Archive for the ‘Professional Liability’ Category

“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.

Gotham Insurance Company Finds Dark Knight

Monday, October 28th, 2013

By Smita Mokshagundam, Sedgwick Chicago

The United States District Court for the Middle District of Florida recently entered summary judgment in favor of Gotham Insurance Company (“Gotham”), finding no coverage for a substantial default judgment entered against its insured on the basis that the claim was not made and reported during the effective dates of the professional liability policy at issue. Lake Buena Vista Vacation Resort, L.C. v. Gotham Ins. Co., 2013 WL 5532677 (M.D. Fla. October 7, 2013).

A default judgment was entered against Coastal Title Services Inc. (“Coastal”) on claims that Coastal misappropriated deposits made by prospective purchasers of a condominium project that Coastal was developing in collaboration with Lake Buena Vista Vacation Resort L.C. (“Buena Vista”).  Two prospective purchasers filed suit against Coastal, one of its principals, Ira Hatch, and Buena Vista.  Buena Vista cross-claimed against Coastal for intentional and fraudulent conversion of the deposits.  A default judgment awarded Buena Vista $15.6 million in damages and $5.2 million in pre-judgment interest, as well as all of Coastal’s property, including any rights Coastal might have to recover under a professional liability insurance policy issued by Gotham to Coastal.

Buena Vista filed suit against Gotham to recover under the professional liability policy for the judgment it obtained against Coastal; Gotham removed the action to federal court.  The Policy provided claims made and reported coverage to Coastal for certain professional errors and omissions.  In entering summary judgment for Gotham, the district court held that the policy did not provide coverage for the $20.8 million judgment because the claim was not reported during the effective dates of the policy.  The court concluded that the notice of the claim fell “woefully short” of what was required under the policy: the notice advised only of a “possible claim”; it did not identify Buena Vista, the underlying plaintiffs, or anyone who might have or make a claim against Coastal; it did not identify the name of the project or the amount of money at issue; and, it noted nothing about the cross-claim brought by Buena Vista which gave rise to the judgment.  In addition, despite Buena Vista’s characterization of Coastal’s liability as arising out of Coastal’s failure to supervise, as opposed to the thefts of the deposits, the district court held that coverage was precluded because the “theft of the escrow funds was the core of the allegations set forth in the cross-claim.”

Seventh Circuit Confirms Viability of Claims Made Defense in Errors and Omissions Policy Dispute

Friday, April 12th, 2013

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.

Business Pursuits Exclusion of a Professional Liability Policy Found To Preclude Coverage for the Insured Law Firm and Its Attorney

Friday, February 22nd, 2013

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.

English Court of Appeal Decision on Multiple Causes and Mitigation of Loss

Wednesday, January 9th, 2013

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.

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