Archive for the ‘Professional Liability’ Category

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.

Offshore Professional Risk in 2014

Wednesday, April 16th, 2014

By Mark Chudleigh, Chen FoleyNick Miles, and Alex J. Potts, Sedgwick Bermuda

From the Cayman Islands to Hong Kong, there’s a lot going on in the world of offshore litigation and law reform. In this report, Sedgwick’s Offshore Professional Risks practice offers a global perspective on professional risk, with unique expertise and solutions valuable to providers and users of offshore services and insurance carriers operating in offshore jurisdictions, including Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, and the Isle of Man.

Learn more about new laws changing the future of this business, collective investment schemes, issues relating to cybercrime and cyberliability, and the dangers of being an offshore lawyer.

 Read the full news report here.

New York’s Highest Court Rappels Down From Possible Major Shift in Insurance Law in K2 Decision

Tuesday, February 18th, 2014

By Katelin O’Rourke Gorman and Greg Lahr, Sedgwick New York

Today, the New York Court of Appeals elected to adhere to precedent in holding that an insurer is indeed allowed to rely on its policy exclusions when faced with a request for indemnity, even if the insurer was not correct in deciding that it did not have a duty to defend. K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., — N.Y.3d –, 2014 WL 590662 (N.Y. Feb. 18, 2014) (“K2-II”). The K2-II decision follows reargument of an earlier decision by the Court of Appeals issued on June 13, 2013. 21 N.Y.3d 384, 971 N.Y.S.2d 229 (N.Y. June 11, 2013) (“K2-I”).

As background, legal malpractice claims had been brought against American Guarantee & Liability Insurance Company’s insured, Jeffrey Daniels. American Guarantee determined that its legal malpractice policy did not cover the claim and, therefore, it did not owe a defense to Daniels, although the court decided otherwise. K2-II at 2. In the underlying malpractice action, the court entered a default judgment against Daniels. Daniels then assigned his rights under the American Guarantee policy to plaintiffs. Plaintiffs, in turn, brought suit against American Guarantee seeking coverage for the judgment entered against Daniels. American Guarantee maintained it had no obligation to provide indemnification for the judgment because “the loss sought was not covered[.]” K2-II at 2. The trial court disagreed with American Guarantee’s position, and granted plaintiffs’ motion for summary judgment. This determination was affirmed on two appeals, the latest under K2-I, on the basis that “American Guarantee’s breach of its duty to defend barred it from relying on policy exclusions.” K2-II at 2.

American Guarantee requested a re-hearing of the K2-I decision, which the Court of Appeals granted on September 3, 2013. Upon rehearing, the court agreed with American Guarantee, noting that the court had failed to “take account of a controlling precedent, Servidone Const. Corp. v. Security Ins. Co. of Hartford (64 NY2d 419 [1985]).” K2-II at 1-2. As a result, the Court of Appeals vacated its decision in K2-I, and reversed the Appellate Division’s order.

The Court of Appeals’ decision in K2-II is largely tied to Servidone. At issue in Servidone was whether an insurer that had breached its duty to defend would be barred from raising coverage defenses to a request for indemnification of a subsequent, reasonable settlement. There, the answer was no; the insurer would not be barred from raising potentially applicable coverage defenses. See K2-II at 2-3. In K2-I, the Court of Appeals had held that, “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” K2-II at 3 (citations omitted). In reaching today’s decision, the Court of Appeals stated that, “[t]he Servidone and K2-I holdings cannot be reconciled.” K2-II at 3. The Court of Appeals also: (1) rejected plaintiffs’ attempt to distinguish Servidone because it involved a settlement, rather than a judgment as was the case in K2; (2) stated that Lang v. Hanover Ins. Co., in which the Court of Appeals held that, “when an insurer has refused to defend its insured, it may litigate only the validity of the disclaimer,” did not apply because “the issue we now face was not presented in Lang,” i.e., “we did not consider any defense based on policy exclusions;” (3) pointed to various other jurisdictions that follow the Servidone approach; and (4) invoked the rule of stare decisis, stating that it is “strong enough” to govern this case. K2-II at 3-6 (citations omitted).

The K2-II decision will come as a relief to insurers, as the Court of Appeals potentially was going to blaze a new path for New York insurance law and significantly restrict an insurer’s ability to deny coverage under an applicable policy exclusion. The court aptly noted: “When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise.” K2-II, at 6. However, insurers should be mindful that the rule still exists in New York that, if it does not provide a defense to its insured, it may not relitigate the issues in the underlying action.

Eye on Insurance: A Look Back at 2013 and Forward to 2014

Monday, February 3rd, 2014

2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.

To view and download a PDF copy, click here.

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

Insurer’s “Premonitions” Accurate in Claim Involving Psychic Group: No Coverage for Second Suit Alleging Same Wrongful Acts as Suit Filed Prior to Policy Inception

Wednesday, November 6th, 2013

By Kathryn M. Metz, Sedgwick Chicago

In Zodiac Group, Inc. v. Axis Surplus Ins. Co., _____ Fed. Appx. _____, 2013 WL 5718439 (11th Cir. (Fla.) Oct. 22, 2013), the United States Court of Appeals for the Eleventh Circuit considered whether facts alleged in an underlying complaint filed in federal court, constituted the “Same Wrongful Act” under a professional liability policy as facts that were alleged in a prior complaint filed in Florida state court.  The Eleventh Circuit determined that the federal court complaint was based on the Same Wrongful Acts as the state court complaint, and thus there was no coverage under the policy because the state court complaint was filed prior to the inception of the policy.

The Zodiac Group was insured under consecutive, annual claims-made professional liability policies issued by Axis Surplus Insurance Company, beginning with the policy period October 1, 2008 to October 1, 2009.  In November 2001, the Zodiac Group entered into an agreement wherein Linda Georgian, a renowned psychic and co-host of the Psychic Friends Network, agreed to endorse the Zodiac Group’s services.  The endorsement agreement ended in March 2007.  In April 2008, Georgian sued the Zodiac group in Florida state court, alleging that the Zodiac Group improperly used Georgian’s name and likeness to imply that Georgian continued to endorse its services despite the termination of the endorsement agreement.  The state court suit was dismissed in November of 2009 for lack of prosecution.  Georgian then sued the Zodiac Group and its owners in federal court in January 2010.  Georgian’s federal court complaint contained allegations similar to those in her state court complaint.

Zodiac Group tendered the federal court complaint to Axis for coverage and defense, but Axis declined the tender on the basis that the claims in the complaint were “first made” before the October 2008 policy incepted.  The Eleventh Circuit agreed with Axis and rejected the Zodiac Group’s argument that the federal court complaint alleged separate wrongful acts because it named new defendants.  Instead, the court concluded that, because the policy language treated all wrongful acts related by common facts, circumstances, transactions, events, and/or decisions as one “Wrongful Act” without limitation with respect to the actor, the prior state court complaint and the later federal court complaint alleged the same single Wrongful Act, and the claim was first made at the time of the state court complaint, prior to inception of the first policy.

Sedgwick Speaks
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. Click here to see a list of upcoming Sedgwick events and scheduled speaking engagements of our attorneys and here to see prior speaking engagements of our attorneys.

Our Firm
Sedgwick provides trial, appellate, litigation management, counseling, risk management and transactional legal services to the world’s leading companies. With more than 370 attorneys in offices throughout North America and Europe, Sedgwick's collective experience spans the globe and virtually every industry. more >

Search
Subscribe
Subscribe via RSS Feed
Receive email updates: