Hot Issues in Professional Liability Coverage:Lessons from the DRI

Transcription

Hot Issues in Professional Liability Coverage:
Lessons from the DRI Compendium
Mark E. Cohen
Zelle McDonough & Cohen LLP
101 Federal St 14th Fl
Boston, MA 02110
(617) 742-6520
mcohen@zelmcd.com
In March 2008, after almost 30 years as head of the Insurance Coverage Department at another Boston based firm, Mark E. Cohen joined with Tony Zelle and
Brian McDonough to form Zelle McDonough & Cohen. Mr. Cohen concentrates his
practice in the areas of insurance coverage and bad faith. During his career as an
insurance coverage specialist, Mr. Cohen has represented insurers in thousands of
coverage matters in every jurisdiction in America and in numerous foreign countries. He has provided coverage advice concerning virtually every type of insurance
policy imaginable, including general liability, excess, and a wide variety of professional liability policies, including employment practices liability, directors’ and officers’ liability, architects and engineers professional liability, and malpractice/errors
or omissions policies for numerous other professions. Mr. Cohen has also drafted
many insurance policies and endorsements for his insurance clients. He has litigated, arbitrated and mediated cases throughout the country and has been admitted
to practice pro hac vice in numerous jurisdictions.
Table of Contents
I. Professional Liability Insurance Coverage: A Compendium of State Law................................................99
A.Introduction...........................................................................................................................................99
B. Arizona Chapter..................................................................................................................................118
C. Florida Chapter....................................................................................................................................132
D. Massachusetts Chapter........................................................................................................................146
Hot Issues in Professional Liability Coverage: Lessons from the DRI Compendium ❖ Cohen ❖ 97
I. Professional Liability Insurance Coverage: A Compendium of State Law
A.Introduction
Goal and Overview
Professional Liability Insurance Coverage: A Compendium of State Law surveys the law in all 50 states,
the District of Columbia, the United States Virgin Islands, Guam and Canada, except for Quebec, concerning 25 major issues, arranged into 10 general topics relating to professional liability and claims-made insurance coverage. The Compendium focuses on case law and statutes that are unique to professional liability and
claims-made policies and also discusses “professional services” exclusions commonly found in general liability and homeowners’ policies. Issues that relate to insurance law generally, such as when there is a duty to
defend and whether an insurer is entitled to allocation of defense costs attributable to non-covered matters,
are not within the scope of the Compendium even if these cases happen to involve claims-made or professional liability policies.
The purpose of the Compendium is to provide a guide for attorneys and claims professionals presented with issues unique to professional liability and claims-made policies. The Compendium seeks to set
forth relevant case law and statutes in a straightforward manner, rather than presenting commentary on any
wrongly decided cases or discussing how the law might evolve in the future.
The Compendium discusses federal and state decisions, both published and unpublished, from official reporters, LEXIS and Westlaw. Before citing an unpublished case mentioned in the Compendium in a
pleading, practitioners should, of course, make sure that citing unpublished cases accords with the pleading
jurisdiction’s rules.
The Compendium includes cases decided through August 2012.
Types of Policies Discussed
Professional liability policies are available for virtually all professions imaginable. The cases cited in
the Compendium involve a wide variety of professional liability policies, including those issued to real estate
brokers and other real estate professionals; medical, mental health and dental professionals; design professionals, such as architects, engineers and surveyors; attorneys and law firms; accountants and accounting
firms; clerics and religious organizations; governmental entities, law enforcement officers and other public
officials; insurance brokers or agents; and insurers. Directors and officers liability insurance policies, including D&O policies that provide “entity coverage” to an insured company or organization, and employment
practices liability policies are also within the professional liability category, and numerous decisions involving
these types of policies are discussed in the Compendium.
Most but not all professional liability policies are written on a claims-made basis, and most but
not all claims-made policies are professional liability policies. The Compendium discusses significant issues
involving claims-made policies and cites cases discussing claims-made issues regardless of whether these
cases involve professional liability policies.
Policy Language and Facts
Unlike general liability policies, which are usually written on ISO forms or other standardized forms,
“standard” professional liability forms or policies do not exist. Policy language varies from insurer to insurer
and from policy to policy. The particular policy language is often crucial to a court’s holding. Therefore, when
a policy’s language is important to a court’s decision, the authors have indicated the relevant policy language.
Likewise, professional liability coverage cases often are highly fact-dependent, so the authors have noted the
relevant facts that were important to a decision. When appropriate, the authors have discussed the courts’
rationales for their holdings.
Style and Citations
The Compendium follows The Bluebook: A Uniform System of Citation (19th ed. 2010) citation style
even when states may have their own citation styles.
For uniformity, and in an effort to facilitate word searches, we have hyphenated “claims-made” but
not “claims made and reported” unless we have quoted from a case or a statute that does otherwise.
For the sake of consistency, we have used the following language:
• “Claimant” means the third-party claimant or the plaintiff in the underlying action
• “Insured” means the policyholder
Specific Topics Addressed in the Compendium
The remainder of this Introduction explicates the topics addressed for each jurisdiction, in the same
outline format as the state chapters. The cases discussed in this Introduction are discussed in greater detail in
the state chapters.
I. Insuring Agreement
A.Is the phrase “negligent act, error or omission” ambiguous? Can it apply to
intentional errors or omissions?
Some professional liability policies apply only to “negligent acts, errors or omissions.” When a policy includes this language, insureds sometimes argue that it is ambiguous whether “negligent” modifies only
“acts,” or whether “negligent” also modifies “errors” and “omissions.” In other words, the question is whether
the policy only covers negligent acts, or whether it also covers intentional errors or omissions. This section of
the state chapters explores these questions.
Most jurisdictions that have decided the issue have found this language to be unambiguous, holding
that a policy containing this language does not cover intentional wrongdoing.
One leading case on this issue is Golf Course Superintendents Ass’n of America v. Underwriters at
Lloyds of London, 761 F. Supp. 1485, 1490 (D. Kan. 1991). In that case, the court explained:
We believe it makes better sense and captures the intent of the parties to construe the definition
of “wrongful act” so that the word “negligent” modifies every relevant term of the definition. It
would be self-defeating to limit the definition of “wrongful act” to negligent acts, but at the same
time cover intentional errors or omissions.
B.What is the standard for determining whether an act, error or omission
involves a “professional service”?
This question seeks to elicit and explain how courts generally interpret the requirement of most professional liability coverage that a covered claim involve an insured’s “professional services,” in contrast to how
courts generally interpret exclusions for damages arising from the insured’s “professional services,” which are
commonly found in general liability and homeowners’ policies. Cases involving both the meaning of “profes100 ❖ Insurance Coverage and Practice Symposium ❖ December 2012
sional services” when used in professional liability policies and in professional services exclusions are cited in
the Compendium.
Most courts that have discussed the meaning of “professional services” have followed the standard
first set forth in the leading case on the issue, Marx v. Hartford Accident & Indemnity Co., 183 Neb. 12, 13–14,
157 N.W.2d 870, 871–72 (Neb. 1968) (internal citations omitted), or some variation of this standard. In Marx,
the court explained that to constitute a professional service
[S]omething more than an act flowing from mere employment or vocation is essential. The act
or service must be such as exacts the use or application of special learning or attainments of
some kind. The term “professional” in the context used in the policy provision means something
more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities. A “professional”
act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or
intellectual, rather than physical or manual. In determining whether a particular act is of a professional nature or a ‘professional service’ we must look not to the title or character of the party
performing the act, but to the act itself.
Therefore, under the Marx test, not all services performed by a professional are “professional services,” and nonprofessional employees can be said to engage in professional services. Whether a particular claim
involves a professional service depends on the circumstances and, in some cases, on the policy language.
Courts have drawn a distinction between “professional services” and administrative, business, clerical or ministerial acts by a professional. The latter types of acts or omissions generally do not involve professional services. E.g., Inglewood Radiology Med. Grp., Inc. v. Hospital Shared Servs., Inc., 217 Cal. App. 3d
1366, 266 Cal. Rptr. 501 (Cal. Ct. App. 1989) (construing alleged wrongful termination and defamation of
employee physician as not constituting “professional service,” defined in physicians’ errors and omissions
policy as “services performed in the practice of the profession of a physician,” because “the decision to terminate employment is a business or administrative decision. In making such a decision, the physician acts as an
employer and not as a “physician rendering services.”). But see Estate of Tinervin v. Nationwide Mut. Ins. Co.,
23 So. 3d 1232, 1237 (Fla. Dist. Ct. App. 2009) (holding employee’s failure to provide doctor with lab report,
which led to patient’s death, an intricate part of professional service provided by doctor).
Similarly, some courts have held that acts that merely set the stage for the performance of professional services are not themselves professional services. E.g., Albert J. Schiff Assocs., Inc. v. Flack, 51 N.Y.2d
692, 700, 435 N.Y.S.2d 972, 976, 417 N.E.2d 84, 88 (N.Y. 1980) (finding circumstances that merely set stage for
performance of business or professional services are not professional activities contemplated by special “professional service” coverage and noting that “[a]n errors and omissions policy is intended to insure a member
of a designated calling against liability arising out of the mistakes inherent in the practice of that particular
profession or business.”).
C.Under what circumstances have courts found that an act, error or omission
involves / does not involve a “professional service”?
In this section, the authors have cited cases in which the courts discussed whether a claim made
against an insured involved the insured’s professional services. Cases discussing whether a claim involves professional services for purposes of either a professional liability policy or a professional services exclusion have
arisen in a wide variety of contexts. The resolution of whether a particular matter involves professional services is highly dependent on the facts and sometimes on the policy language.
Sometimes both a professional liability insurer and a general liability insurer will have a duty to
defend and/or indemnify an insured. This may be because the same claim contains allegations that involve
professional services, as well as allegations that do not involve professional services. In addition, because
courts generally typically construe exclusions against an insurer, and the insurer bears the burden of proving
that an exclusion applies while the insured bears the burden of proving that a claim falls within an insuring
agreement, it is possible that both a professional liability insurer and a general liability insurer will have a duty
to defend the same allegations against an insured when it is not clear whether the allegations involve professional services. For example, in Duke University v. St. Paul Fire & Marine Insurance Co., 96 N.C. App. 635, 386
S.E.2d 762 (N.C. Ct. App. 1990), the North Carolina Court of Appeals held that the professional services exclusion did not apply to the acts of a medical assistant in failing to secure casters on a dialysis chair before moving a patient, finding that such acts were manual rather than mental and did not require any special skill or
training. The court noted that although the case before it involved coverage under the insured’s general liability policy, the insured’s professional liability policy also could cover the matter since courts strictly construe
exclusions and liberally construe provisions that provide coverage. 96 N.C. App. at 640, 386 S.E.2d at 765.
Claims against health care professionals and medical or mental health facilities have generated a
great deal of litigation regarding whether the claims involve professional services. These cases often arise in
one of two situations: (1) a health care professional is accused of sexual misconduct; or (2) a patient falls and
suffers a personal injury.
Most courts have been unwilling to find that claims of sexual misconduct by a medical professional
involve professional services. The relatively few cases that have held otherwise have often involved sexual misconduct allegedly committed during the course of a medical examination that was so intertwined with allegations of professional negligence that the court found that there was a duty to defend and/or indemnify the
insured. For example, in St. Paul Fire & Marine Insurance Co. v. Shernow, 222 Conn. 823, 610 A.2d 1281 (Conn.
1992), a professional liability policy was found to cover a claim against a dentist when allegations of a sexual
assault of a patient were “so inextricably intertwined and inseparable from the intentional conduct that serves
as the basis for the separate claim of a sexual assault.” 222 Conn. at 830, 610 A.2d at 1285. The dentist had been
treating the patient for 10 years and had consistently advised her that nitrous oxide was the appropriate means
of sedation for her. He had never previously assaulted her, and she had always been aware of her surroundings. This time, the patient was scheduled to have a molar filled when the dentist administered nitrous oxide.
The dentist sexually assaulted the patient while she was rendered helpless from the anesthesia, and the dentist
increased the dosage twice when the patient began to come around. She allegedly sustained permanent injuries
based on his administration of the anesthesia including asthma and permanent partial loss of lung capacity.
Other cases have held that claims against mental health professionals who were accused of failing to
manage the transference or counter-transference phenomena properly can involve the insured’s professional
services. E.g., St. Paul Fire & Marine Ins. Co. v. Love, 459 N.W.2d 698 (Minn. 1990); St. Paul Fire & Marine
Ins. Co. v. Mitchell, 164 Ga. App. 215, 217, 296 S.E.2d 126, 127 (Ga. Ct. App. 1982) (involving allegation that
insured induced claimant to engage in sexual relations “as part of her prescribed therapy” and holding this
type of departure from profession’s standard of care indistinguishable from other types of malpractice such as
“improper administration of a drug or a defective operation.”).
When a patient falls and is injured during the course of medical treatment, whether the claim
involves professional services frequently depends on whether the accident involves improper maintenance or
whether it implicates the insured’s specialized knowledge and training. For example, in Harris v. Sternberg,
2001-1827, p. 7 (La. App. 4 Cir. 5/22/02); 2001-2170, p. 7 (La. App. 4 Cir. 5/22/02); 819 So. 2d 1134, 1139,
the insured physician was sued when the physician’s nursing assistant allowed an obese patient to fall off a
102 ❖ Insurance Coverage and Practice Symposium ❖ December 2012
scale while the patient was being weighed. The underlying claim was deemed to involve the insured’s professional services for purposes of the insured physician’s professional liability policy and the professional services exclusion in the physician’s general liability policy. The court reasoned that the underlying claim involved
professional services because weighing the patient was necessary for the patient’s treatment; the scale was
not intended to be used by obese patients; and the assistant did nothing to prevent the wheels on the scale
from rolling. The court found it significant that the plaintiff did not allege that the scale itself was defective. In
another case, Western World Insurance Co. v. Empire Fire & Marine Insurance Co., C.A. No. 7:06-217-RBH, 2006
WL 3337427, at *6 (D.S.C. Nov. 16, 2006), the court found that a claim against an ambulance company alleging
that due to its negligence a patient had fallen off a rolling stretcher involved the ambulance company’s professional services. The court reasoned that “securing and transporting an individual on a rolling stretcher requires
specialized knowledge” and “is part of the ‘professional services’ provided by an ambulance service.” Id.
Whether a claim involves professional services also frequently arises in connection with construction
site accidents. In such claims, the question often is whether the claim—whether brought against an architect,
engineer or other design professional, or a contractor—involves allegations of “general negligence,” i.e., duties
owed by everyone on a construction site, or whether the claim instead involves professional negligence. For
example, in S.T. Hudson Engineers, Inc. v. Pennsylvania National Mutual Insurance Co., 388 N.J. Super. 592,
909 A.2d 1156 (N.J. Super. Ct. App. Div. 2006), the insured was retained to perform an underwater survey of a
pier and set up mechanisms to detect any movement in the pier. It was alleged that the insured became aware
that the pier was about to collapse and failed to provide an adequate warning. The pier collapsed, causing several deaths and numerous injuries. The court concluded that liability “resulting from the failure to warn or
give instructions was not excluded by the professional services exclusion in the CGL policy.” 388 N.J. Super.
at 605, 909 A.2d at 1164. The court noted, however, that allegations respecting an insured’s failure to provide
adequate engineering, supervisory or inspection services or to discover or to remedy a condition for which
the professional services were engaged would necessarily involve professional services. See also, e.g., Chemstress Consultant Co., Inc. v. Cincinnati Ins. Co., 128 Ohio App. 3d 396, 715 N.E.2d 208 (Ohio Ct. App. 1998)
(holding that professional services exclusion did not preclude coverage for allegation that insured engineering
firm breached its duty to ensure safety at construction project site).
In another frequent fact pattern an attorney or another professional is accused of wrongdoing in
connection with billing matters. Most courts have found that such claims do not involve professional services. E.g., Reliance Nat’l Ins. Co. v. Sears, Roebuck & Co., 58 Mass. App. Ct. 645, 792 N.E.2d 145 (Mass. App.
Ct. 2003) (holding that insured attorney’s fraudulent billing did not involve professional services); Cohen v.
Empire Cas. Co., 771 P.2d 29, 31 (Colo. App. 1989) (regarding lawyer’s refusal to pay for legal services of cocounsel a billing practice, holding that it did constitute “professional service” and stating that “[e]xpenses
incurred by a lawyer for maintaining his office, hiring secretaries, investigators, consultants, expert witnesses,
and associates are incidental to a lawyer’s business. His failure to pay either the cost of, or the reasonable value
for, such business expenses cannot rationally be deemed a failure to provide legal advice or assistance to others
in his professional capacity as a lawyer.”) (emphasis in original).
II. Meaning of “Claim”
Unlike commercial general liability policies, which are usually written on an “occurrence” basis,
meaning that a policy may apply whenever damage occurs during the policy period, most professional liability policies are written on a “claims-made” basis. Therefore, for an underlying action to be covered by a
claims-made policy, the “claim” must be first made against the insured during the policy period or, in some
cases, during an extended reporting period. Many professional liability policies define “claim,” but others do
not. Determining what constitutes a claim, however, is often not an easy task. A claim is typically made when
a communication is received by the insured, not when it is sent. Some claims-made policies require that a
claim be made in writing, while other policies indicate that a claim can be made by verbal communications as
well. While it is obvious that receipt of a summons and complaint constitutes the making of a claim, it can be
less clear whether a claim is made when an insured receives a letter or other written communication from a
claimant or the claimant’s attorney, a request for a tolling agreement or an administrative charge or notice.
If an insured receives correspondence sent by or on behalf of a claimant, whether the receipt of that
correspondence constitutes the making of a claim may depend on several factors such as (1) whether the policy defines claim; (2) how the policy defines claim if it does; (3) what the correspondence sent by or on behalf
of the claimant to the insured said; and (4) the context in which the claim was written. For example, Herron v.
Schutz Foss Architects, 282 Mont. 94, 935 P.2d 1104 (Mont. 1997), involved whether a “claim” had been made
under an architect’s professional liability policy. The policy defined claim to mean a “demand for money or
services . . . alleging a wrongful act.” A letter from an attorney indicating that he was representing the claimant and asking the insured to contact its insurance carrier to discuss “this claim” was found to be a claim. The
court stated that it would
be anomalous to hold that a claim is . . . not made until a suit is actually filed. To do so would
encourage litigation as opposed to negotiation and settlement. And, to the extent that the tortfeasor had a claims-made policy in force when he was notified, but did not have such insurance
in force when the lawsuit was filed-perhaps a year or more later-then coverage would be frustrated altogether.
282 Mont. at 101, 935 P.2d at 1108. Moreover, the court explained that “even though there was no request for
a specific dollar amount in the July 12th letter, the text on its face indicates that the [claimants] were seeking
compensatory payment, otherwise, there would be no reason for [the insured] to contact his insurance carrier.” Id.
A. What is a “claim” (when not defined in the policy)?
This topic is geared to situations involving a policy that does not define the term “claim.” Some courts
have found that the undefined term “claim,” as used in a claims-made policy, is ambiguous, and these courts
have construed that ambiguity against the insurer. Many other cases, however, have found the term unambiguous, even when the term was not defined in the policy. These courts have often looked to dictionary definitions to determine what “claim” means.
For example, when not otherwise defined in a policy, Illinois courts define a “claim” as “a demand for
something due or believed to be due,” meaning “a demand by a third party that [the insured] do something.”
Central Ill. Pub. Serv. Co. v. American Empire Surplus Lines Ins. Co., 267 Ill. App. 3d 1043, 1047, 642 N.E.2d
723, 725–26 (Ill. App. Ct. 1994) (quoting Webster’s Fifth New Collegiate Dictionary 205). See also National
Union Fire Ins. Co. of Pittsburgh, Pa. v. Cary Cmty. Consol. Sch. Dist. No. 26, No. 93 C 6526, 1995 WL 66303,
at *3 (N.D. Ill. Feb. 15, 1995) (stating “the common definition of a claim is a demand for money” and quoting
Black’s Law Dictionary 247 (6th ed. 1990) for its definition as a “[d]emand for money or property as of right,
e.g. insurance claim.”).
In Williamson & Vollmer Engineering, Inc. v. Sequoia Insurance Co., 64 Cal. App. 3d 261, 134 Cal.
Rptr. 427 (Cal. Ct. App. 1976), overruling on other grounds recognized, National Steel Corp. v. Golden Eagle
Insurance Co., 121 F.3d 496 (9th Cir. 1997), the court of appeal noted that “the word ‘claim’ was not limited to
a formal lawsuit.” 64 Cal. App. at 270, 134 Cal. Rptr. at 432. As the policy application at issue did not define the
term “claim,” the court reviewed the following definitions:
A ‘claim’ has been defined in ordinary English as ‘a demand for something due or believed to
be due.’ (Merriam, Webster’s 7th New Collegiate Dict. (1972) p. 152.) [An earlier case collected
the following definitions:] “The word (claim) is derived from the Latin clamor, meaning a call,
a demand. In its ordinary sense the term imports the assertion, demand or challenge of something as a right; the assertion of a liability to the party making it to do some service or pay a sum
of money. A ‘claim’ refers to a debt due the claimant. It is a money demand. ‘Claim’ means ‘To
ask for, or seek to obtain, by . . . right, or supposed right; to demand as due.’ A claim connotes an
assertion of a legal right, as distinguished from a recognition of that right.
64 Cal. App. at 269, 134 Cal. Rptr. 2d at 431 (some citations and punctuation omitted).
B.When do courts find a claim is made / not made? What circumstances do
courts find important in determining whether a communication from the
third-party claimant constitutes a claim?
This section focuses on examples of cases in which a court discussed whether a claim was made during the policy period. Cases summarized in this section include cases involving policies that defined “claim,”
as well as cases involving policies that did not define “claim.” The authors have discussed the relevant policy
language and the circumstances relevant to the court’s decision.
Among the issues addressed in this section are (1) whether a mere complaint about an insured’s work
or services can be a claim, and (2) the factors that courts consider when determining whether a communication is a claim. Some factors that courts have found significant when determining whether a communication
constitutes the making of a claim include, did the communication assert that the insured would or could be
held liable for its conduct? Did the communication indicate that the claimant had suffered damages for which
the insured was responsible? Did the letter ask the insured to turn the letter over to its insurer? Did the letter
ask the insured to enter into a tolling agreement?
For example, in an unpublished decision, the Eleventh Circuit Court of Appeals, interpreting Georgia law, held that a claimant’s letter notifying the insured of her concerns over “actions undertaken as her
lawyer,” which included a demand for repayment, constituted a claim made prior to the policy period. Simpson & Creasy, P.C. v. Continental Cas. Co., 453 F. App’x 868, 871 (11th Cir. 2011) (unpublished) (affirming
district court’s ruling that four events established that claim had been made prior to policy period: (1) claimant’s request for her file; (2) investigation and correspondence from claimant’s counsel; (3) executing a tolling
agreement; and (4) claimant’s request that insured notify his insurer).
The lawyer’s professional liability policy at issue in Carosella & Ferry, P.C. v. TIG Insurance Co., 189
F. Supp. 2d 249, 253 (E.D. Pa. 2001) defined “Claim” to mean, in relevant part, “a demand received by the
Insured for money or services.” The court determined that a claim was made when the insured law firm
received a letter from its former clients’, the claimants, new attorney. This letter stated that the claimants
intended to file a malpractice action against the insured and that the claimants had suffered damages due to
the insured’s conduct. This letter also asked the insured to put its errors and omissions insurer on notice and
have its insurer contact the claimants’ new attorney.
III. Related/Interrelated Acts Provisions
Most claims-made policies include related acts or interrelated acts provisions. These provisions may
determine whether related or interrelated claims are treated as a single claim for purposes of the applicable
deductible or self-insured retention amount, or for purposes of determining the applicable limit of liability. Related or interrelated acts provisions may also govern which policy applies when related or interrelated
claims are made in multiple policy periods. There may be some overlap between this section and other sections. For example, a pending or prior litigation exclusion may preclude coverage if a related claim was made
before the pending or prior litigation date included in the policy.
A.For “claims” to be “related,” can they be logically related, causally related, or
either?
Courts have differed over whether multiple claims must be causally related to be deemed related for
purposes of a related or interrelated act provision, or whether, instead, claims can be either “logically related”
or “causally related.” The cases requiring a causal relationship were mostly earlier cases. Arizona Prop. & Cas.
Ins. Guar. Fund v. Helme, 153 Ariz. 129, 134, 735 P.2d 451, 456 (Ariz. 1987). The Helme court stated:
We do not believe that the word “related” as used in the policy can be equated with the phrase
“logical connection.” Logic, like beauty, is in the eye of the beholder and greatly depends upon
the subjective mental process of the reviewer. Incidents may be “logically related” for a wide
variety of indefinable reasons. Causal connection depends, to a much greater extent, on objective
facts in the record.
Id.
The clear majority rule now, however, is that matters can be either logically or causally related to be
deemed as related or interrelated.
Some leading cases applying the majority rule are Gregory v. Home Insurance Co., 876 F.2d 602 (7th
Cir. 1989) (applying Indiana law) (holding that common understanding of term “related” is that it encompasses broad range of connections, both causal and logical), and Bay Cities Paving & Grading, Inc. v. Lawyers’
Mutual Insurance Co., 5 Cal. 4th 854, 21 Cal. Rptr. 2d 691, 855 P.2d 1263 (Cal. 1993).
This topic asks whether courts in each jurisdiction permit claims to be either logically or causally related to satisfy the jurisdictional relatedness requirement, or whether a causal relationship is required.
Because the answer to this question may depend on the policy language, the Compendium authors have
included the relevant policy language in their discussions when the policy language was important to the decisions.
B.Under what circumstances have courts found multiple “claims” are / are not
related?
This topic discusses specific situations in which claims either have or have not been found related
for purposes of a claims-made policy. Because the outcome of this issue is fact dependent, the authors have
described the relevant factual background, including the policy language when it was important to the decision.
Some policies specifically state that claims that are casually related, logically related, temporally
related or a combination of these can satisfy the related acts requirement. Courts have differently identified
circumstances that they viewed as making multiple claims sufficiently related to deem the claims logically or
causally related. For example, the court in Professional Solutions Insurance Co. v. Mohrlang, Civ. A. No. 07-CV02481-PAB-KLM, 2009 U.S. Dist. LEXIS 14187 (D. Colo. Feb. 10, 2009), expressly defined “logically related”
and “causally related” in construing a policy that deemed claims to be related if they were “temporally, logically or causally connected.” Id. at *26. The court held that “logically connected” means “connected by an
inevitable or predictable interrelation or sequence of events.” Id. at *31 (citation omitted). Elaborating, the
court wrote, “Therefore, for two things to be logically connected, one must attend or flow from the other in an
inevitable or predictable way.” Id. Events are “causally connected” when “one person or thing brings about the
other.” Id. at *32–33. Finding “causation requires more than a ‘but-for’ relationship between two things . . . .”
Id. at *33. To be causally connected, “the first thing leads to the second in a direct and traceable way, . . . where
no independent significant thing interrupts the causal chain between the two.” Id. at *33.
IV. Enforcement of Reporting and Notice Provisions
Claims made and reported policies require claims to be reported within a specific time, either during
the policy period, or more often today, within 30 or 60 days after the policy’s expiration. Many cases revolve
around insureds’ efforts to circumvent these reporting requirements. Under Wisconsin law, reporting provisions in claims-made policies are trumped by Wisconsin’s statutory notice requirements, which allow an
insured to have one year after a policy expires to provide notice of a claim under a policy. Lexington Ins. Co. v.
Rugg & Knopp, Inc., 1 F. Supp. 2d 937, 939 (E.D. Wis. 1998), aff ’d, 165 F.3d 1087 (7th Cir. 1999). These notice
requirements are incorporated by law into “all insurance policies . . . delivered or issued for delivery in [Wisconsin],” with a few stated exceptions that do not include claims-made policies. 1 F. Supp. 2d at 939 (quoting
Wis. Stat. §631.01).
In most jurisdictions, however, courts have strictly construed reporting provisions in claims-made
policies and have held that an insurer does not have to show that it was prejudiced by the insured’s failure to
report the claim timely. Moreover, courts have virtually universally held that a claims-made policy does not
offend public policy, and the claim must be first made during the policy period to afford coverage.
Courts often refer to both “pure” claims-made policies (i.e., claims-made policies that do not include
any reporting requirement but merely require that notice be given “as soon as practicable”), and claims made
and reported policies as “claims-made” policies. This can cause some confusion. Courts generally have held
that when a claims-made policy does not contain any reporting provision but includes an “as soon as practicable” notice condition, the insurer must prove that it was prejudiced by the late notice. Likewise, when an
insured reports a claim within the time set by the reporting requirement but had notice of the claim early in
the policy period and did not report the claim until late in the policy period, the insurer must prove that it was
prejudiced by the insured’s breach of the “as soon as practicable” notice condition.
For example, in Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., 288
S.W.3d 374, 380–81 (Tex. 2009), the court explained:
Claims made or discovery policies are essentially reporting policies. If the claim is reported to
the insurer during the policy period, then the carrier is legally obligated to pay; if the claim is
not reported during the policy period, no liability attaches. Claims made policies require notification to the insurer to be within a reasonable time. Critically, however, claims made policies
require that that notice be given during the policy period itself.
Because the requirement that a claim be reported to the insurer during the policy period or
within a specific number of days thereafter is considered essential to coverage under a claimsmade-and-reported policy, most courts have found that an insurer need not demonstrate
prejudice to deny coverage when an insured does not give notice of a claim within the policy’s
specified time frame.
Id. (internal citation omitted).
In Prodigy, however, the Texas Supreme Court distinguished a claims made and reported policy
from a claims-made policy that merely requires notice “as soon as practicable” and does not require that the
insured report the claim to the insurer during the policy period or within a specified number of days thereafter. The Texas Supreme Court concluded that the insurer in Prodigy was not denied the benefit of the claimsHot Issues in Professional Liability Coverage: Lessons from the DRI Compendium ❖ Cohen ❖ 107
made nature of its policy because the claim was reported before the 90-day grace period for reporting claims
expired, even though the parties stipulated that the insured did not provide notice “as soon as practicable”
as required by a separate “condition precedent.” Because the insurer admitted that it was not prejudiced by
the delay in receiving notice, it could not deny coverage based on the insured’s failure to give notice as soon
as practicable. Id. at 382. See also Financial Indus. Corp. v. XL Specialty Ins. Co., 285 S.W.3d 877 (Tex. 2009)
(holding that insurer must show that it was prejudiced by late notice given during the policy period).
A.Are reporting provisions in claims made and reported policies strictly construed, even when the insurer cannot prove it was prejudiced?
This topic discusses cases that have held that a reporting provision in a claims-made policy should
be construed strictly and that the insurer need not prove that it was prejudiced by a late notice. As explained
above, the overwhelming majority of courts have found that a reporting requirement is an essential element of
coverage under a claims made and reported policy. These courts have construed such reporting requirements
strictly, and they have not required claims made and reported insurers to prove that they were prejudiced by
an insured’s failure to provide timely notice.
B.If a claim is reported late, is there coverage if the policy was renewed, and
the claim was reported during the renewal policy period?
Some insureds have argued that even when a claim is not timely reported, if the claim is made during one policy period, the policy is renewed, and the claim is reported during the same insurer’s later policy
period, there still should be coverage. This is sometimes referred to as the “continuous coverage” theory. This
theory has been rejected in most jurisdictions that have considered it. For example, in Ehrgood v. Coregis
Insurance Co., 59 F. Supp. 2d 438, 446–47 (M.D. Pa. 1998), the insureds contended that
renewal of the 1996–1997 policy, in effect, operates as an extended reporting period under that
policy. They [the insureds] argue that because an insured who cancels or does not renew a policy can extend the reporting period, surely an insured who does renew must be given the same
extension. They maintain that denial of the extending [sic] reporting period violates their reasonable expectations as well as public policy.
Id. at 446. The court rejected this argument, explaining:
At first blush, this argument has some intuitive appeal. It seems only logical that an insured who
renews receive greater, or at least not less, protection than one who cancels or fails to renew. This
approach, however, ignores the nature of the policy at issue. Each of the three policies issued by
Coregis is a claims-made policy . . . . [A] claims-made policy insures against the claim itself, regardless of when the event occurred, subject to relevant policy language. [T]he notice, or reporting
period, in a claims made policy defines coverage: if the claim is reported to the insurer during the
policy period, then the carrier is legally obligated to pay; if the claim is not reported during the policy period, no liability attaches. Thus, an extension of the notice period in a “claims-made” policy
constitutes an unbargained-for expansion of coverage, gratis, resulting in the insurance company’s
exposure to a risk substantially broader than that expressly insured against in the policy.
Coregis’s failure to make the extended reporting period option available to policy renewals neither violates public policy nor the Ehrgood Plaintiffs’ reasonable expectations. An optional
extended reporting period for those who cancel or fail to renew a policy protects those insureds
against the gaps in coverage that can result from switching to an occurrence policy or to another
claims-made policy. This insured can only protect himself against the possibility of such claims
by extending the period in which to report claims arising out of the claims-made policy period.
An insured who changes claims-made policy carriers may also face a similar problem, in the
event that the subsequent carrier places a retroactive date that limits coverage for prior acts.
By contrast, insureds who renew their policies face no such problem. The Coregis policies do
not contain a retroactive date. Thus, the 1996–1997 policy offers unlimited prior acts coverage
for the claims that were unforeseeable at the time the policy incepted. Assuming arguendo that
Pennsylvania has a public policy which requires insurers to offer protection against gaps in coverage to insureds changing carriers or policy types, such public policy is simply inapplicable to
insureds who remain with the same carrier and the same type of insurance policy. Furthermore,
the Ehrgood Plaintiffs’ 1996–1997 policy provided them sixty days after the end of the policy
period in which to report any claims or potential claims, thereby protecting them against “eleventh-hour” claims filed toward the end of the policy period. They point to nothing in the insurance policy or in the course of their dealings with Coregis which would have lead them to believe
they had a longer period of time. Thus, their failure to disclose a foreseeable claim within the
prescribed time limits does not frustrate any of their reasonable expectations. The court finds,
therefore, that coverage of the [underlying] claim is precluded under the 1996-1997 policy. The
court will grant summary judgment in favor of Coregis with respect to this claim.
Id. at 446–47 (citations, footnotes and some punctuation omitted).
Those courts that have adopted the continuous coverage theory have often based their holdings on
particular policy language. E.g., Helberg v. National Union Fire Ins. Co., 102 Ohio App. 3d 679, 682, 657 N.E.2d
832, 834 (Ohio Ct. App. 1995) (opining about the phrase “continuously renewed thereafter “in a policy’s exclusions section: “[t]his language indicates that the parties expected the coverage to be continuous if the policy
was renewed at each successive policy expiration.”).
C.Can there be coverage if the claim is made very late during one policy period
and is reported soon after the reporting period expires?
Nearly all courts that have confronted this issue have held that they need to construe reporting provisions in claims made and reported policies strictly, and the insurer is not required to prove that it was prejudiced by an insured’s failure to timely report the claim, even when the claim is first made near the end of the
policy period and is reported soon after the expiration of the policy period or the “grace period.” For example,
the New Hampshire Supreme Court strictly enforced a notice of circumstance requirement that notice be
given during the policy period when notice was sent by overnight mail the day before the policy’s 12:01 a.m.
expiration but was not received before the policy expired. Catholic Med. Ctr. v. Executive Risk Indem., Inc., 151
N.H. 699, 704–05, 867 A.2d 453, 458–59 (N.H. 2005).
One example of one of the very rare cases excusing compliance with a reporting requirement in a
claims made and reported policy due to highly unusual circumstances is Root v. American Equity Specialty
Insurance Co., 130 Cal. App. 4th 926, 30 Cal. Rptr. 3d 361 (Cal. Ct. App. 2005). In that case, the court of appeal
allowed a very narrow exception to the general rule of strict compliance with the notice requirement based on
equitable grounds. The insured was an attorney whose former client filed a malpractice action against him only
three days before his malpractice insurance expired. The insured was not served with the malpractice action
until after the insured’s policy had expired. On the day that the action was filed, the insured received a telephone call from someone who identified herself as an employee of a “legal journal” seeking the insured’s reaction to the action in question. The insured believed that the telephone call was a prank and did not report the
claim to his insurance company. The insured read about the action a few days later in the “legal journal” and
immediately notified the insurer of the claim. This was two days after the insured’s policy had expired. The
court of appeal reversed the trial court’s entry of summary judgment in favor of the insurer by finding it appropriate to excuse the insured’s failure to report the claim before the policy expired. The court of appeal further
noted that when the term functions as a “condition precedent” rather than as an element of “the fundamental
risk insured,” “equitable excusal of conditions precedent” may be applicable when a condition otherwise would
“work a forfeiture.” 130 Cal. App. 4th at 936, 941, 30 Cal. Rptr. 3d at 639, 642 (emphasis in original).
The Root court emphasized “the narrowness of [its] decision,” noting the fact that the insurer presumably had not offered its insured the opportunity to buy an extended reporting endorsement, which would
have given the insured an extra 60 days to report a claim, as significant to its decision. 130 Cal. App. 4th at
929, 938–39, 30 Cal. Rptr. 3d at 632, 638–40. The Root court wrote, “Had [the insured] been given that opportunity . . . equity might not require excuse of the condition, because its excuse would, in effect, be to give [the
insured] the benefit of something that he had the opportunity to buy and passed up.” 130 Cal. App. 4th at 948,
30 Cal. Rptr. 3d at 647 (citation omitted).
In the early days of claims made and reported policies, many policies required an insured to report
a claim to the insurer during the policy period and did not provide a “grace period,” which would leave the
insured with very little time to report a claim if a claimant made a claim against the insured at the very end
of the policy period. Most insurers issuing claims made and reported policies have now dealt with this perceived potential unfairness by giving an insured a 30- or 60-day “grace period” after the policy period expires
in which to report claims. If an insured is given such a grace period to report a claim, it should not have any
basis to assert that it could not timely report a claim.
D.When do courts find reporting of a claim (or a notice of circumstance that
could lead to a claim) is adequate / not adequate?
Most claims-made policies permit an insured to preserve coverage for claims that are first made after
the policy period by sending the insurer during the policy period a notice of circumstances that could lead to
a claim. Courts and insurance policies may refer to this concept by different terms; it may be called a “notice
of circumstance” provision, a “circumstance reporting” provision, or a notice of a “potential claim” or a “possible claim” provision.
Claims-made policies typically list specific information that must be included in a notice of circumstance or a notice of claim. This section of the Compendium addresses cases involving whether a notice of a
circumstance or a notice of a claim provides sufficient information to the insurer. Some courts have required
strict compliance with the policy provisions governing content of the notice, while other courts have found
that only substantial compliance is necessary. Compare Farm Bureau Life Ins. Co. v. Chubb Custom Ins. Co.,
780 N.W.2d 735 (Iowa 2010) (concluding that strict compliance with policy’s notice provision was condition
precedent to coverage). with Greenburgh Eleven Union Free School Dist. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 304 A.D.2d 334, 758 N.Y.S.2d 291 (N.Y. App. Div. 2003) (concluding that “substantial, rather than
strict, compliance” with notice requirements is all that is required; although insured did not give express written notice of disciplinary proceedings that formed basis for underlying claim, insurer had been given notice of
incident giving rise to disciplinary proceedings and was involved in seeking global settlement of claim).
Some cases have dealt with “laundry lists,” an informal term for lists of many potential claims sent to
an insurer with little or no explanatory information. Insureds sometimes submit “laundry lists” in an effort to
preserve coverage when a policy is about to expire, especially when the insured is about to switch its coverage
to another insurer. Courts have usually rejected insureds’ attempts to preserve coverage by sending a “laundry
list” unless the insurer was given sufficient background information about the claim at issue. For example, in
American Casualty Co. of Reading, Pennsylvania v. Sentry Federal Savings Bank, 867 F. Supp. 50, 60 (D. Mass.
1994), the court indicated that a “laundry list” would not serve as a proper notice of circumstances. The court,
however, found that the information that was submitted by the insured in connection with the notice of circumstance in this case was more than a “laundry list” because it described the potential plaintiffs and defendants and the circumstances from which a claim could arise. Therefore, the notice was sufficient to preserve
coverage for claims later made against the insured.
V. Extended Reporting Period Provisions
Claims-made policies usually contain automatic or optional extended reporting provisions or both,
sometimes referred to as “discovery” or “tail” provisions. This topic addresses these provisions. An automatic
extended reporting provision commonly extends, for a very short time period, usually 30 or 60 days, either (1)
the time for a claim to be made (based on occurrences that take place during the policy period; or (2) the time
for the insured to report a claim that was first made during the policy period. An insured does not have to pay
an extra premium for an automatic extended reporting period. An optional extended reporting period provision fills the same function as an automatic extended reporting period provision, but it gives the insured the
option to purchase, usually for a fixed percentage of the original premium amount, a longer extended reporting period of typically one, two or three years.
One issue raised by extended reporting period provisions is whether a claim can be made during the
extended reporting period, or whether the provision merely gives the insured extra time to report a claim that
was made during the policy period. The answer to this question usually depends on the policy language.
Another issue related to extended reporting periods is whether an insured is entitled to coverage
under an extended reporting period when it has obtained subsequent, similar claims-made coverage. For
example, in Employers Reinsurance Corp. v. Karussos, No. 92-749-FR, 1993 WL 165660 (D. Or. May 6, 1993),
vacated on technical grounds due to lack of federal jurisdiction, 65 F.3d 796 (9th Cir. 1995), the district court
held that the issuance of a subsequent, similar policy can extinguish the prior policy’s extended reporting
provision. The prior policy provided no right to purchase an extended reporting period endorsement if the
insured was “issued the same or similar policy with this Company, or any other company.” Id. at *2. The court
concluded that the word “similar” was not ambiguous and that the policy that the insured obtained after the
expiration of the prior policy was “similar” because both policies provided claims-made coverage. The fact
that the later policy contained a prior knowledge provision did not render the policies dissimilar. Therefore,
the insured did not have the right to an extended reporting period under the earlier policy. Id. at *3.
Additionally, claims-made policies often provide an insured with a right to purchase an optional
extended reporting period only if the policy was cancelled or non-renewed. This language has resulted in
cases involving whether a policy was “non-renewed” when an insurer offered a new policy with significantly
different terms than the expiring policy to an insured. For example, in American Casualty Co. of Reading,
Pennsylvania v. Continisio, 17 F.3d 62 (3d Cir. 1994), applying New Jersey law, involved a directors and officers
liability policy issued to a savings and loan association that gave the insured the right to purchase an extended
reporting period if the policy was not renewed. Under the terms of the policy, the insurer also was required
to give notice of the right to purchase an extended reporting period endorsement if there was a non-renewal.
Id. at 67. The insured argued that because the insurer had added a regulatory exclusion to the new policy, this
constituted a non-renewal that should have required the insurer to give the association notice that it had a
right to purchase an extended reporting period. The court, however, determined that this was not a nonrenewal, and therefore, the insurer did not have to give notice to the insured that it had the right to purchase an
extended reporting period. Id.
VI. Prior Knowledge Provisions
Most claims-made policies include prior knowledge provisions, which may be referred to as a prior
notice provision, a discovery provision or an awareness provision. These provisions state that if an insured
had the requisite knowledge of circumstances before the policy’s effective date, or sometimes an earlier date
specified in a policy, coverage will not be provided. These provisions vary; they can require that an insured
have had knowledge of circumstances that “could,” “may,” “might” or “likely would” give rise to a claim. Prior
knowledge provisions may appear in an insuring agreement or in a policy exclusion. Many cases discuss
under which circumstances prior knowledge provisions preclude coverage. The language used in the provisions varies widely from policy to policy.
A.How do courts interpret “prior knowledge” provisions? What standard do
courts apply in determining whether the insured had sufficient prior knowledge – subjective, objective, or a mixed subjective/objective standard?
In this section, the authors have discussed cases addressing the general standard that courts have
applied to determine whether a prior knowledge provision precludes coverage under a claims-made policy.
Which standard applies to a prior knowledge provision may depend on the policy language. The authors have
also included any policy language that was relevant to the decisions.
A few courts have applied a subjective standard: Did the insured actually believe, before the policy’s
effective date, that the circumstances might lead to a claim? Most recent decisions, however, have applied a
mixed subjective/objective standard. Under this standard, a court first asks what information an insured actually knew about before the policy’s effective date, the subjective part of the test, and then the court asks what
a reasonable insured would have believed, based on the information actually known to the insured, the objective part of the test. An example of a case applying the mixed subjective-objective standard is Selko v. Home
Ins. Co., 139 F.3d 146, 151–52 (3d Cir. 1998) (applying Pennsylvania law). First, the insurer has the burden
of proving which facts or information were “actually known to the insured.” Id. at 152. Second, the import of
these known facts and information must be measured by applying an objective standard: what a reasonable
professional in the insured’s field of expertise in possession of such facts and circumstances would recognize,
believe and understand. Id.
B.When do courts find the prior knowledge provision bars / does not bar
coverage?
This topic addresses whether a prior knowledge provision precluded coverage in particular situations. Because the outcome of a prior knowledge issue highly depends on the circumstances, the authors have
described the relevant facts, the policy language and the court’s rationale, as appropriate.
VII. Retroactive Date Provisions
A retroactive date provision precludes coverage if the events that gave rise to a claim occurred before
a certain date, which may or may not be the policy’s effective date. One of the biggest issues related to retroactive date provisions is whether there is coverage when the events in question began before the retroactive date
and continued after the retroactive date, or when an insured had the opportunity to mitigate a claimant’s damages after the retroactive date.
For example, in Schultze v. Continental Insurance Co., 2000 N.D. 209, 619 N.W.2d 510 (N.D. 2000),
the court considered the applicability of a retroactive date to continuing conduct that began before the retroactive date. The insured was a dentist who allegedly had an affair with his hygienist beginning in 1993. He
terminated her employment and allegedly falsely accused her of embezzlement. She sued for sexual harassment and defamation. The court found that a duty to defend existed. The sexual harassment began before the
policy’s “prior act date” of January 23, 1998, and the claims arose from a “continuous pattern of conduct” that
began before that date. 2000 N.D. 209 at ¶ 10, 619 N.W.2d at 514. Thus, coverage did not apply to those claims.
In contrast, the defamation claim occurred when the insured accused the claimant of embezzlement on
November 17, 1998, after the prior acts date. These claims were “distinct from, and not necessarily a continuation of ” the alleged harassment. 2000 N.D. 209 at ¶ 13, 619 N.W.2d at 515. Accordingly, the insurer had a duty
to defend the defamation claims, and by extension, the entire lawsuit.
A.When do courts find a retroactive date provision bars coverage / does not bar
coverage?
In this section, the authors discuss cases in which a retroactive date provision has been found to preclude coverage and cases in which a retroactive date provision has been found not to preclude coverage.
VIII. H
ow Do Courts Interpret Common Professional Liability Policy
Exclusions?
Although professional liability policies contain a wide range of exclusions, we selected the following
exclusions because they have been heavily litigated. In the final section of the state chapters, discussed below,
the authors have discussed cases involving less frequently litigated exclusions.
A. Intentional or Dishonest Acts exclusion
A “dishonest acts” exclusion typically bars coverage for claims arising out of dishonest, criminal, malicious, fraudulent and/or knowingly wrongful acts or omissions. Some cases discussing these exclusions have
focused on whether the insured acted in a dishonest manner. For example, In re Estate of Corriea, 719 A.2d 1234
(D.C. 1998), involved a breach of fiduciary duty claim brought by a client against an attorney who was insured
under a lawyer’s professional liability policy. It was alleged that the insured attorney failed to disclose to the client certain conflicts of interest that the attorney had and that the insured did not obtain his client’s consent to
the conflicts of interest. The policy excluded coverage for “any act, omission or Personal Injury committed by the
insured with actual dishonest, fraudulent, criminal or malicious purpose or intent.” Id. at 1238. While calling this
a close question and agreeing that the insured’s conduct involved “dishonesty,” the court held that whether the
dishonest acts provision precluded coverage could not be determined as a matter of law. The court explained that
although the insured had been found to have “patently breached” the fiduciary duties that he owed to his client,
“whether he did so with intent to deceive” raised a fact question. Id. at 1242. Quoting Black’s Law Dictionary 468
(1990), the court stated that “dishonesty” means a “[d]isposition to lie, cheat, deceive or defraud.” Id. The court
held that “to justify refusal of coverage” under the policy’s dishonest acts exclusion, the insurer had to prove that
“in failing to disclose his conflicting roles, [the insured] intended to keep [his client] in the dark about facts that
he knew, or reasonably could not help but know, might affect its business judgment if known to it.” Id. at 1243.
Whether the insured had that intent could not be determined on summary judgment. Id.
Some policies also contain “innocent insured” language stating that the exclusion does not preclude
coverage for insureds that did not know about, participate in, or acquiesce in the wrongful conduct. Some
cases have discussed whether the insured against whom the claim was made was “innocent,” and whether a
knowingly wrongful act by an individual insured should be imputed to the insured company or firm, or to
other individual insureds. For example, a dishonest acts exclusion in a legal professional liability policy was
found to preclude coverage for a claim based on a law firm’s fraudulent billing practices in St. Paul Fire &
Marine Insurance Co. v. Dresser Industries, Inc., No. 91-2238, 972 F.2d 341, 1992 WL 189491 (4th Cir. Aug.
10, 1992) (unpublished table disposition) (applying Maryland law). The exclusion contained an “innocent
insured” exception that indicated that the exclusion did not apply to insureds that did not personally participate in the wrongful acts and did not “remain passive after having knowledge of any such act or omission.”
972 F.2d at 341, 1992 WL 189491, at *2. The court found that there was sufficient evidence that firm partners
who were named as defendants in the underlying action brought by the firm client, but who did not themselves work on matters for that client, at the least “remained passive” after learning about the wrongful acts, so
that the exclusion precluded coverage for the claims against them. Id.
Some policies require that an insured “in fact” commit the wrongful act or omission, or that there
be a “final adjudication” that the excluded conduct occurred. For example, in Atlantic Permanent Federal Savings & Loan Ass’n v. American Casualty Co. of Reading, Pennsylvania, 839 F.2d 212, 216 (4th Cir. 1988) (per
curiam) (applying Virginia law), cert. denied (U.S. 1988), the policy’s dishonest acts exclusion stated that it
applied only if there was “a judgment or other final adjudication” adverse to the insured directors or officers.
The Fourth Circuit found that this exclusion was ambiguous because, according to the court, it was not clear if
the final adjudication had to be determined in the underlying matter, which had settled, so it did not involve a
final adjudication, or whether the insured’s dishonesty could be adjudicated in a subsequent coverage action.
In contrast, in First National Bank Holding Co. v. Fidelity & Deposit Co. of Maryland, 885 F. Supp.
1533 (N.D. Fla. 1995), the court held that a dishonest acts exclusion in a bank’s directors and officers liability
insurance policy precluded coverage. The court rejected as “frivolous” the insured’s contentions that (1) even
though the individual insured, who was the bank’s president, CEO and controlling shareholder, had pleaded
guilty to bank fraud, making a false statement on a bank document, and violating currency reporting requirements, these crimes did not all necessarily involve crimes of dishonesty; and (2) there had been no “final adjudication,” as required by the policy for the exclusion to preclude coverage, because there was a guilty plea,
rather than a jury verdict. Id. at 1537.
A dishonest acts exclusion in a directors and officers liability policy was construed in United States
Liability Insurance Co. v. Goldin Metals, Inc., Civil Action No. 1:10cv175–LG–RHW, 2011 WL 6002975 (S.D.
Miss. Nov. 30, 2011). The underlying matter alleged that the insureds paid kickbacks to employees of a company that supplied metal coils to the insured company so that the insured could obtain below-market pricing. The exclusion required that the insureds “in fact” commit the dishonest acts for the exclusion to preclude
coverage. The court held that this language required a determination that the insureds actually had committed a dishonest act. According to the court it was “unclear whether a final adjudication would be required or
whether allegations in a complaint are sufficient to exclude coverage.” Id. at *4. Therefore, the court denied the
insurer’s motion for summary judgment.
But in National Union Fire Insurance Co. of Pittsburgh, Pa. v. Continental Illinois Corp., 666 F. Supp.
1180, 1199-1200 (N.D. Ill. 1987) (applying D&O policy), the court distinguished a personal profit exclusion from a dishonest acts exclusion in the same policy, finding that a final adjudication was not necessarily
required for the application of the personal profit exclusion when the personal profit exclusion precluded coverage for conduct that was illegal “in fact,” and the dishonest acts exclusion explicitly called for a final adjudication. The policy excluded coverage for any claim “based upon or attributable to their gaining in fact any
personal profit or advantage to which [the insureds] were not legally entitled.” Id. at 1199.
B. Insured vs. Insured exclusion
Insured vs. insured exclusions are commonly found in directors and officers policies, but they can
be found in other types of professional liability policies as well. The wording of insured vs. insured exclusions
differs from policy to policy. Among the issues raised by this exclusion is whether the exclusion applies only
when a claim is collusive. For example, although several decisions have noted that the purpose of insured vs.
insured exclusions is to prevent coverage for collusive lawsuits, federal courts in Illinois have applied the language of such provisions strictly, and they have done so even when collusion was not implicated. In Level 3
Communications, Inc. v. Federal Insurance Co., 168 F.3d 956, 957-60 (7th Cir. 1999) (involving diversity case in
federal court in Illinois and applying Nebraska law but stating that no “peculiarities” of Nebraska law bore on
case), the insured urged the court not to apply an insured vs. insured exclusion in a D&O policy because it had
been intended to exclude coverage for collusive lawsuits and lawsuits between quarreling members of a corporate family , neither of which had been at issue in the underlying lawsuit. The court instead applied the exclusion strictly as it was written.
Other cases focus on whether a claim brought by a receiver, liquidator or trustee is a claim brought
“on behalf of ” an insured to preclude coverage under a insured vs. insured exclusion. In In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr. S.D. Ohio 2000), for example, the court concluded that the purpose of
the insured vs. insured exclusion did not apply to adversarial claims brought by a trustee against a debtor’s
director, officers or managers. Rather, the court concluded that the purpose of the exclusion was to protect
insurance companies against collusive lawsuits between the insured corporation and its insured officers and
directors. The court noted that a bankruptcy trustee is a separate legal entity that owes no fiduciary obligation
to a debtor. As such, the court concluded that the trustee’s action was not a claim brought “by” an insured or
“on behalf of ” the debtor.
C. Prior or Pending Litigation exclusion
This exclusion typically precludes coverage if, before the “prior or pending” date, which may or may
not be the policy’s effective date, the same or a related claim was brought against an insured. While the language of such exclusions differs from policy to policy, cases discussing them often focus on how similar the
allegations in the prior case must be to the current case. For example, in Comerica Bank v. Lexington Insurance Co., 3 F.3d 939, 942–43 (6th Cir. 1993) (applying Michigan law), the Sixth Circuit Court of Appeals held
that the insured bank’s professional liability policy, which excluded coverage for “all claims arising from all
pending and/or prior litigation as well as all future claims arising out of said pending and/or prior litigations,”
unambiguously excluded coverage for an underlying lawsuit for alleged mishandling of estate assets. Before
the policy’s inception date, the claimant had filed a related action against the insured in its capacity as the
administrator of an estate. The court rejected the insured’s assertions that the exclusion was ambiguous and
that the exclusion did not preclude coverage because the prior action was brought against the insured in the
insured’s representative capacity, not in its corporate capacity. The court noted: “The distinction which plaintiff seeks to make between the bank in its corporate capacity and the bank in its representative capacity is not
found anywhere in the terms of the policy.” Id. at 943.
D. Personal Profit or Advantage exclusion
Personal profit or advantage exclusions may preclude coverage for claims arising out of an insured
gaining profit, remuneration or advantage to which the insured was not entitled. Some exclusions refer to a
“personal” profit or advantage, which has raised the question of whether the exclusion applies only to individual insureds, or whether it can apply to corporations and other entities. Recent cases have often held that
the exclusion can apply even when the insured accused of obtaining the profit or advantage is not a “natural
person.”
In Commercial Union Insurance Co. v. Auto Europe, L.L.C., No. 01 C 6961, 2002 WL 314380, at *4–5
(N.D. Ill. Feb. 28, 2002), for example, the court rejected an insured’s argument that the personal profit exclusion of a tour operators’ professional liability policy could apply only when the underlying complaint alleged
that a natural person received a profit or advantage. Instead, the court found that the policy applied equally
when the underlying complaint alleged that an insured corporation received a profit or advantage to which it
was not entitled, regardless of the involvement of natural persons.
Cases construing profit or advantage exclusions have discussed in what circumstances it can be said
that the insured has gained a profit, advantage or remuneration to which the insured was not legally entitled.
For example, in Gardner v. Cumis Society, Inc., 582 So. 2d 1094 (Ala. 1991), the exclusion was found to preclude coverage for a criminal action brought against an individual insured under a credit union’s professional
liability policy. After the insured was acquitted he sought to have the insurer pay his attorneys’ fees. The exclusion precluded coverage for “gaining in fact a personal profit or advantage” to which the insured was “not
legally entitled.” Id. at 1095. The court held that the exclusion precluded the insurer from having to pay the
insured’s attorneys’ fees because even though the insured was acquitted he admitted to having taken kickbacks, which he knew broke the credit union’s rules. Id. at 1096.
E. Business Enterprise exclusion
A business enterprise exclusion is designed to preclude coverage for claims brought by a business in
which an insured, or sometimes an insured’s family member, has an ownership interest or which the insured
otherwise controls, directs or manages. Insureds sometimes argue that business enterprise exclusions apply
only to collusive claims brought against an insured. Most cases, however, have rejected this narrow construction of the exclusion.
For example, in Jeffer v. National Union Fire Insurance Co. of Pittsburgh, Pa., 306 N.J. Super. 82, 703
A.2d 316 (N.J. Super. Ct. App. Div. 1997), the court determined that there was a fact issue precluding summary judgment on the question whether a business enterprise exclusion precluded coverage. The exclusion
barred coverage for claims made “by or against or in connection with any business enterprise . . . which is
owned by any insured or in which any insured is a partner.” 306 N.J. Super. at 85, 703 A.2d at 318. The issue
was whether the underlying matter was brought “in connection with” a real estate general partnership in
which three partners in the insured law firm were partners.
The court explained that business enterprise exclusions have two purposes: first, “to prevent collusive
suits whereby malpractice coverage could be used to shift a lawyer’s business loss onto the malpractice carrier.” 306 N.J. Super. at 92, 703 A.2d at 322. Second, to avoid the coverage when “an insured so intermingles
his business relationships with his law practice that an insurance carrier incurs the additional risk of having to
cover the insured for legal malpractice claims relating to the conduct of business, rather than solely out of the
professional practice.” Id. The court further explained:
While there may be degrees of “connection,” we hold that the clause seeks to prevent coverage for
legal malpractice that arises from an insured’s involvement in a personal business endeavor, as
compared to malpractice arising from an attorney’s professional relationship with a client. Proof
of actual collusion is thereby rendered unnecessary as the evil is avoided by excluding claims
related to the business of an entity in which the insured has an ownership interest. Through [the
business enterprise exclusion], the policy makes it clear that it will not extend coverage to an
insured sued for professional malpractice outside of legal matters conducted between the firm
and its clients.
Id.
IX. “Loss” or Damages” Covered By a Professional Liability Policy
A.Under what circumstances have courts found that monetary relief awarded
to an insured constitutes “loss” or “damages” as those terms are used in a
professional liability policy? Have courts found that public policy precludes
coverage for restitution of ill gotten gains? Have courts found the return of
professional fees charged by an insured is a “loss” or “damages” covered by
a professional liability policy?
A professional liability insurer typically has a duty to indemnify an insured against “loss” or “damages,” as those terms are defined by a policy. Many courts have held that disgorgement or restitution of
ill-gotten gains is not a covered “loss” under a claims-made policy. A leading case on this issue is Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908, 910–11 (7th Cir. 2001) (involving diversity case in federal court in Illinois and applying Nebraska law but stating, in prior opinion at 168 F.3d 956 (7th Cir. 1999),
that no “peculiarities” of Nebraska law bore on case). Level 3 found that restitutionary awards are not a loss
covered by a directors and officers liability insurance policy. See also, e.g., Alanco Techs., Inc. v. Carolina Cas.
Ins. Co., No. CV-04-789-PHX-DGC, 2006 WL 1371633, at *2 (D. Ariz. May 17, 2006) (finding, when policy
defined “loss” as “damages, judgments, settlements, and Costs of Defense; however, ‘Loss’ shall not include . .
. matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed,”
that return of ill-gotten gains was uninsurable and did not constitute “loss”).
X. Other Significant Professional Liability Coverage Cases
This category contains key professional liability cases that did not fall into the other Compendium
topics. Among the issues discussed in this section are professional liability exclusions other than those discussed above, such as exclusions for sexual misconduct and commingling of funds, and cases discussing
whether provisions in claims-made policies violate public policy. E.g., Laboy v. Gonzalez, No. 92-1228 (JP),
1995 WL 121589 (D.P.R. Mar. 9, 1995) (holding that claims-made policies are enforceable and do not violate
public policy), aff ’d, 70 F.3d 1252 (1st Cir. Nov. 21, 1995) (unpublished).
Arizona
B. Arizona Chapter
A. Is the phrase “negligent act, error or omission” ambiguous? Can it apply to intentional
errors or omissions?
Arizona courts have not addressed whether a “negligent act, error or omission” is ambiguous. However, the Arizona Court of Appeals, in an unpublished decision, held that a “public officials errors and omissions” policy provided coverage for “intentional interference torts.” Irvin v. Lexington Ins. Co., No. 1 CA-CV
09-0270, 2010 WL 3450986 at *8 (Ariz. Ct. App. Sept. 2, 2010) (unpublished), rev. denied (2011). In Irvin, the
policy defined “public officials errors and omissions” as including “any actual or alleged error or misstatement
or misleading statement or act or omission or neglect or breach of duty including misfeasance, malfeasance
or nonfeasance committed by any ‘insured’ in the discharge of their duties.” Id. The Arizona Court of Appeals
held that “coverage for malfeasance includes coverage for intentional interference torts.” Id. Therefore, causes
of action against the public official for tortious interference with a contract and tortious interference with a
business expectancy were within the policy coverage for “public officials’ errors and omissions.” Id.
B. What is the standard for determining whether an act, error or omission involves a
“professional service”?
Some Arizona cases suggest the standard for “professional services” is set forth in Marx v. Hartford
Accident & Indemnity Co., 183 Neb. 12, 157 N.W.2d 870 (1968). See Aetna Cas. & Sur. Co. v. Dannenfeldt, 778
F. Supp. 484, 495-96 (D. Ariz. 1991); Western Corrections Group, Inc. v. Tierney, 208 Ariz. 583, 588, 96 P.3d
1070, 1075 n.2 (Ariz. Ct. App. 2004), rev. denied (2005). Other Arizona cases suggest the Marx standard was
rejected by the Arizona Court of Appeals as too restrictive. See American Cas. Co. of Reading, Pa. v. Kemper,
No. CIV 07-1149-PHX-EHC, 2008 WL 2783272 at *5-6 (D. Ariz. July 16, 2008); St. Paul Fire & Marine Ins. Co.
v. Asbury, 149 Ariz. 565, 566-67, 720 P.2d 540, 541-42 (Ariz. Ct. App. 1986).
In 1991, the Arizona federal district court adopted the Marx definition of “professional services.”
Dannenfeldt, 778 F. Supp. at 495-96. The court quoted extensively from Marx, explaining that:
“A professional act or service is one arising out of a vocation, calling, occupation, or employment
involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly
mental or intellectual, rather than physical or manual.” Marx v. Hartford Accident & Indemnity
Company, 183 Neb. 12, 157 N.W.2d 870, 872 (Neb. 1968) . . . The case law is in accord that, “In
determining whether a particular act is of a professional nature or a professional service we must
not look to the title or character of the party performing the act, but to the act itself.” Marx, 157
N.W.2d at 871-872.
Id.; see also Western Corrections Group, Inc. v. Tierney, 208 Ariz. 583, 588, 96 P.3d 1070, 1075 n.2 (Ariz. Ct.
App. 2004) (Arizona Court of Appeals construes “professional services” in Arizona’s competitive-bid statute as
consistent with Marx), rev. denied (2005).
In 2008, the Arizona federal district court suggested the Marx standard was rejected by the Arizona
Court of Appeals in Asbury. See American Cas. Co. of Reading, Pa. v. Kemper, No. CIV 07-1149-PHX-EHC,
2008 WL 2783272 at *5-6 (D. Ariz. July 16, 2008). The court explained:
American Casualty contends the Asbury court “cited with approval” the Marx case, the case on
which the [Bank of California, N.A. v.] Opie [, 663 F.2d 977 (9th Cir. 1981) (Washington law)]
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court relied. This contention is questionable. Asbury did cite Marx, but without expressly rejecting or adopting it. See Asbury, 149 Ariz. at 566, 720 P.2d at 541 (summing up the Marx rule as “the
question of professional liability coverage turn[ing] upon the nature of the tortious act, and not
upon the mere circumstance that the tortfeasor is a doctor”). Indeed, the court arguably rejected
the Marx rule; the insurer urged the adoption of Marx, but the court ruled in favor of the insured,
finding that Asbury, a gynecologist who inappropriately manipulated patients’ genitalia during examinations, was rendering professional services and therefore was covered by the policy. .
. . [I]n any event, the Asbury ruling is an expansive interpretation of “professional services,” and
unlikely to be characterized as following Marx. See R.W. v. Schrein, 264 Neb. 818, 830, 652 N.W.2d
574, 584 (2002) (rejecting the “minority rule” of Asbury in favor of the “majority rule” in Marx).
Id. (some citations omitted). The Arizona Court of Appeals does not appear to have accepted or rejected the
Marx standard. St. Paul Fire & Marine Ins. Co. v. Asbury, 720 P.2d 540, 542 (Ariz. Ct. App. 1986); see Kemper,
2008 WL 2783272 at *6 (“[I]t could be argued that Asbury followed Opie and Marx, because the sexual misconduct is a special risk inherent in the field of gynecology.”).
C. Under what circumstances have courts found that an act, error or omission involves /
does not involve a “professional service”?
In St. Paul Fire & Marine Insurance Co. v. Asbury, 149 Ariz. 565, 720 P.2d 540 (Ariz. Ct. App. 1986)
a doctor “manipulated” the clitorises of his patients during routine gynecological examinations. The Arizona
Court of Appeals held the doctor was performing “professional services” within the professional liability policy’s coverage. Id. at 567, 720 P.2d at 542. “The claims of Dr. Asbury’s patients that he manipulated their clitorises while performing routine gynecological examinations, if true, was tortious conduct committed while
providing professional services and covered by his insurance policy.” Id.
In General Accident Insurance Co. v. Namesnik, 790 F.2d 1397 (9th Cir. 1986), an attorney arranged
for his clients to capitalize their investments. The investments failed, “some through apparently genuine market losses, others through [the attorney’s] arguably fraudulent actions.” Id. at 1398. The Ninth Circuit held the
attorney was not performing “professional services” within professional liability coverage. Id. at 1399. “The
fact that [the insured] was at all times pertinent an attorney who had represented [his clients] is not responsive to the uncontroverted evidence which establishes that as to the transactions in question, [the insured]
acted as a business agent rather than attorney.” Id. at 1400.
Aetna Casualty & Surety Co. v. Dannenfeldt, 778 F. Supp. 484, 484 (D. Ariz. 1991) involved Charles
Keating’s acquisition of savings and loan institutions in the 1980s. Keating managed the insured parent corporation, which failed, generating “massive civil litigation.” The claimants alleged “misrepresentations to regulatory authorities” and “numerous fraudulent and abusive transactions.” Id. at 490. The Arizona federal district
court held the professional services exclusion barred coverage. Id. at 495-96. Management of the savings and
loans, and the sale of subordinated debentures, were “professional services” within the professional services
exclusion. Id.
In American Casualty Co. of Reading, Pennsylvania v. Kemper, No. CIV 07-1149-PHX-EHC, 2008
WL 2783272 (D. Ariz. July 16, 2008), the insured was a clinical rehabilitation counselor. The insured was
embroiled in a business dispute with the organization. She left the organization with 150 patient files, and she
accused the organization of various wrongdoings. The organization sued the insured for breach of contract
and defamation. The Arizona federal district court held that the suit involved covered “professional services.”
Id. at *7. “The alleged defamatory acts are in fact intertwined with her professional services as a counselor.” Id.
The alleged defamatory acts “fall within the ambit of ‘professional services.’” Id. at *9.
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In St. Paul Fire & Marine Insurance Co. v. Grand, No. 89-15338, 908 F.2d 977, 1990 WL 100224 (D.
Ariz. July 17, 1990) (table disposition), the court found that a claim against the insured, an attorney, brought
by his former employees and alleging that they were fraudulently induced to work for the insured by false
promises of partnership opportunities, did not involve the insured’s professional services. Therefore, the legal
professional liability policy at issue did not provide coverage. The insured argued that the underlying matter
was covered because the policy contained a business enterprise exclusion that excluded coverage for claims
arising from an insured’s “activity as both lawyer and manager in an organization other than your law firm.”
Id. at *3. The insured argued that because coverage was excluded for the insured’s management services in
other organizations that must mean that the policy provided coverage for the insured’s management of the
law firm. Id. The court found this argument without merit. It stated that the exclusion was unambiguous and
did not cover the underlying matter, because the underlying matter had “nothing to do with ‘legal services’ or
malpractice.” Id. at *4. The intent of the exclusion is to limit coverage to malpractice claims arising from the
practice of law. Id.
The Arizona Court of Appeals has authoritatively interpreted the undefined term “claim,” holding:
Although Arizona courts have not defined what constitutes a “claim” in insurance policies, other
courts have defined the term. A claim is a demand for relief, payment, or something as a right,
or as due. The word claim imports the assertion, demand, or challenge of something as a right;
the assertion of a liability to the party making it to do some service or pay a sum of money.
When the terms “claim” and “loss” are intimately connected in a policy, then a “claim” is a
demand which if sustained necessarily results in a loss. In cases lacking a demand for money or
services, the courts have determined that a “claim” had not been made.
National Bank of Ariz. v. St. Paul Fire & Marine Ins. Co., 193 Ariz. 581, 584, 975 P.2d 711, 714 (Ariz. Ct. App.
1999) (internal quotations and citations omitted); see also James River Ins. Co. v. Hebert Schenk, P.C., 523 F.3d
915, 923 n.3 (9th Cir. 2008) (interpreting the undefined term “claim” in an insurance application as “a demand
for money, property, or a legal remedy to which one asserts a right”).
B. When do courts find a claim is made / not made? What circumstances do courts find
important in determining whether a communication from the third-party claimant
constitutes a claim?
In National Bank of Arizona v. St. Paul Fire & Marine Insurance Co., 193 Ariz. 581, 975 P.2d 711 (Ariz.
Ct. App. 1999), the claimants sued the insured bank for wrongful acts and omissions. The underlying complaints did not name any of the insured’s directors and officers as defendants. The Arizona Court of Appeals
held that the directors and officers liability policy therefore did not apply. Id. at 584-85, 975 P.2d at 714-15.
The complaints did not state “claims” against the directors and officers. Id. “[N]one of [the insured’s] directors
and officers were named as defendants, nor were they subject to any demands for relief, payment, or something as a right or as due. Because no demands were made against [the insured’s] directors or officers, we conclude that no claim was made against them.” Id.
In Hoyt v. St. Paul Fire & Marine Insurance Co., 607 F.2d 864 (9th Cir. 1979), the insured lawyer
drafted a will. The will exercised a general power of appointment. The attorney for the decedent’s estate complained to the insured that the exercise of the general power of appointment was improper.
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Since the disposition of the Trust assets in failure of exercise of the power was equally among
Mrs. Cope’s sons and since Mrs. Cope exercised the power to provide an equal disposition among
her sons, I wonder what the point was in having her exercise the power in her will. It seems
as though it has simply created substantial additional tax in her estate which could have been
avoided had she said nothing about the power, in her will. Any thought or information you have
on this point would be greatly appreciated.
Id. at 865. The insured received the letter, and then his professional liability policy expired. The decedent’s
estate sued for legal malpractice. The Ninth Circuit held, under Arizona law, that the letter was not a “claim.”
Id. at 866. The letter “was a request for information and explanation. If [the insured] was put on notice of any
kind it was only that a claim might be expected to follow if the estate attorney was not satisfied with the explanation.” Id.
In Certain Underwriters at Lloyds, London v. Payson Premier, LLC, No. 2 CA-CV 2008-0169, 2009 WL
1156705 (Ariz. Ct. App. Apr. 29, 2009), the insured nursing care facility received a “Notice of Enforcement” from
the Arizona Department of Health Services (“ADHS”). ADHS’s “Notice of Enforcement” alleged that the insured
violated statutes and rules in its discharge of a resident. The resident died as a result. The ADHS referred the incident to its “Enforcement Team.” After receiving this information, the policy period expired. The decedent’s family
sued the insured. The policy defined a “claim” as an “oral or written demand against [the insured] for ‘Damages’
[‘any demand for money’].” The Arizona Court of Appeals held that the “Notice of Enforcement” did not constitute a “claim.” Id. ADHS’s “Notice of Enforcement” was not a demand for money or a “claim.” Id.
A. For “claims” to be “related,” can they be logically related, causally related, or either?
The Arizona Supreme Court holds that claims must be causally related to be considered “related”
under a related/interrelated acts provision. Arizona Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 134,
735 P.2d 451, 456 (Ariz. 1987). Claims that are logically related only are not sufficiently “related” under a
related/interrelated acts provision. Id.
In Helme, the professional liability policy defined an “occurrence” as “any incident, act or omission,
or series of related incidents, acts or omissions resulting in injury.” Id. The Arizona Supreme Court held that
there were two “occurrences” because the claims were not causally related. Id. A logical relationship between
the claims did not suffice. Id. The Arizona Supreme Court said:
We do not believe that the word “related” as used in the policy can be equated with the phrase
“logical connection.” Logic, like beauty, is in the eye of the beholder and greatly depends upon
the subjective mental process of the reviewer. Incidents may be “logically related” for a wide
variety of indefinable reasons. Causal connection depends, to a much greater extent, on objective
facts in the record.
Id.
B. Under what circumstances have courts found multiple “claims” are / are not related?
Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129, 735 P.2d 451 (Ariz.
1987) began with a car accident in which the claimants’ decedent was injured. He went to an insured doctor
for a consultation. The insured doctor failed to correctly read his x-rays and discover the fracture dislocation
of his cervical vertebra. A second insured doctor treated the decedent for his injuries. The second insured doctor also failed to correctly read the x-rays and discover the cervical fracture.
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The insured medical practice’s policy defined an “occurrence” as “any incident, act or omission,
or series of related incidents, acts or omissions resulting in injury.” Id. at 134, 735 P.2d at 456. The Arizona
Supreme Court concluded that the multiple failures to correctly read the x-rays constituted multiple “occurrences.” Id. at 136, 735 P.2d at 458. The Arizona Supreme Court reasoned there were multiple “occurrences”
because the multiple failures to correctly read the x-rays were not causally related:
[B]oth doctors were negligent in failing to look at the x-rays in connection with separate activities—consultation and surgery. Each of the diagnostic failures was a cause of injury and contributed to the ultimate result—death. The doctors’ failures clearly were separate causal acts of
separate doctors on separate days. Nothing in the record indicates that [the first doctor’s] conduct caused [the second doctor] to fail to examine the x-rays.
Id.
A. Are reporting provisions in claims made and reported policies strictly construed, even
when the insurer cannot prove it was prejudiced?
In Arizona, reporting provisions are strictly construed—even when the insurer cannot show prejudice. Thoracic Cardiovascular Assocs., Ltd. v. St. Paul Fire & Marine Ins. Co., 181 Ariz. 449, 455-56, 891 P.2d
916, 922-23 (Ariz. Ct. App. 1994), rev. denied (1995); Sletten v. St. Paul Fire & Marine Ins. Co., 161 Ariz. 595,
596, 780 P.2d 428, 429 (Ariz. Ct. App. 1989), rev. denied (1989). Arizona courts enforce reporting provisions
as written. The insurer does not need to prove prejudice—only the insured’s failure to satisfy the reporting
requirement. Thoracic, 181 Ariz. at 455-56, 891 P.2d at 922-23; Sletten, 161 Ariz. at 596, 780 P.2d at 429.
Arizona case law recognizes that, under a claims made and reported policy, “a report to the insurer
within the policy period is an express condition precedent to coverage.” Thoracic, 181 Ariz. at 453, 891 P.2d at
920. The “essence” of a claims made and reported policy is “notice to the insurer within the policy period.” Id.
at 455, 891 P.2d at 922. Moreover, “the condition requiring the insured to provide notice of a claim during the
policy period is a material part of the agreed exchange. No coverage exists unless notice is given during the
policy term.” Id. at 456, 891 P.2d at 923.
Arizona case law squarely rejects the contention that the notice/prejudice rule applies to claims made
and reported policies. Sletten, 161 Ariz. at 597, 780 P.2d at 430. The Arizona Court of Appeals explained:
[Claimants] urge us to follow California authority applying the late notice/prejudice rule to
claims-made policies. We decline to do so because the effect would be to convert claims-made
policies into occurrence policies. In the absence of actual prejudice from late reporting, which
also defeats coverage under an occurrence policy, all negligence during the policy period would
be covered. We discern no public policy that mandates that only occurrence coverage be sold in
Arizona.
Id.
The issue before the court in Emissions Technology, Inc. v. Twin City Fire Insurance Co., No. CV100393-PHX-NVW, 2010 WL 4579250 (D. Ariz. Nov. 4, 2010), was whether an insurer has to prove it was prejudiced by late notice if the policy is a pure claims-made policy, i.e., a policy that merely states that notice has
to be given as soon as practicable (or some other less than specific deadline), rather than a claims made and
reported policy. The court found that it did not have to decide this issue because the policy at issue was in fact
a claims made and reported policy.
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B. If a claim is reported late, is there coverage if the policy was renewed, and the claim was
reported during the renewal policy period?
No Arizona authority.
C. Can there be coverage if the claim is made very late during one policy period, and is
reported soon after the reporting period expires?
No Arizona authority.
D. When do courts find reporting of a claim (or a notice of circumstance that could lead to a
claim) is adequate / not adequate?
The Arizona federal district court has held that a “laundry list” reporting of a claim was adequate.
Evanston Ins. Co. v. Hearthstone of Sun City, LLC, Nos. CV-08-1632-PHX-FJM, CV-09-0109-PHX-FJM, 2010
WL 1416023 (D. Ariz. Apr. 8, 2010). In Hearthstone, the insured sent a “laundry list” of “claims or possible
claims” one day before the policy period expired. “[O]ne day before [the policy] was to expire, [the insured]
sent [the insurer] a ‘Possible Claim Reporting Log’ containing 112 ‘claims or possible claims.’” Id. at *1. In his
email correspondence to the insurer, the insured wrote: “‘Claims reporting’ in the subject line and stated, ‘I
have attached two logs of claims and potential claims for [the insured]. Please let me know if you have any
questions about these claims.” Id. at *2. The insured testified that “he created and communicated the claims
log in order to fulfill [the insured’s] obligation to notify its insurance carrier of claims and possible claims.” Id.
at *3. The “laundry list” included a description of the claimant’s decedent: “Unavoidable wound progression,
son is an attorney, he has requested form to obtain medical records. Have not rec’d formal request to date.” Id.
at *1. The policy period expired, and the decedent died. The claimant sued the insured for wrongful death.
The Arizona federal district court held the wrongful death suit was not covered by the succeeding
policy period due to the prior knowledge exclusion. Id. at *3. But the wrongful death suit would have been
covered by the subject claims-made policy had the insured not settled the claim prior to the court’s ruling. Id.
The “laundry list” reporting of the claim was adequate. Id.
In Thoracic Cardiovascular Associates, Ltd. v. St. Paul Fire & Marine Insurance Co., 181 Ariz. 449,
891 P.2d 916 (Ariz. Ct. App. 1994), rev. denied (1995), the Arizona Court of Appeals considered an optional
extended reporting provision. The court observed that the optional extended reporting endorsement
would have allowed [the insured] to report claims to [the insurer] after the policy term and
before the end of the term of the reporting endorsement. The policy provided that [the insurer]
would sell the reporting endorsement to [the insured] for a premium based on the rules and ratings plans being used on the day coverage would begin.
Id. at 451, 891 P.2d at 918. However, the insurer “would not provide coverage for claims reported after termination of the policy unless the reporting endorsement was purchased.” Id.
A. How do courts interpret “prior knowledge” provisions? What standard do courts apply in
determining whether the insured had sufficient prior knowledge – subjective, objective,
or a mixed subjective/objective standard?
Arizona courts apply a mixed subjective/objective standard to determine if the insured has sufficient
prior knowledge under a prior knowledge provision. James River Ins. Co. v. Hebert Schenk, P.C., 523 F.3d 915,
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923 (9th Cir. 2008); Evanston Ins. Co. v. Hearthstone of Sun City, LLC, Nos. CV-08-1632-PHX-FJM, CV-090109-PHX-FJM, 2010 WL 1416023 at *2-3 (D. Ariz. Apr. 8, 2010).
In Hearthstone, the prior knowledge provision barred coverage for “[a]ny liability arising out of acts,
errors or omissions of which an Insured had knowledge prior to the inception date of the policy period, if, as
of such date, an Insured could reasonably foresee a claim might result.” Id. at *2. The Arizona federal district
court laid down the standard for prior knowledge:
The only factual issue remaining in this case is whether, prior to the inception of the Lexington Policy, [the insured] foresaw or could have reasonably foreseen that a claim might result
from the incident. That issue turns on an objective test and is based only on the facts that [the
insured] was aware of prior to the inception of the Lexington Policy.
Id. Put another way, the prior knowledge provision turned upon “the facts that [the insured] was aware of
prior to the inception of the Lexington Policy”—a subjective standard—and, given those facts, whether the
insured “foresaw or could have reasonably foreseen that a claim might result”—“an objective test.” Id.
In James River Insurance Co. v. Hebert Schenk, P.C., 523 F.3d 915 (9th Cir. 2008), the prior knowledge provision precluded coverage for claims arising from legal services “rendered prior to the effective date
of the Policy if any insured knew or could have reasonably foreseen that the . . . [services] could give rise to a
‘claim.’” Id. at 923. The Ninth Circuit stated that, under Arizona law, the prior knowledge provision depended
on whether “the firm could reasonably conclude that a malpractice claim would not follow.” Id. To answer this
objective question, the Ninth Circuit considered all of the facts subjectively known to the insured. Id.
B. When do courts find the prior knowledge provision bars / does not bar coverage?
In Evanston Ins. Co. v. Hearthstone of Sun City, LLC, Nos. CV-08-1632-PHX-FJM, CV-09-0109-PHXFJM, 2010 WL 1416023 (D. Ariz. Apr. 8, 2010), the Arizona federal district court held that the prior knowledge provision precluded coverage for the claim.
The insured had sent the preceding insurer a “Possible Claim Reporting Log” one day before the subject Lexington policy incepted. The Reporting Log contained 112 “claims or possible claims,” including the
incident that blossomed into the subject claim. The incident was described in the Reporting Log as follows:
“Unavoidable wound progression, son is an attorney, he has requested form to obtain medical records. Have
not rec’d formal request to date.” Id. at *1.
In his email correspondence accompanying the Reporting Log, the insured wrote the preceding
insurer: “‘Claims reporting’ in the subject line and stated, ‘I have attached two logs of claims and potential claims for [the insured]. Please let me know if you have any questions.” Id. at *2. The insured testified he
“maintained the claims log for the purpose of notifying the insurer of actual or possible claims.” Id. He testified “he created and communicated the claims log in order to fulfill [the insured’s] obligation to notify its
insurance carrier of claims and possible claims.” Id. at *3.
The prior knowledge provision precluded coverage for “[a]ny liability arising out of acts, errors or
omissions of which an Insured had knowledge prior to the inception date of the policy period, if, as of such
date, an Insured could reasonably foresee a claim might result.” Id. at *2. The Arizona federal district court determined that the insurer
has satisfied its burden of showing that the prior knowledge exclusion applies to the claims made
against [the insured] arising from [the incident]. Lexington has demonstrated that prior to the
inception of the Policy, [the insured] foresaw or could have reasonably foreseen that the [] inci-
Arizona 2012
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dent might result in a claim. Therefore, based on the prior knowledge exclusion, the Lexington
Policy does not provide coverage for the claims related to [the incident].”
Id. at *3.
In James River Insurance Co. v. Hebert Schenk, P.C., 523 F.3d 915 (9th Cir. 2008), the Ninth Circuit found that a fact question prevented summary judgment in favor of the insurer. The insured lawyer had
advised the claimants on a failed business venture. After meeting with the claimants in February 2004, the
insured failed to return their phone calls or otherwise communicate with them. On April 27, 2004, the claimants wrote the insured: “Without a doubt, you have abandon[ed] us as well. I have made no fewer than a
dozen attempts to communicate with you since that meeting. I have not received a single call or email. This
is despite your advice to us on 2/5, that we should file a lawsuit.” Id. at 918-19. The policy incepted, and the
claimants notified the insured “they intended to assert legal malpractice claims against [the insured] for the
reasons articulated in the April 27, 2004 letter.” Id. at 919.
The prior knowledge provision barred coverage for claims arising from legal services “rendered prior
to the effective date of the Policy if any insured knew or could have reasonably foreseen that the . . . [services]
could give rise to a ‘claim.’” Id. at 923. The district court granted summary judgment to the insurer. The Ninth
Circuit reversed, holding that summary judgment was “unwarranted.” Id. The Ninth Circuit explained:
[Summary judgment is] unwarranted on the basis of [the prior knowledge provision] because
it is not clear that the [] claim was reasonably foreseeable. The [claimants] never suggested in
their communications with [the insured] that they would bring a “claim.” Nothing in the April
27, 2004 letter demanded or threatened a future demand for money damages or other legal remedies. To the contrary, the [claimants] stated that [the insured] could “bring [the] matter to a
close” simply by returning their documents and waiving fees. [The insured] promptly complied
with these requests. Viewing this evidence in the light most favorable to [the insured], the firm
could reasonably conclude that a malpractice claim would not follow.
Id.
A. When do courts find a retroactive date provision bars coverage / does not bar coverage?
The Arizona Court of Appeals holds that a retroactive date provision is enforceable even where the
retroactive date is the same as the policy inception date. Travelers Indem. Co. v. Mutual Ins. Co. of Ariz., 152
Ariz. 267, 268, 731 P.2d 632, 633 (Ariz. Ct. App. 1986).
In Travelers v. Mutual Insurance Co. of Arizona, the insured doctor misdiagnosed the claimant. Two
days later, the claims-made policy incepted. The policy’s retroactive date was the same as the policy’s inception
date (August 28, 1976). The Arizona Court of Appeals held that the retroactive date provision barred coverage
for the claim. Id.
Under the MICA policy the claim must be against the insurance company during the policy
period but the malpractice must have occurred subsequent to the retroactive date, which is in
this case, August 28, 1976. [The insured’s] malpractice did not take place subsequent to August
28, 1976, thus the MICA policy does not cover [the] claim.
Id. (emphasis in original).
The Ninth Circuit has rejected attacks on retroactive date provisions. See M. Melvin Gentile, D.O., Ltd.
v. Anesthesiologists’ Prof ’l Assur. Co., No. 94-15213, 62 F.3d 1424, 1995 WL 456394 at *2 (9th Cir. Aug. 2, 1995)
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(table disposition) (“[The insured] says that is so because a claims made policy is somehow illusory if it allows
the insured to set a retroactive date that precludes coverage for incidents which occurred earlier. He cites no
authority for that proposition, and it is hardly self-evident. On the contrary, there is nothing illogical or illusory about limiting a claims made contract to events that occurred after a particular date.”).
In Jobe v. International Insurance Co., 933 F. Supp. 844 (D. Ariz. 1995), order withdrawn after settlement, 1 F. Supp. 2d 1403 (D. Ariz. 1997), the legal professional liability policy at issue contained an exclusion
for “any claim or claims arising from or attributable to or based upon any act(s), error(s), omission(s), or personal injury(ies) committed or alleged to have been committed prior to the following retroactive date.” The
court found that this provision did not entitle the insurer to summary judgment, even though in the underlying matter wrongful acts were alleged to have been committed before the retroactive date, because after the
retroactive date “new, additional alleged acts of negligence by other members of the firm were alleged to have
been committed. Id. at 863.
VIII. How Do Courts Interpret Common Professional Liability Policy
Exclusions?
The Arizona federal district court held that a fraud exclusion did not apply in Wojtunik v. Kealy, No.
CV-03-2161-PHX-PGR, 2011 WL 1211529 (D. Ariz. Mar. 31, 2011). There, the exclusion precluded coverage for:
Loss in connection with a Claim made against any insured . . . based upon, arising out of,
directly or indirectly resulting from or in consequence of, or in any way involving any . . . deliberate fraudulent act; provided, however, this exclusion shall not apply unless a judgment or other
final adjudication adverse to any of the Insureds in such Claim shall establish that such Insureds
committed such . . . deliberate fraudulent act.
Id. at *7-8.
Wojtunik arose from claims of securities fraud against the insured officers and directors. The insured
officers and directors allegedly “committed securities fraud during merger negotiations by artificially inflating the value of [their] stock through accounting fraud, and by making false and misleading statements.” Id.
at *1. The company failed within a year after the merger. The claims settled for an $8 million Damron agreement. (A Damron agreement is a stipulated judgment, coupled with a covenant not to execute—in favor of the
insureds—and an assignment of rights, in favor of the claimants.) The insured argued:
[T]he stipulated judgment necessarily invokes the fraud exclusion as a matter of law since that
judgment was a determination that the Insureds committed securities fraud inasmuch as it
resolved the four securities fraud claims ... [and] those claims are scienter-related claims that can
only be successfully pleaded through specific allegations of intent to defraud.” Id. at *8. The Arizona
federal district court rejected this argument, and held that the fraud exclusion did not apply.
Id.
The fraud exclusion did not apply to the settlement or Damron agreement: “The Court interprets the
term ‘final adjudication’ in the exclusion as not applying to a settlement. . . . [T]he exclusion is inapplicable if
the claim against the D & O is settled.” Id. The Damron agreement did not “establish” the insured officers and
directors committed deliberate fraud. Id. at *9. “The settlement did not facially establish that the Insureds
committed a deliberate fraudulent act as there is no such language therein stating that.” Id. On the contrary,
“the underlying settlement agreement specifically stated that neither the terms of this Agreement nor any
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judgment entered against the Insureds in the Wojtunik Lawsuit pursuant to this Agreement are a concession
that any Insured believes he committed any wrongful act.” Id. (internal quotations omitted).
In Biltmore Associates, LLC v. Twin City Fire Insurance Co., 572 F.3d 663 (9th Cir. 2009), the Ninth
Circuit enforced the insured versus insured exclusion in connection with a suit by the insured’s bankruptcy
Chapter 11 debtor-in-possession.
The Ninth Circuit recognized that, under Arizona law, the insured versus insured exclusion “arose
in D & O policies as a reaction to several lawsuits in the mid-1980s in which insured corporations sued their
own directors to recoup operational losses caused by improvident or unauthorized actions. Such lawsuits created problems of moral hazard, collusion, and unintended expansion of coverage.” Id. at 668. The insured versus
insured exclusion was created to guard against this “collusion and moral hazard.” The Ninth Circuit elaborated:
Because risks such as collusion and moral hazard are much greater for claims by one insured
against another insured on the same policy than for claims by strangers, liability policies typically exclude them from coverage. Allowing such claims would turn liability insurance into casualty insurance, because the company would be able to collect from the insurance company for its
own mistakes, since it acts through its directors and officers.
Id. at 669.
In Biltmore Associates, the insured was in Chapter 11 bankruptcy. As “debtor and debtor in possession,”
the insured sued its recently discharged officers and directors for breach of fiduciary duty. The officers and directors (allegedly) “looted the company. . . . they had charged grossly excessive amounts as expenses for inappropriate things, such as ‘personal expenses, strippers, lavish trips, and gifts’ of no value to the company, and failed to
institute appropriate financial controls to prevent this sort of thing.” Id. at 666. The claims were assigned to the
bankruptcy trustee for the benefit of creditors. The bankruptcy trustee and the officers and directors settled by a
$175 million Damron agreement. (A Damron agreement is a stipulated judgment, coupled with a covenant not to
execute—in favor of the insureds—and an assignment of rights, in favor of the claimants.)
The insured versus insured exclusion barred coverage for “Loss in connection with any Claim made
against the Directors and Officers . . . brought or maintained by or on behalf of an Insured in any capacity.” Id.
at 666. The Ninth Circuit held that, under Arizona law, the insured versus insured exclusion barred coverage
for the $175 million Damron agreement. Id. at 670-71. The Ninth Circuit reasoned:
[The trustee] has to step into an insured’s shoes as assignee to have any claim against their insurers, since [the trustee] is not an insured. And in those shoes, it is barred by the exclusion. [The
trustee] cannot jump into the insureds’ shoes to bring the lawsuit, out of their shoes to claim not
to be suing as though it were the insureds, and then back into their shoes to get compensatory
and punitive damages for the insurers’ failure to cover their liabilities.
Id. The Ninth Circuit concluded that the insured and the insured’s bankruptcy chapter 11 debtor-in-possession were
the same for purposes of the exclusion. Id. at 671. “We conclude that for purposes of the insured versus insured
exclusion, the prefiling company and the company as debtor in possession in chapter 11 are the same entity.” Id.
Although the claims were “for the benefit of the creditors,” they were “on behalf of the pre-bankruptcy corporation.”
Id. at 674. The claims were therefore barred from coverage by the insured versus insured exclusion. Id.
The court commented: “That the creditors rather than the shareholders will get whatever money the
insurer pays does not avoid the exclusion. Creditors get much, most or even all of the money any business collects, as part of the business’s overhead.” Id. at 669.
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The Arizona federal district court determined that the insured versus insured exclusion did not apply
in Wojtunik v. Kealy, No. CV-03-2161-PHX-PGR, 2011 WL 1211529 (D. Ariz. Mar. 31, 2011). Wojtunik started
with the claimant’s sale of his closely-held company to the insured. The insured paid the claimant with stock.
Following the merger, the claimant “may have acted similarly to a corporate president in terms of the managerial-type duties he performed for [the insured].” Id. at *3. In a year, the insured was bankrupt. The claimant
sued the former officers and directors for securities fraud.
The insured versus insured exclusion precluded coverage for “Loss in connection with a Claim made
against any Insured . . . by any of the Directors and Officers.” Id. The policy defined “Directors and Officers”
as “any past, present or future duly elected or appointed directors or officers of the Company.” Id. The Arizona
federal district court decided that the exclusion did not apply because the claimant was not a “duly elected
or appointed” officer or director. Id. at *3-4. “[T]he Court concludes that the ‘insured v. insured’ exclusion
does not bar D & O coverage because [the insured’s] corporate records and board resolutions of record do not
establish that [the claimant] was ever the ‘duly elected or appointed’ president of [the insured].” Id. at *5.
In order for the “insured v. insured” exclusion to be applicable under the facts of this case, [the
claimant] must have been “duly elected or appointed” to the position of [the insured’s] president by [the insured’s] board of directors. “Duly,” which is not a defined term in [the] policy, is
generally interpreted to mean in a due manner—that is through regular and proper channels of
corporate governance. Under Arizona law, the proper procedure for selecting a corporate officer
requires selection in accordance with the corporation’s bylaws.
Id. at *3 (internal quotations and citations omitted).
In Alanco Technologies, Inc. v. Carolina Casualty Insurance Co., No. CV 04-0789-PHX-DGC, 2004 WL
5653220 (D. Ariz. Sept. 20, 2004), reconsideration denied, 2004 WL 5663105 (D. Ariz. Oct 25, 2004), the Arizona federal district court held that the insured versus insured exclusion applied to a complaint by a former
director—but did not apply to an amended complaint by a non-insured corporation.
The former director filed a complaint against the insured officers. The complaint was filed on behalf
of a non-insured corporation. The complaint was dismissed with prejudice, and the non-insured corporation
intervened and filed an amended complaint. The insured versus insured exclusion barred coverage for any
claim brought “against any Insured” “by any of the Directors or Officers.” Id.; 2004 WL 5653220 at *1. The policy defined “Directors or Officers” as “any past, present or future duly elected or appointed directors and officers of the Company.” Id.
The Arizona federal district court held that the insured versus insured exclusion barred coverage
for the complaint. Id. at *2. “[U]nambiguous insured versus insured exclusions should be applied according
to their terms, even when the insured-person plaintiff is not suing on his own behalf or is suing in a capacity
other than that of insured person.” Id. The court continued,
[The claimants] argue that insured versus insured clauses have the narrow purpose of preventing collusion and should be limited to accomplishing that one objective. Other courts have divined
additional purposes for such clauses. . . . This Court concludes, consistent with Arizona law, that
exploring the intent of the exclusion is not necessary when the language is plain. The exclusion is
enforceable according to its plain terms simply because that is the agreement struck by the parties.
Id.
Next, in Alanco Technologies, Inc. v. Carolina Casualty Insurance Co., No. CV 04-0789-PHX-DGC,
2005 WL 6242303 (D. Ariz. May 19, 2005), reconsideration denied, 2005 WL 6242305 (D. Ariz. Oct. 31,
2005), the court held that the insured versus insured exclusion did not apply to the amended complaint by
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the non-insured corporation. The insurer argued “claims by uninsured plaintiffs would be eliminated by the
[insured versus insured] exclusion if an insured person happened to make the first related claim.” Id.; 2005
WL 6242303 at *3. The court rejected this contention, and held that the insured versus insured exclusion did
not apply to the amended complaint by the non-insured corporation. Id. “The Court sees little sense in such
an arbitrary application of the [insured versus insured] exclusion. Both insured and uninsured persons may
bring related claims, and the exclusion of such claims under [the insured versus insured exclusion] should be
decided claim-by-claim.” Id.
In Kealy v. Carolina Casualty Insurance Co., No. CV-05-0911-PHX-FJM, 2007 WL 158734 (D. Ariz.
Jan. 16, 2007), the Arizona federal district court held that the “security holders” exception to the insured versus insured exclusion did not apply to a suit by a former officer. The insured versus insured exclusion precluded coverage for:
a Claim made against any Insured . . . by, or on behalf of, or in the right of the Company, or by
any of the Directors or Officers; provided, however, this exclusion does not apply to: [] any Claim
by any security holder of the Company, whether directly or derivatively, but only if such Claim is
instigated and continued totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Insured or the Company.
Id. at *1. The policy defined “Directors or Officers” as including former directors or officers. And the former
officer was a “security holder.” Id.
The Arizona federal district court ruled that the “security holders” exception did not apply to the former officer. The former officer was not “part of a class of plaintiff security holders.” Id. at *4-5. The “security
holders” exception “has substantive meaning in that it allows shareholder derivative claims or claims in which
directors or officers are included in a class of security holder plaintiffs, but they are only included by virtue
of their status as shareholders, and they are not actively participating as litigants.” Id. In sharp contrast, the
former officer “was not simply an officer who was part of a class of plaintiff security holders. Rather, he was
the sole plaintiff who instigated and continued the lawsuit himself. The plain language of [the insured versus
insured exclusion] excludes from coverage such a claim.” Id.
Arizona case law has not addressed the prior or pending litigation exclusion.
In Research Corp. v. Westport Insurance Corp., 289 F. App’x 989 (9th Cir. 2008) (unpublished), the
Ninth Circuit held that the personal profit or advantage exclusion did not apply.
The personal profit or advantage exclusion precluded coverage for “any ‘claim’, or ‘loss’ alleging or
‘arising out of ’ . . . [a]n ‘insured’s’ unjust enrichment, obtaining profit, or advantage to which the ‘insureds’
were not entitled.” Id. at 991. The claimant alleged counts for breach of contract, conversion of royalties, conversion of technical information, fraudulent concealment, breach of the implied covenant of good faith and
fair dealing, breach of fiduciary duties, and unjust enrichment.
The Ninth Circuit held that the personal profit or advantage exclusion precluded coverage for some,
but not all, of the counts alleged by the claimants. Id. at 992. The exclusion “does not apply to the breach of
fiduciary duties claim, nor does it apply to the allegation of breach of the implied covenant of good faith and
fair dealing. Neither unjust enrichment nor profit is an element of either claim.” Id. Furthermore, the insurer
did have a duty to indemnify given the unrebutted testimony of the insured. Id. at 993. The Ninth Circuit concluded:
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[The insured] also produced unrebutted testimony that it did not receive a profit and was not
unjustly enriched. [The insurer] did not introduce any testimony showing that [the insured] was
unjustly enriched by the transactions, or that it profited from them. Given the state of the record,
the district court did not err in determining that the unjust enrichment/profit exclusion did not
relieve [the insurer] from its duty to indemnify.
Id.
The Arizona Court of Appeals holds that the business enterprise exclusion bars coverage where the
direct and proximate cause of the loss is the insured’s business enterprise. Potomac Ins. Co. v. McIntosh, 167
Ariz. 30, 32-33, 804 P.2d 759, 761-62 (Ariz. Ct. App. 1990), review granted (1991), review vacated (1991).
In McIntosh, the insured attorney “orchestrated” the formation of a business venture. The insured was
the general partner and the claimants were the limited partners. Years later, the insured resigned as general
partner “and left the country.” The claimants lost over $260,000. The claimants alleged the insured committed
legal malpractice and general negligence. The insured “‘wore two hats’—one as a general partner [], and the
other as attorney for [the claimants] and for the partnership. [The claimants] argued that they were only seeking recovery for [the insured’s] negligence committed in his role as an attorney.” Id. at 31, 804 P.2d at 760. The
business enterprise exclusion barred coverage for “liability arising out of the Insured’s services and/or capacity
as: [] an officer, director, [or] partner . . . of a business enterprise.” Id.
The Arizona Court of Appeals stated, “the proper focus of our inquiry is the proximate or direct cause
of [the claimants’] loss: attorney negligence or business reverses.” Id. at 32, 804 P.2d at 761. The court decided
that the loss was directly and proximately caused by the insured’s business failures. Id.
[The insured’s] negligent acts, arguably committed in his capacity as an attorney . . . may have
indirectly caused [the] loss, but they were not the proximate cause. . . . This loss is directly attributable to [the insured’s] business failure—not to [the insured’s] actions as an attorney for either
[the claimants] or the partnership.
Id. The business enterprise exclusion precluded coverage for the loss. Id.
In St. Paul Fire & Marine Insurance Co. v. Grand, No. 89-15338, 908 F.2d 977, 1990 WL 100224 (D.
Ariz. July 17, 1990) (table disposition), the court held that a business enterprise exclusion in a legal professional liability policy was unambiguous and did not cover the underlying matter, because the underlying
matter had “nothing to do with ‘legal services’ or malpractice.” Id. at *4. The intent of the exclusion is to limit
coverage to malpractice claims arising from the practice of law. Id.
IX. “Loss” or “Damages” Covered by a Professional Liability Policy
A. Under what circumstances have courts found that monetary relief awarded to an insured
constitutes “loss” or “damages” as those terms are used in a professional liability
policy? Have courts found that public policy precludes coverage for restitution of ill
gotten gains? Have courts found that return of professional fees charged by an insured is
a “loss” or “damages” covered by a professional liability policy?
The Arizona federal district court has held that rescissory damages are uninsurable under Arizona law.
Alanco Techs., Inc. v. Carolina Cas. Ins. Co., No. CV-04-789-PHX-DGC, 2006 WL 1371633 (D. Ariz. May 17, 2006).
In Alanco, the insured acquired significant assets from another company in exchange for stock.
The stock was worth far less than promised. “[T]he complaint as a whole makes clear that the alleged injury
to [the claimant] was the transfer of its assets to [the insured] in exchange for less valuable stock.” Id. at *3.
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“Most of the claims expressly seek rescission or rescission-type damages, including rescission, voiding of the
transaction, the benefit of the bargain, or the recovery of [the claimant’s] assets through a constructive trust.”
Id. (internal citations omitted).
The policy defined “loss” as “damages, judgments, settlements, and Costs of Defense; however, ‘Loss’
shall not include . . . matters which may be deemed uninsurable under the law pursuant to which this Policy
shall be construed.” Id. at *2. The insurer argued:
[The claimant sought] rescissory damages—i.e., consideration that [the insured] should have paid
to [the claimant] when it obtained [the claimant’s] assets in exchange for [the insured’s] stock—and
that such damages are uninsurable as a matter of law because they constitute the return of an “illgotten gain.” Id. (citing Level 3 Comm’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001) (“The
interpretive principle for which Federal contends—that a ‘loss’ within the meaning of an insurance
contract does not include the restoration of an ill-gotten gain—is clearly right.”)).
Id. The Arizona federal district court agreed with the insurer.
The court stated that the claimant sought rescissory damages. Id. at *3. And “rescissory damages are
uninsurable under the law.” Id. at *4. Therefore, the policy did not provide coverage for the suit against the
insured. Id. at *3-4.
By contrast, in Wojtunik v. Kealy, No. CV-03-2161-PHX-PGR, 2011 WL 1211529 at *10 (D. Ariz. Mar.
31, 2011), the court held that the “loss” definition did not preclude coverage. The court explained:
Even assuming that Arizona public policy precludes insurance reimbursement for restitutionary
or disgorgement payments made by an insured, an issue that Wojtunik disputes and the Court
need not resolve here, the Court concludes that the stipulated judgment constitutes a loss within
the meaning of the policy. The cases on which TIG relies, such as Level 3 Communications, Inc.
v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001) and Alanco Technologies, Inc. v. Carolina Casualty
Ins. Co., 2006 WL 1371633 (D. Ariz. May 17, 2006), do not control here because the allegations
and assorted claims in the securities fraud complaint underlying the stipulated judgment did not
necessarily restrict potential recovery to restitutionary or disgorgement-type damages. While
Wojtunik’s securities fraud action certainly arose from IFC’s failure to compensate Wojtunik
for the purchase of his company as required by the parties’ contract, it did not seek the return
of IFC’s ill-gotten gains as any rescissory-type relief would have been futile given that IFC was
in Chapter 7 bankruptcy proceedings at the time this action was commenced. Unlike in Level
3 and Alcano Technologies, the damages sought against the Insureds, which included both
compensatory and punitive damages for the harm suffered by Wojtunik, were not rescissory in
nature given that the Insureds could not have disgorged any ill-gotten gains because IFC, not the
Insureds, received the benefit of Wojtunik’s transaction with IFC, and IFC never indemnified the
Insureds for the damages at issue in the stipulated judgment.
Id.
A professional liability policy may bar coverage for a claim through a sexual acts exclusion. Such an
exclusion is valid and enforceable in Arizona. Chicago Ins. Co. v. Manterola, 191 Ariz. 344, 346-47, 955 P.2d
982, 984-85 (Ariz. Ct. App. 1998) (holding that sexual acts exclusion precluded professional liability coverage
for insured psychologist where claimant’s allegations “stem[ed] entirely from the mishandling of the transference phenomenon and the resulting sexual relationship with her. [The claimant] has not alleged any other act
of malpractice by [the insured psychologist] other than his development of a sexual relationship with her.”).
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In general, the phrase “negligent act, error or omission” does not include intentional acts. For example, in WellCare of Florida, Inc. v. American International Specialty Lines Insurance Co., 16 So. 3d 904, 906
(Fla. Dist. Ct. App. 2009), an insurance agent alleged that a health insurer breached its contract by refusing to
allow the agent to sell a particular product and “embarked upon a deliberate plan to interfere in the relationship between [the agent] and its customers.” The court explained that an “errors and omissions policy is not
designed to provide coverage to the insured for its own systematic, deliberate, wrongful conduct.” Id. at 907.
Consequently, the agent’s claims were not covered under the policy. Id.
Florida courts have also found that liability for a “negligent act, error or omission” does not include
claims due to a “fortuitous” theft. In Jeb Travel, Inc. v. Connecticut Indemnity Co., 896 So. 2d 896, 897 (Fla.
Dist. Ct. App. 2005), airlines made claims against a travel agency for the cost of tickets stolen from the agency.
The agency paid and sought reimbursement from its E&O carrier, asserting that its negligence in handling the
tickets was a covered event. Id. at 898. Finding no ambiguity in the policy, the court explained that the airline
claims were a consequence of the theft and not the agency’s negligence. Id. The court characterized the theft
as a “fortuitous event” and, as a result, determined that the phrase “because of . . . any negligent act, error or
omission of the insured” did not include liability resulting from the theft. Id.
Under Florida law, “professional services” are those that require specialized training. Aerothrust Corp.
v. Granada Ins. Co., 904 So. 2d 470, 472 (Fla. Dist. Ct. App. 2005) (citing Black’s Law Dictionary 1246 (8th
ed. 2004) (defining “professional” as “[a] person who belongs to a learned profession or whose occupation
requires a high level of training and proficiency”)). Whether an act results from a professional service “is determined by focusing upon the particular act itself, as opposed to the character of the individual engaging in
the act.” Lindheimer v. St. Paul Fire & Marine Ins. Co., 643 So. 2d 636, 638 (Fla. Dist. Ct. App. 1994).
When an insurance policy fails to explicitly define the term “professional services,” Florida courts
have considered, among other things, whether the service involves specialized skill, requires specialized training, is regulated, requires a degree, and/or whether there is an entity that certifies or accredits persons or that
sets forth standards of practice for the performance of those services. Auto-Owners Ins. Co. v. E.N.D. Servs.,
Inc., No. 8:10-cv-2387-T-30EAJ, 2011 WL 6319189, at *4 (M.D. Fla. Dec. 15, 2011).
In determining whether an act, error or omission involves a “professional service,” Florida courts
focus on the nature of the service rendered and the cause of the injury. In general, the alleged injuries must be
caused by the professional service at issue as opposed to an act that requires no professional skill. For example, Lindheimer v. St. Paul Fire & Marine Insurance Co., 643 So. 2d 636, 637 (Fla. Dist. Ct. App. 1994) involved
a dentist who sexually assaulted his patient during a root canal procedure after administering Valium to place
her in a “twilight sleep.” Even though the sexual acts occurred during the course of the procedure, the court
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found that the dentist’s conduct was not covered under the professional liability policy because the injuries
allegedly suffered by the patient arose from a battery and not from any medical diagnosis, treatment or care.
Id. at 639.
In the context of professional services exclusions in general liability policies, courts applying Florida law have expanded the scope of “professional services” to include certain non-professional ministerial or
administrative tasks that are an integral part of the professional service rendered. See, e.g., Alpha Therapeutic Corp. v. St. Paul Fire & Marine Ins. Co., 890 F.2d 368 (11th Cir. 1989) (error made by medical technician in
transcribing test results involved professional service for which coverage was precluded by professional services exclusion); Colony Ins. Co. v. Suncoast Med. Clinic, LLC, 726 F. Supp. 2d 1369, 1377-78 (M.D. Fla. 2010)
(acts of hiring staff, purchasing assistive technology and establishing and implementing policies and procedures governing diagnostic testing and communication among medical staff were inextricably intertwined
with professional medical services provided by insured); Estate of Tinervin v. Nationwide Mut. Ins. Co., 23
So. 3d 1232, 1237 (Fla. Dist. Ct. App. 2009) (employee’s failure to provide doctor with lab report, which led to
patient’s death, was intricate part of professional service provided by doctor); State Farm Fla. Ins. Co. v. Campbell, 998 So. 2d 1151, 1155 (Fla. Dist. Ct. App. 2008) (medical assistant’s act of positioning patient’s foot for
purpose of x-ray was professional service because positioning patient was essential in order to take x-ray).
However, garden variety negligence claims that do not directly implicate a professional act are typically beyond the scope of “professional services.” For example, in Scottsdale Insurance Co. v. Lock Towns Community Mental Health Center, Inc., 442 F. Supp. 2d 1287, 1289-90 (S.D. Fla. 2006) an exclusion for injuries due
to the rendering or failure to render a professional service, did not preclude coverage under a commercial general liability insurance policy for the insured psychiatric institute’s negligence in failing to keep a patient safe
from its employees. The negligence claim did not invoke any duty to provide proper psychiatric treatment. Id.
Claims arising out of poor business decisions frequently fall outside the scope of a policy’s definition
of “professional services” when the claims do not implicate any services rendered to a third party. In Block v.
Fireman’s Fund Insurance Co., 609 So. 2d 763 (Fla. Dist. Ct. App. 1992) the insured veterinarian was not entitled to coverage under a professional malpractice policy with respect to a negligence action brought by an
injured employee. The employee’s complaint alleged that the veterinarian negligently forced her to return to
work before her hand injury had healed, and that the veterinarian did not provide her with protective gloves
for handling animals. Id. The court found that the policy did not provide coverage for business decisions concerning conditions of employment. Id.; see also International Surplus Lines Ins. Co. v. Seagrave House, Inc., 572
So. 2d 933, 936-37 (Fla. Dist. Ct. App. 1990) (holding that professional liability policy provided coverage only
for injuries suffered by patients or clients of insured as result of improper or inadequate provision of professional services, not for claims of wrongful discharge from employment).
In Roberts v. Florida Lawyers Mutual Insurance Co., 839 So. 2d 843, 846 (Fla. Dist. Ct. App. 2003),
the court held that the insured law firm’s partners’ internal dispute over how to divide money received from a
lawsuit did not fall within the insuring agreement. See also Rissman, Barrett, Hurt, Donahue & McClain, P.A.
v. Westport Ins. Corp., No. 11-13827, 2012 WL 1889410 (11th Cir. May 25, 2012) (lawyers professional liability
policy did not cover claim based on insured’s conduct as unlicensed real estate broker, and not as attorney);
but see Nardella Chong, P.A. v. Medmarc Cas. Ins. Co., 642 F.3d 941, 943 (11th Cir. 2011) (under Florida law,
mismanagement of funds held in law firm’s trust for clients constitutes professional service, where definition
of “professional service” includes services rendered as “‘trustee . . . or . . . in any similar fiduciary capacity’ as
long as ‘those services [are] typically and customarily performed by an attorney’”).
In Appel v. Lexington Insurance Co., 29 So. 3d 377, 380 (Fla. Dist. Ct. App. 2010), the policy defined
“professional services” as services “professional services rendered in the business of selling, installing, main152 Hot❖Issues
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taining, monitoring or providing connection services for” specified electronic medical monitoring devices.
The court held that the insured company’s two directors’ alleged failure to detect a “Ponzi scheme” perpetrated
by the company’s president did not constitute “professional services rendered for others by the insured.” Id.
In Vogelsang v. Allstate Insurance Co., 46 F. Supp. 2d 1319 (S.D. Fla. 1999), the insured attorney was
sued for defamation by the ex-husband of a woman the attorney had represented in a divorce. The claimant
alleged that he had been defamed when the insured called the claimant a “crook.” The attorney sought coverage for the defamation claim under his general liability policy. The general liability insurer declined coverage
based upon the policy’s professional services exclusion. The court determined that the exclusion precluded the
insurer from having a duty to defend, and noted that a professional services exclusion can apply even though
the claimant is not the insured’s client. Id. at 1321. The court emphasized that the insured was not accused
of committing a wrongful act in the commercial aspect of his law practice. Rather, the allegations against the
insured “flow[ed] directly from [the insured’s] professional decisions, while rendering legal services.” Id. at
1323.
Florida courts have not adopted a particular definition of a “claim” when the term is not defined
in the policy. However, it is clear that courts applying Florida law will interpret the undefined term “claim”
broadly and in the manner most favorable to the insured. See United States Fire Ins. Co. v. Fleekop, 682 So. 2d
620, 627 (Fla. Dist. Ct. App. 1996) (in absence of alternative definition, term “claim” must be read in context of
entire policy to include notice of occurrences or potential claims given during discovery period).
In Utica Mutual Insurance Co. v. Pennsylvania National Mutual Casualty Insurance Co., 639 So. 2d 41,
43 (Fla. Dist. Ct. App. 1994), the court found that the undefined term “claim” was ambiguous. Consequently,
the term was construed against the insurer and in the manner that extended the greatest amount of coverage under the policy. Id. (affirming trial court’s finding of multiple claims because there were seven separate
construction projects involved in underlying actions, separate bonds issued for those projects, and defaults
occurred at separate points in time).
Any written notice to the insured seeking monetary or non-monetary relief may be considered
a claim. See, e.g., Vozzcom, Inc. v. XL Specialty Ins. Co., No. 10-60213-CIV, 2010 WL 1540023, at *6 (S.D.
Fla. Apr. 19, 2010) (employees’ written notices of intent to join class action against insured employer were
“claims”); KB Home v. St. Paul Mercury Ins. Co., 621 F. Supp. 2d 1271, 1275 (S.D. Fla. 2008), aff ’d, KB Home v.
Travelers Ins. Co., 339 F. App’x 910 (11th Cir. 2009) (unpublished) (filing of employment discrimination complaint with county civil rights division against insured was “claim” under insured’s employment practice liability policy).
In determining whether a communication from a claimant constitutes a claim, Florida courts
focus on the extent to which the communication is a demand for monetary relief or services or otherwise
serves as notice of an intent to initiate an action against the insured. See, e.g., National Fire Ins. v. Bartolazo,
27 F.3d 518, 519 (11th Cir. 1994) (letter from patient’s attorney to physician was not “claim,” because letter made no demand for money or services and did not allege medical incident, but rather merely requested
patient’s medical records and alluded to possible claim for malpractice); Myers v. Interstate Fire & Cas. Co., No.
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8:06-CV-2347-T-30MAP, 2008 WL 276055, at *5 (M.D. Fla. Jan. 30, 2008) (demand for disclosure of liability
insurance information is not “claim”).
Notice of a prospective or potential demand for money or services will generally not qualify as a
“claim.” Additionally, a warning or threat of future litigation is insufficient to constitute a “claim.” See Clarendon Nat’l Ins. Co. v. Muller, 237 F. App’x 451 (11th Cir. 2007) (unpublished) (attorney’s letter to his malpractice
insurer did not provide notice of actual claim, where letter simply informed insurer that, if future events did
not resolve client’s concerns, client and trust would suffer damages as result of malpractice and might make
demand for money or services in form of lawsuit); Clarendon Nat’l Ins. Co. v. Massari, No. 8:05CV1282T26MSS, 2006 WL 3422083, at *4 (M.D. Fla. Nov. 2, 2006) (letter to insureds advising of potential incidents
that could result in litigation was not notice of actual claim during policy period), aff ’d, Clarendon Nat’l Ins.
Co. v. Muller, 237 F. App’x 451 (11th Cir. 2007) (unpublished); see also Office Depot, Inc. v. National Union
Fire Ins. Co. of Pittsburgh, Pa., 734 F. Supp. 2d 1304, 1321-22 (S.D. Fla. 2010) (sums paid by insured corporation on behalf of its officers, directors, and employees in connection with Securities and Exchange Commission inquiry and investigation did not constitute “losses” arising from “claims”), aff ’d, 453 F. App’x 871 (11th
Cir. 2011) (unpublished); but see Paradigm Ins. Co. v. P & C Ins. Sys., Inc., 747 So. 2d 1040, 1041 (Fla. Dist. Ct.
App. 2000) (letter written by judgment creditor’s attorney to insurance agent was “demand for money” and a
“claim” because letter alleged agent’s negligent failure to procure liability insurance for judgment debtor and
asked agent to turn letter over to its E&O insurer for handling).
In Continental Casualty Co. v. Wendt, 205 F.3d 1258, 1262 (11th Cir. 2000), the court concluded that
the word “related” is unambiguous and should be afforded its plain meaning. The policy stated: “Any claim or
claims arising out of the same or related wrongful acts, shall be considered first made during the policy term
in which the earliest claim arising out of such wrongful acts was made.” Id. at 1260. The court noted: “The
words ‘relate’ or ‘related’ are commonly understood terms in everyday usage. They are defined in the dictionary as meaning a ‘logical or causal connection between’ two events.” Id. at 1262 (citing Webster’s Third New
International Dictionary (1981)).
In Continental Casualty Co. v. Wendt, 205 F.3d 1258, 1264 (11th Cir. 2000), the court found that certain claims were “related to” claims forming the basis for an earlier suit that resulted in the insurer’s payment
of the policy limits. Therefore, the claims were not covered by the policy. The policy provided, “Any claim or
claims arising out of the same or related wrongful acts, shall be considered first made during the policy term
in which the earliest claim arising out of such wrongful acts was made.” Id. at 1260. The court determined
that the claims were “related” because they arose out of the same course of conduct. The fact that the claims
resulted in a number of different harms to different persons, each of which had different causes of actions
against the insured, did not render the claims “unrelated.” Id. at 1264.
In Westport Insurance Corp. v. Key West Insurance, Inc., 259 F. App’x 298, 299 (11th Cir. 2007)
(unpublished), the insured broker made a series of misrepresentations to its customer regarding the inclusion
of wind and hail coverage in two separate property and casualty insurance policies. The professional liability
policy provided that “[t]wo or more ‘claims’ arising out of . . . a series of related or continuing ‘wrongful acts,’
shall be a single ‘claim.’” Id. at 299. Because the incidents involved the same insurance agent repeating the
same false statements, the court concluded that the claims were causally and logically related, and thus, a single claim. Id. at 300.
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The per-claim policy limits in the lawyer’s professional liability policy involved in Eagle American
Insurance Co. v. Nichols, 814 So. 2d 1083 (Fla. Dist. Ct. App. 2002), applied to claims involving “the same or
related Wrongful Act[CTs].” Id. at 1085. The underlying legal malpractice action alleged that the insured attorney had failed to name multiple parties as defendants in a medical malpractice action in which the insured
had represented the claimant. The court concluded that all the alleged wrongful acts (failing to name different
parties as defendants in the medical malpractice case) were related. Therefore the per-claim policy limit, not
the aggregate policy limit, applied. Id. at 1087.
In Capital Growth Financial LLC v. Quanta Specialty Lines Insurance Co., No. 07-80908-CIV, 2008 WL
2949492 (S.D. Fla. July 30, 2008), the court found that various arbitration claims filed after the expiration of
the insured’s E&O policy and a claim filed against the insured during the policy period were based upon the
same interrelated acts, namely alleged churning. Therefore, the claims filed after the expiration of the policy
were covered because they were deemed to be the same claim as that filed during the policy period. Reviewing
nationwide decisions, the court determined that exact factual overlap was not required for a finding of relatedness, but merely that the claims be logically linked by a “sufficient factual nexus.” Id. at *8.
Reporting provisions in claims-made policies are strictly construed under Florida law. The insurer
need not establish prejudice as a result of a delay in reporting. See Jennings Constr. Servs. Corp. v. ACE Am. Ins.
Co., 783 F. Supp. 2d 1209, 1212-13 (M.D. Fla. 2011); Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 515
(Fla. 1983).
Coverage under a claims-made policy is effective only if the act is discovered and reported to the
insurer during the policy term. Gulf v. Dolan, 433 So. 2d at 515. The critical difference between occurrencebased and claims-made policies is that “claims-made policies require that … notice be given during the policy
period itself.” Id. at 514-15 (emphasis in original).
[W]hile a failure to timely report a claim under an occurrence policy may not preclude coverage unless prejudice is established, claims-made-and-reported polices “are essentially reporting
policies. If the claim is reported to the insurer during the policy period, then the carrier is legally
obligated to pay; if the claim is not reported during the policy period, no liability attaches.”
Jennings, 783 F. Supp. 2d at 1212-13 (emphasis in original) (quoting Gulf v. Dolan, 433 So. 2d at 515); see also
Pantropic Power Prods., Inc. v. Fireman’s Fund Ins. Co., 141 F. Supp. 2d 1366, 1369 (S.D. Fla. 2001) (notice-prejudice rule does not apply to claims-made policies; such a rule would in effect expand scope of coverage and
permit insured to enjoy benefit for which it has not given consideration), aff ’d, 34 F. App’x 968 (11th Cir. 2002);
Doctors Co. v. Health Mgmt. Assocs., Inc., 943 So. 2d 807, 810-11 (Fla. Dist. Ct. App. 2006) (insured health care
provider’s failure to submit claim reports of incidents within policy period precluded professional liability
coverage for medical malpractice claims made after expiration of policy, regardless of prejudice to insurer).
Claims made during one policy period but reported to the insurer during a renewal policy period are
considered late. Accordingly, coverage does not exist for such claims under a claims-made policy. For example, in Pantropic Power Products, Inc. v. Fireman’s Fund Insurance Co., 141 F. Supp. 2d 1366, 1370 (S.D. Fla.
Florida
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2001), aff ’d, 34 F. App’x 968 (11th Cir. 2002), the district court determined that an insured’s failure to report a
claim during the time permitted by the policy is not excused if the claim is reported during the renewal policy period. The court explained that the insurer typically charges a lower premium in a claims-made policy
because it undertakes a more limited risk. In exchange, the insured is only permitted to make and report a
claim during a narrow window of time. Id. 141 F. Supp. 2d at 1369. The court noted that extending the time
period to report claims under a claims-made policy would “in effect expand the scope of coverage, and permit
the insured to enjoy a benefit for which he has not given consideration.” Id. at 1369-70.
However, in Cast Steel Products, Inc. v. Admiral Insurance Co., 348 F.3d 1298, 1304 (11th Cir. 2003),
the Eleventh Circuit determined that coverage existed for a claim discovered during one policy period but
reported during the renewal policy period. The policy contained a provision that automatically extended the
reporting provision upon cancellation and non-renewal, but was silent as to whether a renewal would extend
the reporting time period. As a result of this ambiguity, the court found that a renewal would, in fact, extend
the reporting time period. Id. at 1299-1300.
Although the Cast Steel decision was premised upon an ambiguity in the policy, it may represent
a shift away from the more stringent standard imposed by Pantropic. Id. at 1303-04. The Cast Steel court
explained:
Though we are sympathetic to the rationale of Pantropic, and would generally agree that the
lower premium charged for a claims-made policy should entitle an insured to lesser coverage
than a broader, and more expensive, occurrence policy, we find it both illogical and inequitable
to deny coverage to the insured who chooses to renew its claims-made policy for successive years
with the same insurer - particularly in the scenario we are faced with here. Cast Steel’s claim
was reported to Admiral mere hours after the expiration of the [first policy], and during a time
period in which the [renewal policy] had become effective . . . [I]f choosing to cancel or nonrenew provided the insured with an extended reporting period, electing to continue to do business with the same insurer by renewing the claims-made policy certainly “should not precipitate
a trap wherein claims spanning the renewal are denied.”
Id. at 1303-04 (citing Helberg v. National Union Fire Ins. Co., 102 Ohio App. 3d 679, 657 N.E.2d 832, 834
(1995)).
Although Florida courts have strictly construed reporting provision in claims-made policies, certain
situations may warrant an extension of time to report. In Gulf Insurance Co. v. Dolan, Fertig & Curtis, 433 So.
2d 512, 516 n.1 (Fla. 1983), the Florida Supreme Court noted: “[I]f an impossibility prevented notice being
given to an insurer at the very end of the policy period, it may well be that an insured would be relieved of giving notice during the period of such impossibility.”
In United National Insurance Co. v. Jacobs, 754 F. Supp. 865 (M.D. Fla. 1990), the insured had until
a discovery period expired on October 26, 1988 at 12:01 a.m. to report a claim to the insurer. A claim was
made against the insured on October 25, 1988 at 10:00 a.m., when the insured was served with a summons
and complaint. The claims-made policy at issue required the insured to report claims “in writing to the Company [i.e., the insurer].” Id. at 868. The insurer received notice on October 27, 1988, one day after the discovery
period expired. The court found that because the claim was not timely reported to the insurer, the insured did
not satisfy the policy’s requirements.
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In Clarendon National Insurance Co. v. Muller, 237 F. App’x 451 (11th Cir. 2007) (unpublished), the
court held that an insured’s letter to his malpractice insurer did not provide adequate notice of a claim as
defined under the policy. The policy defined a “claim” as “a demand received by the Insured for money or
services arising out of an act or omission, including personal injury, in the rendering of or failure to render
legal services.” Id. at 451. In a letter from the insured to the insurer, the insured attorney advised the insurer of
concerns regarding his prior legal representation and the potential that it could give rise to a claim. The court
determined that the letter did not put the insurer on notice of any present demand as required under the policy, but rather simply notified the insurer of a potential lawsuit. Id. at 452. Moreover, although the policy permitted the insured to report potential claims to the insurer during the policy period, the policy did not permit
the insured to report potential claims to the insurer during the extended reporting period. The extended
reporting period was in effect when the potential claim was reported to the insurer. Id.
In National Union Fire Insurance Co. of Pittsburgh, Pa. v. Underwriters at Lloyd’s, London, 971 So. 2d
885, 888 (Fla. Dist. Ct. App. 2007), the court determined that the insured did not adequately notify the insurer
of a potential claim. The policy provided that a notice of a potential claim had to contain the following information: “1. the specific Wrongful Act, and 2. the consequences which have resulted or may result therefrom,
and 3. the circumstances by which the Assureds first became aware thereof.” Id. at 886. The court held that
the insured’s letter advising the insurer of a suit to terminate a merger agreement was insufficient to provide
notice of a subsequent shareholders’ suit that was filed after the expiration of the policy. Even though both
suits arose out of same allegations of misrepresentation, the initial complaint forwarded to the insurer did not
adequately describe the consequences that resulted from insured’s wrongful acts. Id. The court explained that
the insurer could not reasonably be expected to speculate that litigation in connection with a failed merger
would lead to a shareholders’ class action against the directors and officers for securities law violations. The
insured’s obligation to provide notice cannot be shifted to the insurer to speculate as to all of the consequences
that may result from specific wrongful acts by sifting through voluminous documents. Id. at 889.
In United National Insurance Co. v. Jacobs, 754 F. Supp. 865 (M.D. Fla. 1990), the court held that even
if an insurance agency was an authorized representative of the insurer for purposes of receiving notice, when
the policy required that written notice be given to the insurer before the end of the discovery period, and on
the last day of the discovery period verbal notice was given by the insured to the agency, that notice was insufficient because the policy required that the insured give written notice.
“Tail” or discovery period coverage supplements a claims-made policy to give the insured added protection at a time when the insured may be vulnerable to suit. United States Fire Ins. Co. v. Fleekop, 682 So. 2d
620, 623 (Fla. Dist. Ct. App. 1996). This extended coverage protects insureds for incidents that occurred during the policy period but that were not presented until after the policy expired. Tail coverage picks up where
the claims-made policy leaves off, with respect to acts committed during the original policy period. Id.
Tail coverage does not provide indemnity for new negligent acts or omissions committed during the
tail period. Id. As to future claims from incidents arising during the policy period, an insured who purchases
claims-made coverage with a tail obtains the equivalent of occurrence coverage. Arad v. Caduceus Self Ins.
Fund, Inc., 585 So. 2d 1000, 1001 (Fla. Dist. Ct. App. 1991). Notably, the Florida Supreme Court has held that
no gratuitous or reasonable extended reporting period is available to an insured who has not specifically purchased tail coverage. Gulf Ins. Co. v. Dolan, Fertig & Curtis, 433 So. 2d 512, 516 (Fla. 1983).
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Depending upon the policy’s definition of “claim,” notice of a potential claim during the extended
reporting period may be sufficient to trigger tail coverage. In Fleekop, the term “claim” was not expressly redefined in the extended reporting or tail provision. 682 So. 2d at 627. The insured accounting firm sent a letter
to its professional liability insurer within the extended reporting period, listing seven hundred individuals
and entities who had a reason to sue the insured over the promotion of failed tax shelters, which were investigated by the Internal Revenue Service. After the extended reporting period expired, suit was filed against
the insured. Id. at 624. The insurer argued that the insured’s prior letter had provided notice of only “potential” rather than actual claims, and was insufficient to meet the reporting requirements of the tail coverage. Id.
However, the court disagreed and found that the insured’s letter constituted sufficient notice of the potential
claims to trigger coverage during the tail period. Id. at 627.
However, where the plain language of the policy requires notice of an actual claim during the policy period, tail coverage will not be available in the absence of sufficient notice of an actual claim. In Clarendon National Insurance Co. v. Massari, No. 8:05-CV1282T-26MSS, 2006 WL 3422083, at *2 (M.D. Fla. Nov. 2,
2006), aff ’d, Clarendon Nat’l Ins. Co. v. Muller, 237 F. App’x 451 (11th Cir. 2007) (unpublished), the insured
notified his insurer of a potential claim during the extended reporting period. However, the insured did not
notify the insurer of the actual claim until after the extended reporting period expired. Id. 2006 WL 3422083,
at *2. The policy provided coverage for potential claims reported during the policy period; however, the plain
language of the extended reporting period provision covered actual claims only. Id. at *6. The lack of notice of
an actual claim during the extended reporting period precluded coverage for the insured. Id. at *9.
In United National Insurance Co. v. Jacobs, 754 F. Supp. 865 (M.D. Fla. 1990), the court held that the
insured did not timely report a claim during the policy’s discovery period. However, the court found that even
if the claim had been properly reported during the discovery period, the policy still would not have provided
coverage because under the terms of the policy the discovery period became inoperative once the insured
obtained a policy from another insurer providing “the same or similar coverage.” Id. at 869.
The claims-made policy at issue in James River Insurance Co. v. Oscar I. Garcia, Architect, P.A.,
-- F. Supp. 2d --, No. 11-61851-CV, 2012 WL 1252507 (S.D. Fla. Apr. 13, 2012), stated that the insured was
entitled to extended reporting period coverage only “in the event of a cancellation or non renewal,” but the
policy added that “[a] change in Policy terms and conditions and/or premium shall not be considered non
renewal …” Id. at *2. The court determined that although the insurer sent the insured a statutorily required
non-renewal notice due to a change in policy terms in the later policy, the statutorily required notice did not
alter the plain meaning of the policy that a change in policy terms was not a non-renewal for purposes of the
extended reporting period provision. Id. at *4.
Under Florida law, a standard prior knowledge provision precluding coverage for claims arising out
of any acts or omissions occurring prior to the inception of the policy, if the insured knew or could have reasonably foreseen that such acts or omissions might be expected to be the basis of a claim or suit, is unambiguous. Lawyers Prof ’l Liab. Ins. Co. v. Dolan, Fertig & Curtis, 524 So. 2d 677, 678 (Fla. Dist. Ct. App. 1988).
Courts applying Florida law have adopted an objective standard when interpreting “prior knowledge”
provisions. In Eddy, LLC v. Continental Casualty Co., 784 F. Supp. 2d 1331, 1343 (M.D. Fla. 2011), the policy
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did not provide coverage if the insured “had a basis to believe that any ... act or omission … might be reasonably be expected to be the basis of a claim.” The court found that, regardless of the insureds’ subjective beliefs,
the plain language of the policy precluded coverage. Id.
Continental Casualty Co. v. ZHA, Inc., 874 F. Supp. 1322 (M.D. Fla. 1995) involved a claims-made
policy that was issued to a party that acted as an owner’s representative (i.e., a construction manager), in connection with a stadium construction project. During construction, pipes were ruptured and workers allegedly
came into contact with hazardous materials. The policy’s prior knowledge provision precluded coverage for “a
wrongful act or circumstance arising out of professional services . . . from which you could expect that a claim
would result.” Id. at 1324. The court raised the issue of, but did not finally determine, whether an objective or
subjective standard applied (although the court suggested that the emphasis placed on “you” in the provision
could mean that the provision was ambiguous concerning whether an objective standard should be applied).
Regardless of the standard, the court found that a question of fact, as to whether the prior knowledge provision barred coverage, precluded summary judgment.
In Coregis Insurance Co. v. McCollum, 961 F. Supp. 1572, 1575 (M.D. Fla. 1997), the prior knowledge
provision stated that “coverage [would] not be afforded if at the effective date any insured under the policy
knew or could have reasonably foreseen any claim arising out of any act, error, omission or personal injury
that might be expected to be the basis of a claim or suit.” Prior to the policy’s effective date, an associate at the
insured law firm wrote a memorandum to one of the firm’s partners documenting her belief that a former client might file a malpractice claim. Id. at 1576. Summary judgment was granted in favor of the insurer on the
basis that the associate and the firm knew a month before the effective date of the policy that a malpractice
claim might be filed by their clients, but failed to disclose this information to the insurer. Id. at 1580.
In Eddy, LLC v. Continental Casualty Co., 784 F. Supp. 2d 1331, 1343 (M.D. Fla. 2011), the policy contained a prior knowledge provision that conditioned coverage on the insureds’ having no knowledge of an
act or omission in the provision of professional services that might reasonably be expected to be the basis of
a claim. Internal communications revealed concerns on the part of an employee of the insured that a claim
might be filed. Id. Moreover, the insured failed to notify the insurer of any concerns regarding a potential
claim prior to the effective date of the policy. Id. As a result, the court concluded that no coverage existed
based on the plain language of the policy. Id.
In Axis Insurance Co. v. Farah & Farah, P.A., No. 3:10-cv-393-J-37JBT, 2011 WL 5510063, at *9 (M.D.
Fla. Nov. 10, 2011), it was undisputed that the insured attorney believed that the premature filing of a medical negligence complaint against the federal government (without satisfying pre-suit notice requirements)
could result in a malpractice claim. The policy provided coverage “provided that . . . prior to the . . . inception
date of the first policy issued by [Axis] . . . no Insured had a basis to believe that any such act or omission . . .
might reasonably be expected to be the basis of a Claim.” Id. at *4. On this basis alone, the court found that the
insurer was entitled to summary judgment as a result of the prior knowledge provision. Id. at *9.
In Kopelowitz v. Home Insurance Co., 977 F. Supp. 1179 (S.D. Fla. 1997), the lawyer’s professional liability policy at issue provided coverage only if before the policy’s effective date the insured “had no reasonable
basis to believe that [he] had breached a professional duty or to foresee that a claim would be made against
[him].” Id. at 1189. The court held that the knowledge of one partner at the insured law firm should not be
imputed to another partner for purposes of the prior knowledge provision. Id. at 1190. In any event, the court
held that even if the knowledge of one partner could be imputed to the other partner, there was insufficient
evidence that either partner had the requisite knowledge. Id.
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In Leeds v. First Mercury Insurance Co., No. 10-22729-CV, 2011 WL 2971228, at *1 (S.D. Fla. July 20,
2011), which, as the court noted, involved “spies, intrigue, and vast sums of money,” the court found that the
insurer did not have any duty to indemnify the insured under a lawyer’s professional liability insurance policy.
The insured attorney was retained by the claimant to file a lawsuit against the Cuban government based upon
her fraudulent marriage to a Cuban spy. The claimant obtained a more than $27 million judgment, but was
unable to collect most of the judgment, even though soon afterwards the insured was able to help collect a
$67 million judgment against the Cuban government for a different client. Id. at *2. Prior to the policy’s inception, the claimant wrote to the insured to inquire why her judgment had not been satisfied from the same
frozen assets that the other client had received. The claimant did not demand monetary satisfaction from the
insured, but the insured nevertheless retained his own counsel in connection with the situation. Id. During
the policy period, the claimant retained counsel, who communicated with the insured’s counsel about settlement and sent the insured’s counsel a draft complaint. A mediation was then scheduled. It was only after that
(but during the policy period) that the insurer was put on notice. Id. at *3. The policy required as a condition
of coverage that the insurer be notified within ten days after the insured received a “written notice of a claim
or circumstances which could give rise to a claim.” Id. The court held that the insurer was not given timely
notice of a circumstance which could give rise to a claim, because the insured had knowledge of the claimant’s
allegations and acted on that knowledge before involving the insurer. Id. at *5. The court also determined that
the insurer was prejudiced by the insured’s failure to timely notify it.
In Scardaville v. Illinois Union Insurance Co., No. 5:04-CV-389-OC-10GRJ, 2006 WL 1208011, at *3
(M.D. Fla. May 4, 2006), the insurer issued a policy that covered written claims first presented to the insurer
during the policy period arising out of wrongful acts occurring subsequent to the applicable retroactive date.
Several of the alleged wrongful acts occurred prior to the retroactive date. Although there was evidence suggesting that one of the alleged wrongful acts could have occurred after the retroactive date, there was no evidence that the claimants actually suffered any damages as a result of that act. Id. at *4. As a result, the court
found that no coverage was available under the policy. Id.
VIII. Professional Liability: Exclusions
Florida courts have held that exclusions for any claims arising out of dishonest, fraudulent, criminal,
or malicious acts or omissions by the insured are unambiguous. See Estate of Bombolis v. Continental Cas. Co,
Inc., 740 So. 2d 1229, 1230 (Fla. Dist. Ct. App. 1999) (precluding coverage for law firm whose attorney committed theft of client’s money). However, in order to bar coverage, all of the alleged wrongful acts must fall
within the scope of the exclusion.
In St. Paul Fire & Marine Insurance Co. v. Icard, Merrill, Cullis & Timm, P.A., 196 So. 2d 219, 223-24
(Fla. Dist. Ct. App. 1967). The court held that an insurer could not rely on a dishonest acts exclusion where the
complaint against the insured contained mere conclusory conjectures of dishonesty and conspiracy unsupported by allegations of actual facts. Id. at 222. Further, even though some of the alleged acts arguably fell
within the exclusionary clause of the policy, some of the other acts constituted only malpractice. Therefore,
the insurer was obligated to provide a defense to the insured. Id. at 223-24.
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In First National Bank Holding Co. v. Fidelity & Deposit Co. of Maryland, 885 F. Supp. 1533 (N.D. Fla.
1995), the court held that a dishonest acts exclusion in a bank’s directors and officers liability insurance policy
precluded coverage. The court rejected as “frivolous” the insured’s contentions that (1) even though the individual insured, who was the bank’s president, CEO and controlling shareholder, had pleaded guilty to bank
fraud, making a false statement on a bank document, and violating currency reporting requirements, these
crimes did not all necessarily involve crimes of dishonesty; and (2) there had been no “final adjudication,” as
required by the policy for the exclusion to preclude coverage, because there was a guilty plea, rather than a
jury verdict. Id. at 1537.
A requirement in a dishonest acts exclusion that there be a “final adjudication” meant that the
insurer had to pay defense costs because there had been no final adjudication regarding the insureds’ dishonesty, even though the allegations in the underlying complaint involved dishonest acts. National Union Fire Ins.
Co. of Pittsburgh, Pa. v. Brown, 787 F. Supp. 1424, 1428-30 (S.D. Fla. 1991), aff ’d, 963 F.2d 385 (11th Cir. 1992)
(unpublished table disposition). The district court found it significant that the directors and officers policy in
question was a liability policy, rather than an indemnity policy.
A criminal acts exclusion in a policy issued by a Sheriff ’s Self-Insurance Fund was found to preclude coverage for a claim that a deputy sheriff sexually assaulted an inmate, even though the policy covered
assaults and batteries “growing out of … law enforcement duties.” Keen v. Florida Sheriffs’ Self-Ins. Fund, 962
So. 2d 1021 (Fla. Dist. Ct. App. 2007). The court noted that there was no causal connection between the sexual
assault and the deputy’s law enforcement duties. Id. at 1024.
Courts applying Florida law have construed “insured vs. insured” exclusions according to their plain
terms. Sphinx Int’l, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 412 F.3d 1224, 1228 (11th Cir. 2005)
(former director of insured corporation who allegedly misrepresented his qualifications and failed to disclose
non-compete covenant prior to taking position was nevertheless “duly elected” director and “duly appointed”
officer for purposes of “insured vs. insured” exclusion). The rationale underlying such exclusions is to bar
coverage for collusive suits by a corporation against its directors and officers. However, the application of the
exclusion is not limited to situations where the underlying actions appear collusive. Id.
In PowerSports, Inc. v. Royal & Sunalliance Insurance Co., 307 F. Supp. 2d 1355, 1362 (S.D. Fla. 2004),
aff ’d, 128 F. App’x 95 (11th Cir. 2005), the district court applied an insured vs. insured exclusion to bar coverage for an entire suit against the insured even though some of the plaintiffs did not qualify as insureds under
the policy. The exclusion at issue applied to claims made against any insured person brought or maintained
by or on behalf of any insured person in any capacity. Id., 307 F. Supp. 2d at 1359. The court reasoned that the
plain terms of the exclusion applied to the entire suit against the insured company because the suit was originally filed by the insured’s officers. Id. at 1362. Despite the insured’s contention that coverage should have
been available for the claims asserted by the non-insured plaintiffs, the court found that no coverage was
available because the complaint treated all plaintiffs as one collective group. Id.
In contrast, the appellate court in Rigby v. Underwriters at Lloyd’s, London, 907 So. 2d 1187, 1188
(Fla. Dist. Ct. App. 2005), rev. granted, 917 So. 2d 192 (Fla. 2005), rev. dismissed as improvidently granted, 934
So. 2d 1183 (Fla. 2006), held that an insured vs. insured exclusion did not apply to a suit brought against the
insured by a bankruptcy trustee, despite the fact that the trustee was listed as an insured under the policy. At
the time of the alleged wrongful acts, the trustee was acting in his capacity as a trustee on behalf of the creditors, and not as an officer or director of the insured company. Id., 907 So. 2d at 1189. Consequently, the court
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determined that the insured vs. insured exclusion did not apply to the claim asserted by the trustee on behalf
of the company’s creditors. Id.
Florida courts have broadly interpreted exclusions for claims arising out of prior or pending litigation
to include actions that are factually connected or related to the claim at issue. See, e.g., Acosta, Inc. v. National
Union Fire Ins. Co. of Pittsburgh, Pa., 39 So. 3d 565 (Fla. Dist. Ct. App. 2010). In Acosta, the court found that
the prior litigation exclusion barred coverage for a suit alleging that the insured corporation wrongfully
acquired the accounts of its competitor. Id. at 577. All of the claims asserted against the insured arose out of
a prior turnover suit against the insured for return of the competitor’s property. Even though the causes of
action and damages in the suits were not identical and a distinction existed between the property identified in
each complaint, the court explained that the seizure of property and the actions at issue in the two suits were
still connected as part of an overall scheme. Id.
D. Personal Profit or Advantage Exclusion
In International Insurance Co. v. Johns, 874 F.2d 1447, 1455 (11th Cir. 1989), the Eleventh Circuit determined that a personal profit exclusion did not apply to losses sustained by directors resulting from their
settlement with a shareholder over payments made to the board under a performance incentive plan. The
court found that the settlement was a loss under the director’s liability policy, and that the exclusion for any
loss attributable to the insured directors “gaining in fact any personal profit or advantage to which they were
not legally entitled” was not applicable. Id. Despite the fact that the shareholders had never approved the performance incentive plan, the plan served a legitimate purpose and was not illegal. Id.
In Clarendon National Insurance Co. v. Vickers, 265 F. App’x 890 (11th Cir. 2008) (unpublished), the
claim asserted against the insured was premised upon the insured officer’s conduct as a co-trustee in permitting the transfer of a major asset of a trust. Because the claims did not include any allegations related to the
insured’s actions as an officer or director of any business enterprise, the court concluded that the policy’s business enterprise exclusion did not apply. Id. at 891.
constitutes “loss” or “damages” as those terms are used in a professional liability policy?
International Insurance Co. v. Johns, 874 F.2d 1447, 1470 (11th Cir. 1989) involved a disgruntled shareholder who filed a derivative action alleging that the performance incentive plan and consulting agreement in
place for the insured’s board of directors amounted to a waste of corporate assets. The parties settled the litigation and the shareholders dismissed the action in exchange for the return to the corporation of $600,000
awarded under the performance incentive plan. The court found that the sums paid by the officers and directors
in settlement of the derivative shareholder’s suit constituted a “loss” covered under the policy. Id.
In Scottsdale Insurance Co. v. Haynes, 793 So. 2d 1006 (Fla. Dist. Ct. App. 2001), the court held that
attorneys’ fees were not “damages” covered under an assisted living facility’s professional liability policy. In
that case, the policy stated that coverage included “all sums which the insured shall become legally obligated to pay as damages because of injury to which this insurance applies caused by a medical incident which
occurs during the policy period.” Id. at 1008. The court concluded that an award of attorneys’ fees to a prevail162 Hot❖Issues
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ing party arising from a statutory or contractual provision does not fall within the scope of “damages because
of injury to which this insurance applies.” Id. at 1009-10.
B. Have courts found that public policy precludes coverage for restitution of ill gotten gains?
Under certain circumstances, courts applying Florida law have held that ill-gotten profits recovered
from an insured are “damages” covered under a professional liability policy. See Limelight Prods., Inc. v. Limelite Studios, Inc., 60 F.3d 767 (11th Cir. 1995). In the underlying trademark infringement case, the plaintiffs
alleged violations of the Lanham (Trademark) Act, which authorizes recovery of ill-gotten profits equivalent
to the plaintiff ’s own lost profits. The claimant sought to garnish the infringers’ insurance policies to recover
its award. The insurers objected on the grounds that recovery of “ill-gotten profits” was not covered by their
policies. Id. at 769. The district court granted summary judgment to the claimant, and the appellate court
affirmed, holding that recovery of “ill-gotten profits” was covered by the insurance policies at issue. Id. The
court interpreted the term “damages” broadly in favor of the insured because the insurers “wrote the policies,
selected that term, and chose not to define or restrict it.” Id. The court refused “to allow [the insurers] to deny
coverage for the very injury they took payment to insure against.” Id.
However, it should be noted that the court’s decision in Limelight appears to be limited to its facts.
See CNL Hotels & Resorts, Inc. v. Houston Cas. Co., 505 F. Supp. 2d 1317 (M.D. Fla. 2007), aff ’d in part and rev’d
in part, CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co., 291 F. App’x 220 (11th Cir. 2008) (unpublished).
Recovery of ill-gotten profits is permitted as a measure of damages under the Lanham Act because proof of
actual damages is often unavailable. Id., 505 F. Supp. 2d at 1325. Thus, an award of ill-gotten profits in a Lanham Act case is a covered loss because it is restitutionary in form, but not in substance. See id. (quoting Level
3 Commc’ns v. Federal Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001) (“a ‘loss’ within the meaning of an insurance
contract does not include the restoration of an ill-gotten gain.”; applying Nebraska law but stating, in prior
opinion, that no “peculiarities” of Nebraska law bore on case)).
In Waste Corp. of America, Inc. v. Genesis Insurance Co., 382 F. Supp. 2d 1349 (S.D. Fla. 2005), aff ’d,
209 F. App’x 899 (11th Cir. 2006), the district court held that a breach of contract claim did not seek recovery
for a “loss,” and therefore the underlying complaint was not covered by a directors and officers liability insurance policy. The court stated that regardless of whether Florida or Texas law applied the result would be the
same, so the court did not decide the choice of law issue. Id., 382 F. Supp. 2d at 1353. The policy’s “loss” definition provided, in relevant part, that “loss” means: “[A]ny amounts which the Directors or Officers are legally
obligated to pay, . . . including damages, judgements [sic], Settlements, and Defense Costs; provided, however,
Loss shall not include . . . any matter which may be deemed uninsurable under the law pursuant to which this
Policy shall be construed.” Id. at 1351-52. The court explained:
[T]he threshold question is whether claims based on breaches of contract should be read into the
insuring agreement, despite the absence of such a coverage clause, based on the policy’s definition of “loss,” the requirement of a “wrongful act,” and public policy considerations.
As an initial observation, as pointed out in Holmes’ Appleman on Insurance,
[e]ven in the absence of an express exclusion, courts have held that a claim alleging breach
of contract is not covered under a professional liability policy because there is no “wrongful
act” and no “loss” since the insured is simply being required to pay an amount it agreed to
pay.
Eric Mills Holmes, Holmes’ Appleman on Insurance 2d §146.6 (2003).
. . . Deciding whether to read breach of contract coverage into the insuring agreement should
be determined against the backdrop of the strong public policy against insuring such breaches.
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There is good reason for the general prohibition. Allowing an insured to control whether it will
be covered for its act of breaching a contract places the insured in the unique posture of voluntarily choosing to do some act for which he knows an insurance company will compensate him
even if he chooses wrongly. Who wouldn’t buy insurance if he could decide whether to perform
or decline to perform some act which would give him coverage for that action? Such a premise
eliminates all risk to a potential insured. He could enter into a contract safe in the assumption
that if he later decides to engage in an act which might be considered a breach, the insurance
company will step forward to cover the consequences of his act if he was wrong; and if he was
right, he still walks away with no consequence to himself. Such a practice is inimical to the entire
concept of insurance.
Id. at 1354-55.
C. Have courts found the return of professional fees charged by an insured is a “loss” or
“damages” covered by a professional liability policy?
Florida courts have not addressed the extent to which the return of professional fees constitutes a
covered “loss.” However, in Continental Casualty Co. v. Black & Black, P.A., 674 So. 2d 163, 164 (Fla. Dist.
Ct. App. 1996), the court found that a “return of fees” exclusion was clear and unambiguous. The exclusion
applied to preclude coverage for an action against the insured as a result of excessive fee charges. Id.
With respect to the issue of a professional liability insurer’s duty to defend, Nateman v. Hartford
Casualty Insurance Co., 544 So. 2d 1026 (Fla. Dist. Ct. App. 1989) is noteworthy. In that case, the court went
beyond the scope of the facts alleged in the underlying complaint in determining an insurer’s obligation to
defend an insured under a professional liability policy. The underlying complaint alleged that a doctor was an
employee of the insured hospital when, in fact, the doctor was an independent contractor. On this basis, the
court found that the hospital’s liability carrier did not owe a defense or indemnity to the independent contractor. Id. at 1028.
Nateman represents a departure from the general rule in Florida that the duty to defend is governed
by the allegations in the complaint, whether groundless or not. Specifically, the court created a narrow exception where, notwithstanding allegations to the contrary, the insurer establishes that the purported insured
is not actually an insured under the policy. Id. at 1027. An insurer is not obligated to provide a defense to
a stranger merely because the plaintiff alleges that the defendant is an insured. The “creation of the basic
insurer-insured relationship and the ensuing duty to defend cannot be left to the imagination of the drafter of
a complaint.” Id.
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D. Massachusetts Chapter
Massachusetts
The Massachusetts Supreme Judicial Court has held that a professional liability policy covering “negligent acts, errors or omissions” can provide coverage for non-negligent errors or omissions. In other words,
the court found the term “negligent” only modified “acts,” and not “errors or omissions.” USM Corp. v. First
State Ins. Co., 420 Mass. 865, 868, 652 N.E.2d 613, 614-15 (1995); see also Gateway Group Advantage, Inc. v.
McCarthy, 300 F. Supp. 2d 236, 242-43 (D. Mass. 2003) (internal citations omitted) (directors and officers policy covering “any breach of duty, neglect, error, misstatement, misleading statement, omission or act” covers
“more than what one commonly thinks of as mere negligence: misstatement, misleading shareholders, regulators or the public, foolishly overcompensating an incompetent CEO, refusing to rein in the CFO’s rampant
sexual harassment of subordinates and so on”).
Massachusetts courts have adopted the standard applied in the leading decision concerning the professional services definition, Marx v. Hartford Accident & Indemnity Co., 183 Neb. 12, 13, 157 N.W.2d 870
(1968). The portion of the Marx decision that the Massachusetts Supreme Judicial Court has quoted states:
[A professional liability] insurer’s liability is thus limited to the performing or rendering of
‘professional’ acts or services. Something more than an act flowing from mere employment or
vocation is essential. The act or service must be such as exacts the use or application of special
learning or attainments of some kind. The term ‘professional’ in the context used in the policy provision means something more than mere proficiency in the performance of a task and
implies intellectual skill as contrasted with that used in an occupation for production or sale of
commodities. A ‘professional’ act or service is one arising out of a vocation, calling, occupation,
or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is
predominantly mental or intellectual, rather than physical or manual. In determining whether a
particular act is of a professional nature or a ‘professional service’ we must look not to the title or
character of the party performing the act, but to the act itself.
Roe v. Federal Ins. Co., 412 Mass. 43, 48, 587 N.E.2d 214, 217 (1992) (internal citations omitted).
The Supreme Judicial Court further explained in Roe that this standard recognizes that: (1) membership in a profession traditionally has required specialized knowledge or learning acquired through “rigorous
intellectual training”; (2) in determining whether professional services are involved, a court’s focus should be
on the act or services performed and not the fact that the wrongdoer was a professional; and (3) there must
be a causal relationship between the alleged harm and the professional act or services for there to be coverage
under a professional liability policy.
Massachusetts courts have also recognized a distinction between “professional services” and the
insured’s business activities. In Massamont Insurance Agency, Inc. v. Utica Mutual Insurance Co., 489 F.3d 71
(1st Cir. 2007) (applying Massachusetts law), the court explained:
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The renting of an office, the engagement of employees, arrangements to expand the size of one’s
activities, these may all have some connection with a covered business or profession. But, while
they may set the stage for the performance of business or professional services, they are not the
professional services contemplated by this special coverage. An errors and omissions policy is
intended to insure a member of a designated calling against liability arising out of the mistakes
inherent in the practice of that particular profession or business.
Id. at 74 (quoting Albert J. Schiff Assocs., Inc. v. Flack, 51 N.Y.2d 692, 417 N.E.2d 84, 88 (1980)).
In Medical Records Associates, Inc. v. American Empire Surplus Lines Insurance Co., 142 F.3d 512, 515
(1 Cir. 1998) (applying Massachusetts law), the court reviewed the Massachusetts cases that have construed
“professional services,” when that term is used in an insuring agreement in a professional liability policy or a
professional services exclusion in a general liability policy. The court noted that these cases do not “paint an
unwavering line of demarcation between ‘professional’ and ‘non-professional’ activities.” Id. at 515. The court
further stated that a court applying the maxim that ambiguities are to be construed against an insurer “might
well be inclined to find certain conduct to be both covered by a professional E&O policy but not excluded by a
CGL policy’s professional liability exclusion.” Id.
st
In Jefferson Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., 42 Mass. App. Ct.
94, 102, 677 N.E.2d 225, 231 (1997), the court held that a professional services exclusion in a general liability
policy did not apply to “non-specialized, clerical or administrative activity” that required “only the everyday
practical abilities of the average adult, not the art of the adept,” or “specialized training, intellectual skill or
professional judgment.” The court also determined that the undefined term, “professional services,” as used in
the exclusion was ambiguous and therefore would be strictly construed against the insurer. See also Essex Ins.
Co. v. Berkshire Envtl. Consultants, Inc., No. 99-30280-FHF, 2002 WL 226172 (D. Mass. Feb. 7, 2002) (administrative and clerical services are not “professional services”); McNulty v. Assurance Co. of Am., 81 Mass. App. Ct.
1121, 963 N.E.2d 776 (2012) (sexual touching of a patient was something that required no professional skill).
A sexual assault on a patient by a dentist was found not to involve the dentist’s professional services,
as that term was used in the dentist’s malpractice policy. Roe v. Federal Ins. Co., 412 Mass. 43, 587 N.E.2d 214
(1992).
In Medical Records Associates, Inc. v. American Empire Surplus Lines Insurance Co., 142 F.3d 512 (1st
Cir. 1998) (applying Massachusetts law), the court held that a claim that the insured overbilled attorneys for
providing medical records did not involve the insured’s professional services, as that term was used in a professional liability policy. See also Clermont v. Continental Cas. Co., No. 10-cv-10595, 2011 WL 1235389 (D.
Mass. Mar. 29, 2011) (fee splitting dispute between attorneys did not involve professional service); Reliance
Nat’l Ins. Co. v. Sears, Roebuck & Co., 58 Mass. App. Ct. 645, 792 N.E.2d 145 (2003) (insured attorney’s fraudulent billing did not involve professional service).
In Massamont Insurance Agency, Inc. v. Utica Mutual Insurance Co., 489 F.3d 71 (1st Cir. 2007) (applying Massachusetts law), the court found that an insurance agent’s breach of a contractual exclusivity provision
(i.e., that it would only write certain lines for one insurer) did not involve the agent’s professional services, and
therefore the claim was not covered by an insurance agents and brokers errors and omissions policy.
Several Massachusetts decisions have also addressed professional services exclusions in general
liability policies. See GRE Ins. Group v. Metropolitan Boston Hous. P’ship, Inc., 61 F.3d 79, 84 (1st Cir. 1995)
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ments complied with applicable regulations was not “professional service”; although exclusion specifically
stated that it excluded coverage for supervisory, inspection and engineering services, court determined that
exclusion did not apply to non-professional supervisory or inspection services); Jefferson Ins. Co. v. National
Union Fire Ins. Co. of Pittsburgh, Pa., 42 Mass. App. Ct. 94, 677 N.E.2d 225, 230-31 (1997) (professional
services exclusion did not preclude coverage for claim against insured ambulance company alleging miscommunication between dispatcher and ambulance attendants that resulted in delay in arriving at medical
emergency, in turn resulting in third-party claimant’s death); Camp Dresser & McKee, Inc. v. Home Ins. Co.,
30 Mass. App. Ct. 318, 568 N.E.2d 631 (1991) (professional services exclusion in general liability policy did
not preclude coverage for claim against insured engineering company alleging that insured engineers failed
to warn about dangers on construction site; court distinguished between professional negligence and “ordinary negligence.”); Commerce Ins. Co. v. Massachusetts Med. Prof ’l Ins. Ass’n, No. 945462F, 1995 WL 809990
(Mass. Super. Ct. July 26, 1995) (professional services exclusion in medical practice’s general liability policy
did not apply to claim brought by nurse, who was injured while assisting during surgery when she was cut by
surgical instrument; court indicated that exclusion contemplates that there must be doctor-patient relationship between insured and claimant).
There are no reported Massachusetts decisions that have addressed the meaning of the undefined
term “claim” when contained in a claims-made policy.
Utica Mutual Insurance Co. v. Gieschi, No. 93-3297, 1996 WL 351142 (Mass. Super. Ct. June 27, 1996),
involved a claim made by an insurance agent’s former client against the insured under an insurance agent’s
professional liability policy. The court found that a telephone call the insured received from the claimant’s
attorney, asking for information and suggesting that a claim might be brought against the insured, did not
constitute a “claim.” The policy defined a “claim” to mean “a demand received by the insured for monetary
damages or services including the service of suit or the institution of arbitration proceedings.” The court based
its decision on the fact that there was no evidence that any specific demand for money or services was made
during the telephone call.
In contrast, an email demand sent by a client to an insured investment advisor regarding the loss of
the client’s investment portfolio was a “claim,” when the policy defined “claim” to mean, among other things,
“a written demand against any insured for monetary damages.” Panagora Asset Mgmt., Inc. v. St. Paul Mercury
Ins., 674 F. Supp. 2d 315 (D. Mass. 2009).
Although not addressing this issue in any detail, the court in Gateway Group Advantage, Inc. v.
McCarthy, 300 F. Supp. 2d 236, 245 (D. Mass. 2003), noted that “the commonly used dictionary definition of
‘related’ … [is] a ‘logical or causal connection between’ two events.”
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In Gateway Group Advantage, Inc. v. McCarthy, 300 F. Supp. 2d 236 (D. Mass. 2003), the court found
that a prior acts exclusion precluded coverage under a directors and officers policy. The exclusion stated that
the policy would not provide coverage if the wrongful act or a related wrongful act had occurred before a specific date. The policy defined “Related Wrongful Acts” to mean “Wrongful Acts which are the same, related
or continuous, or Wrongful Acts which arise from a common nucleus of facts.” Id. at 240. The court found
that the allegations made in the underlying lawsuit at issue and in an earlier case were “related,” because they
involved a “single course of conduct” (i.e., a standard sales pitch) even though the two matters involved representations made to different persons, in different states, at different times. Id. at 245.
The policy involved in Allmerica Financial Corp. v. Certain Underwriters at Lloyd’s London, 449 Mass.
621, 871 N.E.2d 418, 430 (2007) contained a prior acts exclusion that precluded coverage if a claim involving an Interrelated Wrongful Act was brought before the policy’s effective date. “Interrelated Wrongful Acts”
was defined in the policy to include wrongful acts “which are logically or causally connected by reason of any
common fact, circumstance, situation, transaction or event.” The underlying lawsuit was a class action alleging
that misrepresentations were made in connection with the sale of life insurance policies. Before the policy’s
effective date, another claim alleging misrepresentations in connection with the sale of life insurance policies
had been made against the insured. The insurer asserted that coverage for the class action was barred by the
prior acts exclusion. The Massachusetts Supreme Judicial Court, however, found that there was a triable issue
as to whether the exclusion applied. The court noted that while the two cases “do share a similarity … that
similarity is not sufficient to establish that these cases involved a ‘common fact, circumstance, situation, transaction or event’ … Commonality is a more demanding requirement than similarity.” Id.
The court noted that the two cases involved transactions that “took place in different times and locations and involved different policyholders [and] different sales agents.” Therefore, the Supreme Judicial Court
held that the trial court erred by granting the insurer’s motion for summary judgment. Id.
Under Massachusetts law, reporting provisions in claims-made policies are strictly construed. The
insurer does not have to prove it was prejudiced by the insured’s failure to report the claim on time. See
National Union Fire Ins. Co. v. Talcott, 931 F.2d 166 (1st Cir. 1991) (applying Massachusetts law) (also explaining that claims-made policy can include “as soon as practicable” notice condition as well as reporting requirement – and still be claims made and reported policy); Financial Res. Network, Inc. v. Brown & Brown, Inc., No.
09-11315-MBB, 2012 WL 1114577 (D. Mass. Mar. 31, 2012) (same); Chas. T. Main, Inc. v. Fireman’s Fund Ins.
Co., 406 Mass. 862, 551 N.E.2d 28 (1990).
In Chas. T. Main, Inc., the court explained that, while the purpose of a notice condition in an occurrence-based policy is to permit the insurer to investigate the facts, a reporting provision in a claims-made
policy is the “essence of determining whether coverage exists.” The court indicated that “the purpose of a
claims-made policy is to minimize the time between the insured event and the payment” and “provide fairness in rating setting.” The court noted: “If a claim is made against the insured but the insurer does not know
about it until years later, the primary purpose of insuring claims rather than occurrences is frustrated.” The
court also found that a Massachusetts statute, Mass. Gen. Laws c. 175 §112, which provides that an insurer
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cannot decline coverage due to late notice unless the insurer has been prejudiced, does not apply to claimsmade policies. Chas. T. Main, Inc., 406 Mass. at 864-65, 551 N.E.2d at 29-30.
In Financial Resources Network, Inc. v. Brown & Brown, Inc., No. 09-11315-MBB, 2012 WL 1114577,
at *25-26 (D. Mass. Mar. 31, 2012), the court explained that providing the insurer with notice of a claim was
“of the essence” in a claims-made and reported policy, and that a showing of prejudice by an insurer for an
insured’s failure to timely report a claim is unnecessary.
When an insured reported a matter to defense counsel that the insurer had appointed to represent him
in an unrelated case, this did not satisfy the insured’s obligation to timely report the claim to the insurer. Medical Prof ’l Mut. Life Ins. Co. v. Steinberg, No. 03-5746-BLS2, 2006 WL 1096794 (Mass. Super. Ct. Feb. 16, 2006).
Failure to timely report a claim on time under a claims-made policy precludes coverage when the
third-party claimant seeks recovery as an alleged third-party beneficiary under the policy, just as it precludes
coverage for the insured. A third party claimant has no greater rights against the insurer than the insured has.
Young Men’s Christian Ass’n of Greater Worcester v. National Union Fire Ins. Co. of Pittsburgh, Pa., 65 Mass.
App. Ct. 1121, 843 N.E.2d 722 (2006).
The insurer’s failure to send the policy to the insured (the policy was sent to the insured’s broker) did
not excuse the insured’s failure to timely report a claim. Gargano v. Liberty Int’l Underwriters, Inc., 572 F.3d 45
(1st Cir. 2009) (applying Massachusetts law).
The First Circuit, applying Massachusetts law, has rejected the “continuous coverage” theory. Under
this theory, an insured’s failure to report a claim during the time permitted by a claims made and reported
policy is excused if the claim is reported while a renewal policy issued by the same insurer is in effect.
National Union Fire Ins. Co. v. Talcott, 931 F.2d 166 (1st Cir. 1991). In Talcott, the court explained:
Similarly unavailing is [the policyholder’s] argument that the fact that notice was received when
he was still covered by another policy from the same insurance company compels a different
result. The argument fails for the simple reason that continuous coverage was wholly immaterial to the underlying rationale [of the Supreme Judicial Court decision holding that reporting
provisions in claims-made policies are to be strictly construed]. The essence of that decision was
the right of the insurer to set its future premiums and reserves with full knowledge of the outstanding claims it is obligated to meet, and this circumstance requires strict adherence to the
[reporting] requirement regardless of whether the same company continued to provide coverage
(through a different policy) at the date the notice was received.
Id. at 168-69.
Massachusetts courts have strictly construed reporting provisions in claims-made policies and have
not given any indication that late reporting can be excused when the claim is made very late in the earlier policy period and is reported very soon after the time to report claims expired. Moreover, Massachusetts courts
have found that to be covered under a claims-made policy, the claim must have been first made during the
policy period.
The court in New England Environmental Technologies v. American Safety Risk Retention Group, Inc.,
738 F. Supp. 2d 249, 256 (D. Mass. 2010) found that coverage was provided for a claim reported five days after
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the policy period, because the claim was reported during an automatic extended policy period. The court also
noted, however, that Massachusetts cases strictly enforcing reporting provisions in claims-made policies generally have involved claims that were reported well after the policy period. The court stated that the insurer could
not “reasonably suggest that [the five day] delay had a meaningful impact on its ability to set future premiums.”
In American Casualty Co. of Reading, Pennsylvania v. Sentry Federal Savings Bank, 867 F. Supp. 50,
60 (D. Mass. 1994), the court indicated that a “laundry list” (i.e., a notice provided by the insured concerning
numerous possible claims that does not provide any details regarding the surrounding circumstances) would
not serve as a proper notice of circumstances. The court, however, found that the information that was submitted by the insured in connection with the notice of circumstance in this case was more than a “laundry
list,” because it described the potential plaintiffs and defendants and the circumstances from which a claim
could arise. Therefore, the notice was sufficient to preserve coverage in the event that a claim was later made
for these circumstances against the insured.
In Brown Daltas & Associates, Inc. v. General Accident Insurance Co., 48 F.3d 30 (1st Cir. 1995) (applying Massachusetts law), the court found that for a notice of circumstance to trigger coverage, the policy
required that the insured become aware of the circumstances that could lead to a claim during the policy
period when the notice of circumstance was given. The policy stated that “if during the policy period the
Insured shall first become aware of any circumstances which may subsequently give rise to a claim,” the
insured could preserve coverage by submitting a notice of the circumstance. Because the insured first became
aware of the circumstances that could lead to a claim prior to the effective date of the policy period in which
the notice was given, a notice of circumstances given during the later policy period did not preserve coverage.
The court explained that the relevant inquiry “is not the point at which the insureds first came to believe that
a claim was a possibility, it is the point at which they first became aware of the circumstances which in fact led
them to file their notice of potential claim.” Id. at 38.
In Financial Resources Network, Inc. v. Brown & Brown, Inc., No. 09-11315-MBB, 2012 WL 1114577
(D. Mass. Mar. 31, 2012), the court found that an extended reporting period provision did not provide coverage when no “actual” claim was made until after the extended reporting period. The policy expressly covered only potential claims reported during the policy period, and actual claims made and reported during the
policy period or first made and reported during the extended reporting period. The court found that because
no actual written demand for monetary damages was first made and reported during the policy period or the
extended reporting period, rather only a potential claim was reported during the extended period, the insured
did not qualify for coverage.
In James River Insurance Co. v. Alliance Children’s Services, Inc., No. 08-10360-GAO, 2009 WL
1292770 (D. Mass. May 8, 2009), the court found that an extended reporting period provision did not provide coverage when the claim was made a few days after the policy’s expiration date but during the extended
reporting period. The court concluded that the provision did not extend the time for claims to be made after
the policy’s expiration date, but only extended the time for reporting claims first made during the policy
period. The policy stated that claims had to be first made during the policy period but could be reported during either the policy period or the extended reporting period.
Although describing the case as involving a “close call,” the court in New England Environmental Technologies v. American Safety Risk Retention Group, Inc., 738 F. Supp. 2d 249 (D. Mass. 2010) found that coverage
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existed for a claim made during the policy period and reported during the policy’s automatic extended reporting period. The policy’s automatic extended reporting period stated that it did not provide coverage if the insured
had obtained “other similar insurance” after the policy expired. The insurer renewed the policy, but the court
found that the renewal policy did not constitute “other similar insurance” within the meaning of the extended
reporting period provision. The court indicated that the purpose of an automatic extended reporting provision is
to provide a short period after the policy expires for the insured to report claims. The court found that the reference to “other similar insurance” was intended only to apply to insurance policies issued by a different carrier, so
that there would be no gap in coverage if the insured did not renew the policy with the same insurer.
When the policy precluded coverage if the insured had a “reasonable basis to foresee” that a claim
would be made, the Massachusetts Appeals Court applied a mixed subjective/objective standard to determine
whether a prior knowledge provision precluded coverage. Under this standard, the court first considers what
information the insured subjectively had knowledge about before the policy’s effective date. The court next
determines whether an objectively reasonable insured, armed with the knowledge that the insured actually had,
would have believed before the policy’s effective date that a claim would be made against him or her. Applying
this test, the court found that the prior knowledge provision precluded coverage, despite the insured’s contention that he did not subjectively realize that a legal malpractice claim would be brought against him before the
policy’s effective date. TIG Ins. Co. v. Blacker, 54 Mass. App. Ct. 683, 767 N.E.2d 598 (2002).
In Sunrise Properties, Inc. v. Bacon, Wilson, Ratner, Cohen, Salvage, Failky & Fitzgerald, P.C., 425
Mass. 63, 679 N.E.2d 540 (1997), the Supreme Judicial Court held that a prior knowledge provision in a Legal
Professional Liability insurance policy with “innocent insured” language precluded coverage for a claim
against the insured law firm, because the firm’s principal knew about a potential claim before the policy’s
effective date, and his knowledge could be imputed to the firm.
In TIG Insurance Co. v. Blacker, 54 Mass. App. Ct. 683, 767 N.E.2d 598 (2002), the court found that a
prior knowledge provision precluded coverage. Before the policy’s effective date, the insured received a letter
from an attorney for one of the insured’s clients indicating that the insured was the potential target for a malpractice action and suggesting that the insured enter into a tolling agreement. The court found that this letter
provided the insured with sufficient prior knowledge of a potential claim to preclude coverage.
In Perrone v. American Guaranty & Liability Insurance Co., 284 B.R. 315 (D. Mass. 2002), the court
found that a prior knowledge provision in a Legal Professional Liability policy did not preclude coverage, even
though the insured’s employee knew, before the policy’s effective date, that she had embezzled money from
clients. The policy precluded coverage if the “named insured [or] any … employee … had any reasonable basis
to believe that the insured had breached a professional duty or to foresee that a claim would be made against
the insured.” The court found that the provision did not preclude coverage, because the scheme was unknown
and not discoverable by the insured attorney before the policy’s effective date. The court indicated that the
provision’s purpose is to protect the insurer against “reasonably foreseeable, but undisclosed risks. … A reasonable attorney would expect coverage to include all claims made during the policy period, except claims
arising from prior acts known to the insured which he did not disclose to the insurer.” Id. at 319.
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In Keegan v. Mt. Vernon Fire Insurance Co., No. 1451, 2002 WL 31731474 (Mass. App. Div. Dec. 2,
2002), a prior knowledge exclusion in an insurance agent’s professional liability policy was found to preclude
coverage when the insured agent knew, before the policy’s effective date, that coverage had not been properly
procured for a client; a lawsuit had been brought against the agent’s client for which it did not have insurance
coverage due to the agent’s error; and the agent had been urged to notify its errors and omissions carrier about
a potential claim. The policy excluded coverage for “any wrongful act or circumstance likely to give rise to a
claim of which any insured had knowledge, or otherwise had a reasonable basis to anticipate might result in a
claim” prior to the policy’s inception date. Id. at *2.
A retroactive date provision in a claims-made policy is valid and enforceable even when the retroactive date coincides with the policy’s effective date. James J. Mawn Enters., Inc. v. Liquor Liab. Joint Underwriting Ass’n, 42 Mass. App. Ct. 417, 677 N.E.2d 1162 (1997).
One Massachusetts trial court judge held that a retroactive date provision in a Legal Professional Liability policy precluded coverage when the wrongful acts in question occurred before the retroactive date, even
though the insured attorney could have mitigated the damages by taking action after the retroactive date. The
policy provided that “the wrongful act … must happen or on before the prior acts date.” Derrah v. Continental Cas. Co., No. 97-3005-D, 2000 WL 1473150 (Mass. Super. Ct. July 5, 2000); see also Ferguson v. General Star
Indem. Co., 582 F. Supp. 2d 91 (D. Mass. 2008).
A retroactive date provision in a Legal Professional Liability policy issued to a criminal defense lawyer precluded coverage for a claim against the insured for mishandling a client’s criminal defense. The client’s
criminal trial occurred before the retroactive date, but the client did not have a basis to bring an actionable
claim against the insured lawyer until after the retroactive date, when it was judicially determined that the client had received ineffective assistance of counsel in the criminal case. Even though the client could not have
successfully sued the insured until after the retroactive date, because his claim was solely based on events that
occurred before the retroactive date, the retroactive date provision precluded coverage. Aviles v. Westport Ins.
Co., 67 Mass. App. Ct. 1117, 857 N.E.2d 508 (2006).
In Manganella v. Evanston Insurance Co., No. 09-11264-RGS, 2011 WL 5118898 (D. Mass. Oct. 28,
2011), a Massachusetts federal district court judge found that a retroactive date provision in an Employment
Practices Liability policy did not preclude coverage for a sexual harassment claim brought against the insured
company due to sexual harassment committed by its sole shareholder and director. The policy covered only
wrongful employment practices that solely took place after the retroactive date. The insurer argued that the
sexual harassment did not occur exclusively after the retroactive date, relying on statements in the claimant’s
administrative charge that she was subjected to nearly constant harassment throughout her employment,
which began two years before the retroactive date. However, at her deposition the employee testified that she
did not feel threatened or intimidated until after the retroactive date. The court stated that the insurer had a
duty to investigate the inconsistency presented by the employee’s allegations before deciding to decline coverage. Because it was unclear whether the retroactive date provision precluded coverage, the insurer breached its
duty to defend. Consequently, the insurer had the burden of proving it had no duty to indemnify. Because the
insurer failed to meet this burden, it was responsible for reimbursing the insured for its settlement with the
claimant. Id. at *7.
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VIII. How Do Courts Interpret Common Professional Liability Policy Exclusions?
A federal district court judge concluded that an intentional acts exclusion did not preclude coverage in Manganella v. Evanston Insurance Co., No. 09-11264-RGS, 2011 WL 5118898 (D. Mass. Oct. 28, 2011),
even though the insured company’s sole director and shareholder had been found in two prior adjudications
to have sexually harassed the claimant. The exclusion precluded coverage for claims “based on conduct of
the Insured or at the Insured’s direction that is committed with wanton, willful, reckless or intentional disregard of any law or laws that is or are the foundation for the Claim, or with criminal or malicious purpose
or intent; but this exclusion shall not apply to the strictly vicarious liability of any Insured …” Id. at *3. The
insurer argued that the individual’s intentional wrongdoing should be imputed to the company. Id. at *7. The
court rejected this argument, noting that the company was a legally separate corporate identity and the policy
specifically covered the insured company for “strictly vicarious liability … for the wanton, willful, reckless or
intentional disregard of another.” Id.
A dishonest acts exclusion was found to preclude coverage in New England Insurance Co. v. Stewart
Title Guaranty Co., 57 Mass. App. Ct. 1107, 782 N.E.2d 557 (2003). The exclusion barred coverage for “any
claim arising out of any dishonest, fraudulent, or malicious act, error or omission of any insured committed with actual dishonest, fraudulent or malicious purpose or intent.” The court found that even though the
policy included “innocent insured” language, the wrongful acts of the insured attorney would be imputed to
the insured law firm, because the insured attorney who committed the wrongful acts was the sole owner of
the law firm. Furthermore, the court determined that a negligence finding in the underlying lawsuit would
not be binding on the insurance coverage issues, when fraud was not alleged in the underlying lawsuit and the
insured was represented in the underlying lawsuit by independent counsel.
An exclusion stating that the policy would not cover claims “alleging fraud, dishonesty or criminal
acts or omissions on the part of the insured” precluded coverage, even if the insured did not intend to harm
the claimant. New Fed Mortg. Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 543 F.3d 7 (1st Cir. 2008)
(applying Massachusetts law).
While professional liability policies typically exclude coverage for dishonest, fraudulent and intentionally wrongful acts, a Massachusetts statute, Mass. Gen. Laws c. 175 §47, Sixth (b), which is applicable to
all insurance policies, prohibits insuring “any person against legal liability, other than bodily injury, by his
deliberate or intentional crime or wrongdoing.”
Several Massachusetts decisions have held that the purpose of insured vs. insured exclusions is to
prevent coverage for collusive suits brought by or on behalf of one insured against another insured. Because
the purpose of the exclusion is to prevent coverage for collusive claims, these courts have found that coverage for claims brought against insureds by a bankruptcy trustee or a receiver is not precluded by the insured
vs. insured exclusion. See Molten Metal Tech., Inc. v. Executive Risk Indem. Co., 271 B.R. 711 (D. Mass. 2002)
(insured vs. insured exclusion did not preclude coverage for claim brought by insured company’s bankruptcy
trustee); American Cas. Co. of Reading, Pa. v. Sentry Fed. Sav. Bank, 867 F. Supp. 50, 59-60 (D. Mass. 1994)
(insured vs. insured exclusion did not preclude coverage for claim brought by Resolution Trust Corporation as
bank’s conservator against insureds; claim was not collusive); but see Stratton v. National Union Fire Ins. Co. of
Pittsburgh, Pa., No. 03-CV-12018-RGS, 2004 WL 1950337, at *5 (D. Mass. Sept. 3, 2004) (although exclusion’s
purpose is to prevent coverage for collusive suits brought by corporations trying to recoup corporate losses by
suing corporation’s directors and officers, who if they have insurance coverage would have nothing to lose by
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taking blame, here exclusion precluded coverage because underlying lawsuit was brought by corporation and
not by bankruptcy trustee).
In Strange v. Genesis Insurance Co., 536 F. Supp. 2d 71 (D. Mass. 2008), the court found that the term
“stockholder,” as used in an insured vs. insured exclusion, included security holders.
In order for a prior or pending litigation exclusion to preclude coverage, there must be a substantial
overlap between the claim at issue and the prior claim, but a complete overlap between the claims is not necessary. Federal Ins. Co. v. Raytheon Co., 426 F.3d 491 (1st Cir. 2005) (applying Massachusetts law). The exclusion in this case precluded coverage for, “any claim against any insured . . . based upon, arising from, or in
consequence of any demand suit or other proceeding pending on or prior to [the prior/pending date] or any
substantially similar fact, circumstance or situation . . . .” Id. at 497. The court said that the exclusion’s purpose
is to promote the insured giving prompt notice and to prevent the insured from stacking successive policy
limits to cover “essentially the same or very closely related claims.” Id. at 499.
The Massachusetts Appeals Court found that a pending and prior exclusion and a prior knowledge
exclusion did not prevent an insurer from having a duty to defend a lawsuit for damages filed during the policy period, when that lawsuit contained new factual allegations and included new defendants that were not
named in two earlier lawsuits seeking a declaratory judgment only. Massachusetts Insurers Insolvency Fund v.
Redland Ins. Co., 72 Mass. App. Ct. 1113, 891 N.E.2d 718 (2008).
A prior and pending litigation exclusion was found to prevent coverage in Town of Saugus v. Zurich
American Insurance Co., 791 F. Supp. 2d 274 (D. Mass. 2011). The exclusion precluded coverage for “all future
claims arising from … pending or prior litigation.” The court found the lawsuit at issue either arose directly
from the issues in the prior litigation or the insured’s behavior during the prior litigation.
In Aetna Casualty & Surety Co. v. Clasby, 788 F. Supp. 61 (D. Mass. 1991), the court held that a personal profit or advantage exclusion precluded the insurer from having a duty to defend a claim against an
insured based upon payments of secret commissions to the insured to which the insured was not legally entitled.
Although the exclusion applied to “the insured gaining in fact any personal profit or advantage to which such
insured was not legally entitled,” the court did not discuss the impact, if any, of the “gaining in fact” language.
The policy at issue in Town of Saugus v. Zurich American Insurance Co., 791 F. Supp. 2d 274 (D. Mass.
2011), excluded coverage for the insured “gaining profit, advantage or remuneration to which the insured is not
legally entitled.” The insured argued that the exclusion did not prevent the insurer from having a duty to defend
because the claimant’s allegations were not true. The court explained, however, that whether there is a duty to
defend depends on the claimant’s allegations, even if they are baseless. All the claims brought against the insured
were based upon the allegation that the insured gained remuneration to which it was not legally entitled.
Mt. Airy Insurance Co. v. Greenbaum, 127 F.3d 15 (1st Cir. 1997) (applying Massachusetts law)
involved an underlying lawsuit brought by a claimant who had invested in real estate partnerships with attorneys from a law firm that was insured under a Legal Professional Liability Policy. The claimant brought a malpractice action against several firm attorneys, asserting that they had misappropriated partnership funds.
The exclusion barred coverage for “any claim arising out of or in connection with the conduct of a business
enterprise other than the named insured … which is owned by any insured or in which any insured is a partner or which is directly or indirectly controlled, operated or managed by any insured …” The court found that
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this business enterprise exclusion precluded coverage, even though the claimant had sought recovery for legal
malpractice. The court noted that if the underlying lawsuit had not alleged professional malpractice, it would
not have been covered because it did not fall within the scope of the policy’s insuring agreement. Therefore,
if the exclusion does not apply whenever there is an attorney-client relationship between the insured and the
claimant, the exclusion would have no purpose. Id.; see also Corcoran Jennison Mgmt. Co. v. Tudor Ins. Co., 66
Mass. App. Ct. 1117, 850 N.E.2d 621 (2006) (exclusion for claims made by “any business enterprise which is
operated, managed or owned in whole or in part by the insured or an affiliated, subsidiary or associated company” barred coverage for claim brought by business managed by named insured).
constitutes “loss” or “damages” as those terms are used in a professional liability
policy? Have courts found that public policy precludes coverage for restitution of ill
gotten gains? Have courts found the return of professional fees charged by an insured is
a “loss” or “damages” covered by a professional liability policy?
116 Commonwealth Condominium Trust v. Aetna Casualty & Surety Co., 433 Mass. 373, 376-77, 742
N.E.2d 76, 78-79 (2001) held that legal fees and costs are not a “loss” covered by a directors and officers liability insurance policy that defined loss to mean “damages.” The “ loss” definition was not ambiguous.
In Genzyme Corp v. Federal Insurance Co., 637 F. Supp. 2d 282, 288-89 (D. Mass. 2009), a
Massachusetts federal district court judge noted that numerous courts have found that there is no insurable
loss when an insured is forced to disgorge money to which it is not legally entitled. The court commented
that this “legal principle is undoubtedly correct and would almost certainly be adopted by a Massachusetts
court. A thief should not be able to claim the return of stolen property as insurable loss.” Id. The policy at issue
excluded coverage for matters that are uninsurable under the applicable law.
The district court’s opinion in Genzyme, however, was reversed in part by the First Circuit in Genzyme Corp v. Federal Insurance Co., 622 F.3d 62, 70 (1st Cir. 2010). The First Circuit held that public policy
considerations did not preclude coverage in the circumstances presented by the case, and it was not necessary
for the First Circuit to decide whether to adopt the rule that disgorgement of ill-gotten gains is uninsurable
because Genzyme did not obtain any ill-gotten gains resulting from the transaction at issue.
A. Employment Practices Liability Insurance
The court in Cadete Enterprises, Inc. v. Philadelphia Indemnity Insurance Co., Civil Action Nos.
11-3252-BLS1, 11-3503-BLS1, 2012 WL 3263736 (Mass. Super. Ct. July 11, 2012), addressed whether a
claim brought by employees against the insured, a Dunkin’ Donuts franchisee, alleging violations of the
Massachusetts Tips Statute, Mass. Gen. Laws c. 149 §152A, was covered by a policy providing employment
practices liability coverage. The court first rejected the insured’s argument that the claim fell within the scope
of the insuring agreement. The insured argued that the Tips Statute allegations fell within the insuring agreement, because these allegations “implicitly assert a breach of an implied employment agreement” or an
“employment related misrepresentation.” Id. at *3. Both of these offenses were included within the policy’s
“Employment Practices Act” definition. Id. In rejecting this argument, the court noted that “neither a breach
of contract nor misrepresentation is an element essential in proving a violation of the Tips Act.” Id. at *4.
Moreover, the underlying complaints did not include any allegations that the insured had breached any contracts or made any misrepresentations. Id.
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The court also determined that an exclusion for “any actual or alleged violation(s) of any of the
responsibilities, obligations or duties imposed by . . . the Fair Labor Standards Act . . . or any similar federal,
state, local or foreign statutory or common law” precluded coverage. Id. at *2. The insured contended that the
Tips Statute and the FLSA “are not similar because the FLSA cannot be read to prohibit managers from sharing in a tip pool with non-managers, as does the Tips Act. They take the position that the purpose of the FLSA
is to regulate wages and hours, not tip pools.” Id. at *4. The insured contended that the FLSA and Tips Statute
are similar because both statutes “regulate the compensation relationship between employers and employees.”
Id. The court explained the rationale for its decision, stating:
The Policies do not require that the federal and state laws at issue be identical for the exclusion to
apply, the laws only must be “similar.” “Similar” is defined as “having a likeness or resemblance,
especially in a general way,” www.dictionary.com or “having characteristics in common.” www.
Merriam-Webster.com. The purpose of the FLSA Exclusion is to prevent insurance coverage for
claims alleging certain labor law violations, whether under federal or state law. Practically speaking, using the term “similar” in the FLSA Exclusion “avoids the need to catalog every state and
local law that is similar to the FLSA, which would be inefficient, and further puts insureds on
notice that the Policy excludes coverage for violations of state labor laws similar to the FLSA.”
The court concludes that, although the FLSA and the Tips Act are not identical, they are both designed
to protect the interests of employees and enforce working conditions, and both provide remedies if an
employer fails to comply. They are generally alike and share many of the same characteristics, sufficient for this court to conclude that they are “similar” as that word is commonly understood.
Id. at *6 (some internal citations and punctuation omitted).
B. Sexual misconduct exclusions
In Valley Forge Insurance Co. v. Field, 670 F.3d 93 (1st Cir. 2012) (applying Massachusetts law), the court
considered whether an abuse or molestation exclusion in professional liability policy precluded coverage. It was
alleged that the insureds failed to detect or report signs that a minor patient had been physically abused. The
exclusion precluded coverage for abuse that occurred to anyone in the insureds’ “care, custody or control.” There
was no dispute that the child was not in the insureds’ physical custody or control when any abuse took place. Id.
at 98. Interpreting the term “care” according to its plain and ordinary meaning, as dictated by Massachusetts law,
the court considered whether the relationship between the child and the insureds was characterized by “charge,
supervision, management: responsibility for or attention to safety and well-being.” Id. at 99. The court found
that because the child was receiving bi-weekly outpatient therapeutic services from the insureds when she was
abused, she was under the insureds’ “care” and the exclusion precluded coverage. Id. at 105.
In Merrill v. American Casualty Co. of Reading, Pa., No. 10-P-1606, 79 Mass. App. Ct. 1124, 2011 WL
2224923 (June 9, 2011), the court considered whether a sexual misconduct exclusion in a professional liability policy precluded coverage for a malpractice claim against a therapist. The exclusion provided that the
insurer would not pay for “any claim . . . for any act of sexual intimacy.” The underlying malpractice claim
involved allegations that the therapist committed malpractice because he “negligently mishandled the ‘transference’ phenomenon by engaging in repeated sexual conduct with [the patient] during therapy sessions.” Id.
The patient asserted the exclusion did not preclude coverage because the “sexual intimacy” was a mere consequence of the negligence. Id. The court explained that the coverage question did not turn on what cause of
action was alleged, but rather on whether the claim involved “any act of sexual intimacy.” Id. The court determined that an improper sexual relationship was at the root of the underlying claim and this was inseparable
from the malpractice. Therefore, the exclusion barred coverage. Id.
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Hot Issues in Professional Liability Coverage:Lessons from the DRI

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