In New York, One Priest’s Multiple Acts of Sexual Abuse on a Minor Constitutes Multiple Occurrences

May 8th, 2013

By Diana (Tremback) Karnes, Sedgwick Chicago, and Gregory Lahr, Sedgwick New York

Yesterday, New York State’s highest court, for the “first time,” ruled on the meaning of “occurrence” in the context of multiple incidents of sexual abuse of a minor by a priest that spanned several years and policy periods.  In Roman Catholic Diocese of Brooklyn v. National Union Fire Insurance Company, 2013 NY Slip Op 03264 (May 7, 2013), the New York Court of Appeals found that, in the context of sexual abuse of a minor by a priest, multiple acts of sexual abuse constitute multiple occurrences. 

The underlying action alleged that a Diocese priest repeatedly molested a minor at different locations over a period of six years.  The Diocese settled the underlying action, and then sought settlement reimbursement from one of its general liability insurers, National Union.  National Union disclaimed coverage, prompting the Diocese to file a declaratory judgment action. 

In the declaratory judgment action, National Union filed a summary judgment motion arguing that each incident of sexual abuse constituted a separate occurrence that was subject to a separate self-insured retention (SIR), and the settlement should be paid pro rata across each of the implicated policies.  The trial court denied the motion, and on appeal the Appellate Division reversed.  This appeal ensued.

As a “threshold matter,” the Court of Appeals determined that National Union did not waive the issues involving SIR exhaustion and allocation under NY Insurance Law § 3420(d) because they are not defenses used to disclaim coverage.  Because there was no statutory duty to disclose a liability limitation, National Union was not barred from arguing the application of the SIR and allocation.

The Court of Appeals then turned to the central issue in the case, stating that this was the “first time” it was addressing the meaning of “occurrence” in this context.   The court’s analysis began by reviewing the policy, noting that “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  It found no policy language evincing an intent to aggregate separate incidents into a single occurrence.  Consequently, the court applied the “unfortunate event” test.  In doing so, the court concluded that the multiple incidents of sexual abuse were not part of a singular causal connection, and lacked the requisite temporal and spatial closeness to join them into a single occurrence.  The court also indicated that the “continuous or repeated exposure” language in the definition of occurrence was more likely designed to deal with environmental losses, rather than “priests and choirboys.”  The court held that the Diocese must exhaust a separate SIR for each occurrence.

The instant case provides guidance on when multiple incidents will be considered multiple occurrences under New York law.  Interestingly, in his dissent, Judge Graffeo posits that the multiple incidents constitute a single occurrence because they stem from the repeated or continuous exposure of the child to the same negligently hired and supervised priest.  Judge Graffeo further writes that the analysis adopted by the plurality “suggests that each act of sexual abuse involving the same victim constitutes a separate occurrence.”  Despite Judge Graffeo’s reading of the plurality opinion, it would seem possible that multiple incidents could be aggregated into a single occurrence under a different set of facts and with different policy language.  Time will tell.

New Jersey Passes Law Requiring Summary of Homeowners Policy

May 7th, 2013

By Daniel Pickett, Sedgwick New York

On May 6, 2013, the New Jersey state legislature approved Assembly Bill A-3642, which now becomes Public Law 2013, c.53, requiring homeowners insurance policies delivered or renewed in New Jersey to contain a one-page summary of the policy which identifies any notable coverages or exclusions.

Under the prior law, when a homeowners insurance policy was issued or renewed, insurers were required to provide a consumer information brochure to the insured which included certain information about the National Flood Insurance Program as well as the insurer’s hurricane deductible program. The amended law, which was introduced in the wake of Super Storm Sandy, now expressly requires the brochure to be written in a manner that is simple, clear, understandable and easily readable. It also expands the contents of the brochure to include the one-page summary. The law, which goes into effect in 90 days, leaves it to the New Jersey Commissioner of Banking and Insurance to determine which coverages and exclusions are to be considered “notable”.

The law explicitly provides that the summary is not to be considered a replacement for the terms of the policy or as having the effect of altering coverage terms. Additionally, it provides that the summary will not confer new or additional rights beyond those expressly provided by the policy.  Indeed, it requires that the summary expressly state that it is only provided to the homeowner as a guide to understanding the terms of the policy. It is anticipated that this should thwart any attempts by policy holders to assert that the summary is evidence that coverage is broader or different from that provided for by the terms, conditions and exclusions of the policy.

New York Appellate Division Affirms Zoning Ordinance Banning Fracking

May 6th, 2013

By Martin L. Eide, Sedgwick New York

The Sedgwick Insurance Law Blog has been following decisions related to hydraulic fracturing for potential impacts on insurance coverage issues.  Although not involving coverage, the New York Supreme Court, Appellate Division, recently upheld two zoning ordinances passed by Dryden and Middlefield, New York in 2011, prohibiting the exploration and production of natural gas and petroleum. These decisions are victories for local governments seeking to ban hydraulic fracturing (“fracking”) before the current statewide moratorium against fracking is lifted.

In Matter of Norse Energy Corp. USA, v. Town of Dryden, et al., – AD3d –, 2013 NY Slip Op 03145 (3rd Dep’t May 3, 2013) and Cooperstown Holstein Corp., v. Town of Middlefield, – AD3d –, 013 N.Y. Slip Op. 03148 (3rd Dep’t May 2, 2013)(decided based upon the analysis in Norse Energy), the Appellate Division, Third Department, affirmed two February 2012 Supreme Court decisions granting summary judgment in favor of two towns that passed zoning ordinances banning natural gas and petroleum production operations.  The ordinances in question were passed in 2011, and subsequently challenged by natural gas exploration companies alleging that the ordinances were preempted by New York’s Oil, Gas and Solution Mining Law (OGSML) which, among other things, regulates the production and storage of oil and natural gas. The trial courts disagreed with the production companies’ preemption arguments, and granted cross-motions for summary judgment in favor of the towns because the zoning ordinances in question only limit the use of land and do not attempt to regulate the manner in which oil and gas is extracted, as regulated in New York under the OGSML.

On appeal, the Third Department affirmed for the same fundamental reasons. First, the OGSML does not expressly preempt the local zoning regulations because the OGSML’s preemption clause is limited to the gas, oil and solution mining industries generally, but not the use of land which is under the police power of local municipalities. This is supported by the OGSML’s legislative history and the Court’s interpretation of the “plain meaning” of the preemption clause. Secondly, implied or conflict preemption does not apply here, because the OGSML’s provisions regulating the location of drilling and extraction processes to maximize efficiency and avoid wasting natural resources does not include land use and zoning restrictions. Thus, the local zoning ordinances were reasonable uses of the towns’ police powers.

We expect a further appeal of this issue, and will be monitoring these matters for further developments.

Please click here for other recent posts on fracking.

Costs and Attorney Fees Awarded In the Same Action in Idaho

May 6th, 2013

By Christina Y. Ahn, Sedgwick San Francisco

In Employers Mutual Casualty Co. v. Donnelly, No. — P.3d —-, 2013 WL 1693661 (Idaho Apr. 19, 2013), a majority of the Idaho Supreme Court affirmed a declaratory judgment action decision that an insurer was required to pay costs and attorneys’ fees taxed against the insured in the underlying action, while affirming that the awarded damages were excluded from coverage.  Additionally, the majority affirmed that the plaintiffs in the underlying action were not entitled to attorneys’ fees in the declaratory judgment action under the relevant statutes.

David and Kathy Donnelly hired Rimar Construction, Inc. (RCI) to repair and remodel their home.  The Donnellys filed suit against RCI alleging various causes of action, including breach of contract and breach of warranties, and damages.  RCI had a commercial general liability policy issued by Employers Mutual Casualty Company (EMC).

EMC filed a declaratory judgment action in the state district court to establish that it did not have a duty to pay any damages claimed or awarded to the Donnellys in the underlying action.  The declaratory judgment action was stayed pending the verdict in the underlying action; the Donnellys were ultimately awarded $128,611.55 in damages and $296,933.89 in costs and attorney fees against RCI.  Thereafter, the district court entered summary judgment in the declaratory judgment action, concluding that although the policy did not afford coverage for the Donnellys’ damages because they were contractual, the policy afforded coverage for the costs and attorneys’ fees.  The district court denied the Donnellys’ attorneys’ fees in the declaratory judgment action.  Both EMC and the Donnellys appealed.

The majority of the Idaho Supreme Court affirmed the district court’s decision with respect to the attorneys’ fees and court costs taxed against RCI.  The court reasoned that EMC’s duty to pay stemmed from its duty to defend as articulated in the supplementary payments section of the policy.  Because the Donnellys alleged damages that implicated the applicable provisions of the policy, EMC was obligated to pay all costs and attorneys’ fees awarded against RCI in the underlying action.

The majority also affirmed the district court’s decision regarding the damages.  It concluded that the damages awarded for breach of implied warranty of workmanship were contractual, and the policy expressly excluded contractual damages.  Thus, EMC did not have a duty under the policy to indemnify RCI for the damages awarded to the Donnellys.

The majority went on to find that the district court did not err in denying attorneys’ fees to the Donnellys under Idaho Code §§ 12-120(3) and 41-1839.

The concurring opinion only addressed the dissent’s arguments.  The dissent primarily found that the policy did not afford coverage for costs and attorneys’ fees in cases in which no covered damages were awarded against the insured, and referred to the reasonable expectations of the insured for payment.  However, the concurring opinion disagreed with the dissent’s interpretation based on the clear and unambiguous wording of the policy, and further noted that the insured’s reasonable expectations could not have altered the wording.

Florida Court Reconfirms that Insurance Policies May be Voided Based on an Insured’s Innocent Misrepresentations

May 2nd, 2013

By Aaron F. Mandel, Sedgwick New York

Earlier this week, the Florida District Court of Appeal once again concluded that, where an insurance policy does not impose a stricter standard for voiding insurance policies based on misrepresentations than section 627.409 of the Florida Statutes (“Section 627.409”), Section 627.409 permits an insurer to do so based on even innocent misrepresentations if the insurer demonstrates that it would not have issued the policy had it known the truth.

In Universal Property & Casualty Insurance Co. v. Johnson, No. 1D12-0891, 2013 WL 1809639 (Fla. Dist. Ct. App. 1st Dist. Apr. 30, 2013), a fire destroyed the Johnsons’ home.  Universal insured the home, and its policy contained a condition (the “Voidance Condition”) providing that the entire policy would be void if, before or after a “loss,” the insured:  (1) “intentionally concealed or misrepresented any material fact or circumstance”; (2) engaged in fraudulent conduct; or (3) “made false statements.” Universal investigated the claim and denied coverage based on a misrepresentation in the Johnsons’ policy application.  Specifically, the Johnsons answered “no” when asked if either of them had been convicted of a felony in the last 10 years, but Mrs. Johnson had actually been convicted of five felonies in July 1998.  It was later determined that this misrepresentation was innocent in that it was based on a misunderstanding as to the actual date when Mrs. Johnson had been convicted, and that Universal would not have issued the policy had it known the truth about Mrs. Johnson’s criminal history.

The Johnsons sued Universal for coverage and Universal counterclaimed, arguing that it was entitled to void the policy pursuant to Section 627.409.  The Johnsons claimed that Universal could not rely on Section 627.409 to void the policy because the Voidance Condition imposed a more stringent standard than Section 627.409 – i.e., it required that the misstatements be intentional in order to void the policy.  The trial court agreed, and Universal appealed.

The appellate court reversed.  Although it acknowledged that parties to insurance policies are free to contract out of the requirements of state or federal law (provided they don’t violate public policy in the process), the appellate court concluded that the Universal policy did not impose a stricter standard for voiding its policy than Section 627.409.  The court first noted that the Johnsons’ interpretation of the Voidance Condition’s third prong rendered it superfluous of the condition’s other two prongs, in violation of Florida law.  The court also rejected the Johnsons’ argument that the third prong required intent based on the Voidance Condition’s title, “Concealment or Fraud,” even though concealment and fraud require intent.  Specifically, the court reiterated its prior holding that, “headings or subheadings of a document do not dictate the meaning of the entire agreement, especially where the literal language of the heading is contrary to the agreement’s overall scheme.”

Construction Defect Coverage Quarterly

April 29th, 2013

In honor of Earth Day, which recently celebrated its 43rd birthday, the lead article in the current issue of our Construction Defect Coverage Quarterly addresses potential coverage issues implicated by green construction. We also continue the analysis of how various states define “occurrence” under liability policies, and highlight a recent opinion from a Washington federal court enforcing a broad EIFS exclusion.

Please click here to read the CDCQ and let us know if you are intrested in being placed on the mailing list for this quarterly newsletter.

Washington Federal Judge Presumes that Liability Insurer May Not Assert Attorney-Client Privilege or Work Product Protection in Bad-Faith Suit

April 19th, 2013

On April 12, 2013, Judge Richard Jones of the U.S. District Court for the Western District of Washington ruled that in a bad-faith lawsuit against a liability insurer, the judge would presume that the insurer has no attorney-client privilege or work-product protection. Judge Jones’ ruling thereby materially extended the holding of the Washington Supreme Court’s recent decision in Cedell v. Farmers Insurance, in which a 5-4 majority presumed that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad-faith lawsuit. 

Click here for the Insurance Law Blog’s previous coverage of Cedell.


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

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.

New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private Investors

April 11th, 2013

By Eryk Gettell, Sedgwick San Francisco

In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”. 

Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”).  The policy contained a “professional services” exclusion, however it did not define the words “professional services”.

The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares.  Shortly thereafter, three related class action lawsuits were brought against DLA.  DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.

Philadelphia denied coverage based on the “professional services” exclusion.  DLA sued for declaratory relief and breach of contract.

The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did.  In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.  

The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities. 

The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”. 

Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face. 


Supreme Court of Washington Holds that Insurers Are Not Entitled to Reimbursement of Non-Covered Defense Costs

April 4th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

In a 5-4 decision, the Washington Supreme Court held that an insurer may not recover defense costs incurred under a reservation of rights while the insurer’s duty to defend is undetermined.  National Sur. Corp. v. Immunex Corp., No. 86535-3 (Wash. Mar. 7, 2013).  Although not addressed by the court, the ruling likely only applies to duty to defend policies, as opposed to policies that require the insurer to reimburse defense costs.  The decision is also important because the court confirmed that insureds under duty to defend policies may recover their pre-tender defense costs, unless the insured’s late tender prejudiced the insurer.

National Surety Corporation issued excess and umbrella liability insurance policies to Immunex Corporation for the period from 1998 to 2002.  In August 2001, Immunex notified National Surety that it was under government investigation concerning its wholesale drug pricing.  Beginning in 2001, Immunex was sued in more than twenty actions for claims regarding its alleged price fixing of wholesale drugs.  In October 2006, Immunex tendered its defense of the lawsuits to National Surety.

National Surety issued its reservation of rights letter to Immunex in March 2008.  National Surety advised that, while it did not believe the litigation was covered, it still needed to complete its coverage investigation.  National Surety agreed to defend Immunex until it could obtain a judicial declaration regarding whether the litigation was covered.  National Surety advised that it would reimburse Immunex’s post-tender defense costs, but also reserved the right to recoup any defense costs if it was later determined that there was no coverage, and that National Surety was entitled to reimbursement.

In March 2008, National Surety filed a declaratory judgment action against Immunex in state court.  The trial court ruled that National Surety did not have a duty to defend, but also that National Surety was still responsible for Immunex’s defense costs through the court’s coverage ruling, subject to a set-off if the insured’s late tender was prejudicial.  Both parties appealed, and the Court of Appeals affirmed the trial court’s decision.  National Surety then appealed to the Washington Supreme Court.

The court’s analysis began with a discussion of Washington’s duty to defend principles, as well as the public policy concerns that are implicated by duty to defend policies.  The majority emphasized that, because the duty to defend is broader than the duty to indemnify, an insurer must defend its insured if a reasonable interpretation of the facts or law could result in coverage.  If the insurer is uncertain as to its duty to defend, it may defend under a reservation of rights, and seek a declaratory judgment relieving the insurer of its duty to defend.  The majority stressed that by doing so, the insurer benefits because it avoids breaching its duty to defend, as well as other potential downsides such as a bad faith finding, waiver, and estoppel.

After considering how other jurisdictions have ruled on this issue, the court sided with the minority of jurisdictions, and explained that “[disallowing reimbursement is most consistent with Washington cases regarding the duty to defend, which have squarely placed the defense decision on the insurer’s shoulders.”  The court held that an insurer cannot receive protection from bad faith claims or breach of contract without any responsibility for defense costs if there is a later determination of no duty to defend because, “[t]his ‘all reward, no risk’ proposition renders the defense portion of the reservation of rights defense illusory,” and the insured would “receive no greater benefit than if its insurer had refused to defend out right.”

The court also addressed two related issues: (1) whether National Surety was required to reimburse Immunex’s pre-tender defense costs; and (2) whether Immunex’s late tender prejudiced National Surety, such that it was relieved of any responsibility for defense costs.  With respect to the pre-tender defense costs issue, the court held that an insured under a duty to defend policy is entitled to recover its pre-tender defense costs, except where the late tender has prejudiced the insurer.  However, the court ruled that summary judgment on the issue of prejudice was inappropriate because there were disputed facts as to this issue.

The dissent criticized the majority’s sweeping determination that insurers may never recover defense costs under a reservation of rights.  The dissent argued that the court should follow the approach used by the majority of jurisdictions which looks to whether the insurer’s payment of the insured’s defense costs would unjustly enrich the insured.  The dissent also disagreed with the majority’s view that the unjust enrichment issue was “simply irrelevant,” because National Surety did not receive any “benefit” simply by complying with its duties under the law.

The Immunex decision is a significant departure from the majority of jurisdictions which allow insurers to recoup their defense costs based on equitable considerations when there is a finding of no coverage.  It is important to note, however, that the court’s decision was largely influenced by Washington’s rules concerning duty defend to defend policies.  If the policy at issue had a duty to reimburse defense costs (in which the insured controls its own defense), the court likely would have permitted the insurer to recoup its defense costs incurred under the reservation of rights.

This case is just one of a few recent Washington decisions that the Insurance Law Blog has reported on. Please click here to see posts about other recent Washington decisions impacting insurers.

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