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Illinois Federal Court Holds That DOJ Subpoena Qualifies As A “Claim” For A “Wrongful Act”

In Astellas US Holding, Inc. v. Starr Indem. & Liab. Co., 2018 U.S. Dist. LEXIS 89725 (N.D. Ill. 2018), the U.S. District Court for the Northern District of Illinois held that a government-issued subpoena can qualify as a demand for non-monetary relief, thereby constituting a “Claim” against an insured. Astellas US Holding, Inc. (“Astellas”), a US based pharmaceutical company, sued its insurers for denying coverage for the expenses incurred in responding to a government-issued subpoena and investigation. The government’s investigation focused on potential kickbacks where patients receiving financial assistance from pharmaceutical companies like Astellas were also using those companies’ products. The U.S. Department of Justice issued a subpoena to Astellas demanding certain documents relating to the alleged Federal health care offenses. The subpoena stated that failure to comply exposed Astellas to liability in judicial enforcement proceedings and punishment for disobedience.

Astellas gave timely notice of the subpoena to its primary insurer and two excess insurers. The insurers denied coverage for the costs associated with responding to the subpoena, arguing that the subpoena did not constitute a “Claim” under the policy as it was not a demand for monetary, non-monetary or injunctive relief. Instead, the insurers argued, it was merely a request for production of documents. Astellas subsequently complied with the government subpoenas and incurred defense costs that exceeded the insurers’ limits of liability.

Astellas filed suit against all three insurers seeking a declaration that they owed reimbursement for the defense costs incurred, and all three insurers moved to dismiss the complaint. The motions argued that the subpoena did not constitute a “Claim” for a “Wrongful Act” as required by the policy.

The policy defined “Wrongful Act” as “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Company.” Although the subpoena did not expressly identify the “Wrongful Act” committed by Astellas, the DOJ allegedly told Astellas that its donations to charities violated the law. As such, the court determined that the subpoenas concerned a potential “Wrongful Act” as the government was investigating Astellas for allegedly unlawful acts. This was apparent from the language of the tolling agreement entered into between the DOJ and Astellas, which addressed the investigation of a “possible violation” of the law.

The court also found that the subpoena qualified as a “Claim” pursuant to the policy’s definition of that term. The policy defined “Claim” to include a demand for non-monetary relief, as well as a written request to toll the statute of limitations. The court held that the subpoena sufficiently demanded Astellas to appear and produce specific documents, and therefore sought some form of “relief” from Astellas. To that point, the DOJ had the ability to initiate enforcement proceedings for Astellas’ non-compliance, thereby making the subpoena more than an informal request for information. The subpoena also was a written request that Astellas toll the statute of limitations as the government required Astellas to enter a tolling agreement halting the statute of limitations during the investigation of possible violations. The court therefore denied the insurers’ motion to dismiss.

California Supreme Court Holds Insured Entitled to Coverage Under CGL Policy for Negligent Hiring

In its recent decision in Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co.,2018 Cal. LEXIS 4063 (Cal. June 4, 2018), the Supreme Court of California addressed the question of whether an insured’s negligent hiring, retention and supervision of an employee who intentionally injured a third-party can be considered an occurrence under a general liability policy.

The insured, L&M, was the construction manager on a project at a middle school in California. It was alleged that one of its employees sexually abused a thirteen year old student during the course of the project. The student later brought a civil suit against L&M based on its negligent hiring, retention and supervision of the employee-perpetrator.

L&M’s general liability insurer, Liberty, denied coverage on the basis that because the underlying incident was not accidental, the derivative negligence claims against L&M necessarily were not caused by an occurrence either.  In the ensuing coverage litigation, the United States District Court for the Eastern District of California held in Liberty’s favor, reasoning that L&M’s hiring, supervision and retention of the employee were not the injury-causing acts.  On appeal, the United States Court of Appeals for the Ninth Circuit elected to certify this question to the California Supreme Court.

In considering the question, the Court began its analysis by revisiting the distinction between coverage for a perpetrator of sexual assault and the employer of the perpetrator, as explained in its 2010 decision in Minkler v. Safeco Ins. Co. of America, 49 Cal. 4th315 (Cal. 2010).  Minklerestablished that while the perpetrator is not entitled to coverage for his or her misconduct, L&M’s allegedly negligent hiring, retention, and supervision were independently tortious acts” and therefore had to be considered independently for coverage.  The Court agreed that the district court properly distinguished between the perpetrator’s liability and L&M’s liability, but failed to properly analyze the facts.

Specifically, the Court rejected the district court’s analysis on the issue of causation.  Coverage for L&M, explained the Court, turned “on whether the damages for which the insured became liable resulted – under tort law– from covered causes.” (Emphasis in original.). That is, the inquiry must be whether the insured’s conduct is a “substantial factor” in bringing about the plaintiff’s injury.  While the district court found that L&M’s alleged negligence was too attenuated to be the cause of the plaintiff’s injury, the Court disagreed, citing to numerous California decisions in which an employer’s negligence can be considered a substantial factor in a sexual molestation claim, so long as the negligence is the starting point of the series of events leading to the act of molestation.  The Court found that L&M’s negligence was, in fact, the starting point for the underlying misconduct.

After distinguishing numerous cases relied on by Liberty and the district court, the Court discussed the societal implications of allowing coverage for the derivative claims against employers resulting from sexual abuse committed by employees.  The Court did not see a public policy reason that would preclude coverage for such claims.  On the contrary, it recognized economic and practical reasons for allowing such coverage, explaining:

Liberty’s arguments, if accepted, would leave employers without coverage for claims of negligent hiring, retention, or supervision whenever the employee’s conduct is deliberate. Such a result would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally.  The requirements for liability of this kind are not easily met, but they are well established.  Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence.

Illinois Court Finds Allegations of Intentional Misconduct Precludes E&O Coverage

Ill. State Bar Ass’n Mut. Ins. Co. v. Leighton Legal Grp., LLC¸ 2018 IL App. (4th) 170548, arose from underlying litigation wherein the plaintiffs, beneficiaries of a trust, filed suit against the insured, an attorney and co-trustee for the trust.  The complaint contained various causes of action relating to the insured’s creation of a second trust that allegedly deprived the plaintiffs of the benefits due to them through an original trust of which they were beneficiaries.  In sum, the plaintiffs contended that the insured took the principal of the first trust to which the plaintiffs were beneficiaries and “poured” it into a second trust created by the attorney.  Although the plaintiffs were also beneficiaries of the second trust, they alleged that it contained materially different terms and created a self-compensation scheme for the insured.  To that point, the insured had appointed himself as a co-trustee under the second trust, eliminated the requirement to use a qualified financial institution as a co-trustee, and included a clause that invalidated a gift to a beneficiary that unsuccessfully challenged the validity of a testamentary document.

The underlying complaint filed by the plaintiffs was replete with allegations of willful conduct by the insured in carrying out the scheme.  The Illinois State Bar Association Mutual Insurance Company (“ISBA”) denied coverage to the insured asserting that the intentional conduct alleged in the complaint was excluded from coverage.  More specifically, ISBA claimed that an exclusion for any claim “arising out of any criminal, dishonest, fraudulent or intentional act or omission” barred coverage for the claim.  ISBA also argued that the policy’s insuring agreement required a “negligent act, error or omission in the rendering of or failure to render professional services.”

ISBA filed a declaratory judgment action seeking a determination it owed no coverage to the insured.  The trial court granted the insured’s motion for judgment on the pleadings and found that ISBA owed a duty to defend, and ISBA appealed.

The Appellate Court of Illinois, Fourth District, reversed the trial court’s decision and found in favor of ISBA.  The insured had argued that as long as the underlying complaint could be based on negligence, a duty to defend was owed by ISBA.  The court found, however, that the allegations in the complaint concerned conduct by the insured that fit squarely within the policy exclusion.

In interpreting the policy exclusion, the court held that a provision precluding coverage for intentional conduct required that the insured intend to cause the consequence of his act or omission, or believe that the consequences of his act or omission were substantially certain to result.  In that sense, an exclusionary clause for intentional conduct does not apply merely because an insured intended to act, but rather only applies to “intentional misconduct.”  As the underlying complaint alleged that insured created the second trust for the purpose of establishing a self-compensation scheme, the claim addressed “intentional misconduct” that could not be the result of negligence.  The Appellate Court therefore reversed the trial court decision and entered judgment in favor of ISBA.

Illinois Court Holds Exoneration During Policy Period Does Not Trigger Malicious Prosecution Coverage

In First Mercury Insurance Company v. Ciolino, 2018 IL App (1st) 171532, the First District of the Illinois Appellate Court held that the exoneration of an underlying claimant during a policy period does not trigger personal injury coverage for malicious prosecution. The decision affirmed the judgment of the Circuit Court of Cook County, which held that the insurer did not have a duty to defend its insured for a malicious prosecution claim based on offensive conduct that took place more than a dozen years before the relevant policy period.

The plaintiff in the underlying lawsuit, Alstory Simon, alleged that the insured, a private investigator, conspired in 1999 with a professor affiliated with Northwestern University’s Innocence Project to frame Simon for a 1982 double homicide in order to secure the release of the real killer, who had been previously convicted. Simon specifically alleged that in February 1999, the insured illegally impersonated a police officer to enter Simon’s home and obtained a false confession from Simon through threats, false evidence and “other illegal tactics.” In March 1999, Simon was indicted for murder based on the allegedly false evidence obtained by the insured, and in September 1999 he pleaded guilty to the murder of one of the victims and to the voluntary manslaughter of the other victim. Fourteen years later, the Cook County State’s attorney re-opened its investigation of the underlying homicide, and in October 2014, the State’s Attorney’s office requested Simon’s exoneration. Simon was released the same day. Simon filed suit against Northwestern and the insured in February 2015.

The insured tendered Simon’s complaint to its general liability insurer, First Mercury, under a 2014-2015 policy that was in effect at the time of Simon’s exoneration. The First Mercury policy covered suits seeking damages for “personal injury,” including malicious prosecution, caused by an “offense” committed during the policy period. The policy did not define the term “offense.” First Mercury disclaimed coverage on grounds that the underlying lawsuit did not allege an “offense” during its policy period, as all of the insured’s alleged wrongful conduct occurred in 1999. The insured countered that the “offense” did not occur until Simon was exonerated during the First Mercury policy period because, under Illinois law, a claim for malicious prosecution does not accrue until the plaintiff is exonerated.

The Circuit Court agreed with First Mercury, and the Appellate Court affirmed. The Appellate Court reasoned that the “straightforward reading” of the term “offense” mandated that coverage was dependent on whether the insured’s offensive conduct was committed during the policy period, not whether the underlying cause of action accrued during the policy period.

The insured’s argument had relied on the Seventh Circuit’s 2012 decision in American Safety Insurance Co. v. City of Waukegan, 678 F.3d 475, which held that an underlying claimant’s exoneration was an “occurrence” that triggered coverage. The First District of the Appellate Court held that American Safety conflicted with three subsequent Illinois appellate decisions from other districts—St. Paul Fire & Marine Insurance Co. v. City of Zion, 2014 Il App (2d) 131312, Indian Harbor Insurance Co. v. City of Waukegan, 2015 IL App (2d) 140293, and County of McLean v. States Self-Insurers Risk Retention Group, Inc., 2015 IL App (4th) 140628—all holding that exoneration was not a trigger of coverage under varying policy language. As such, the Appellate Court held that the Seventh Circuit’s decision in American Safety was no longer persuasive authority.

Massachusetts Court Holds No E&O Coverage for Medical Provider’s Alleged Billing Fraud

In its recent decision in Barron v. NCMIC Ins. Co., 2018 U.S. Dist. LEXIS 75512 (D. Mass. May 4, 2018), the United States District Court for the District of Massachusetts had occasion to consider whether billing practices qualify as a professional service insured under a medical malpractice insurance policy.

NCMIC insured a group of chiropractors under a professional liability policy affording coverage for “damages because of an injury” subject to the requirement that the injury be caused by an accident arising from the negligent omission, act, or error in the provision of professional services, a term defined as “services which are within the scope of practice of a chiropractor in the state or states in which the chiropractor is licensed.”

The insured chiropractic group sought coverage for an underlying suit brought against it by GEICO. GEICO alleged that the chiropractic group engaged in various fraudulent schemes in an effort to obtain higher payments from GEICO under Massachusetts’ No-Fault Personal Injury Protection (PIP) statute. Among other things, the suit alleged that the group overprescribed treatments without regard to any individual person’s actual injuries, and engaged in practices designed to maximize the amount of treatment rendered and PIP benefits received. GEICO also alleged that the group engaged in numerous other schemes, such as manipulating patients’ injury complaints, manipulating invoices, and manipulating service codes.

The court held that GEICO’s lawsuit did not come within the Policy’s grant of coverage, and in doing so, rejected the insured’s argument that GEICO’s suit alleged a “mix of both negligence claims and fraudulent billing. While the underlying suit made reference to patients having been mistreated as a result of the insured’s negligent care, the court concluded that the suit did not allege that this mistreatment caused injury to any particular individual, nor was any relief sought by GEICO for such injuries.

The court further observed that the policy issued by NCMIC did not broadly cover all suits arising out of the insured’s rendering of professional services, but only suits seeking damages for injuries resulting from such services. Thus, the court concluded, “The Underlying Action targets alleged fraudulent billing practices that caused GEICO to pay or settle false or inflated medical insurance claims, not professional malpractice that caused patient injuries.”

New York Court Holds Pollution Exclusion Inapplicable to 9/11 Claims

In its recent decision in National Union Fire Insurance Co. of Pittsburgh, PA v. Burlington Ins. Co., 2018 N.Y. Misc. LEXIS 1503 (Sup. Ct. NY Co. Apr. 27, 2018), the Supreme Court of New York for New York County considered whether the total pollution exclusion applied with respect to an underlying bodily injury suit brought individuals claiming injury as a result of exposure to toxic conditions at the World Trade Center site in the immediate aftermath of September 11, 2001.

Burlington issued a primary policy and National Union issued a commercial umbrella policy to one of the contractors that aided in the cleanup recovery after September 11, 2001. The insured was named as a defendant in several suits brought by individuals claiming respiratory illness and other injuries as a result of having worked on the recovery effort without having been provided proper protective wear. Burlington denied coverage for the suits on the basis of its policy’s total pollution exclusion. National Union subsequently dropped down to provide a defense and ultimately settled the matters. It later brought suit against Burlington, alleging that Burlington’s denial of coverage was improper.

In considering the matter, the court noted that it has long been the case that under New York law, the pollution exclusion is limited to matters believed to be traditional or classic environmental harm. It nevertheless noted a pair of decisions from the Southern District of New York finding the pollution exclusion inapplicable to similar World Trade Center-related claims on the basis that the injured claimants were not suing on the theory that the insured-defendants created a pollution condition, or failed to abate one, but instead that the defendants failed to provide a safe workplace and failed to provide appropriate protections against an existing pollution condition. The court found these cases persuasive and held the exclusion inapplicable to the underlying matters.

In so concluding, the court rejected Burlington’s argument that notwithstanding any individual claimant’s theory of liability, the pollution exclusion should still apply since “none of the workplace safety issues or injuries would exist but for the polluted environment.” The court conceded that New York courts have, in fact, applied a “but for” analysis for some insurance policy exclusions, such as the assault and battery exclusion. It nevertheless found a lack of support for applying a “but for” analysis in the context of the pollution exclusion, and in fact noted case law to the contrary. The court concluded, therefore, that in light of the “extensive allegations of lack of workplace safety” and given case law from the federal courts, Burlington failed to meet “its heavy burden of showing that the dispersal of pollutants, standing alone, caused the plaintiffs’ injuries in the Underlying Actions.”

Kansas Federal Court Applies Prejudice Requirement to Pollution Buy-Back Endorsement

In its recent decision in PetroSantander (USA), Inc. v. HDI Global Ins. Co., 2018 U.S. Dist. LEXIS 59696 (D. Kan. Apr. 9, 2018), the United States District Court for the District of Kansas, applying Texas law, had occasion to consider whether an insurer need be prejudiced based on an insured’s untimely reporting under a pollution buy-back endorsement.

HDI insured PetroSantander under a general liability policy with a limited pollution liability buy-back endorsement, affording coverage for pollution incidents of a limited temporal duration and only then when reported to HDI within 120 days after the incident first becomes known to the insured.  PetroSantander sought coverage for a pollution incident that it reported to its broker within forty days of its happening, but which was not reported to HDI until 141 days of the event.   At issue in the subsequent litigation was whether HDI needed to demonstrate prejudice as a result receiving first notice three weeks after the expiration of the reporting period.

In analyzing this question, the court observed that Texas courts have long recognized that prejudice is a consideration for late notice under occurrence based policies as well as for reporting within the policy period of a claims made and reported policy.  HDI nevertheless cited to two decisions from the United States Court of Appeals for the Fifth Circuit, both of which predicted Texas law on the very issue: Matador Petroleum Corp. v. St. Paul Surplus Lines Inc. Co., 174 F.3d 653 (5th Cir. 1999) and Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 719 F.3d 700 (5th Cir. 2013). In both cases, the Fifth Circuit held that given the limited coverage afforded under a pollution buy-back endorsement, prejudice is not a relevant consideration.

Notwithstanding these two cases, the PetroSantander court predicted that the Texas Supreme Court would not follow their holdings.  In particular, the court reasoned that both Fifth Circuit cases did not properly analyze Texas law on prejudice, and in particular Order 23080 issued by the Texas Department of Insurance, which establishes a prejudice requirement for policies issued or delivered in Texas.  As the court explained:

Neither Matador nor Starr provide any analysis of Order 23080, explain why the Order did not apply under the circumstances presented, or even mention the Order. The Court has no convincing evidence before it that the Fifth Circuit silently considered and rejected the application of Order 23080 to Matador and Starr, and Defendant’s arguments fail to persuade the Court otherwise. Rather, a review of Fifth Circuit opinions specifically citing Order 23080 demonstrates that the Fifth Circuit has recognized not only that the Order applies to CGL policies, but also that the Order is “mandatory” and effectuated a “change in Texas insurance law.”

Thus, breaking with Matador and Starr, the court held that prejudice would be required under Texas law for failure to comply with the 120 reporting period, and that as such, and given HDI’s failure to demonstrate any prejudice as a result of the receiving notice 141 days after the insured’s discovery of the pollution incident, the court held that the insured was entitled to coverage for the incident.

 

Illinois Appellate Court Finds Breach of Duty to Defend When Insurer Reserved Rights to Challenge Insured’s Decision to Settle Without The Insurer’s Consent

Rogers Cartage Co. v. Travelers Indem. Co.¸ 2018 IL App. 160098 (5th Dist. 2018), arose from underlying litigation involving environmental contamination and cleanup at two United States Environmental Protection Agency (EPA) Superfund sites. Pharmacia Corporation (Pharmacia) and Solutia, Inc. (Solutia) brought a third-party claim against Rogers Cartage Company (Rogers) alleging that Rogers handling of toxic materials, disposal of cleanup waste, and deposit of those wastes in pools was the cause of the environmental contamination at the Superfund sites.

Beginning in 1960 and for the next several years, Travelers issued policies of insurance to Rogers. The policies issued by Travelers required that, in the event of litigation against Rogers, Travelers would defend and indemnify Rogers. When Rogers was sued in the underlying litigation in 2009, Travelers sent Rogers a reservation of rights letter, including language agreeing to contribute to the payment of reasonable and necessary fees for defense-related work performed by counsel of Rogers’ choice.

On September 9, 2010, Rogers informed Travelers of the trial date and advised Travelers that it was planning an informal settlement meeting with Pharmacia and Solutia and would advise Travelers of any settlement demand

On October 8, 2010, Pharmacia and Solutia sent Rogers a demand for settlement. The claimants proposed settling the case for $4 million if Travelers would participate and resolve the claims for cash, but in the event that Travelers refused, they proposed settling with Rogers in the amount of $7.5 million, with Rogers paying $50,000.00 and pursuing insurance proceeds for the remainder, using claimants’ counsel.

On November 2, 2010, claimants renewed their demand of $4 million to be paid by Travelers, with no mention of the alternative proposal. The renewed demand was forwarded to Travelers. Rogers’ counsel told Travelers that claimants’ demand was reasonable in light of the facts but that he believed the case could be settled between $2 and $3 million. Additionally, he advised Travelers that he did not believe that he could win at the trial level but thought there was an 85% chance of prevailing on appeal; however, Rogers could neither afford to go to trial nor afford to lose at trial.  Rogers’ counsel concluded that there were only two reasonable options: negotiate and settle or indemnify Rogers and post the bond on appeal.

On November 19, 2010, Travelers disputed coverage and claimed that Rogers had less than $300,000.00 in applicable coverage. Travelers made a counteroffer of $275,000.00 to claimants’ demand, and claimants countered with $3.75 million. Travelers refused to make any other counteroffers.

On December 30, 2010, Travelers sent Rogers a letter advising them that Travelers did not consent to any unilateral settlement negotiations, and that if negotiations were taking place or a settlement had been reached, Rogers would be in breach of the cooperation and anti-assignment clauses in its policies, negating coverage. Travelers then filed suit against Rogers disputing coverage under the policies.

Ultimately, Rogers, without the consent of Travelers, entered into a settlement with Pharmacia and Solutia for $7.5 million, out of which it agreed to pay $50,000.00 and promised to seek indemnification from Travelers. After entering into the settlement agreement, Rogers, Pharmacia and Solutia, brought suit against Travelers seeking a declaration of coverage.

Rogers filed a motion for partial summary judgment seeking a finding that it did not breach any terms of the Travelers policies by settling without Travelers consent. On May 3, 2012, the trial court granted partial summary judgment in favor of Rogers, finding that Travelers breached its duty of good faith to settle.

Additionally, Rogers filed a motion for partial summary judgment seeking rulings that Travelers breached its duty to defend and therefore should be estopped from asserting defenses to coverage. On December 12, 2014, the trial court granted Rogers’ motion and found that Travelers breached its duty to defend and must indemnify Rogers in the underlying suit. The trial court also awarded Rogers $2,665,384.90 in attorney’s fees and costs and an additional $60,000.00 penalty pursuant to the Insurance Code. Travelers appealed.

On appeal, the Court affirmed the trial court on the basis that Travelers’ conduct breached its duty to defend, when the insurer refused to settle within the policy limits and attempted to intimidate Rogers into stopping negotiations and settlement. The court reasoned that Travelers’ threat of negating coverage in an attempt to keep Rogers from settling was contrary to Illinois law and constituted a breach of its duty to defend. The court stated that “while Travelers initially agreed to defend Rogers in the underlying action under a reservation of rights, Travelers attempted to take over the defense of the matter by refusing to allow Rogers to settle at a crucial time during negotiations.” The court found Travelers actions to be offensive and contrary to standard industry practice, putting its interests ahead of its insured. Furthermore, the court found Travelers actions to amount to evidence of “bad faith,” also breaching its duty to settle.

Seventh Circuit Finds Policy Limits Cap Insurer’s Exposure On An Excess Verdict Despite Improperly Denying A Duty To Defend

In Hyland v. Liberty Mut. Fire Ins. Co., 2018 U.S. App. LEXIS 6460 (7th Cir. March 15, 2018), the United States Court of Appeals for the Seventh Circuit considered whether a liability insurer could be saddled with the full amount of an excess verdict against its insured when it improperly failed to defend the insured in an underlying suit.  Liberty Mutual issued an automobile policy that covered a vehicle driven by Michiah Risby as well as anyone driving the vehicle with Risby’s permission.  The vehicle was involved in an accident while Miquasha Smith was driving and passenger Monteil Hyland was injured.  Smith asserted that Risby gave her permission to drive the vehicle and therefore claimed insured status under the Liberty Mutual policy, but Risby denied giving her permission to drive. 

Hyland sued Smith, but Liberty refused to provide a defense or indemnify Smith because she was not driving the car with permission and therefore did not qualify as an insured.  Smith defaulted and a judgment was entered for $4.6 million, which was assigned to Hyland to pursue against Liberty Mutual.  Hyland then filed suit against Liberty Mutual in the U.S. District Court for the Central District of Illinois to collect the full judgment.  The district court concluded that Liberty Mutual’s failure to either defend Smith or file a declaratory judgment action violated Illinois law and made it liable for the entire $4.6 million judgment, even though the policy limits were $25,000 per person.  Liberty Mutual appealed.

The Seventh Circuit reversed.  The court first acknowledged that the estoppel theory cited by the district court could not be the basis to impose the excess judgment on Liberty Mutual, as no Illinois court endorsed that result through estoppel.  This was true even though Liberty Mutual conceded that it should have provided a defense to Smith.

The court then evaluated Hyland’s alternative argument that her $4.6 million in damages were approximately caused by Liberty Mutual’s neglect in failing to defend its insured, Smith.  Liberty Mutual argued that such a theory would only be viable if there was a finding of bad faith, as Illinois law is clear that an insurer’s exposure is limited to the policy limits plus $60,000 under Illinois’ bad faith statute (215 ILCS 5/155).  Hyland argued that bad faith was not required, and it could recover from Liberty Mutual simply by showing the underlying judgment was caused by the failure to defend.

The Seventh Circuit recognized that no Illinois court had squarely addressed whether bad faith was a necessary element of the claim for recovery in excess of policy limits, but ruled that it did not need to answer that question as Liberty Mutual’s neglect could not have caused the judgment.  The court found that the facts of the underlying suit made clear that Smith was liable for the accident, and a defense attorney could not have avoided that result.  With respect to the damages awarded in the underlying suit, Hyland did not argue that a defense attorney assigned to Smith could have achieved a result for less than $4.6 million, and in fact argued that was the correct judgment for her injuries.  The court therefore held that because Smith did not have a plausible defense to liability or damages, the $4.6 million judgment was not caused by Liberty Mutual’s failure to defend and the maximum loss caused by the failure to defend was the policy’s $25,000 limit.  The district court’s decision was vacated and remanded.

New York Court Addresses Coverage for School District’s Alleged Civil Rights Violations

In its recent decision in Graphic Arts Mut. Ins. Co. v. Pine Bush Central School District, 2018 N.Y. App. Div. LEXIS 1553 (N.Y. 2d Dep’t Mar. 9, 2018), the Second Department of the New York Appellate Division had occasion to consider a general liability insurer’s indemnity obligations with respect to a lawsuit alleging that the insured school district failed to adequately address anti-Semitic acts committed against students.

The Pine Bush Central School District and several individual administrators were named as  defendants in a suit brought by five students alleging that their civil rights had been violated as a result of defendants having been “deliberately indifferent to anti-Semitic harassment and discrimination perpetrated by other students.”  The District’s general liability insurer, Graphic Arts, provided a defense to the suit under a reservation of rights and ultimately disclaimed an indemnity obligation.  The suit later settled for approximately $4.5 million, none of which was paid by Graphic Arts.

Graphic Arts later commenced a declaratory judgment action, seeking a declaration of non-coverage on several grounds.  Among the arguments raised by Graphic Arts was that the underlying suit alleged that defendants had acted in an intentionally discriminatory manner, and that as such, coverage was precluded as a result of an exclusion for intentional discrimination and that in any event, the relief sought by the students did not qualify as loss resulting from an occurrence. The District moved to dismiss the complaint based on failure to state a claim.

While the lower court dismissed Graphic Arts’ causes of action pertaining to a duty to indemnify, leaving only a cause of action pertaining to the reasonableness of the underlying settlement, the appellate court reversed.  Of note to the court were several specific allegations in the underlying suit alleging that the acts of anti-Semitism were reported to the defendants and that defendants failed to take any action, thus allowing for the inference that defendants intended for the harassment to occur.  The appellate court agreed that while coverage can be afforded for the unintentional results of intentional acts, it could not rule out the possibility that the District and the various administrators intended these harms, at least on a duty to dismiss standard.  As the court explained:

While “it is not legally impossible to find accidental results flowing from intentional causes, i.e., that the resulting damage was unintended although the original act or acts leading to the damage were intentional” … the insurance policies do not conclusively establish that the plaintiff is obligated to indemnify the defendants in the underlying action, and the other evidence submitted by the defendants did not utterly refute the factual allegations set forth in the plaintiff’s complaint. Whether the incidents set forth in the amended complaint in the underlying action were accidents present questions of fact which cannot be determined on a motion to dismiss pursuant to CPLR 3211(a)(1) and (7).