Archive for the ‘Professional Liability’ Category

United Kingdom Budget 2015 – Pension Reform Implications for Financial Advisers and Their Insurers

Friday, June 19th, 2015

By Richard Booth, Sedgwick London

Insurers providing professional liability coverage should be aware of certain changes in the way individuals in the UK may use their defined contribution pension savings, as new claims activity may result.

The March 2015 Budget announcement revealed the Chancellor’s intention to take pension reforms even further in 2016, including allowing pensioners who already have taken out annuities to sell the income they receive. Previous reforms announced in 2014 mean that, as of April 2015, individuals reaching 55 are now given the options of:

  1. Taking a number of smaller lump sums, and in each case 25% of the sum will be tax free.
  2. “Cashing-in” all of their pension savings for one lump sum.

As the Liberal Democrats’ pensions minister warned last year, the reforms raise the spectre of pensioners blowing their hard earned pension contributions on Lamborghinis, rather than making more prudent investment decisions.

The reforms (those implemented in April 2015 and proposed for 2016) have been welcomed by many commentators for giving individuals more choice in terms of how they spend their savings. The Government has recognized, however, that there are accompanying risks, and the Citizens Advice Bureau will provide individuals with guidance via the “Pension Wise” service. Because the service will not provide advice, many people will consult an Independent Financial Advisor (IFA).

Some IFAs will be expecting new work as a result of the reforms. With a wide variety of investment options available to individuals, and “low risk” products still offering disappointing returns, IFAs will be presenting pensioners with products that offer the potential for higher income and growth, but with higher levels of risk attached. This inevitably will bring further claims activity to the sector relating to the quality of advice provided. It will be a matter of when, rather than if, the first complaints to the Financial Ombudsman Service and claims in the civil courts start to emerge.

The decisions that individuals will need to make in relation to pension contributions will potentially have huge consequences for their retired life. A correspondingly high level of importance will attach to the advice IFAs provide. They must, therefore, ensure that:

  1. They fully understand the reforms including the potential tax implications for their clients’ specific circumstances.
  2. They adequately “fact find” their clients; for example, finding out if they require income from their investment or whether their circumstances merit prioritising capital growth.
  3. They advise on the impact receiving a lump sum payment will have on any entitlements they may need to state benefits.
  4. They record their recommendations, and rationale for them, in sufficient detail so that complaints and claims can be responded to with contemporaneous evidence.

Professional indemnity insurers should consider whether Proposal Form documentation should include specific questions in relation to what pension advice IFA’s are providing, what percentage of an insured firm’s business is related to pension advice, and what risk management processes and procedures are in place to ensure sound advice and to limit claims.

Colorado Supreme Court Holds that the Notice-Prejudice Rule Does Not Apply to Date-Certain Notice Requirement in Claims-Made Policies

Wednesday, February 25th, 2015

By Eryk Gettel, Sedgwick San Francisco

Like many jurisdictions, Colorado’s notice-prejudice rule generally provides that an insured who fails to provide timely notice of a claim does not lose policy benefits unless the insurer establishes that the late notice prejudiced its interests.  Friedland v. Tranvers Indem. Co., 105 P.3d 639, 643 (Colo. 2005).  In Craft v. Philadelphia Indemnity Insurance Co., 2015 WL 658785 (Colo. Feb. 17, 2015), the Colorado Supreme Court held that this rule does not apply to date-certain notice requirements in claims-made policies.

Dean Craft was the principal shareholder and president of Campbell’s C-Ment Contracting, Inc. (CCCI).  Craft agreed to sell a portion of his CCCI shares to Suburban Acquisition Company (Suburban), and later sold his remaining shares back to CCCI.  Suburban and CCCI sued Craft for alleged misrepresentations and fraud regarding the stock sales.

At the time he was sued, Craft was unaware that CCCI had purchased a D&O policy from Philadelphia Indemnity Insurance Company (Philadelphia).  The policy required the insured to notify Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired.  The policy period was November 1, 2009 to November 1, 2010.  Craft did not report the matter to Philadelphia until March 2012 (more than one year after the policy had expired), and settled the underlying litigation in June 2012.  Philadelphia ultimately denied coverage for Craft’s legal fees and the underlying settlement because Craft had not complied with the policy’s notice provision.

Craft sued Philadelphia in Colorado State Court for breach of contract, breach of the implied covenant of good faith and fair dealing, and statutory violations.  Philadelphia removed the case to federal district court, and then successfully moved to dismiss the coverage action on the basis that Craft did not notify Philadelphia of the claim within 60 days of the policy’s expiration date.  After appealing the district court’s decision, the Tenth Circuit certified the following questions to the Colorado Supreme Court:  (1) whether the notice-prejudice rule applies to claims-made liability policies as a general matter; and (2) whether the rule applies to one or both types of notice provisions in claims-made policies.  Because the parties agreed that the prompt notice requirement was not at issue, the Colorado Supreme Court limited its analysis to the issue of whether the notice-prejudice rule applies to a claims-made policy’s date-certain requirement.  The court answered the question in the negative.

The court first explained how “occurrence” and “claims-made” policies differ in terms of the coverage they provide.  Whereas occurrence policies (like the policy in Friedman)provide coverage for injuries or damage that occur during the policy term regardless of when the claim is actually made, claims-made policies (like the policy in Craft) only provide coverage if the claim is made during the policy period or any applicable extended reporting period.  The court further explained that this conceptual difference is critical to the risks that insurers undertake and the premiums that insureds pay.  With a claims-made policy, the risk to the insurer passes when the policy expires.  Thus, the date-certain requirement in a claims-made policy is a fundamental policy term because it defines the temporal boundaries of the policy’s basic coverage terms.  The court found that, to extend the notice-prejudice rule in the context of a claims-made policy’s date-certain notice requirement, “would defeat the fundamental concept on which coverage is premised.”

The court also rejected Craft’s argument that strict enforcement of the date-certain notice requirement would result in a windfall for the carrier based on a technicality.  To apply the notice-prejudice rule so as to excuse an insured’s noncompliance with a date-certain requirement would essentially rewrite the policy and effectively create coverage where none previously existed.  By doing so, the insured — and not the insurer — would reap the windfall.

Court Confirms Insurer Permitted to Choose Counsel in Discharging Duty to Defend

Friday, February 13th, 2015

By Aaron Mandel, Sedgwick New York

An insurer’s duty to defend and how that duty gets discharged may be one of the most frequently litigated coverage issues.  Although typical policies afford insurers the right to control their insureds’ defense, insureds often prefer to appoint their own counsel and have their insurer reimburse them for their defense costs.  That is especially true where the insurer reserves its rights under its policy.  The latest opinion addressing this issue came out of the U.S. District Court for the Northern District of California in Travelers Property Casualty Co. v. Kaufman & Broad Monterey Bay, et al., No. 5:13-cv-04745-EJD (Feb. 11, 2015).

Sometime before February 2012, the developers (“KB”) of a housing project located in Northern California hired Norcraft to perform cabinet work.  Norcraft was insured under commercial general liability insurance policies issued by Travelers, which extended additional insured coverage to KB for liability arising out of Norcraft’s work.  In February 2012, homeowners sued KB for construction defects including defects in Norcraft’s work (the “underlying lawsuit”).  Travelers agreed to defend KB in that lawsuit after receiving a copy of Norcraft’s subcontract with KB – which Travelers did not receive until almost eight months after the underlying plaintiffs filed their lawsuit against KB – and appointed defense counsel to do so.  KB objected to the law firm Travelers appointed to defend them because they claimed it was “ethically conflicted from representing [KB] since it had represented parties adverse to [KB] in other cases pertaining to similar issues as the [underlying lawsuit].”

Facing KB’s objection to the appointed counsel, Travelers sought a declaration that KB’s objection was a “material breach of [Travelers’] policies and of the implied covenant of good faith and fair dealing.”  KB counterclaimed arguing that Travelers “did not intend to provide [KB] with an immediate, full, complete, and conflict-free defense” because Travelers knew about the appointed law firm’s alleged conflicts.  The parties cross-moved for summary judgment.

First addressing KB’s claim that Travelers did not “immediately” defend them in the underlying lawsuit, the court concluded that Travelers’ duty to defend was not triggered until it received all relevant information to determine the existence of coverage.  In that regard, the court noted that Travelers first received that information when it received a copy of Norcraft’s subcontract with KB and agreed to defend approximately one week later.

The court next addressed KB’s argument that Travelers did not provide it with a “complete” defense.  KB claimed that Travelers’ defense was not “complete” because it extensively reserved its rights to, among other things, withdrawing its defense if it later determined there was no coverage available under its policy.  The court concluded that this argument failed because KB did not explain why Travelers’ reservation of rights violated its duty to defend.

KB also argued that Travelers improperly “entered into a secretly negotiated settlement agreement” with the underlying plaintiffs that resolved their claims arising out of Norcraft’s work.  Rejecting KB’s argument that this violated Travelers’ duty to defend, the court wrote:

Since it is undisputed that [Travelers] had the duty to defend, [Travelers] had the right to control settlement negotiations of the covered claims without [KB’s] participation.  That [Travelers] settled only the claims arising out of the work of Norcraft does not make the settlement improper, nor does it indicate that [Travelers] further its own interests, and [KB] have not shown that it experienced increased defense fees and costs – outside of what it would have otherwise incurred – due to [Travelers’] withdrawal from the [underlying lawsuit].

Ultimately, the court concluded that, because Travelers “fulfilled its contractual duty to defend [KB] against all claims arising out of the work of Norcraft, . . . [Travelers] did provide a complete defense.”  And because it found that Travelers satisfied its duty to provide KB with an “immediate” and “complete” defense, the court found that Travelers was entitled to appoint counsel to defend KB in the underlying lawsuit.

Cannonball! CGL Policy Does Not Cover Pool Contractor for Subcontractor’s Negligence

Tuesday, October 7th, 2014

By Jeffrey Dillon, Sedgwick New York

In Standard Contractors, Inc. v. National Trust Ins. Co., Civil Action No.:7:14-cv-66-HL, the U.S. District Court for the Middle District of Georgia recently granted a commercial general liability insurer’s motion to dismiss a contractor’s coverage action on the ground that the policy’s “Contractors Errors and Omissions” coverage applied only to property damage to the contractors’ work arising from the contractor’s own negligence, not that of its subcontractor.

The contractor sought coverage for the costs it incurred to repair damage to a pool facility it was hired to renovate. The contractor alleged that the damage to the pool and surrounding areas arose from the faulty workmanship of its subcontractor, which allegedly deviated from the design plan by failing to include essential parts and installing an improperly sized component.

In relevant part, the subject policy’s Contractors Errors and Omissions coverage applied to “property damage” to the contractor’s work “due to faulty workmanship, material or design….”  However, in order for coverage to apply, the damages must have resulted from the contractor’s negligent act, error or omission while acting in its “business capacity as a contractor or subcontractor.”  The policy specifically exempted from this coverage “[a]ny liability for ‘property damage’ to ‘your work’ if the damaged work or the work of which the damages arises was performed on your behalf by a subcontractor.”

The court ruled that the exemption prohibited the contractor’s claim for coverage, which the court found to arise solely from the negligent work of its subcontractor.  The court rejected the contractor’s argument that an exception to a policy exclusion, which appeared to extend coverage to damages arising out of work performed on the contractor’s behalf by a subcontractor, demonstrated that coverage attached.  The court found that the more specific and limited language of the coverage grant prevailed over the more broadly inclusive language of the exception to the policy exclusion.



Insured Not Justified in Ignoring Claims-Made-and-Reporting Requirements

Friday, August 8th, 2014

By Beth Yoffie, Sedgwick Los Angeles

An insured’s attempt to circumvent the claims-made-and-reporting requirements of its professional liabilty policy, by arguing that the doctrine of promissory estoppel applied, was thwarted when a court ordered summary judgment in favor of the insurer on grounds that there was no clear and unambiguous promise by the insurer, and no justifiable reliance by the insured.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp., United States District Court, C.D. California, No. CV 13-07129-RGK (VBKx) (July 7, 2014).

Plaintiff Hamman-Miller-Beauchamp-Deeble, Inc. (HMBD), an insurance broker, received two letters in 2010 from an attorney claiming that his client had sustained damages as a result of HMBD’s negligence.  The attorney asserted that HMBD improperly advised the client that a health insurance policy it sold her would cover treatment from a non-contracted provider.  HMBD waited until it was served with a lawsuit two years later to provide notice of the claim to its Insurance Professionals Errors and Omissions Liability insurer.  General Insurance Company of America (General) denied coverage on the basis that (1) HMBD was aware of the accusation of negligent services prior to the inception of the policy; and (2) the claim was not both made against and reported by HMBD while the policy was in effect. HMBD sued General for breach of contract, bad faith and promissory estoppel.

In opposing General’s summary judgment motion, HMBD argued that the demand letters did not constitute a “Claim” triggering its duty to report.  The Court disagreed. First, the letter informed HMBD that it was “legally responsible for … damages” and thus contained a demand for damages. It also informed HMBD that the damages were the result of “negligence” and, therefore, alleged a wrongful act arising out of HMBD’s services.  The Court further found that, even if the letters were not “Claims,” the Policy would not provide coverage because HMBD knew of the wrongful act giving rise to the lawsuit and/or had a basis to reasonably anticipate that the lawsuit would be filed before the policy incepted. 

In its promissory estoppel claim, HMBD asserted that, in handling a different HMBD claim in 2008,  General’s claim representative told HMBD’s president that “he probably didn’t have to put General on notice of the Temple matter unless and until a lawsuit was filed.”   The Court found the alleged statement did not constitute a clear and unambiguous promise supporting promissory estoppel.  It also found that HMBD’s reliance on the alleged statement was unjustified as a matter of law when the parties entered a new insurance contract with contrary terms.

Prior Publication Precludes Coverage for Advertising Injury

Wednesday, July 23rd, 2014

By Daniel Bryer, Sedgwick New York

In Street Surfing, LLC v. Great American E&S Ins. Co., 752 F.3d 853 (9th Cir. 2014), the court held that the prior publication exclusion precluded coverage to Street Surfing, LLC (“Street Surfing”) for an underlying lawsuit alleging Street Surfing improperly used a third party’s advertising idea.

Great American E&S Insurance Company (“Great American”) issued two consecutive general liability policies to Street Surfing covering personal and advertising injury liability.  The policies specifically excluded (i) prior publication, (ii) copyright and trademark infringement (the “IP Exclusion”) and (iii) advertising injury arising out of any actual or alleged infringement of intellectual property rights (the “AI Exclusion”).

In June 2008, Street Surfer was sued by Ryn Noll (“Noll”), who owned the registered trademark “Streetsurfer,” claiming trademark infringement, unfair competition and unfair trade practices under federal and California law.  Street Surfer submitted a claim for coverage to Great American and tendered Noll’s complaint.  Great American denied coverage, citing the IP Exclusion and the AI Exclusion.

Street Surfer brought a declaratory judgment against Great American seeking defense and indemnification for the Noll action.  Affirming the district court, the Ninth Circuit held that the prior publication exclusion relieved Great American of its duty to defend Street Surfing in the Noll action because the extrinsic evidence available to Great American at the time of tender conclusively established: (1) that Street Surfing published at least one advertisement using Noll’s advertising idea before coverage began; and (2) that the new advertisements Street Surfing published during the coverage period were substantially similar to that pre-coverage advertisement.

The policies’ prior publication exclusion exempted from coverage “‘[p]ersonal and advertising injury’ arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”  The straightforward purpose of this exclusion, the court ruled, was to “bar coverage” when the “wrongful behavior . . . beg[a]n prior to the effective date of the insurance policy.”

In the context of advertising injury coverage, an allegedly wrongful advertisement published before the coverage period triggers application of the prior publication exclusion, barring coverage of injuries arising out of re-publication of that advertisement, or any substantially similar advertisement, during the policy period, because such later publications are part of a single, continuing wrong that began before the insurance policy went into effect.

The test, then, is whether reuse “of substantially the same material” occurred.  In making this determination, the court focused on the relationship between the alleged wrongful acts “manifested by those publications,” holding that a “post-coverage publication is ‘substantially similar’ to a pre-coverage publication if both publications carry out the same alleged wrong.”  Focusing on the alleged wrongful acts fulfills the prior publication exclusion’s purpose of barring coverage when “the wrongful behavior had begun prior to the effective date of the insurance policy.”

Lights Out for Policyholders Seeking Business Interruption Coverage Due to Loss of Electricity

Monday, May 19th, 2014

By Alex Shilliday, Sedgwick Dallas

Super Storm Sandy caused widespread power outages throughout the New York metropolitan area in late October 2012, rendering it impossible for many companies and firms to conduct business.  In Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., Civil Action No. 13-CV-2177 (S.D.N.Y. Apr. 24, 2014), a law firm with an office in New York, NY purchased a property insurance policy that included coverage for loss of business income and extra expense.  The policy provided coverage due to a business interruption “caused by or result[s] from direct physical loss or damage by a covered peril …” to the covered premises. On October 29, 2012, with the storm bearing down on New York City, the area’s electrical power servicer preemptively shut off the power to three utility service networks to preserve its equipment in the event of flooding.  The power interruption affected the law firm’s building, essentially closing it for five days. The firm filed a business interruption claim under its property policy, which the insurer denied because the law firm did not suffer a covered loss under the policy, and the law firm subsequently filed suit.

On the parties’ motion and cross-motion for summary judgment, the Southern District of New York held that preventive power outages rendering an office building unusable did not constitute “direct physical loss or damage” to the covered premises and, therefore, did not trigger coverage for loss of business income and extra expense under the property insurance policy.  The district court noted that a “direct physical loss or damage” to the covered premises was a condition precedent to coverage under the policy.

The law firm had argued that “direct physical loss or damage” did not require actual structural damage; rather, there only needed to have been a change to the covered premises from an initial satisfactory state into an unsatisfactory state caused by some external event.  The firm relied on case law from other jurisdictions, where courts applying other states’ laws found that an external event (such as an invasion of noxious or toxic gases, contamination of well water, and threat of imminent rockfall) rendering the premises unusable and uninhabitable constituted a “direct physical loss or damage” despite not being tangible, structural, or even visible. The district court distinguished those cases because each involved the closure of a building due to either a physical change for the worse, or a newly discovered risk to the physical integrity of the premises.  Conversely, the law firm’s building was closed after the decision was made to preemptively shut off power to preserve equipment at the power supply and distribution centers. The district court reasoned that the words “direct” and “physical” modified the phrase “loss or damage” and, therefore, connote a need for actual, demonstrable harm of some form to the premises in order to trigger coverage. The court found that the “forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure,” did not constitute a “direct physical loss or damage” to the premises.  The district court held that the insured law firm failed to meet its burden of showing that the policy covered its losses and, therefore, granted the insurer’s motion for summary judgment and dismissed the case with prejudice.

The court’s holding reminds us that the phrase “direct physical loss or damage” in a property insurance policy should not be read so broadly as to include claims regarding mere loss of use of premises.  This case reinforces the requirement that there be a direct physical change for the worse to the premises, or a newly discovered risk to the physical integrity of the premises, in order to trigger loss of business income and extra expense coverage.  Without such “direct physical loss or damage” to the covered premises, the insured cannot meet its burden of proof to establish coverage.

Virginia Federal Court Allows Recoupment by Insurer – Where Guilty Pleas Triggered Coverage Exclusions

Friday, May 2nd, 2014

By Christina Van Wert, Sedgwick San Francisco

In Protection Strategies, Inc. v. Starr Indemnity & Liability Co., Civil Action No. 1:13-cv-00763 (E.D. Va. Apr. 23, 2014), the United States District Court for the Eastern District of Virginia granted Starr Indemnity & Liability Company’s (“Starr”) motion for summary judgment on its claim for recoupment of all funds it had advanced to Protection Strategies, Inc. (“PSI”) for its defense of an investigation by the NASA Offices of the Inspector General (“NASA OIG”).  The court concluded that, in the wake of the guilty pleas by executives of PSI, the NASA OIG investigation triggered certain exclusions in PSI’s directors and officers liability insurance policy.

PSI, a global security management and consulting company that did business with NASA, purchased from Starr a form of directors and officers liability coverage that covered individuals and the company itself.  In January 2012, during the coverage period, PSI received a subpoena from the NASA OIG, and a search and seizure warrant relating to PSI’s alleged violations of various false statement and fraud provisions of the U.S. Criminal Code.  The NASA OIG subsequently executed a search of PSI’s headquarters.  Several months later, the U.S. Attorney for the Eastern District of Virginia sent a letter to PSI indicating that it was investigating PSI for civil liability in connection with its participation in the Small Business Administration (SBA) Section 8(a) program.

PSI notified Starr of the NASA OIG investigation and demanded payment of its defense costs.  Starr initially took the position that the investigation did not constitute a “claim” under the policy, which was rejected by the district court.  Thereafter, Starr issued a reservation of rights letter and began reimbursing PSI for the defense costs it incurred in indemnifying its officers, specifically four executives who were the primary targets of the NASA OIG investigation.  The NASA OIG investigation continued through 2012 and, in 2013, the four PSI executives entered guilty pleas, each stipulating that he knowingly and willfully defrauded the U.S. government.

PSI and Starr filed cross-motions for summary judgment.  Starr contended that the guilty pleas triggered four exclusions in the policy, and that it was entitled to recoup the amounts it had advanced for the defense fees.  Three of the exclusions were incorporated into the directors and officers liability coverage section of the policy, Exclusion 3(a) (“Profit Exclusion”), Exclusion 3(b) (“Fraud Exclusion”), and Exclusion 3(d) (“Prior Knowledge Exclusion”).  The fourth exclusion was based on the Warranty and Representation Letter attached to the policy, wherein PSI represented that “[n]o person or entity proposed for insurance under the policy referenced above has knowledge or information of any act … which might give rise to a claim(s), suit(s) or action(s) under such proposed policy.”  The letter further stated that, if any such “knowledge or information exists, then … any claim(s), suit(s) or action(s) arising from or related to such knowledge or information is excluded from coverage.”

In reviewing the evidence, the district court concluded that the policy’s exclusions applied and acted as a complete bar to coverage for the investigation of PSI and its officers.  The district court found that the personal profit and fraud exclusions “unambiguously” applied, as the guilty pleas established that the executives knowingly, intentionally and improperly gained an advantage and illegal remuneration because of their fraudulent activities.  The district court found that the guilty pleas also triggered the prior knowledge exclusion as the pleas showed that each of the officers had knowledge when the policy incepted of an ongoing scheme to defraud the government.  The district court further found that the exclusion in the warranty letter had been triggered as based on PSI’s “material misrepresentation” that no person had knowledge of facts that might give rise to a claim.  The district court concluded that, because the entirety of the defense costs advanced fell under the exclusions in the policy, Starr was entitled to recoupment.


So A Man Walks Out of a Bar . . . Applying the Liquor Liability Exclusion to a Drunken Pedestrian

Wednesday, April 30th, 2014

By Jason Chorley, Sedgwick San Francisco

In State Automobile Mutual Ins. Co. v. Lucchesi, ___ Fed. Appx. ___, 2014 WL 1395690 (3d Cir. Apr. 11, 2014), the U.S. Court of Appeals for the Third Circuit upheld summary judgment for State Auto and concluded that a liquor liability exclusion in a general liability policy precluded coverage for bodily injuries sustained by a bar patron hit by a taxi after leaving the bar.

State Auto issued a commercial general liability policy to the owners of Champs Sports Bar & Grill, located in State College, Pennsylvania.  The policy contained a liquor liability exclusion precluding coverage for “damages” an insured became obligated to pay because of “bodily injury” for which the insured was held liable because of “causing or contributing to the intoxication of any person,” “furnishing of alcoholic beverages to a person … under the influence of alcohol,” or violating a “statute … relating to the sale, gift, distribution, or use of alcoholic beverages.”

One night, Clinton Bonson was drinking at Champs and left the bar on foot.  While crossing a major thoroughfare, he was hit by a speeding taxi and seriously injured.  Bonson sued Champs, its owner, and two former bartenders, alleging that Champs was liable for his injuries because it:  (1) failed to cut Bonson off, which enhanced his degree of intoxication; and (2) allowed Bonson to leave the bar intoxicated.  Although State Auto initially provided a defense subject to a reservation of rights, it filed a declaratory relief action in Pennsylvania federal court and sought summary judgment based on the liquor liability exclusion.  Champs conceded that the liquor liability exclusion applied to the bar’s furnishing of alcohol to Bonson in excess, but argued that it did not apply to Bonson’s claim that Champs let Bonson leave the bar while intoxicated.  The district court granted summary judgment in favor of State Auto, noting that the claims were inextricably intertwined, and that the sole basis for the claims was the service of alcohol.

On appeal, the Third Circuit noted that every claim in Bonson’s complaint sought damages for the bodily injury he suffered when he was hit by the taxi.  Rejecting the same argument Champs made before the district court (i.e., that the exclusion did not apply to Bonson’s claim that he was allowed to leave the bar while intoxicated), the court stated that “if coverage of the former claim is excluded, so is coverage of the latter, as both claims see ‘damages because of’ the exact same ‘bodily injury.’”

“Related Acts” Reduce Insurer’s Exposure by Half

Tuesday, April 22nd, 2014

By John Na, Sedgwick Los Angeles

The Eighth Circuit Court of Appeals recently held that, under Minnesota law, multiple wrongful acts by a financial advisor to four plaintiffs are “interrelated” and “logically connected” within the meaning of the policy’s “Interrelated Wrongful Acts” limitation.  In Crystal D. Kilcher v. Continental Casualty Co., 2014 WL 1317296 (8th Cir. April 3, 2014), the Eighth Circuit reversed the district court’s ruling that the policy’s $1 million coverage limit for a single claim did not apply, instead finding that the insured’s wrongful acts in selling life insurance policies and unsuitable investment products to the plaintiffs constituted a single claim, reducing Continental’s exposure.

The four plaintiffs in Kilcher were clients of financial advisor Helen Dale of Transamerica Financial Advisors, Inc.  Continental insured Transamerica and Dale under a claims made, professional liability policy providing $1 million in coverage per claim up to an aggregate amount of $2 million.

Starting in 1999, Dale advised each plaintiff to purchase whole life insurance policies.  In addition, she instructed plaintiffs to invest in various annuities, some with surrender charges for early withdrawals.  In 2007, plaintiffs learned their investments and portfolios were not suitable for their age, background, and investment goals.  Plaintiffs ultimately consolidated their claims and filed a single suit against Dale and Transamerica alleging breach of fiduciary duty, negligent misrepresentation, fraudulent misrepresentation, fraud, unsuitability, and violation of state securities laws. In January 2012, the parties entered into a settlement wherein Continental agreed to pay $1 million to settle plaintiffs’ claims against Dale, and submit to the district court for a ruling on whether plaintiffs’ claims constituted a single claim or multiple claims.

The policy provides that multiple claims “involving the same Wrongful Act of Interrelated Wrongful Acts shall be considered as one Claim.”  The policy defines “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”  The district court did not find Dale’s wrongful acts logically or causally connected to one another, holding that plaintiffs submitted at least two different claims because Dale’s wrongful acts included not only selling life insurance policies but also unsuitable annuities as well.  Continental appealed the district court’s ruling.

The Eighth Circuit reversed the district court’s ruling, holding that plaintiffs’ claims are interrelated as they are logically connected to a common set of “fact, circumstance, situation, transaction or event.”  The court noted that, although Dale may have made different misstatements, omissions, or promises to each plaintiff on different dates, the analysis does not stop there.  The court stated that a logical connection exists between all of Dale’s wrongful acts, such as her desire to earn commissions by advising plaintiffs to purchase life insurance policies and investments not suitable for them.  In addition, the court found that the plaintiffs are all young, unsophisticated investors who presented the same opportunity to Dale: an investor who trusted in Dale to act in his or her best interest.  The court refused to engage in “micro-distinguishing” between the different acts involved in selling different types of life insurance policies and annuities, instead finding that they are all logically connected by Dale’s  instructions that plaintiffs make inappropriate purchases and unsuitable investments.

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