By Scott M. Bloom and Luke W. Panzar, Sedgwick San Francisco

The Seventh Circuit confirmed that the notice requirements of “claims-made” policies entitle insurers to deny coverage where, before the policy’s inception, the insured knows of circumstances that “might reasonably be expected” to give rise to a claim.  Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mut. Ins. Co., Case No. 12-1579 (7th Cir.), _____ F. Supp. 3d_______ (“KBP”). 2013 WL 1296724.

An insured law firm, KBP, purchased consecutive malpractice policies from the same insurer for the periods 2006-2007 (“Policy 1”) and 2007-2008 (“Policy 2”).  During Policy 1 it represented a client in a series of transactions.  It misfiled a contract which resulted in the collapse of a deal.  Policy 1 expired about two months after the transaction fell through.

In the renewal application for Policy 2, KBP denied knowledge of any unreported acts or omissions that might give rise to a claim.  Sometime later it learned that its client was considering a malpractice suit in connection with the failed transaction.  It notified the insurer under Policy 2. 

The insurer disclaimed coverage on the basis that KBP had learned of the facts giving rise to the claim before inception of Policy 2.  It also took the position that, because KBP had not given notification before expiration of Policy 1, cover was precluded under that policy also. Litigation ensued.  The district court granted summary judgment in the insurer’s favor.  Its decision was upheld on appeal. 

The court reasoned that timely notice to the insurer was a “condition precedent” to coverage under a claims-made policy.  It was reasonable for KBP to have been aware of the possibility of a malpractice claim once it was known that the transaction had collapsed and the firm’s related mitigation efforts had failed.  The insured should have notified the insurer as soon as it became aware of these circumstances.  KBP did not properly report the claim during Policy 1, and there was no coverage under Policy 2 as KBP was aware of circumstances giving rise to it prior to inception. 
 
The insurer was not required to show prejudice before denying the claim.  In the court’s view, applying such a requirement would create an expansion of coverage for which no premium was paid.

Click here to view the opinion.

By Ekaterina Levy, Sedgwick San Francisco

An Illinois appellate court held that a lawyers professional liability policy’s business pursuits exclusion barred coverage for an underlying civil conspiracy action against a law firm and one of its attorneys.  American Zurich Ins. Co. v. Wilcox & Christopoulos, LLC, 2013 Ill. App. LEXIS 23 (Jan. 17, 2013).  The underlying suit alleged that the attorney, through the services of his own company, prepared fraudulent documents in order to obtain a liquor license for a restaurant.  The court found that the exclusion was not rendered ambiguous solely because the attorney acted “for” two companies (his own and the restaurant) in procuring the liquor license.

An investor filed a civil conspiracy lawsuit against the Wilcox law firm, attorney Wilcox, and other defendants, alleging that the defendants were involved in a conspiracy to open and operate a restaurant by illegal means.  The company that was to operate the restaurant, Panacea Partners, allegedly retained attorney Wilcox and his company, Liquor License Solutions, to obtain the liquor license.  The complaint alleged that Liquor License Solutions was involved in the fraudulent scheme, Wilcox prepared false corporate documents, and Wilcox acted both individually and in the scope of his employment with Liquor License Solutions.

The Wilcox firm requested coverage for the lawsuit from American Zurich pursuant to a lawyers professional responsibility claims-made policy.  At issue before the appellate court was whether a “business pursuits” exclusion operated to preclude coverage.  Specifically, the exclusion provided that the policy did not afford coverage for “any claim based upon or arising out of in whole or in part, from the alleged acts or omissions by any Insured, with or without compensation, for any business enterprise, whether for profit or not-for-profit, in which any Insured has a controlling interest.”

The court rejected the insured’s argument that the exclusion applies only when an insured attorney does work for an entity in which any insured has a controlling interest, whereas the underlying complaint alleged that Wilcox’s work was done for Panacea Partners and not for Liquor License Solutions.  Relying on the dictionary definition, the court found that the term “for” is unambiguous, and in the context of the entirety of the exclusion the term meant “for the benefit of.”  Because Wilcox, an insured, acted for the benefit of his company, Liquor License Solutions, while working to obtain a liquor license for Panacea Partners, the court held that the business pursuits exclusion was triggered, and American Zurich had no duty to defend attorney Wilcox or the Wilcox law firm.

Under this decision, the business pursuits exclusion will bar coverage as long as an insured’s work benefitted its own company, even if the insured simultaneously performed legal work for a third party.

By Chen Foley

In Ace European Group & Ors v Standard Life Assurance Limited, [2012] EWCA Civ 1713, the English Court of Appeal reaffirmed the principle that where a loss has multiple causes, the insured’s entitlement to an indemnity in respect of an insured cause is unaffected by the fact that there also exist equally effective uninsured causes.  Liability insurers are therefore not entitled to an apportionment by reference to the insured and uninsured causes of the loss.

A copy of the judgment/opinion can be found here.

Standard Life marketed a fund as a temporary and secure home for short-term investments.   In fact, investors’ money was placed in risky asset-backed securities.

Standard Life revalued the fund resulting in an immediate, one-off fall in the fund’s value.  It was obvious to Standard Life that this would give rise to claims against it.  To preempt these, and in an attempt to avoid further reputational damage, it made a lump sum payment into the fund and compensated a number of investors directly at a cost of UK£101,862,048.

Standard Life sought to recover the sum under its professional liability policy arguing it was a “Mitigation Cost”.  Insurers denied the claim, arguing the sum (i) was paid with the dominant purpose of avoiding reputational damage and (ii) was not required to avoid or reduce prospective third party claims.  Both arguments were rejected at first instance.

On appeal, although the insurers did not challenge the finding of coverage for Mitigation Costs, they argued that they were entitled to an apportionment of the Mitigation Costs between that portion which was insured (i.e. used to preempt third party claims) and that portion which was uninsured (i.e. intended to protect Standard Life’s reputation).

The appeal was dismissed.  The court reasoned that concepts such as averaging and underinsurance, which insurers had sought to rely upon, were of no application to liability insurance.  Accordingly, the rationale underlying the principle of apportionment was irrelevant and inapplicable in the liability context.

It was suggested at first instance that the insurers could have limited the recoverable Mitigation Costs by requiring them to relate “solely” or “exclusively” to a specific purpose.  The Court of Appeal did not address this point specifically although it noted that apportionment in the liability context could produce significant uncertainty because the very nature of the liabilities that insurers will seek to carve out are often impossible to quantify.  If insurers do wish to cover mitigation costs, they might also seek to control their exposure through the imposition of a sub-limit or strict provisions requiring insurer consent to any settlements.

By Daniel Pickett

In Coats Rose Yale Ryman & Lee PC v. Navigators Specialty Insurance Co., 2012 WL 4858194 (5th Cir. October 15, 2012), the U.S. Court of Appeals for the Fifth Circuit upheld a lower court’s grant of summary judgment to Navigators. This was an action brought by an insured law firm seeking a declaration that Navigators had a conflict of interest and, therefore, must pay for independent counsel to defend the firm in a malpractice case.

The parties had cross-moved for summary judgment before the U.S. District Court for the Northern District of Texas. The insured (a law firm) argued that, although Navigators had yet to reserve its right to disclaim coverage based upon the dishonesty exclusion, its ability to do so in the future created a conflict of interest.  Navigators maintained that it had not reserved its right, and would not, to deny coverage based on the exclusion.   The District Court explained that a “potential” conflict of interest was not sufficient to trigger an insured’s right to select independent counsel and, therefore, held that the insured had failed to establish that there was a conflict of interest.

The insured also argued that a conflict of interest existed because the Navigators’ policy covered compensatory damages, but not the return of fees, and an attorney chosen by Navigators would be able to steer any award toward uncovered damages.  The court rejected this argument because, among other things, it would not be in Navigators’ interest for the attorney defending the firm to concede facts that would lead to a return of fees award because such a concession would acknowledge wrongdoing, likely increasing any compensatory damages award.

The Appellate Court, in a relatively short decision, based its decision on “substantially the same reasons” set forth in the District Court’s decision.

By Susan Koehler Sullivan

In Health Net, Inc. v. RLI Insurance Company, et al., Cal. Ct. App. Case N. B224884 c/w B240833, the California Court of Appeal clarified that contract benefits owed by an insured are not covered by a liability insurer because the obligation to pay contractual amounts is not a loss due to a “wrongful act.” 

The appellate court reversed summary judgments granted by the trial court based upon the application of a “dishonesty” exclusion, finding instead that most (and potentially all) of the underlying ERISA class action claims brought against the insured did not fall within the scope of the insuring agreements.  The insured, Health Net, had been sued in two class actions for underpaying out-of-network claims, and had settled those claims for $215 million, inclusive of plaintiff’s attorney’s fees and various business practice changes.  The insured sued four of its insurers seeking payment of its defense expenses and the settlement of the class actions.  The appellate court concluded that “there is no coverage for the vast bulk of the claims asserted in these actions.  Specifically, there is no coverage for the actions to the extent they sought:  (1) unpaid [contractual] benefits; (2) injunctive relief; (3) civil penalties; (4) damages arising out of claims subject to the willful act and other policy exclusions; and (5) attorney’s fees arising out of any of the above.”

The appellate court held that even absent a breach of contract exclusion, the Insuring Agreement of the applicable policies did not provide coverage for the insured’s contractual obligations – whether the insured committed a wrongful act in its failure to pay such benefits.  Quoting August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co., 146 Cal.App.4th 565, the court explained “[P]erformance of a contractual obligation – - – is a debt the [insured] voluntarily accepted.  It is not a loss resulting from a wrongful act within the meaning of the policy.”  Id. at pp. 581-582.   

The court rejected the insured’s argument that the underlying settlement consisted of amounts paid to resolve disputed claims, and therefore “does not establish such amounts were owed under contract.”  In footnote 24, the court stated:  “[W]e determine coverage by the allegations of the underlying actions.  To the extent the underlying actions sought coverage for unpaid benefits, the underlying actions were not covered by the policy –  thus no amounts paid to settle those claims were covered by the policy.  An insured cannot transform an uncovered contract claim into a potentially covered one simply by settling it prior to any decision being made on its merits.”   The court explained that even where breach of contract claims involve alleged negligence or breach of fiduciary duties,  it is required to “consider the nature of the damage and the risk involved, not the name of the causes action pleaded” in determining insurability.  Citing Vandenberg v. Superior Court, 21 Cal.4th 815, 838-839 (1999).  Thus, whether or not Health Net’s conduct was negligent or violated ERISA, the nature of the claims asserted involved the failure to pay contract benefits, and those unpaid benefits were not the responsibility of the insurers. 

The court also rejected the insured’s argument that the plaintiffs’ fee award, which comprised $70 million of the underlying settlement, constituted an independent claim for damages, apart from the unpaid benefits or other settlement amounts.  The court ruled that “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.”  The court stated that if “a complaint alleges some covered wrongful acts and some acts which are not covered, the claim for attorney’s fees is covered only to the extent it arises out of the covered wrongful acts.”

The appellate court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some but not all of the underlying claims, some of which might potentially allege a covered loss, and remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”