May 2016 Professional Liability Roundup: Recent Cases Involving Attorneys and Brokers and Other Professionals
- whether breach of contract and wage and hour claims allege injury arising out of “any negligent act, error or omission” necessary to trigger employee benefits liability coverage;
- whether third-party negligence claims by an insured against an insurance broker/agent for failure to procure adequate coverage may proceed prior to a determination of whether coverage exists under the insured’s policy;
- whether claims against an insured-optical business for engaging in intentional torts and unfair business practices by locking out a business partner and engaging in fraudulent activity are professional services falling with the scope of a professional liability policy; and
- whether a prior knowledge exclusion precludes coverage for claims against an insured-child placing agency for negligent licensing, where the insured had prior knowledge of the foster parent’s history of abuse.
We provide brief summaries of these cases below.
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Hartford Cas. Ins. Co. v. Karlin, Fleisher & Falkenberg, LLC, --- F.3d --- (7th Cir. May 16, 2016) (applying Illinois law): Under Illinois law, claims for breach of contract and violation of the Illinois Wage Payment and Collection Act do not constitute a “negligent act, error or omission” where the allegations “sound in contract.”
A former employee of an insured-law firm sued the law firm for breach of contract and violations of the Illinois Wage Payment and Collection Act (“IWPCA”). The plaintiff alleged that the insured-law firm failed to pay the former employee for his accrued vacation and sick leave when he left the law firm. The insured-law firm had an employee benefits liability policy that provided coverage for “employee benefits injury,” which was defined to mean “injury that arises out of any negligent act, error or omission in the ‘administration’ of your ‘employee benefits program.’” The insurer denied coverage on the basis that a breach of contract is not a “negligent act.”
In the ensuing declaratory judgment action in the U.S. District Court for the Eastern District of Illinois, the insured-law firm argued that the alleged violation of the IWCPA “sounded in negligence” and therefore triggered a duty to defend. The district court agreed that “[a] violation of the IWPCA need not involve an intentional act.” However, the district court held that the IWCPA claim “sounds in contract, not in negligence,” determining that the insured-law firm’s decision not to follow their alleged policy of paying accrued sick leave was not a “negligent act.” The district court noted the “well-recognized line of demarcation between negligent acts and breaches of contract,” and granted the insurer’s motion for summary judgment, holding that the insurer owed no duty to defend or indemnify the insured-law firm.
On appeal, the Seventh Circuit upheld the denial of coverage, concluding that the insured-law firm’s alleged violation of the IWCPA was tied to breach of contract claim. The Seventh Circuit noted that “[t]his is the norm in the insurance industry: 'responsibility to make payments according to a contract is not the sort of duty that will support an action in negligence.'"
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The Cincinnati Specialty Underwriters Insurance Company v. Code 3 Security & Protection Services, Inc., et al., No. 8:16-CV-127-T-30TBM, 2016 WL 2759152 (M.D. Fla. May 12, 2016) (applying Florida law): Under Florida law, third-party negligence claims by an insured against an insurance agent and broker for failure to procure adequate coverage may proceed prior to a determination of whether coverage exists under the insured’s policy, where the coverage and third-party disputes involve similar issues of fact.
An insured-security company, Code 3 Security (“Code 3”), acquired a general liability insurance policy from Cincinnati Specialty Underwriters Insurance Company (“Cincinnati”) with the assistance of an insurance broker, CSU Producer Resources (“CSU”), and insurance agency, Bay Area Insurance Group (“Bay Area”). Code 3 was sued in Florida state court for negligent hiring and entrustment after one of its security guards allegedly shot, with an electronic Taser, the plaintiff. Cincinnati filed a declaratory judgment action in the U.S. District Court for the Middle District of Florida, seeking a declaration that it no owed no coverage for the underlying lawsuit, namely by reason of an “Assault or Battery” exclusion contained in the Cincinnati policy. This led Code 3 to file a third-party complaint against CSU and Bay Area, asserting that, if the court finds that no coverage exists under the Cincinnati policy, then its broker and agent are liable for negligence and breach of fiduciary duty for failing obtain the proper policy.
CSU moved to dismiss the third-party complaint on the grounds that, without a coverage determination, any claim against it had not accrued and was thus premature. CSU argued that if the court found coverage existed under the Cincinnati policy, the claims against CSU would be moot. In deciding whether to allow the third-party action to proceed, the court considered the following factors: (1) the merits of the underlying coverage action; (2) the merits of the third-party complaint; (3) the potential of impleader to complicate or delay the action; and (4) the prejudice to the impleaded party. While the court stated that each of these factors suggested not allowing the third-party claims to proceed against CSU and Bay Area, the court concluded that dismissing the third-party claims completely would be inefficient, as the same set of facts could arise in the coverage dispute and the third-party complaint. The court held that both the coverage dispute with Cincinnati and Code 3’s dispute with its agent and broker were likely to involve the same issues of fact, and, therefore it would be most efficient to keep the complaints together, but stay the third-party claims for the time being.
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Peerless Indem. Ins. Co. v. Surowiak, 2016 WL 1730644 (Ill. App. 1 Dist. April 29, 2016) (applying Illinois law): Under Illinois law, claims against an insured-optical business for engaging in intentional torts and unfair business practices by locking out a business partner and engaging in fraudulent activity are not professional services falling with the scope of a professional liability policy.
An insured-optical business and its owner were sued in Illinois state court after removing a partner from the optical business, forming another corporation, and continuing to use the optical business’ assets. The business partner asserted claims against the insureds for breach of contract, conversion, breach of fiduciary duty, waste of corporate assets, common law fraud, replevin, and violations of the Illinois Consumer Fraud & Deceptive Business Practices Act and Uniform Deceptive Practices Act.
The insured’s professional liability insurers filed a declaratory judgment action, seeking a declaration that they had no duty to defend the insureds. The policy contained a “Optometrists Professional Liability-Illinois” endorsement covering “bodily injury” and “property damage” arising out of the rendering of or failure to render professional services in connection with the insured’s business as an optometrist, including treatment, advice or instruction. The insurers argued that the endorsement was not triggered because the underlying lawsuit failed to allege “bodily injury” or “property damage” caused by an “occurrence.”
The trial court granted the insurers’ motion for judgment on the pleadings, finding that the insurers’ had no duty to defend or indemnify the insureds. The Appellate Court affirmed, finding that the allegations that the insureds engaged in intentional torts and unfair business practices by locking out the business partner, using the business’ assets and credit, and engaging in fraudulent activity, all related to intentional business torts and unfair competitive practices, and were insufficient to trigger coverage. The Appellate Court cited to Illinois precedence holding that professional liability policies generally provide coverage only for those risks “inherent” in the insured’s professional services, and do not provide coverage for tortious conduct and improper business practices, which are “ancillary” to the performance of professional services.
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Diamond State Ins. Co. v. Boys' Home Ass'n, Inc., No. 3:13-CV-456-J-34PDB, 2016 WL 1110422 (M.D. Fla. Mar. 22, 2016) (applying Florida law): Under Florida law, prior knowledge exclusion does not preclude an insurer’s duty to defend a child placing agency in a lawsuit alleging negligent licensing, where there are no allegations that the insured was aware of its failure to uncover information which should have disqualified the foster parent for licensure.
An insured-child placing agency was sued in Florida state court for negligent licensing after licensing a foster parent who had a criminal background of child abuse. The insured-agency reported the lawsuit to its professional liability insurer. The insurer filed a declaratory judgment action in the U.S. District Court for the Middle District of Florida, seeking a determination that it did not owe a duty to defend or indemnify the insured-agency. The insurer argued that coverage was excluded pursuant to the policy’s prior knowledge exclusion, which excluded coverage for any “claim, suit, or wrongful act that might result in a claim or suit, of which any insured had knowledge or could have reasonably foreseen at the signing date of the application for this insurance [July 20, 2010].” The insurer relied on a June 2006 DCF report provided to the insured-agency, which indicated that there was an abuse report against the foster parent, and revealed instances of prior abuse by the foster parent in 1991, 2002, and 2002. Another report from October 2006 disclosed another instance of physical abuse of a foster child by the foster parent. The insurer argued that, based on the 2006 reports, the insured-agency had actual or prior knowledge that the foster parent had a criminal abuse history and, therefore, coverage was excluded pursuant to the prior knowledge exclusion.
The district court held that the prior knowledge exclusion did not preclude a duty to defend the underlying lawsuit, finding that the underlying complaint contained no allegations that, before 2010 (when the insured signed its insurance application), the insured-agency was aware that it breached a duty in licensing the foster parent. The district court noted that, while the insured-agency may have had knowledge of the foster parent’s history of abuse, there were no allegations that the insured-agency “was aware of its failure to uncover the information which should have disqualified [the foster parent] for licensure.” The district court found that a reasonable person may not have viewed the 2006 reports as potentially leading to a claim because the insured received hundreds of abuse reports per year, but had only been sued once for negligent licensure.
For more information on these or other E&O issues, please contact Jason P. Minkin at 312-762-3230, orJMinkin@BatesCarey.com.