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West Virginia Court Allows Rescission of Professional Liability Policy

In its recent decision in ALPS Prop. & Cas. Ins. Co. v. Turkaly, 2018 U.S. Dist. LEXIS 5026 (S.D. W.Va. Jan. 11, 2018), the United States District Court for the Southern District of West Virginia had occasion to consider the circumstances under which rescission of an insurance policy is permissible under West Virginia law.

ALPS insured Michael Turkaly under a series of claims made lawyers professional liability policies.  The first policy was in effect for the period September 1, 2015 to August 31, 2016, and the renewal policy became effective upon the expiration of the first policy.  Mr. Turkaly stated in his renewal application that he was unaware of any facts or circumstances that could give rise to a claim.  Two weeks later, he affirmed in writing that his answers in the renewal application remained true.  In fact, Mr. Turkaly had received a request in July 2016 to waive service of a legal malpractice lawsuit filed against him.  While he had not been served as of the date that he completed his renewal application, he had been served by the time he affirmed his answers in the renewal application.

In considering ALPS’ claim for rescission, the court observed that under West Virginia law, rescission is governed by W. Va. Code § 33-6-7, which states that misrepresentations shall not prevent recovery under an insurance policy unless the misrepresentations are fraudulent or material, or unless the insurer can demonstrate that it would not have issued the policy, or would have issued the policy on different terms, had it known the true facts.  To prevail based on fraud, the insurer is required to demonstrate specific intent to deceive.  By contrast, to prevail based on the two other grounds, the insurer need only demonstrate that the misrepresentation was “material.”  The standard for demonstrating materiality, as set forth by the West Virginia Supreme Court, is an objective analysis looking to “whether the insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.”

Applying these criteria, the court concluded that Mr. Turkaly made two misrepresentations to ALPS: the first in stating that it was not aware of circumstances that could give rise to a claim and the second in reaffirming this representation two weeks later.  The court concluded that these misrepresentations were material, reasoning:

… it is fair to conclude that a reasonable insurer would have taken alternative action in offering Michael Turkaly insurance coverage had it known that Michael Turkaly was being sued for mismanaging a trust as a trustee. A reasonably prudent insurer would consider a claim related to a lawyer’s actions as a trustee, whether or not that claim is covered by the policy, relevant to the risk and therefore material to the insurance contract providing professional liability coverage.

The court, therefore, declared the policy to be void ab initio.  As a result, ALPS had no coverage obligations to Mr. Turkaly for the underlying suit.  At the same time, ALPS was not entitled to return of defense costs it had incurred in defending Mr. Turkaly in the underlying matter.

 

 



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California Court Holds Insured’s Activities Not an Occurrence

In its recent decision in Henstooth Ranch LLC v. Burlington Ins. Co., 2018 U.S. Dist. LEXIS 1176 (N.D. Cal. Jan. 3, 2018), the United States District Court for the Northern District of California had occasion to consider whether an insured’s land restoration activities constituted an “occurrence” for the purpose of a general liability policy.

Burlington insured Henstooth, a limited liability corporation organized for the purpose of the ownership of a parcel of property that was encumbered by a conservation easement.  The easement was for the purpose of protecting the property’s natural habitat and specifically prohibited improvements and certain environmentally harmful activities.  Henstooth was sued by the easement holder for its efforts to construct a road and a home.  These efforts, claimed the underlying plaintiff, not only violated the easement, but also resulted into damage to the property requiring restorative efforts.  Prior to suit, and over the other side’s objections, Henstooth attempted to performed its own land restoration efforts.  These efforts not only failed, but allegedly resulted in further damage to the land.

Burlington argued that it had no coverage obligations in connection with the underlying suit because Henstooth’s conduct, as outlined in the underlying complaint, was intentional and thus did not come within the policy’s definition of “occurrence.”  Henstooth countered that at the very least, a defense obligation was triggered by its attempt at restoration efforts, which while performed intentionally, negligently failed, thus resulting in damage it did not intend.

The court sided with Burlington, observing that in undertaking the restoration efforts, Henstooth allegedly ignored the easement holder’s request that Henstooth hire a consultant and prepare a restoration plan for approval prior to implementation.  Henstooth’s failure to do so, and its unilateral actions in performing the restoration efforts, explained the court, was intentional in nature, regardless of whether Henstooth intended to cause additional harm to the property.  As the court reasoned, the term “accident” in the policy definition of “occurrence” refers to the nature of the insured’s conduct, not to its unintended consequences.

 

 



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Alabama Court Holds Professional Liability Exclusion Applicable to Negligent Inspection

In its recent decision in AIX Specialty Ins. Co. v. H&W Tank Testing, Inc., 2017 U.S. Dist. LEXIS 169787 (M.D. Ala. Oct. 12, 2017), the United States District Court for the Middle District of Alabama had occasion to consider the scope and permissibility of a professional liability exclusion contained in a general liability policy.

H&W, a tanker truck inspection company, was sued in connection with its alleged negligence in inspecting a tanker truck carrying a load of propane gas.  The truck later was involved in a crash, which resulted in the propane leaking and ultimately exploding, causing severe injuries to the driver.  The driver sued H&W on the basis that it negligently failed to test and inspect the propane tank.

H&W sought coverage for the suit under its general liability policy issued by AIX.  The policy contained an endorsement titled Testing or Consulting Exclusion, applicable to an error, omission, defect or deficiency in any test performed or an evaluation, consultation or advice given by or on behalf of any insured.   AIX denied coverage for the underlying suit on the basis of the exclusion.  H&W nevertheless contended that the exclusion was void as against Alabama public policy and that in any event, it did not apply to the allegation that it had failed to properly inspect plaintiff’s tank.

Considering first the scope of the exclusion, the court rejected H&W’s argument that the exclusion did not apply to allegations of negligent inspection.  H&W argued that the literal terms of the exclusion applied only to testing, and did not include inspection, and that a distinction could be drawn between negligent testing and negligent inspection.  The court concluded that there was no meaningful distinction between a test and an inspection, nor would a reasonable person understand these words to have different meanings.

Turning to the issue of public policy, H&W argued that because it was required under Alabama statutory law to maintain general liability insurance for its inspection services, it was improper for AIX to issue a policy with an inspection exclusion.  The court rejected this argument, noting that the statutory requirement for insurance applied only to companies such as H&W, not to their insurers.  The court concluded that the burden was on H&W to secure the proper coverage and that this burden could not be shifted on AIX to assume responsibility for H&W’s mistake.

 

 



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New Jersey Court Holds No Coverage for Sexual Harassment Claim Under E&O Policy

In its recent decision in Aaron Ambulance Med. Transp., Inc. v. Certain Underwriters at Lloyd’s, 2017 U.S. Dist. LEXIS 149409 (D.N.J. Sept. 14, 2017), the United States District Court for the District of New Jersey had occasion to consider the scope of coverage afforded under a professional liability policy for allegations of sexual harassment against an employee.

Underwriters issued to Aaron Ambulance a professional liability policy insuring its ambulance-related services.  The policy’s main form contained an exclusion for sexual misconduct, sexual abuse and/or child abuse.  It also contained exclusions for claims brought by one insured (defined to include employees) against another and for unlawful discrimination.  Aaron Ambulance purchased an extension of coverage to the policy, set forth in an endorsement, affording coverage for claims arising out of sexual misconduct, sexual abuse, and/or child abuse.  This extension of coverage was subject to a separate sublimit of coverage and the express condition that the endorsement did not change any other terms or conditions of the policy.

Aaron Ambulance sought coverage under the policy for a suit brought against it by an individual alleging that she was subject to hostile sexual harassment and abuse during the time of her employment with Aaron Ambulance.  Underwriters took the position that the extension of coverage for sexual misconduct only extended to sexual misconduct committed in the context of rendering professional services and that the policy did not insure workplace-related claims.  Aaron Ambulance countered that the extension of coverage for sexual misconduct claims was not limited to claims asserted by patients, and that at the very least, it had a reasonable expectation that the extension of coverage would include employment-related sexual harassment claims.

Siding with Underwriters, the court agreed that the plain reading of the endorsement in conjunction with the various exclusions in the policy made clear that the endorsement did not negate the exclusions for allegations of unlawful discrimination or for claims brought by insureds, a term defined to include employees.  In so concluding, the court accepted Underwriters’ argument that the policy only provides professional liability as opposed to employment practices liability insurance.  As the court explained:

Absent express reference to other provisions of the Policy, the Court is disinclined to construe the Policy as expansively as Plaintiffs suggest. It would be a generous interpretation indeed to read Endorsement 7 to expand coverage beyond professional services and into the realm of sexual harassment and discrimination—all without using or defining such terms or referring to related definitions, declarations, or exclusions. A plain reading, rather, recognizes that the Policy says what it means through well-defined and consistently-employed terms. Such a reading also supports the conclusion that, as Defendant persuasively argues, sexual misconduct is insured against not in the sense of sexual harassment or in the context of an office environment, but simply in rendering professional ambulatory services—a situation not raised by the allegations of the underlying complaint. Without further guidance from the express terms of the Policy, therefore, there is no reasonable basis to find ambiguity or an expectation of coverage.



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New Jersey Court Holds Pollution Exclusion Inapplicable to Unintentional Contamination

In its recent decision in Benjamin v. State Farm Ins. Co., 2017 U.S. Dist. LEXIS 131078 (D.N.J. Aug. 17, 2017), the United States District Court for the District of New Jersey had occasion to consider the scope of the pollution exclusion under New Jersey law.

At issue in the Benjamin case was a policyholder’s right to coverage under his homeowner’s insurance for liabilities associated with a leaking underground storage tank located under his property.  Notably, the insured was unaware of the tank when it purchased the property.  It was only after the insured learned of the tank’s existence, and undertook efforts to have it excavated and removed, that he determined that the tank had leaked several years prior to his purchase of the property, resulting in soil and groundwater contamination.  The policyholder then sought coverage under several of his homeowner’s insurance policies for remedial efforts required by the New Jersey Department of Environmental Protection.

The Benjamin court addressed a number of coverage issues, including whether the insured’s liability resulted from an occurrence, the scope of the owned property exclusion, and how loss should be allocated under New Jersey law.  The court also addressed the application of the pollution exclusion, and in particular under what circumstances the exclusion applies to unintentionally created pollution.

In considering the scope of the exclusion, the court observed that New Jersey state and federal case law construing the pollution exclusion – both the qualified and absolute exclusion – have read an intentionality requirement into the exclusion.  Thus, not only is the exclusion limited to traditional environmental harm, as reflected in the Supreme Court’s decision in Nav-Its, Inc. v. Selective Ins. Co. of America, 869 A.2d 929 (N.J. 2005), but application of the exclusion has been limited to intentional industrial pollution even for exclusions not containing the “sudden and accidental” exception.  The court referred to its own prior decision in Castoro v. Hartford Accident and Indemnity Co., Inc., 2016 U.S. Dist. LEXIS 134686 (D.N.J. Sept. 29, 2016), in which it held that as a matter of public policy the exclusion did not apply to unintentional pollution caused by a “mom and pop” contracting business where the contamination was not expected or intended from the standpoint of the insured, even if the event giving rise to the contamination was expected.

Relying on this case law, the court denied the carriers’ motions for summary judgment on the basis of the exclusion, observing that the insurers failed to allege, or even attempt to demonstrate, that the insured policyholder expected or intended the pollution, particularly since he had no part in causing the release and was not even aware of the underground storage tank until long after the leak had happened.

 



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Florida Court Holds Prior Knowledge Exclusion Precludes Coverage for Malpractice Suit

In its recent decision in Farbstein v. Westport Ins. Corp., 2017 U.S. Dist. LEXIS 125990 (S.D. Fla. Aug. 9, 2017), the United States District Court for the District of Florida had occasion to consider the application of a prior knowledge exclusion in a lawyers professional liability policy.

At issue in Farbstein was Westport’s coverage obligations arising from its insured’s work associated with a real estate transaction.  The malpractice suit alleged that the insured learned just weeks prior to the deal’s closing that he had failed to negotiate a key term that had been requested by his client concerning responsibility for a pre-payment penalty clause in the mortgage existing on the property.  The insured acknowledged the mistake to his client, and admitted that there would be financial implications to the mistake, but nevertheless counseled his client to move forward with the transaction because the consequences of voiding the deal altogether could prove costlier than merely paying the penalty.  While discussing the consequences of the error with his client, the insured allegedly made reference to his professional liability policy.  On the insured’s advice, the deal closed and the client ultimately paid nearly a half million dollars extra in penalties as a result of the insured’s mistake.

Nearly one month after the closing of the deal, the insured’s professional liability policy expired, and the insured subsequently purchased a renewal claims made and reported policy from Westport. The i policy contained an exclusion applicable to any wrongful act committed prior to the policy’s inception date if the named insured “knew or could have reasonably foreseen that such WRONGFUL ACT might be expected to be the basis of a CLAIM.”  At issue in the ensuing coverage litigation was whether the insured reasonably could have expected a claim as of the inception date of the renewal policy.

In considering this question, the court acknowledged that while the duty to defend analysis is typically limited to the four corners of a complaint, extrinsic evidence sometimes can be considered for the purpose of resolving prior knowledge defenses, particularly when “the underlying complaint does not contain the facts relevant to whether the insured knew of the alleged wrongful acts prior to the inception of the policy.”  The court nevertheless observed that the malpractice suit contained specific allegations concerning the insured’s alleged conduct sufficiently demonstrating an act, error or omission committed prior to the policy’s inception, and that as such, it was not necessary to consider extrinsic facts to determine whether the insured had, in fact, committed a wrongful act.

Turning to the issue of the insured’s state of knowledge as of the inception date of the policy, the court observed that the prior knowledge exclusion in the Westport policy could apply based on one of two alternatives: either a subjective determination that the insured believed that a claim would be made or an objective determination that the insured reasonably should have expected a claim to be made.  The court noted that the complaint alleged that the insured had conversation he had with his client – well in advance of the policy’s inception – in which he admitted his mistake to his client and discussed the consequences of this error, which discussion included references to the attorney’s professional liability insurance.  These alleged facts, explained the court, sufficed to demonstrate a subjective knowledge on the insured’s part that a claim might be made during the policy period.  The court therefore concluded that the exclusion applied to preclude a defense and indemnity obligation.



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Massachusetts Court Holds Upholds Exclusion Applicable to Personal and Advertising Injury

In its recent decision in National Union Fire Ins. Co. v. Town of Norwood, 2017 U.S. Dist. LEXIS 116638 (D. Mass. July 26, 2017), the United States District Court for the District of Massachusetts had occasion to consider the scope of an exclusion in a general liability policy applicable to knowing violations of another’s rights.

National Union insured the Town of Norwood, which was sued by Boston Executive Helicopters (“BEH”) arising out of a permitting dispute regarding BEH’s attempts to expand its helicopter operations business.  Norwood had determined it would not consider BEH’s permit application, allegedly as a result of a complaint BEH had made to the FAA regarding Norwood’s alleged mismanagement of an airport.  BEH subsequently filed suit against Norwood, alleging that Norwood colluded with BEH’s competitors to stifle competition.  While the suit originally contained several causes of action, it was later pared down to a single cause of action alleging that Norwood retaliated against BEH in violation of the First Amendment.

National Union initially agreed to provide Norwood with a defense under a reservation of rights, but subsequently sought a declaration that it had no continuing defense obligation when the suit was amended to a single cause of action for retaliation.  National Union contended that the retaliation claim fell within an exclusion in its policies applicable to acts committed by the insured with the knowledge that such act would violate the rights of another and would inflict personal and advertising injury.

In considering the coverage dispute, the court acknowledged that under Massachusetts law, an insurer is obligated to defend an entire lawsuit so long as a single cause of action is potentially covered.  The court further observed, however, that under Massachusetts law, “the insurer is permitted to withdraw the defense” when the claimant can no longer establish a claim that would fall within the policy’s coverage.

With this in mind, the court considered the application of the knowing violations exclusion.  Norwood argued that for the exclusion to apply, National Union had to demonstrate that not only did Norwood intend the retaliatory act, but that it also intended the resulting harm to BEH.  The court agreed that knowing violations exclusions are construed in such a manner under Massachusetts law.  The court nevertheless reasoned that for a retaliation claim, the intent to cause harm is necessarily part of the cause of action since retaliatory acts are necessarily undertaken with the purpose of punishing a party.  As the court explained, “[b]ecause the conduct covered by a First Amendment retaliation claim is inherently willful, it requires intentionality and the deliberate infliction of injury.”  As such, the court concluded that the retaliation claim necessarily came within the scope of the exclusion and that National Union had no continuing duty to defend.

 

 

 

 



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Kentucky Court Holds Professional Liability Insurer Can Pay Limits and Terminate Its Defense Obligation

In its recent decision in Mt. Hawley Ins. Co. v. MESA Med. Grp., PLLC, 2017 U.S. Dist. LEXIS 111949 (E.D. Ky. July 19, 2017), the United States District Court for the Eastern District of Kentucky had occasion to address a provision in a professional liability policy permitting an insurer to “dump” its policy limits and “run” from its defense obligation.

Mt. Hawley insured MESA Medical Group under a medical professional liability policy with a $1 million limit of liability.  By endorsement agreed to by the parties after the policy was initially issued, defense costs were to treated as being outside of the policy’s limit of liability, but the endorsement expressly stated that Mt. Hawley at any time could tender the remaining policy proceeds and thereby terminate any future defense obligation it might have concerning any particular claim.  Notwithstanding this language, MESA Medical Group argued that Mt. Hawley was not permitted to tender its policy limits and avoid a defense in connection with an underlying claim as a matter of Kentucky common law.

In addressing this argument, the court acknowledged that in the absence of specific language to the contrary, an insurer has an ongoing defense obligation, even if policy limits have been exhausted as a result of payment of a judgment, settlement or interpleader.  The court noted, however, that there is no law preventing an insured and insurer from contracting around this general rule.  As such, the court agreed that the specific language of the endorsement permitting Mt. Hawley to tender its policy limits and terminate its defense was enforceable.  The court agreed that in hindsight the endorsement may have been a bad idea for MESA Medical Group, but that “in the absence of coercion or the violation of a public policy,” which the court found lacking on both counts, it was enforceable and that Mt. Hawley could elect to terminate its defense.

 

 

 



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New York Court Holds Pollution Exclusion Applicable to Pollution Caused by Covered and Uncovered Causes

In its recent decision in Matter of Midland Ins. Co., 2017 N.Y. App. Div. LEXIS 5065 (N.Y. 1st Dep’t June 22, 2017), the Supreme Court of New York, Appellate Division, First Department, had occasion to consider the application of the absolute pollution exclusion to contamination resulting from different sources, only one of which was clearly excluded.

At issue in Midland was coverage for the insured’s liabilities under CERCLA for lead contamination of soils in a residential area in Omaha, Nebraska.  The lead was partially a result of the insured’s mining operations, but also a result of the chipping and flaking of lead based paint on the houses in the area.  While the insured did not paint the houses, or manufacture the paint used on the homes, it was jointly and severally liable for the soil contamination under CERCLA, and thus responsible for remediating the soils.

The insured argued that under New York law, chipping and flaking of lead paint is not necessarily excluded by the pollution exclusion.  Westview Assocs. v Guar. Nat’l Ins. Co., 717 N.Y.S.2d 75 (2000); Herald Sq. Loft Corp. v Merrimack Mut. Fire Ins. Co., 344 F Supp 2d 915 (S.D.N.Y. 2004).  As such, the insured argued that at the very least, the exclusion should not apply to the entirety of the cleanup costs and that the costs should be allocated between lead contamination resulting from its mining operations and lead contamination resulting from lead paint chipping and flaking.

The court agreed that under some circumstances, lead paint does not come within the exclusion.  It nevertheless concluded these cases inapplicable since “the combined effect of the lead emissions and the lead paint was soil contamination – of the same soil.”  As the court observed, any soil solely contaminated as a result of lead paint would not have come within the scope of CERCLA.  As such, the court agreed that the exclusion applied to preclude coverage for the entirety of the underlying remedial costs.



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New York Court Holds General Liability Insurer Has Duty to Defend Odor Claim

In its recent decision in Hillcrest Coatings, Inc. v. Colony Ins. Co., 2017 N.Y. App. Div. LEXIS 4519 (N.Y. 4th Dep’t June 9, 2017), the Supreme Court of New York, Appellate Division, Fourth Department, had occasion to consider coverage under a general liability for allegations of odor emanating from a recycling facility.

Hillcrest operated a glass, paper and paper recycling facility in upstate New York.  Suit was filed against it by nearby residents complaining that Hillcrest operated its facility in a negligent fashion, thereby allowing hazardous materials and other substances to be discharged into areas where plaintiffs worked and resided.  The suit also alleged that Hillcrest’s facility created a pervasive malodorous condition.

Hillcrest sought coverage for the underlying suit under its general liability policy issued by Colony.  The policy contained a hazardous materials exclusion, which like a pollution exclusion, barred coverage for bodily injury or property damage “which would not have occurred in whole or [in] part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  The policy defined hazardous materials as “pollutants” as well as “lead, asbestos, silica and materials containing them.”  “Pollutants,” in turn, was defined by the policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

In an ensuing coverage action, Colony maintained that its policy’s hazardous materials exclusion barred coverage for the underlying suit.  The Fourth Department, affirming the trial court’s ruling on summary judgment, held that Colony had a duty to defend since it was not clear from the face of the complaint that the allegations of odor came within the scope of the exclusion.  As the court explained, “[a]lthough many of the factual assertions in the second amended complaint allege that the odor resulted from hazardous materials, those are not the only factual allegations therein. Indeed, foul odors are not always caused by the discharge of hazardous materials.”



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