Court holds that insurer that breached duty to defend must pay policy limits after default judgment against policyholder

A union's Pension and Annuity Funds ("the Funds") alleged that the Wellesley Advisory Realty Fund  (WARF) had mismanaged and squandered a $5 million investment.  WARF put the money into various real properties such as hotels.  The properties were foreclosed upon or lost all their value due to unpaid taxes and mortgages. The Funds sued WARF for negligence and ERISA violations.

WARF's insurer, Scottsdale Insurance Company, declined to defend it under a Business and Management Indemnity Policy, asserting that exclusions applied.  A default judgment entered against WARF.  WARF assigned to the Funds its rights in the insurance policy.

Scottsdale relied on three exclusions.  The Professional Services Exclusion excluded claims that "arose out of" or "involved" "real estate development, property management, the purchase of real property, or the arrangement of financing on real property."

In Scottsdale Insurance Co. v. Byrne, __ F.3d __, 2019 WL 211420 (1st Cir.), the United States Court of Appeals for the First Circuit held that Scottsdale had breached its duty to defend.  Although some of the Funds' allegations pertained to WARF's actions as a property manager for one of the hotels, there were other allegations that did not necessarily pertain to property management.

Scottsdale also argued that an ERISA exclusion applied.  There was no dispute that that exclusion applied to the ERISA claim.  Scottsdale argued that it also applied to the negligence claim because it arose from the same set of facts as the ERISA claim.  The court disagreed, holding that, interpreting ambiguous terms in the the policy against the insurer, the ERISA exclusion did not extend to a negligence action.  

Scottsdale argued that even if it had a duty to defend, a conduct exclusion excluded its duty to indemnify.  The court noted that while some of the allegations would come within the conduct exclusion, others would not. Scottsdale had not made any attempt to allocate losses that fell within the conduct exclusion from losses that were outside of it.  A default judgment had already entered.  The court held that there was no basis to relieve Scottsdale of its obligation to pay the policy limit.

New Massachusetts law will require short-term rentals like AirBnB to have $1 million in insurance

Agency Checklists has a good summary here. 

Massachusetts Appeals Court holds insured's bankruptcy estate barred by issue preclusion from bringing bad faith settlement claim against insurer after injured plaintiff lost on the same claim

Valerie Troiano injured Elsa Villanueva in a car accident.  After a jury trial a judgment of $414,500 entered for Villanueva.   Commerce, Troiano's insurer,  paid the $100,000 policy limit.  An execution against Troiano entered in the amount of $552,352.37 (which presumably included interest.)

Villanueva sued Commerce, alleging that it had engaged in unfair settlement practices when it initially failed to settle her claim for the $100,000 policy limit.  After trial a verdict entered in favor of Commerce on that claim. 

Troiano filed a petition for bankruptcy.  The bankruptcy trustee retained  the same attorney who had represented Villanueva in her unsuccessful claim against Commerce, to pursue a bad faith settlement claim against Commerce on behalf of the bankruptcy estate.  

In Cruickshank v. Mapfre U.S.A, __ N.E.3d __, 2019 WL 122947 (Mass. App. Ct.), the Massachusetts Appeals Court held that the lawsuit must be dismissed on the ground of issue preclusion. 

The doctrine of issue preclusion prevents relitigation of an issue decided in an earlier action between the same parties or their privies.  The question before the court was whether the the trustee of Troiano's bankruptcy estate was in privity with Villanueva, the plaintiff in the earlier unsuccessful claim against Commerce.


The court agreed with Commerce that the concept of "virtual representation" applied.  Under that theory, issue preclusion applies if the interests of the parties in the two suits are so closely aligned that the party in the first suit is the virtual representative of the party in the second suit.

The court noted that a trustee in bankruptcy is a fiduciary representing not only the bankruptcy estate but the creditors of the estate.  Therefore, the trustee of Troiano's bankruptcy estate was acting on behalf of Villanueva as a creditor of the estate.  Moreover, the benefit of any recovery on a claim of failure to settle would flow to Villanueva rather than Troiano. Thus, although the trustee (and trustee's attorney) nominally represented Troiano, that representation in the action against Commerce was for the sole benefit of Villanueva.   The doctrine of issue preclusion therefore applied.

Because the holding is based in large part on bankruptcy law, specifically the duties of the bankruptcy trustee, it may not have wider applicability to a situation where the defendant tortfeasor has not declared bankruptcy after a verdict in excess of the policy limit.  That circumstance does not arise very often.  Typically, the defendant will assign to the plaintiff her right to bring a bad faith settlement practices lawsuit against the insurer in exchange for the plaintiff releasing her rights against the defendant.  Few plaintiffs' attorneys see the point in forcing a defendant into bankruptcy, where their client's recovery will be minimal. 

US District Court holds that slip and fall in parking lot does not arise out of building tenant's operations or premises

Cummings Properties leased an office suite to the Massachusetts Department of Revenue.  The lease required Cummings to use reasonable efforts to ensure that snow and ice are removed from the parking lot.

A DOR employee sued Cummings, alleging that she slipped and fell on ice in the parking lot of the building in which the DOR office suite was located. Cummings sought coverage under a commercial general liability policy issued to the DOR by Public Service Insurance Company (PSIC).  Cummings was an additional insured on the policy "but only with respect to liability arising out of [DOR's] operations or premises owned by or rented to [DOR]."  The additional insured endorsement identified the DOR's office suite as the location for which Cummings was an additional insured.

In Cummings Properties, LLC v. Public Service Ins. Co., __ F.Supp. 3d __, 2018 WL 6171878 (D. Mass.), the United States District Court for the District of Massachusetts held that the loss was not covered under the policy.

First, the court held that the DOR employee's injuries did not arise out of the DOR's "operations."  "Arriving in the parking lot and walking to work has nothing to do with  DOR's operations."

Second, the court held that the employee's injuries did not arise out of premises rented to the DOR.  The court pointed out that the additional insured endorsement identified the office suite as the insured location.  The DOR did not rent the parking lot or any parking spaces; the lot was a common area maintained by Cummings.  "The mere fact that Barresi was injured in a common area while en route to the rented premises does not automatically make her claim one arising out of the rented premises."

Although not discussed in the decision, it is worth noting that  regardless of whether or not it is an additional insured on the DOR's policy, Cummings almost certainly has coverage for the claim under its own general liability policy.  Indeed, it is likely that Cummings' general liability insurer, not Cummings itself, is pursuing coverage from PSIC.  If both policies provide coverage, then how much of the loss each pay (up to their policy limits) will be determined by their "other insurer" clauses.