Professional Liability Roundup
In recent months, courts have issued numerous decisions impacting both the liability exposures frequently seen on the professional liability front, as well as the insurance coverage issues arising from those liabilities. To keep you abreast of these developments, we provide below a summary of those recent professional liability decisions. As an overview, the decisions generally fall into these categories, addressing the following issues:
- Insurance Broker Liability
- the contractual obligations owed by an insurance broker to an insured;
- the principal-agent relationship between an insurance broker and an insurer;
- the "special relationship" between an insurance broker and an insured that can impose a heightened duty of care on the broker;
- an insurance broker's liability to an insured for a scrivener's error;
- the scope of coverage under an insurance broker's errors and omissions policy;
- the preclusion of liability for an insurance broker based on its failure to provide timely notice of a claim where the claim at issue was excluded from coverage by the policy's "insured vs. insured" exclusion;
- the application of the prior knowledge exclusion in a lawyer's professional liability policy;
- the scope of coverage for an attorney during and after employment under a law firms' professional liability policy;
- the application of the "employment-related practices" to the defamation claims by a former law partner against another partner; and;
- the implied waiver of the attorney-client privilege.
- the application of the conduct exclusion to a real estate firm's alleged bank fraud scheme;
- the application of the "complete defense" rule to title insurance;
- the application of a complaint's allegations to an errors and omissions policy's prior acts deadline;
We provide brief summaries of these cases below.
1. INSURANCE BROKER LIABILITY
C.L Thomas, Inc. v. Lexington Ins. Co. (Tex. App., Sept. 11, 2014): Insurance broker can be liable for insured's failure to provide timely notice of claim based on contractual obligation to advise of policy's notice requirements.
An employee obtained a $5.1 million arbitration award against the insured-employer for wrongful termination and defamation. After satisfying the judgment, the insured sought coverage for the award under the employment practices liability coverage in a claims-made primary policy and an umbrella policy that covered liability for compensatory damages for personal injury, including defamation. After both insurance claims were denied for failure to provide timely notice, the insured sued both insurers and its broker.
The Court of Appeals of Texas, overruling the trial court's grant of summary judgment for the broker, found that the broker failed to meet its burden on the claim against it that it failed to educate the insured as to the notice requirements in the claims-made primary policy. The court found that pursuant to the Client Service Agreement between the broker and the insured, the broker was contractually obligated to "educate [the insured] as needed," which included the notice requirements applicable to the primary policy. Therefore, according to the court, it was reasonably foreseeable that the broker's failure to advise the insured of the notice requirements may result in untimely notice of a claim.
Cammeby's Mgmt. Co., et al. v. Affiliated FM Ins. Co., et al. (S.D.N.Y., Oct. 1, 2014): Insurance broker can be liable to insured for negligence resulting in scrivener's $20 million error while executing insurer's change in policy limits.
The owners of a commercial real estate complex in New York filed a $30 million claim for flood damage arising from Superstorm Sandy under its $30 million high-hazard flood sublimit in a flood policy issued by Affiliated FM Insurance Company ("Affiliated"). It was not until the claim was filed that Affiliated allegedly discovered a scrivener's error in the policy endorsement reflecting the amount of this sublimit as $30 million instead of $10 million, which is what Affiliated thought was the amount of the sublimit. While this allegedly stemmed from the insured seeking to increase the limit to $30 million a year prior and then changing that position, this issue was disputed. After the discovery, Affiliated issued a new endorsement correcting this error to reflect a $10 million high-hazard sublimit, effective from the date of the endorsement containing the scrivener's error. Affiliated then paid the $10 million to the insured on its claim, and the insured sued Affiliated and its broker.
After summary judgment motions by all parties were denied, the matter proceeded to a jury trial. The jury found that the broker was negligent in effectuating Affiliated's reduction of the sublimit to $10 million, that the endorsement was a mutual mistake as a result of this negligence, and that the broker failed to prove that the insured ratified the reduction. Final judgment was entered against the broker for the difference between the sublimits – $20 million – plus pre-judgment interest, with the claims against Affiliated dismissed.
Golden Rule Ins. Co. v. Tomlinson (Kan., Oct. 24, 2014): Insurer was bound by broker's omission of insured's preexisting medical conditions on insurance application and, therefore, was precluded from denying coverage.
A broker submitted two health insurance applications on the insured's behalf. The second application, submitted by the broker to Golden Rule Insurance Company ("Golden Rule"), omitted the insured's preexisting abdominal conditions, an action the broker later described as a "mistake." After the policy was issued based on this application, Golden Rule denied coverage for the insured's proposed abdominal reconstruction surgery on the basis that it was a preexisting condition that the insured was obligated to disclose in the application but did not.
The insured filed a complaint with the Kansas Insurance Department, which ruled that the insured could rely on the broker's representation that Golden Rule would only examine the last 90 days of her medical history because the broker was acting within his authority as Golden Rule's agent when he submitted the application. The Supreme Court of Kansas affirmed this finding (reversing the Court of Appeals' finding that the broker was an independent broker rather than an agent of Golden Rule), holding that Golden Rule could not deny coverage for the insured's alleged failure to disclose a preexisting condition because a principal-agent relationship existed between Golden Rule and the broker. Golden Rule was bound by the acts and omissions of the broker. According to the independent broker contract between the broker and Golden Rule, the broker had actual authority to solicit and submit applications for insurance to Golden Rule, and therefore, was acting within the scope of his authority on behalf of Golden Rule when he omitted the insured's medical history from the application.
Tiara Condominium Assoc., Inc. v. Marsh, USA, Inc. (S.D. Fla., Oct. 31, 2014): A "special relationship" between insurance broker and client can impose on broker a heightened duty of care requiring broker to advise client as to the amount of coverage prudently needed.
The insured, the condominium board for Tiara Condominium ("Tiara"), brought suit against its broker, Marsh, USA, Inc. ("Marsh"), claiming, among other things, breach of fiduciary duty and negligence, after the complex was devastated by two back-to-back hurricanes in 2004. Tiara's 2004 windstorm insurer determined that the two hurricanes were not separate occurrences. Tiara claimed that Marsh's failure to advise it to obtain occurrence-based coverage caused it to incur $35 million in economic losses for incomplete repairs.
The court denied the broker's motion for summary judgment, finding an issue of fact existed as to whether the "special relationship" existed between Tiara and Marsh that subjected the broker to an extra-contractual, heightened common-law duty of care requiring it to advise as to the amount of coverage prudently needed to meet the client's complete insurance needs and best protect its interests. Tiara presented evidence that a long-term relationship existed with the broker, that it relied on the broker to keep it apprised of its insurance needs and in compliance with its policies, that the broker regularly participated in meetings of Tiara's insurance committee to offer advice, that the broker held itself out as a highly skilled expert in property casualty insurance, and that Tiara dealt exclusively with the broker on all insurance coverage needs.
Even in light of this evidence, the jury unanimously found that Tiara did not have the "special relationship" with Marsh necessary to trigger additional duties for the broker beyond what is typical in a broker-insured relationship.
Margulis v. BCS Ins. Co. (Ill. App. Ct., Nov. 26, 2014): Unsolicited, automated "robocalls" by insurance broker advertising its business fell outside the scope of broker's professional liability coverage because making such calls was not "rendering services for others."
In the underlying class action lawsuit, insurance broker Bradford & Associates ("Bradford") allegedly conducted a robocalling scheme in violation of the Telephone Consumer Protection Act, transmitting tens of thousands of unsolicited, automated messages promoting its services. When Bradford was sued for this conduct, Bradford's professional liability insurer, BCS Insurance Company ("BCS"), denied coverage and did not defend the action on the grounds, among others, that such solicitation of business to the general public without any established business relationship does involve "rendering services for others as a licensed Life, Accident, and Health Insurance Agent," and further, that the prerecorded messages involved intentional rather than negligent acts, errors, or omissions. The insured and the underlying claims entered a settlement that was approved, and which contemplated funding exclusively from insurance proceeds. Given that insurance had been denied, the underlying plaintiff filed a declaratory judgment action seeking a declaration that BCS had a duty to defend and pay the judgment.
Affirming summary judgment for BCS, the Appellate Court of Illinois found that BCS had no duty to defend or indemnify Bradford because the making of robocalls did not fall within the scope of its professional liability policy. In order to potentially fall within the scope of coverage, there must have been alleged negligent acts, errors, or omissions arising out of the insured's business conduct in "rendering services for others" as a licensed insurance broker. The court determined that no coverage was available because making such calls did not involve rendering services for the call recipients as clients or customers of the broker.
Ecolite Concrete U.S.A. Inc. et al. v. G.S. Levine Ins. Serv. Inc. (Cal. Ct. App., Dec. 31, 2014): Insurance broker is not liable to insured for failure to provide timely notice of claim to insurer when "insured vs. insured" exclusion of directors and officers policy would have precluded coverage for insured anyway.
When the business relationship between Ecolite Concrete U.S.A. Inc. ("Ecolite") and RQ Construction Inc. ("RQ") soured, RQ officers (and former Ecolite Directors) George Rogers ("Rogers") and Mike Patterson ("Patterson") sued Ecolite on behalf of RQ. Prior to filing suit, Rogers sent emails to Ecolite, in his capacity as RQ CEO, threatening legal action. Ecolite then forwarded these emails to its insurance broker, G.S. Levine Insurance Services Inc. ("GSL"). GSL allegedly did not notify Ecolite's insurer, ACE/Illinois Union Insurance Co. ("Illinois"), after receiving the emails because the suit had not yet been filed. Once RQ filed the underlying lawsuit against Ecolite, Illinois refused to defend Ecolite based on, among other things, late notice under the policy.
After a jury returned a verdict against Ecolite, finding that notice was indeed "late," thereby precluding coverage, Ecolite filed suit against GSL and another broker claiming negligence based on the brokers' failure to timely notify Illinois of RQ's claims. Affirming the trial court's judgment for GSL, the California Court of Appeals found that GSL's alleged failure to timely report Ecolite's claim to Illinois caused no damage because the policy would have ultimately excluded coverage for Ecolite under the "insured vs. insured" exclusion. The court found that RQ's underlying lawsuit against insured Ecolite was brought "at the direction of" RQ officers Rogers and Patterson, who were insureds, along with Ecolite, under the Illinois policy. It was undisputed that Rogers and Patterson were Ecolite directors at the relevant time, thereby triggering the application of the exclusion.
2. ATTORNEY MALPRACTICE LIABILTY
Cardenas v. Twin City Fire Ins. Co. (N.D. Ill., Sept. 19, 2014): Attorney's unjustifiable failure to timely serve defendant creates expectation of malpractice claim, thereby precluding coverage pursuant to prior knowledge exclusion in subsequent E&O policy.
Maria Cardenas' ("Cardenas") civil rights action was dismissed after her attorney failed to timely serve the defendant. Her attorney's attempts to reverse the February 2010 dismissal over the next year were futile. At no point during the course of that year did the attorney notify his legal malpractice insurer, Twin City Fire Insurance Company ("Twin City"), of these proceedings. In the following period, when the attorney was sued for malpractice, Twin City denied coverage based on, among other reasons, the prior knowledge exclusion. The insured's rights under the policy were assigned to Cardenas pursuant to a settlement. Cardenas then filed suit against Twin City to obtain coverage for the underlying settlement.
The U.S. District Court for the Northern District of Illinois granted summary judgment in favor of the insurer, concluding, in relevant part, that the attorney's conduct – inexcusably failing to meet "widely recognized" time deadlines – met the conduct necessary to trigger the prior knowledge exclusion. The court found that the attorney could have reasonably expected, before the August 29, 2011 inception of the policy, that this conduct would form the basis of a malpractice claim. For these reasons, there was no duty to defend or indemnify the insured pursuant to the policy's prior knowledge exclusion.
Duckson v. Continental Cas. Co. (D. Minn., Dec. 8, 2014): Law firm's professional liability insurer has no duty to defend former attorney whose work on an investment fund that began while at the firm continued in a different capacity after his termination from employment and, thus, fell outside the scope of coverage.
A Hinshaw & Culbertson LLP ("Hinshaw") attorney was retained to draft documents related to the sale of interests in a real estate investment fund. He eventually became the fund's investment advisor and partner. Hinshaw later terminated the attorney. An underlying securities lawsuit was commenced against the attorney, alleging the attorney made material misrepresentations during his involvement with the investment fund, while employed by Hinshaw and thereafter. Hinshaw's professional liability insurer, Continental Casualty Co. ("Continental") denied coverage for those claims which it contended fell outside the scope of the attorney's work for Hinshaw.
Unpersuaded by the attorney's argument that the claims involved his legal work for the investment fund while at Hinshaw, the U.S. Magistrate recommended that the court dismiss the attorney's breach of contract claims against Continental. The U.S. Magistrate found that the attorney's work for the fund after employment with Hinshaw fell outside the scope of professional liability coverage and was precluded from coverage by the capacity exclusion. He profited not in legal fees but in investment advisory fees that went directly to him, not to Hinshaw, through his own investment advisory firm.
Peerless Indem. Ins. Co. v. Moshe & Stimson LLP (Ind. Ct. App., Dec. 30, 2014): Insurer has no duty to defend attorney where defamation claim by former partner is "employment-related," falling within the policy's EPL exclusion.
Sarah Moshe filed suit against her brother and law partner, Justin Stimson ("Stimson"), alleging defamation and seeking a formal dissolution of the partnership, claiming, among other things, that her brother refused the firm's dissolution, refused to compensate her, and made accusations about her integrity and professional competence. Stimson sought defense and indemnification from Peerless Indemnity Insurance Co. ("Peerless"), the firm's professional liability insurer. Peerless denied the claim and sought a declaration that it had no duty to defend or indemnify Stimson based on the policy's "employment-related practices" exclusion.
In reversing the trial court and remanding for an entry of summary judgment for Peerless, the Indiana Court of Appeals found Stimson's attempted distinction between his sister's status as a firm partner versus an employee to be a "red herring." Rather, the correct inquiry is whether Stimson's alleged defamation was "employment-related," a term which is undefined in the policy. The court agreed with Peerless that the exclusion was unambiguous and barred coverage when applying the plain and ordinary definitions of "employment" and "related" because the plaintiff's claims against her brother related to her job. "The policy at issue was designed to protect the siblings in suits brought by third parties – it was not meant to protect one against the other in a suit between the two."
3. "OTHER" E&O ISSUES AND DEVELOPMENTS
General Star Nat'l. Ins. Co. v. Adams Valuation Corp., et al. (N.D. Ill., Sept. 23, 2014): Real estate firm's alleged bank fraud scheme excluded under conduct exclusion.
After real estate appraisal and consulting firm Adams Valuation Corporation and Douglas Adams (collectively, "Adams") were sued for RICO violations, fraud, and aiding and abetting in connection with an alleged multi-million dollar bank fraud scheme involving insider loans, General Star National Insurance Company ("General Star"), its errors and omissions insurer, denied coverage and sought a declaration that it had no duty to defend.
General Star moved for judgment on the pleadings, arguing that it owed no duty to defend pursuant to the policy's exclusion for claims "arising out of a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation... committed by, at the direction of, or with the knowledge of any insured." In granting judgment on the pleadings for the insurer, the U.S. District Court for the Northern District of Illinois found that such RICO and fraud claims "necessarily allege" the requisite conduct to bring the claim within the scope of this exclusion. According to the court, it was clear from the face of the underlying complaint alleging fraudulent acts and intentional misrepresentation that the case was excluded from coverage.
Philadelphia Indem. Ins. Co. v. Chicago Title Ins. Co. (7th Cir., Nov. 13, 2014): The "complete defense" rule, requiring insurer to provide a complete defense for both covered and uncovered claims, does not apply to title insurance.
In the underlying lawsuit, real estate lender Western Capital Partners LLC ("Western") was accused of a scheme to defraud owners of a commercial building in Chicago, with allegations of fraud, violations of consumer protection laws, and breach of contract. Western tendered the defense to Chicago Title Insurance Company ("Chicago Title"), which insured the mortgages under a title policy. Chicago Title undertook the defense but only as to claims potentially covered by the policy, which limited claims to those adverse to the insured's title, such as claims involving defects in title or lien priority. Western then sought coverage from Philadelphia Indemnity Insurance Company ("Philadelphia"), its general liability insurer, which brought a declaratory judgment action against Western and Chicago Title seeking a determination of its obligation to defend, arguing that the title policy was the primary policy and Chicago Title had a duty to defend the entire suit.
The Seventh Circuit Court of Appeals, applying Illinois law, reversed the lower court and held as a matter of first impression that, as the "complete defense" rule applicable to general liability policies does not apply to a title insurance policy, Chicago Title is only obligated to defend against claims covered under its policy. The court noted the difference between the risks undertaken with the two types of policies – title insurers cover risks that are already in existence when the policy is issued, not those that may arise in the future. The scope of title insurance policies, according to the court, is generally more limited, whereas general liability policies encompass broad duties of defense and indemnification.
1st Amer. Warehouse Mortgage Inc. v. Topa Ins. Co. (Cal. Ct. App., Nov. 19, 2014): No coverage for real estate broker where complaint's allegations of wrongdoing predated the policy's prior acts date.
The underlying lawsuit stemmed from real estate brokerage firm 1st American Warehouse Mortgage Inc.'s ("1st American") alleged misconduct in a real estate purchase in California. After one investment partner obtained a default judgment against the other investment partner related to the purchase, the investment partner then sued 1st American, claiming the other investment partner was its agent and that the company failed to supervise by allowing him to make a real estate deal on a suspended license. First American's claim was denied by its errors and omissions insurer, Topa Insurance Company ("Topa"), because the partnership's purchase of the property occurred before the prior acts date in the policy. First American then sued Topa for bad faith and breach of contract.
The Court of Appeals of California affirmed summary judgment for Topa, finding the complaint's alleged wrongdoing predated the policy's prior acts date, which provided that no coverage would be available for 1st American where the negligent act, error, or omission occurred prior to March 1, 2006.
Everest Indem. Ins. Co. v. The Honorable Judge Rea, et al. (Ariz. Ct. App., Jan. 15, 2015): In bad faith action, insurer did not impliedly waive attorney-client privilege when defending decision to settle based on subjective good faith, which included consultations with counsel.
In the underlying action, several insureds claimed their insurer, Everest Indemnity Insurance Company ("Everest"), committed bad faith by entering into a settlement that, to their detriment, exhausted their liability coverage. Everest argued that its decision to settle was made in good faith based on its subjective beliefs concerning the good-faith nature of its actions and admittedly consulted with counsel before and during settlement negotiations. After the trial court ordered production of documents Everest believed were privileged communications with counsel, Everest sought to withhold those documents on the basis of attorney-client privilege.
The issue before the court was whether Everest impliedly waived the attorney-client privilege regarding its communications with counsel by asserting subjective good faith as a defense. Under Arizona law, the waiver of attorney-client privilege is implied when, after consulting with counsel, a party affirmatively asserts "that it was acting in good faith because it relied on the counsel's advice to inform its own evaluation and interpretation of the law." In finding in favor of Everest, the court distinguished that Everest merely consulted with counsel and received advice before and during settlement, but there was no showing that Everest was in doubt as to any legal issues or that its subjective belief regarding settlement was the product of advice from counsel. Further, Everest had not asserted that it was dependent on counsel's advice when forming its subjective beliefs surrounding its course of conduct, and thus, had not placed advice from counsel at issue.
For more information on these or other E&O issues, please contact Jason P. Minkin at 312-762-3230, or JMinkin@BatesCarey.com.