actual or alleged agreement by the company to extend credit.

“Lending wrongful act [also] includes the servicing of loans for others under a contract or agreement.”

Your policy says your company “shall have no duty to defend.” But “reasonable defense expenses” are covered.

Your policy also provides: “All claims involving interrelated wrongful acts shall be considered a single claim and shall be deemed to be have been first made when the earliest claim was first made.” And “interrelated wrongful acts” include “wrongful acts that have as a common nexus any fact, circumstance, situation, event, transaction or series of facts, circumstances, situations, events or transactions.”

Like all good underwriters, you don’t want to cover breach of contract claims. It wouldn’t make sense. The bank could contract with anyone, accept benefits, fail to perform, and simply have your company pay loss. What’s the incentive to perform? Isn’t this the “moral hazard” you learned about in underwriting school?

Your policy therefore includes a contractual liability exclusion common in professional and management liability and D&O policies. It provides:

The Insurer shall not be liable to make any payment for loss in connection with any claim based upon, arising out of, relating to, in consequence of, or in any way involving: … any assumption by the company or an insured person of any liability or obligation under any contract or agreement, or the failure to perform any contract or agreement, unless such company or insured person would have been liable even in the absence of such contract or agreement[.]

Your company thus will avoid paying loss from contract breach, unless liability exists absent a contract. So you think.

Policy issued. Premium paid. Claims-made policy term is about to expire. No claims. No reported circumstances. All is well.

But just before the policy’s August 30, 2009 expiration, a business sues the bank. It claims the bank reneged on a promise to make loans to fund construction of an RV and boat storage facility. It claims breach of contract. It also claims breach of an implied covenant of good faith, estoppel, and detrimental reliance.

Your company pays for the bank’s defense, reserving rights including to raise the contract liability exclusion.

Six months later, the business and bank conditionally settle. Bank agrees to make loans to the business, with bank and business to mutually release each other if the loans are made.

So, not too bad; this should be over. Right?

Later the bank and business disagree about funding a loan for project steel. Then in July 2010, well after the policy term, business and its owner, as an additional party, amend the complaint to include claims for breach of the settlement agreement and an implied covenant of good faith.

Your company continues paying for defense, while reserving rights. But then the court grants a summary judgment for the bank, leaving only the new counts for breach of the settlement agreement and related implied covenant.

That’s a great development. It’s especially great, you think, because those counts were claims made after the policy term, right? So not within the coverage? Plus don’t they fall squarely within the contract liability exclusion? Aren’t they claims “based upon” or at least “in any way involving” “a failure to perform any contract or agreement”? Your company thus discontinues funding the defense.

But the bank thinks differently and sues. Now it’s up to the black-robed one to decide. And . . .

The Court Decision: In a case generally along those lines, Idaho Trust Bank v. Bancinsure, Inc. et al, Case No. 1:12-cv-00032-REB (D. Idaho Mar. 20, 2014), this particular black-robed one held the post-policy period claims about breaching the settlement agreement and implied covenant were deemed made when the original claims were made. So during the policy period. And the contract exclusion didn’t apply, said this court. The policy, available on the Federal court’s Pacer system, fills gaps in the court’s opinion about material policy wording. So we’ve included that wording in this post.

Single policy period Claim/interrelated wrongful acts: The post-policy period claims–about the settlement agreement–and policy period claims–about the unfunded loans for a storage facility–“involve[ed] interrelated wrongful acts,” said the court. So, under the policy, they’re “considered a single claim” and “deemed to have been made when the earliest claim was first made”–namely, during the policy period.

In arguing the issue, insurer cited deposition “admissions” by business’s corporate designee that the claims were unrelated.

What sayeth the court? Although designee’s testimony “may lend some support for [insurer’s] position, it does not compel that result.” But not only did designee’s testimony not “compel the result,” it wasn’t even enough to create a fact issue requiring a trial. Based on deposition testimony and law, the court granted the business a summary judgment. While the court considered designee’s testimony “relevant,” the nature of the claims was shown by the pleadings regardless of designee’s characterization of them.

As the court explained:

Here, the [2009] Claim and 2010 Claim involve the same parties, the same lending relationship between the parties, and the same underlying subject matter (the steel for Hutchens’ proposed RV Facility). The definition of “interrelated wrongful acts” describes a broad range of relationships that is decidedly satisfied here. The [2009] Claim and 2010 Claim share as a common nexus, facts, circumstances and events. The 2010 Claim would not exist but for the attempts to settle the [2009] Claim. On that fully-faceted record, the Court has little difficulty concluding that the 2010 Claim is “interrelated” to the [2009] Claim, as defined in [insurer’s] Policy.

There are many cases supporting this decision, including those the court cited: WFS Financial, Inc. v. Progressive Casualty Ins. Co., Inc., 232 Fed. Appx. 624, 625 (9th Cir. 2007) (two class actions having as common basis defendant’s alleged wrongful business practice “interrelated” as alleged harms “causally related and do not present such an `attenuated or unusual’ relationship that a reasonable insured would not have expected the claim to be treated as a single claim under the policy”); Highwoods Props. v. Exec. Risk Indem., Inc., 407 F.3d 917, 924-25 (8th Cir. 2005) (though alleging different legal theories, suits related as they alleged insured provided shareholders misleading information for merger approval); Capital Growth Financial LLC v. Quanta Specialty Lines Inc. Co., 2008 WL 2949492, *4-5 (S.D. Fla. July 30, 2008) (although involving different investors, additional or different investments, and unique allegations about specific misrepresentations, claims related as they all alleged pattern of unsuitable and risky investments by insureds).

Contract exclusion: The court also said the contract liability exclusion didn’t apply.

The broadly worded lender liability insuring agreement doomed this insurer, in this court’s view. The contract liability exclusion couldn’t be reconciled with the broad coverage grant–said the court.

As the court explained:

[The business owner’s] allegations with respect to the 2010 Claim [(about the settlement agreement)], although identified as “breach of contract” and “breach of the implied covenant of good faith and fair dealing,” stem from his allegation that [bank] promised to extend a loan and subsequently failed to do so. This falls squarely within the definition of a “lending wrongful act.”

And, yes, that’s true: “Lending wrongful act,” under the lender liability insuring agreement, included “any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the company concerning . . . an actual or alleged failure or refusal by the company to extend credit . . . .”

As the court also explained:

[S]uch an exclusion [(namely, the contract liability exclusion)] would not be enforceable as it would eliminate coverage for something otherwise clearly covered under the Policy. An insurer cannot seek to apply policy limitations and exclusions in a way to defeat the precise purpose for which the insurance is purchased. [Citation omitted] While the Court does not find the contractual liability exclusion to render the Policy completely illusory, the Court will not enforce it against [bank] on the particular facts in this case. Again, the Court emphasizes that an insurer cannot in one section provide coverage for acts that include “an actual or alleged agreement” and then, in another section, attempt to exclude coverage for claims “based upon [or] arising out of” “the failure to perform any contract or agreement[.]” These two sections cannot be reconciled and therefore the Court construes the exclusion against [insurer] and finds that there is coverage for the 2010 Claim under the Policy.

In this court’s view, the insurer by the contract liability exclusion took away the coverage it promised in the insuring agreement.

Distinguishing insurer’s cases applying similar exclusions, the court stated: “[Insurer’s] Policy is unique from the policies at issue in the cases cited by [insurer] in that it expressly states it covers ‘lending wrongful acts’ which include ‘an actual or alleged agreement by the company to extend credit’ but then excludes coverage for ‘any liability or obligation under a contract.'”

So the breach of contract claim was covered. And it didn’t matter that, under Idaho law, the good faith and fair dealing claim sounded “in contract” rather than tort.

Comments: Whether claims involve interrelated wrongful acts is frequently litigated. And this blog has discussed other decisions on that issue including here and here. With “interrelated wrongful acts” broadly defined, the court’s conclusion is no surprise. Somewhat surprising is the insurer argued against relatedness. Insurers in reported decisions are frequently arguing the opposite and winning in circumstances like these.

Contract liability exclusions also are frequently litigated as reported in this blog here and here. This case is unique because of the broad lender liability insuring agreement, incorporating the broad lending wrongful act definition.

But it’s not unusual for insureds to argue an exclusion took away what insurer agreed to cover and, thus, that coverage is illusory. That narrowing should be a problem, however, only when it leaves nothing material covered. As Allan Windt, a leading insurance commentator states with ample citations in “Insurance Claims and Disputes”: “The correct rule . . . is that an insurance policy does not afford illusory coverage if some material coverage is afforded.” Not surprising. There’s nothing illusory about insurance if it provides material coverage, even if an exclusion narrows the coverage grant. The point of an exclusion after all is to narrow coverage

This court acknowledged that, notwithstanding the contract exclusion, there was material coverage under the lender liability insuring agreement. That was evidenced at least by the insurer’s funding of the bank’s defense up until all the settlement breach and implied covenant claims were the only claims remaining. But in this court’s view, the “two sections [(the coverage grant and contract exclusion)] cannot be reconciled.” And so it “construes the exclusion against the insurer. . . .”

But were the coverage grant and exclusion really irreconcilable? Why wasn’t it reasonable to say that coverage for a loss from claims based on acts, omissions or the like concerning a loan, refusal to make a loan, or agreement to make a loan, is limited to claims where the bank or another insured “would have been liable even in the absence of such contract or agreement”? So, for example, lender liability claims in tort, rather than contract? Doesn’t this reconcile the lender liability insuring agreement and contract exclusion? It seems that this exclusion narrowed the lender liability exclusion just as an exclusion is supposed to, that there was material coverage left notwithstanding the exclusion, and that the coverage grant and exclusion were reconcilable. Maybe an appeal?

So what’s an underwriter to do? Don’t count on courts. Don’t put your company in a position where it has to litigate this issue. Time to revisit the insuring agreements. Look at cases this court cites where the exclusion was enforced and, in this court’s view, there was no issue with reconciling the coverage grant and the contract exclusion. How about that for a start?

Tags: Idaho, professional liability, contract exclusion, interrelated wrongful acts, related wrongful acts, lending wrongful acts, illusory coverage, bankers professional liability policy, BPL policy, lender liability, D&O insurance, management liability insurance

by Christopher Graham and Joseph Kelly

You’re a partner in a legal or other professional services firm. Or maybe you’re a director of a non-profit or private corporation. Your firm buys professional liability insurance. Or your non-profit or private company buys D&O insurance. There’s an application. And someone other than you answers the application questions, signs the application, and submits it to the insurer. You don’t review the application. Insurer issues a policy. Then there’s a claim against you. Insurer says “Sorry, no coverage. Your application included a materially false answer. We rescind.” You say, “But, I didn’t know the answer was false. I’m innocent!” You also say, “There’s wording making the contract severable as to each insured. You can’t rescind as to me. I’m innocent!”

If you read this blog regularly, you saw this scenario in our December 2013 blog post here about Illinois State Bar Association Mutual Ins. Co. v. Law Office of Tuzzolino and Terpinas, 2013 IL App. (1st) 122660 (Nov. 22, 2013). There, an Illinois appeals court held that the innocent insured, an attorney, wins, because of wording deemed to provide contract severability and the common law innocent insured rule.

Here is the legal malpractice policy “severability” wording that made the difference:

The APPLICATION, and any addendum or supplements and the Declarations, are the basis of the Policy. They are to be considered as incorporated in and constituting part of this Policy. The particulars and statements contained in the APPLICATION will be construed as a separate agreement with and binding on each INSURED. Nothing in this APPLICATION will be construed to increase the COMPANY’S Limit of Liability.

Recently, however, the Illinois Supreme Court agreed to review the appeals court decision. Presumably it will consider (1) whether there’s a separate contract between insurer and each insured, non-rescindable as to the innocent insured and (2) whether under the common law, the insurer can rescind a professional liability policy as to an innocent insured.

For partners in professional services firms and directors of non-profits and private companies severability is critical. You don’t want to learn you’re uninsured because a bad apple misrepresented material facts to the insurer.

Years ago it was not unusual for insurers to rescind D&O policies based on material misrepresentations in insurance applications, even for public companies and banks. Rescission was common following bank failures in the 1980’s. That could mean innocent D&O’s were uninsured because of misrepresentations someone else made.

Thereafter severability clauses became common in D&O policies. Later you saw separate Side A policies just for directors and officers, independent director policies, and non-rescindable public company D&O policies. With capacity and competition, insurers issued new policies for non-profit and private company boards based on renewal or other applications requiring little disclosure. Rescission in the D&O insurance world as a practical matter has not been much of a risk, in our experience. (Hey, readers. Do you agree? Please comment.)

But rescission is still an issue every insurance purchaser and broker should consider. Get the application answers right. But consider severability and, better yet, a non-rescindable policy. The common law innocent insured doctrine isn’t something to count on.

Stay tuned to this blog for our report on further developments in this important case.

Tags: Illinois, legal malpractice insurance, professional liability insurance, D&O insurance, management liability insurance, rescission, innocent insured doctrine, severability

by Christopher Graham and Joseph Kelly

You may think it’s just big law firms carrying D&O insurance. Kevin LaCroix of the D&O Diary reported here, for example, about Dewey LeBoeuf’s supposed $50 million in D&O insurance from three insurers. But out of Rhode Island, we have a case addressing D&O insurance for a small firm focused on personal injury and disability claims. That case, Rob Levine & Associates, Ltd. v. Travelers Casualty and Surety Company of America, C.A. No. 13-560-M (D. R.I. Feb. 3, 2014), addressed the policy’s professional services exclusion.

For the D&O underwriter of professional services firms, a goal is to assure your policy doesn’t insure risk you’d expect the professional liability insurer to insure. So your policy includes a professional services exclusion. For an insurance buyer, you’d expect some coordination between policies. But where’s the line between professional services and business risks for a professional services firms? How about advertising for professional services?

There are a lot of lawyers doing TV ads. Ever watch day time TV? First it’s auto wrecks. Then it’s nursing homes. Then it’s asbestos. Then it’s divorce. We will get you the money you deserve! Now, back to Maury Povich! Banner ads on the internet. Same things. Ever drive from Chicago to Detroit. Got to love lawyer billboards near the Indiana line and approaching the City of Detroit! We live in a great country!

One day you issue a duty-to-defend D&O policy to a law firm advertising heavily on the TV and internet. The firm’s catch phrase is “Call a Heavy Hitter® Today!”” Two former clients hit the firm with a multi-count complaint. One count is labeled “Class Action Deceptive Trade Practices.” The former clients allege the lawyers “‘deceptively advertise in all media in Rhode Island'” and “‘gave the false impression to [clients] and presently give the false impression to future clients that [they] have special expertise in personal injury cases and disability cases and will recover more money than other Rhode Island lawyers.'”

Lawyers deny wrongdoing and say defend us. You say, “Sorry. Our ‘Legal Services Exclusion’ applies to ‘Loss for any Claim based upon or arising out of any Wrongful Act related to the rendering of, or failure to render, professional services.'” You cite Rhode Island cases applying “arising out of” broadly. You cite non-Rhode Island cases construing “professional services” broadly. Allegations of misleading advertising are “inextricably intertwined with the rendering of professional services.”

Lawyers say the deceptive practices count alleges misleading statements “‘related to advertising, not the actual rendering of legal services.'” “‘[R]elated to the rendering of, or failure to render, professional services,'” for the D&O Policy, means “‘the actual performance of acts incident to particular professional services[,] [f]or example, . . . gathering medical records, negotiation of a settlement, filing complaints, and preparing discovery responses.'” The Wrongful Act was the “making misleading statements in advertisements.'” It wasn’t rendering legal services.

What does the court say? Lawyers win! Summary judgment! Insurer must defend. The count was about deceptive advertising, not about providing professional legal services. Further:

What seems clear from the plain language of the exclusion is that it was meant to exclude claims commonly referred to as malpractice claims, as opposed to claims arising from the business side of running a legal business. The policy in question here was a Directors and Officers’ policy, not a legal malpractice policy

Applying the exclusion to allegations about future clients, moreover, would ignore the word “render” in the exclusion. The lawyers didn’t render any services to future clients. Applying the exclusion here also would render the D&O policy meaningless. The firm’s business is “related to the rendering of … professional services.”

The opinion doesn’t address the multiple other counts in the complaint, including whether the lawyers malpractice insurer defended them. Nor is the firm’s commercial general liability advertising injury coverage addressed. That coverage generally is limited to “Offenses” including “misappropriation of advertising ideas,” “disparagement,” and “infringing upon another’s slogan.” So it’s not for consumer claims about buying a product or service based on an allegedly deceptive ad.

The opinion also doesn’t address whether the firm purchased D&O and professional liability insurance from the same insurer. Coverage presumably would be coordinated most effectively were that true. And there’s also presumably less risk of insurers claiming a coverage gap and pointing fingers at each other.

Comments on what insurers market this product for small law firms and frequency of purchases are encouraged.

Tags: Rhode Island, D&O, directors and officers liability insurance, management liability insurance, professional services exclusion, legal service exclusion, advertising, lawyers professional liability, lawyers malpractice, advertising injury

by Christopher Graham and Joseph Kelly

Surprise! Words in a contract may not mean what they say. Even when they’re unambiguous. Or even if agreed by sophisticated parties. That’s particularly true for insurance contracts. And lately it’s super-double particularly true for claims made insurance contracts.

You saw that in our recent post about California and Maryland cases involving claims made policies with reporting requirements. Although insurance buyers failed to report claims timely under contract wording, judges didn’t care. Insurers must pay unless they show prejudice from delay, the judges ruled. California judges decided that way because of judge-made “common law.” And it’s California! Maryland judges decided that way because a statute required the result, they said.

Now in the land of cheese, beer, and brats, Wisconsin judges made a decision smelling like Limburger for Wisconsin claims made insurers. The case is Anderson, et al v. Aul, et al, Case No. 2013AP500 (Feb. 19, 2014). And the insurer loses on an untimely reporting defense even though the insured wasn’t even close to meeting the policy’s reporting requirement. The problem for the insurer: a statute trumped the policy wording.

This was a lawyers’ professional liability insurer. And the law firm insurance buyer was as sophisticated as you can get. There was no lack of clarity in the policy wording. Insurer’s policy cover warned: “THIS IS A CLAIMS MADE AND REPORTED INSURANCE POLICY. COVERAGE IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO US DURING THE POLICY PERIOD.” Insurer’s declarations page warned: “This policy is limited to liability for only those claims that are first made against the insured and reported to the Company during the policy period.” Insurer’s insuring clause conditioned coverage on “claims first made against you and first reported to us in writing during the policy period.” And it also warned that “[y]our failure to send a written report of a claim or claim incident to us within the policy period shall be conclusively prejudicial to us.”

Despite those warnings, the law firm waited until 11 months after the policy period to report a claim. But who cares, says the court! Under WIS. STAT. § 631.81, “an insurer whose insured provides notice within one year of the time required by the policy must show that it was prejudiced and that it was reasonably possible to meet the time limit.” This law firm’s notice was within 11 months. No prejudice? Insurer as a matter of law loses, at least based on the reporting defense.

For a claim reported more than a year after the reporting time limit, a claims made and reported insurer likewise couldn’t simply rely on tardiness to deny coverage. Under the Wisconsin statute, “when notice is given more than one year after the time required by the policy, there is a rebuttable presumption of prejudice and the burden of proof shifts to the claimant to prove that the insurer was not prejudiced by the untimely notice.”

The Wisconsin law applied to all liability insurance policies. There was no distinction made between claims made and occurrence policies. Who knows whether the lawmakers knew or considered the differences between the policies. But it doesn’t matter. For Wisconsin insurance buyers, buy a round of Leinie’s, Schlitz, Hamm’s, or Old Style for everyone at your local tavern to celebrate your win!

Insurers say the reporting requirement isn’t there merely to allow timely investigation and defense. The reporting and claims made requirements are the essence of the insurance. Whether prejudice resulted from untimely reporting shouldn’t matter. The reporting requirement allows insurers to close their books on risk once the reporting period ends. It also allows for more effective product pricing.

Insurance buyers argue late notice should make no difference if the insurer isn’t harmed in its ability to investigate or defend. Their advocates convinced politicos in some states to pass laws saying so, including Wisconsin. Sometimes they get judges to in effect do the same.

So watch out insurance underwriters. You may not have what you think. Make sure you consider the possibility of a statute or judge-made law and price your product accordingly.

And watch out insurance purchasers. You may have something better than what your contract’s words say, though it’s still best to simply do what your contract says you should do, timely report!

Tags: Wisconsin, professional liability insurance, lawyers professional liability insurance, lawyers malpractice insurance, D&O insurance, directors and officers liability insurance, claims made and reported, claims made, late notice, prejudice, notice prejudice

by Christopher Graham and Joseph Kelly

You underwrite claims-made D&O, and professional, fiduciary, and employment practices liability insurance. So claims trigger coverage. As a policy condition, customers must report claims as soon as practicable, but in no event later than 30 days after the policy period.

Customers include medical device companies. They need professional and commercial general liability insurance. You combine your professional liability and historically occurrence-trigger CGL products into a claims-made product. You love that product: no worries about long-tail claims from occurrences years earlier; much easier to know when risk ends; easier to price products; and, best of all, actuaries love you.

So you think your risk ends when the 30-day claim-reporting window ends unless a claim is reported. You also may have risk of a claim developing after the policy period from a circumstance reported during the policy period; or of a claim made during a 12-month extended reporting period if purchased; or of a post-policy period claim involving the same or related wrongful acts as a policy period claim. That’s it. You think.

But if your claim reporting requirement isn’t in the policy’s insuring agreement and you’re in California, think again, says the court in Newlife Sciences LLC, et al v. Landmark American Ins. Co., Case No. 13-05145 (N.D. Cal. Feb. 18, 2014).

There, a medical device company buys a combined professional liability-CGL product effective July 17, 2008-2009. It’s a duty-to-defend policy. Company is sued less than 3 months after policy inception. But it doesn’t report the claim. It buys a 1-year renewal policy. And the predecessor policy’s 30-day claims-reporting window ends; still no claim reported. Insurer closes its books.

About 2 months later, about a year after the claim, company finally reports the claim to insurer. Insurer says “Sorry, yes, the claim was made during the July 17, 2008-2009 policy period. But you didn’t report it timely. So you’re out of luck.” Company says, “But we bought another policy from you. What difference does it make? You really haven’t suffered any prejudice?”

Insurer says “Timely notice was a condition to coverage. Your claims-made policy has a reporting requirement. You ignored it. We closed our books. We price our products based on the claim made and reporting requirements. Prejudice doesn’t matter. You can’t ignore contract terms.”

Company says, “But this is California.” You must prove prejudice to avoid coverage for late notice. It sues insurer.

Insurer moves to dismiss; company’s complaint shows it didn’t comply with the claims-made policy’s reporting requirement. Claims-made policies differ from occurrence policies where prejudice is required for a late-notice defense.

The court denies the motion: “When the insurer’s affirmative defense is that the insured failed to comply with one or more policy conditions, the insurer must also show prejudice.” According to the court:

The concept of “claims made” policies has been further extended by a type of policy in which the insuring agreement specifically limits the insurer’s obligations to “claims made and reported” during the policy period. In such policies, “[t]imely reporting of the claim is thus the event triggering coverage.” . . . These policies “are essentially reporting policies.” [Citation omitted]. The reporting requirement in a “claims made and reported” policy is, thus, not a condition of coverage but part of the coverage definition itself. Whereas an insurer bears the burden to show it was prejudiced by the insured’s failure to comply with a reporting condition, it is the insured that bears the burden to show the claim was timely reported in a “claims made and reported” policy.

The court thus found the reporting requirement’s location controls whether insurer must prove prejudice from late notice. A reporting condition requires proof of prejudice. But an insuring agreement reporting requirement does not, at least if about reporting within 30 days of policy termination. But the court never really explains why the result differs because of wording location. It doesn’t appear insurer argued there was no substantive difference between locating the wording in the insuring agreement or a notice condition.

Insurer instead argued the reporting condition was incorporated into the insuring agreement. But the court didn’t buy the argument, explaining:

[T]he policies at issue are titled “claims made” policies . . . , in which the insuring agreement limits coverage to claims made against the insured during the policy period or any extended reporting periods provided for by the policy. . . . The policies also include as a condition of coverage that the insured report all claims to the insurer no later than 30 days from the close of the policy period. According to [insurer], this condition transforms each policy into a “claims made and reported” policy because all conditions of coverage are incorporated into the insuring agreement itself by a separate clause that states, “[Insurer] will pay those sums that the Insured becomes legally obligated to pay as damages because of `personal and advertising injury’ to which this insurance applies.” . . . [Insurer], however, provides no authority for the proposition that such a statement should transform each condition of coverage—and presumably, each exclusionary provision—into a term of the basic insuring agreement. Such a reading would defeat the interpretive rules discussed above, in which the onus is on the insured to prove a claim falls within the basic scope of insurance and on the insurer to prove any exclusions or conditions apply. “Although it is a well-established principle that an insurer has the right to limit policy coverage, it is also the rule that any limitation of coverage must conform to the law and public policy.” [citation omitted]

Whether prejudice is required from late notice is controlled by state law. For liability policies, it frequently makes a difference whether the policy trigger is an occurrence or claim. In many states, insurers under occurrence policies must prove prejudice to avoid coverage for late notice. The reporting requirement allows insurers to investigate occurrences and defend and settle suits. If delay doesn’t adversely affect those efforts then insurers shouldn’t avoid coverage, so say many courts.

In many states, insurers under claims-made policies in contrast need not prove prejudice to avoid coverage from late notice, at least if notice is required within the policy period or a limited window thereafter. Unlike the notice requirement in occurrence policies, the reporting requirement in claims-made policies also allows insurers to close their books on risk once the reporting period ends. The two policy types thus fundamentally differ. But for this court, all that mattered was the reporting requirement’s location. But was that a distinction that should make a difference?

A court in at least one state found location made no difference. See Navigators Specialty Insurance Co. v Medical Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb 21, 2014). But it also found that regardless of location a claims-made insurer must prove prejudice. There the reporting requirement was in the insuring agreement, not the notice condition. And the result was driven by a statute requiring proof of prejudice for late notice, mainly applied to occurrence policies, but applied in this case to a claims-made policy.

Watch for further legislation and court decisions addressing this issue. You’ll be sure to see them!

Tags: California, professional liability, commercial general liability, CGL, notice, prejudice, notice-prejudice, claims made, claims made and reported, medical device, insuring agreement, condition

by Christopher Graham and Joseph Kelly

You’re the D&O, professional liability, or other insurer with a duty-to-defend policy. Your insured is sued in tort. You defend under a reservation of rights. But you don’t believe there’s coverage. And you don’t want to have to continue paying for a defense. So you sue for a declaration of no coverage.

You’re the insured. You’ve been sued by a party claiming injury. Now your insurer sues you. So you have two suits to address and you’re not too happy. You’re also concerned your insurer’s suit will prejudice your defense in the tort suit. You believe insurer’s suit will address issues material to your liability in the tort suit. So you argue it should be stayed. You also claim it would be bad faith for insurer to pursue a coverage suit prejudicial to your tort suit defense.

Insurer argues its suit won’t prejudice your tort suit defense and that delaying resolution of coverage would require funding a defense that isn’t covered. What’s a court to do?

Well, one court, in Federal Ins. Co. v. Holmes Weddle & Barcott P.C., et al, Case No. C13-0926JLR (W.D. Wa. Nov. 14, 2013), deferred deciding on a stay until a legal malpractice insurer and insured law firm briefed three coverage issues. As explained: “It may be that all that is needed to decide this coverage action is to apply settled contract and insurance law to a set of admitted and undisputed facts.” This court wasn’t convinced law firm’s malpractice defense would be prejudiced by addressing those three issues.

Insurer already had moved for a summary judgment. And so “the court [could] simply examine that motion to determine whether it is possible to resolve this case without causing prejudice to [the firm].” Insurer’s motion “raise[d] several arguments that could potentially resolve the question of coverage without requiring the court to find facts of consequence to the malpractice action.”

The malpractice case was about how the firm handled a pre-policy period tort suit. Insurer argued the malpractice claim during the policy period and a motion for discovery sanctions in the tort suit were “Related Claims.” In discovery for the tort suit, firm produced an incomplete claim file. After client lost at trial, the court sanctioned firm and client, finding each “‘recklessly certified’ that the claim file was complete when in fact it was not.” Client’s claim against firm in part alleged malpractice by failing to produce the entire claim file. Resolving the “Related Claims” issue wouldn’t prejudice firm’s defense in the malpractice case because it “would require the court to examine only the proximity of the relationship between the post-trial [pre-policy period] sanctions motion and [client’s policy period] legal malpractice claim.” And “[t]his inquiry does not implicate questions of causation [in the malpractice suit], it only requires the court to compare two claims to determine whether they are ‘related’ as a matter of contract and insurance law.”

Insurer also relied on prior knowledge and application exclusions. Insurer’s argument “would require the court to examine only whether [firm] knew about facts prior to January 2012 that ‘might reasonably be expected to give rise to a claim.'” Relying on Carolina Casualty Ins. Co. v. Ott, No. C09-5540 RJB (W.D. Wa. Mar. 26, 2010), the court in a similar vein concluded “[t]his limited inquiry would not prejudice [firm] in the legal malpractice action.”

So it would allow insurer’s summary judgment motion to proceed on those issues and on whether the firm must reimburse insurer for defense fees. But the court left the door open for firm to object again.

If the firm believed insurer’s arguments may prejudice its defense, it would need “to point out in a very specific manner if and where it believes resolution of these issues will require findings that would cause prejudice to its defense in the malpractice action”

“[Firm] may file a cross motion for summary judgment if it wishes, but the court will expect [it] to safeguard its own interests by raising only issues and arguments that will not cause prejudice in the malpractice action.”

The court will resolve the case by summary judgment only if it wouldn’t prejudice firm’s defense. Otherwise it would stay the case. Insurer meanwhile would continue to defend firm under a reservation of rights. Firm also agreed to indemnify insurer for defense expenses, if there was no coverage.

The court appears to have struck a fair balance between insurer and firm’s interests. Stay tuned because we may see more from this court about issues important to D&O and professional liability insurers.

Tags: Washington, professional liability, legal malpractice, management liability, D&O, duty to defend, declaratory action, stay, related claims, prior knowledge, application exclusion, prejudice

by Christopher Graham and Joseph Kelly

The 2008 financial crises continues to generate lawsuits affecting professionals, directors, and officers and their insurers. The Fourth Circuit recently addressed an insurer’s duty to defend and indemnify a real estate closing service sued for conspiring to strip equity from homeowners in foreclosure. See Cornerstone Title & Escrow, Inc. v. Evanston Ins. Co., Case No. 13-1318 (4th Cir. Feb. 19, 2014). The opinion is “unpublished” and thus non-binding in the Fourth Circuit, but parties still may cite it in arguing their positions. For D&O and professional liability insurers and their customers, the analysis of the personal profit exclusion thus potentially has broader application. This court says the exclusion won’t apply where the insured allegedly is liable and makes restitution for co-conspirators’ improper gains, but isn’t alleged to have received gains itself.

The scheme

Remember 2008. Real-estate values collapse. Home equity vanishes. Mortgages exceed collapsing market values. Or equity is substantially diminished. Jobs are lost. Mortgage payments are missed. Foreclosures ramp up.

And schemers scheme.

A foreclosure “consulting” business is born. Consultant joins forces with mortgage broker and real-estate closing service. Consultant’s market? Homeowners facing foreclosure. Its product? Sale-leaseback transactions: we’ll buy your home; you get cash for your home equity; you avoid foreclosure; we’ll lease the home to you; you stay in it; and you re-purchase it later.

And what does consultant get? A consulting fee, it says.

What does consultant really get? The fee. Plus cash homeowner was to get for her home equity. Plus monthly rent much higher than the mortgage payment.

How does consultant get homeowners’ cash for equity? Consultant tells them unspecified closing fees and charges consumed the equity and convinces them to sign over their checks.

How is closing service involved? It supposedly provides closing services for the sale-leaseback, fails to deliver checks to homeowners for their equity, and delivers them instead to consultant.

What else happens? High rent drives homeowners/now-renters from their homes. There’s never a buy-back for homeowners.

The suit

And . . . the Maryland Attorney General in 2008 sues consultant, mortgage broker, closing company and related parties. AG alleges closing service and all other defendants violated Maryland’s Protection of Homeowners in Foreclosure Act and Consumer Protection Act, by scheming to “take title to homeowners’ residences and strip the equity that the homeowners ha[d] built up in their homes.” AG also alleges closing service, by failing to disclose it provided homeowners’ equity checks to consultant, violated the Consumer Protection Act; and, in acting as settlement agent, “participated in and provided substantial assistance to [consultant’s equity-stripping] scheme.” AG identifies 13 transactions and asks for a variety of relief, including restitution.

AG not only seeks to hold closing service responsible for its alleged non-disclosure, but also for co-defendants’ acts. AG alleges the service’s “concerted action [made] the enterprise possible”; so it’s “jointly and severally liable” for each co-defendant’s acts, including failing to provide written agreements; requiring membership fees before providing consulting services; obtaining interests in homes while offering consulting; representing services were to avoid foreclosure; failing to disclose the nature of services, material terms of sale-leaseback agreements, rental agreements, and of any subsequent repurchase; failing to provide statutorily required forms and notices; failing to determine whether homeowners have reasonable ability to make lease payments and repurchase homes; misleading consumers about entitlement to closing proceeds and about placing them in escrow; taking consumers’ settlement checks; and recording deeds and encumbering properties before rescission periods expire.

Closing service denies AG’s allegations.

The policy and coverage litigation

Closing service looks for defense under a “Service and Technical Professional Liability Insurance” policy. Subject to the policy’s terms, Evanston Insurance Company agreed to pay “the amount of Damage and Claims Expenses because of any (a) act, error or omission in Professional Services rendered or (b) Personal Injury committed by [closing service].”

But insurer refuses to defend. It cites exclusions for claims arising out of (a) improper personal gain, (b) dishonesty, (c) conversion, theft, and the like, and (d) the Real Estate Settlement Procedures Act.

Closing service settles with AG by agreeing to pay over $100,000 in restitution. And it sues insurer for breach of a duty to defend and indemnify.

Insurer wins a summary judgment. AG’s claims are excluded as arising out of improper personal gain and conversion, theft, and the like. Dishonesty and RESPA exclusions aren’t addressed.

But the appeals court decides the improper personal gain and conversion exclusions are no grounds for avoiding coverage and returns the case to the district court to consider the dishonesty and RESPA exclusions.

So why the result? The duty to defend is broader than the duty to indemnify. If some claims in AG’s complaint are potentially within coverage, insurer must defend all claims, even if others are excluded. This appeals court reasoned that at least some of AG’s claims were outside the scope of the improper personal gain and conversion exclusions. So the district court was wrong in finding no duty to defend, at least based on the two exclusions it cited. Since its decision on defense was in error, and its decision on indemnity was for the same reasons, its indemnity decision was wrong too.

Personal Profit Exclusion:

How did the improper personal gain exclusion apply? It applied to claims “based upon or arising out of [closing service’s] gaining any profit or advantage to which [closing service] is not legally entitled.”

What was the appeals court explanation for why AG claims were outside its scope? The AG’s “complaint did not allege that any particular ‘profit’ or ‘advantage’ inured to [closing service’s] benefit, as [the improper personal gain] exclusion . . . requires. To the contrary, the complaint alleged that all the relevant benefits and funds went to [consultant and related parties] and, perhaps, [mortgage broker]. It was [consultant and related parties], after all, who “stripped” the equity from homeowners’ homes by contriving false fees and other reasons to obtain the homeowners’ settlement proceeds.”

“There is no allegation that [closing service] should not have collected the settlement proceeds because, as a settlement agent, the company was required to do so. [citation omitted] While the homeowners’ equity and money might be an illegal profit or advantage that went to someone after settlement, those assets went to parties other than ‘the Insured’ under the terms of [its] policy with Evanston.”

The improper personal gain exclusion also “would not apply because the underlying complaint did not allege illegal profiteering by [closing service]. Instead, the complaint alleged illegal conduct that produced incidental gains. Put another way: the Attorney General could have succeeded on its claims against [closing service] without showing that [it] received a single dollar or any other advantage, legal or illegal. In fact, many of the claims for which [closing service] was allegedly jointly and severally liable did not involve money at all, but instead alleged wrongful disclosures and misrepresentations. [citation omitted] The underlying nondisclosure claims, at a minimum, do not ‘arise out of’ the illegal profit or advantage itself, so those allegations of the complaint do not fall within the exclusion.”

“[I]t makes no difference that [closing service] received fees for the settlement services that it provided at closing when the houses were conveyed to [consultant]. The complaint does not allege that [closing service] overcharged or that it failed to provide bona fide settlement services. . . . [Closing service’s] receipt of legally justified funds does not defeat policy coverage. [citation omitted] More importantly, . . . , [AG’s] complaint did not seek damages for the ‘consideration or expenses paid to [closing service] for services or goods.’ [citation omitted] Because [AG’s] claims did not touch upon [closing service’s] settlement fees, those fees could hardly have been a ‘profit’ or ‘advantage’ that spurred the underlying claim.”

It also didn’t matter that AG sought “restitution” from closing service. “[I]n a case that involves ‘concerted action’ . . . the restitution award doesn’t necessarily aim to disgorge benefits from particular defendants. Instead, the award serves to disgorge the benefits going to the scheme as a whole. A conspiring Consumer Protection Act defendant will therefore face potential restitution anytime any of his co-conspirators enjoyed some benefit. [citation omitted] A defendant who enjoyed no personal gain could still be ordered to pay restitution if he were part of a broader concerted action that produced benefits to a fellow co-defendant.”

In deciding this point, the court relied on J.P. Morgan Secs. Inc. v. Vigilant Ins. Co., 992 N.E.2d 1076, 1082-83 (N.Y. 2013). That court found the exclusion inapplicable where the insured’s disgorgement payment “did not actually represent the disgorgement of [insured’s] own profits,'” but instead “‘represented the improper profits acquired by third-part[ies].'”

Conversion Exclusion:

How did the conversion exclusion apply? It applied to claims “based upon or arising out of the actual or alleged theft, conversion, misappropriation, disappearance, or any actual or alleged insufficiency in the amount of, any escrow funds, monies, monetary proceeds, or any other assets, securities, negotiable instruments, irrespective of which individual, party, or entity actually or allegedly committed or caused in whole or part the [excluded act].”

What was the appeals court explanation for why AG’s claims were outside its scope? Well:

In Maryland, the payee of a check (here, the homeowner) must receive the check before he or she can bring a conversion action based on a misuse or improper delivery of it. [citation omitted] Where the payee has not received the check, the payee retains a cause of action against the drawer (in this case, [closing service]) for the liability reflected in the check, but, at least at that point in time, cannot bring a conversion action. [citation omitted] In this case, [closing service] allegedly misdirected the settlement checks before they ever reached the hands of the homeowners. Thus, the necessary element of delivery for a Maryland conversion action to the payee was absent at the time of the allegedly wrongful transfer by [closing service].

What else did the appeals court say about the exclusion? The AG’s complaint included “other allegations” outside of its scope so insurer would have a duty to defend even if closing service’s alleged misdirection of homeowner checks qualified as a claim “based upon or arising out of . . . conversion . . . .”

Tag: Maryland, professional liability, improper personal gain, personal profit exclusion, conversion exclusion, duty to defend

by Christopher Graham and Joseph Kelly

So your client or customer threatens a suit. And the time for suit is about to expire. You can avoid the suit. But you have to agree to extend time to sue. Sounds good. Otherwise you’ll be defending a lawsuit. Maybe you’ll have adverse publicity too. Maybe you can work things out with no suit. Maybe they’ll just drop it. So you agree. A year passes; no suit. More time passes; still no suit. Looks like the problem is over. You say, Hallelujah!

But then the sheriff shows up with that pesky summons and complaint. The suit is by the United States for the Coast Guard. It would be too late for it to sue. But you signed a tolling agreement giving it more time. Your company was sub-contracted work to convert old cutters into new and improved cutters. One of the cutters had a structural failure. The US government alleges you “knowingly misled the Coast Guard to enter into a contract for the lengthening of Coast Guard cutters by falsifying data relating to the structural strength of the converted vessels.” It alleges you violated the False Claims Act and alleges common law fraud, negligent misrepresentations and unjust enrichment.

You have claims-made private company D&O or management liability insurance. The claim involves wrongful acts. So you notify the insurer.

But wait a minute, says the insurer. Our policy covers a Claim first made during the policy period. We defined Claim as including “a written demand for monetary or non-monetary relief.” This Claim was first made well before then, back when you signed a tolling agreement.

Your tolling agreement acknowledges you were informed by the government that it believed it “may have certain civil causes of action and administrative claims against [you] under the False Claims Act, [citation omitted], other statutes and regulations including the Program Fraud Civil Remedies Act, [citation omitted], equity, or the common law, arising from [your] performance of conversion work on the U.S. Coast Guard Deepwater Program’s 110 Foot Island Class vessels.” And your agreement also states that, “as consideration for the United States not filing, or initiating claims against [you] under the False Claims Act, [citation omitted]or the Program Fraud Civil Remedies Act,” a certain period would be excluded to determine the timeliness of “any civil or administrative claims.”

You argue the Claim at least for negligent misrepresentation and unjust enrichment was first made when the government sued you. Those two claims aren’t explicitly mentioned in the tolling agreement. And they were in a suit filed during the insurer’s claims-made policy period. Insurer says pound sand! You say see you in court!

So what does the court decide? Insurer wins, as explained in XL Specialty Ins. Co. v. Bollinger Shipyards, et al, Case No. 12-2071, (E.D. La. Jan 3, 2014). As the court explained:

The tolling agreement between [subcontractor] and the United States stated that the government believed that it had claims against [subcontractor] arising from its performance of the conversion work for [general contractor], and memorialized [subcontractor’s] agreement to toll the statute of limitations so that the parties could discuss settlement of those claims before engaging in litigation. Clearly, then, under the language of the D&O Policy, the United States’ “claim” against [subcontractor] was first made in 2008, over two years before the policy period began.

So, as an insured, what should you do when asked to agree to toll the time for suit? Well, you better consider whether you have professional liability, D&O, or other insurance? And if you have insurance, you better notify your insurer. It appears this insured may not have had a management liability policy when asked to sign the tolling agreement. We say that because the insured didn’t sue under any policy in effect then.

But if it did have a policy then, it should have notified its insurer promptly after the government threatened suit and before signing any agreement. For an insured, the wisest course is to give prompt notice of anything that might be a Claim or turn into one.

Tags: Louisiana, D&O, tolling agreement, management liability policy, private company D&O policy, claim, policy period

by Christopher Graham and Joseph Kelly

You have a contract. You’re obligated to pay a third party. And naturally, being a capitalist, you’d prefer not to take the hit. You’re creative. And you’re savvy about insurance. And you think, gee, maybe my D&O or professional liability insurer can pay instead of me. So you ask. But they refuse. They say: “That’s your contract, not our policy obligation.” So off to court you go. And the wearers of black robes decide who wins and loses! And so it was in Entitle Ins. Co. v. Darwin Select Ins. Co., Case No. 13-3269 (6th Cir. Jan. 29, 2014.

This time the insured was a title insurer. Its contracts were with mortgage lenders and real-estate sellers and buyer-borrower. The contracts were closing protection letters. And under those contracts, title insurer agreed to indemnify lender, seller, or buyer for certain misconduct by title insurer’s closing agent. The misconduct was agent’s theft. And the theft was of a whopping $3.9 million in escrowed funds.

Yikes, says title insurer. That’s a lot of dough! And, yes, we issued closing protection letters. And so yes, we have to make those who have them whole. But gee wiz, we really would prefer not to take a big hit. Title agent has no money; so out of luck there. But how about Darwin’s professional liability policy? What does that policy provide? Does it fit the claim and cover the loss?

Under the insuring agreement, Darwin agreed that it “will indemnify the Insured for Loss, including Defense Expenses, from any Claim or Extra-Contractual Claim first made against them during the Policy Period or any applicable Extended Reporting Period … for Professional Liability Wrongful Acts committed on or after the date of incorporation or formation of the Named Insured and prior to the end of the Policy Period.”

“Professional Liability Wrongful Act,” in the definitions, means “any actual or alleged act, error, omission, misstatement or misleading statement, in the performance of or failure to perform Professional Services … by any Insured, or by an individual or entity for whom the Company is legally responsible.”

Okay, that’s great–so it can be an actual or alleged act “by an individual or entity for whom the Company [(title insurer)] is legally responsible”? Wouldn’t that include the thieving title agent who stole the $3.9 million, you ask? And as title insurer, isn’t it “legally responsible” for what title agent did? And so shouldn’t Darwin as professional liability insurer pay?

No, says the court. Under the contract between title insurer and agent, the scope of the agency was limited to issuing title policies. It included nothing else; and, thus, none of the closing and escrow services title agent offered.

Title insurer’s liability for agent’s acts was limited to acts within the scope of agent’s very limited agency. And when agent stole the $3.9 million it was acting for itself rather than within the scope of the agency. “To the extent that [title agent] performed closing and escrow-related services for the clients, [it] did so on its own behalf”–so said the appeals court.

Although title agent had many victims, title insurer made whole only the victims having closing protection letter contracts. All victims purchased title insurance from title insurer via the rouge agent. But only some victims paid extra for a closing protection letter. Title insurer paid victims only because of it’s legal liability under closing protection letter contracts, not because it was “legally responsible” for the rouge agent’s acts.

As the court explained:

[Title insurer] asks that we interpret its insurance policy to allow [title insurer] to secure business by making contractual guarantees to its clients regarding the performance of third-party business partners that are not its agents and then force its insurer to foot the bill when that third-party fails to perform according to [title insurer’s] guarantee, despite [title insurer’s] disavowal of all non-contractual responsibility, legal or otherwise. Because this interpretation directly contravenes the language of its professional liability insurance policy, we must decline E[title insurer’s] request.

The district court also had held the claimed amounts weren’t “Loss” because the Loss definition carved-out “amounts due pursuant to an express contract or agreement . . . .” And it held that title insurer’s liability fell within an exclusion “for actual or alleged liability under any express contract or agreement.” As the district court explained, the closing protection letters were “a debt [the title insurer] voluntarily accepted, not a loss resulting from a wrongful act within the meaning of the Policy.” To hold otherwise would mean a party could “enter into a contract safe in the assumption that if he later decides to engage in an act which might be considered a breach, the insurance company will step forward to cover the consequences of his act if he was wrong; and if he was right, he still walks away with no consequence to himself. Such a practice is inimical to the entire concept of insurance.”

The appeals court didn’t address these issues because it didn’t have to. But they are additional arguments insurers will make when faced with insurance claims such as in this case. This type of litigation is seen with some frequency. And you should expect to see more of it, especially when there’s big money at stake making litigation cost easier to swallow.

Tags: Ohio, professional liability, title insurance, loss, contractual liability, contract exclusion, wrongful act