A video primer on the duties of an insurer to defend and indemnify

Welcome to my video.  

First Circuit holds insurer does not have duty to defend or investigate when allegations of complaint do not sketch facts showing coverage

Denise Doherty sued Lundgren Management Group, Inc., a building management company, alleging negligence and other claims stemming from water infiltration into her condominium unit beginning in 2004 in a building managed by Lundgren.  She alleged that Lundgren did not make timely or appropriate repairs.

Lundgren was insured by Clarendon National Insurance Company from June 24, 2004 to June 24, 2005.  It was insured by Philadelphia Indemnity Insurance Company from September 1, 2007 to September 1, 2008.

Philadelphia denied coverage in part on the ground that there were no occurrences during its policy period.  Clarendon defended Lundgren.  After the underlying case settled Clarendon sued Philadelphia for contribution.  That case eventually arrived at the United States Court of Appeals for the First Circuit.  In Clarendon Nat't Ins. Co. v. Philadelphia Indemnity Ins. Co., 954 F.3d 397 (1st Cir. 2020), the court affirmed summary judgment for Philadelphia.

COMPLAINT DID NOT REASONABLY SKETCH FACTS LEAVING OPEN THE POSSIBILITY OF COVERAGE

Clarendon first argued that although the underlying complaint alleged that one leak occurred in 2004, it did not allege specific information as to the time of other leaks.  Therefore, the complaint was reasonably susceptible of an interpretation that some of the leaks occurred during Philadelphia's policy period.

It initially appeared that the First Circuit was going to decide the issue under the law relating to the perennial question of when reasonably knowable facts outside the complaint can affect the duty to defend.  But the court pivoted and held that the allegations of the complaint itself showed that there was no coverage under the Philadelphia policy. 

The First Circuit pointed out that an insurer does not have a duty to defend if there is "undisputed, readily knowable, and publicly available information" in court records that demonstrates that the insurer has no duty to defend, or if "there is an undisputed extrinsic fact that takes the case outside the coverage and that will not be litigated in the trial of the underlying action." 

But the court held that there was no coverage because allegations in the complaint itself showed that the loss was outside of Philadelphia's policy period.  The complaint alleged that the leaks started in 2004, that repairs were not made in an appropriate manner, and that Doherty continued to request repairs. The complaint also referenced chronic dampness that began before the Philadelphia policy period.  The duty to defend was not triggered.

NO DUTY TO INVESTIGATE CLAIMS THAT ARE NOT REASONABLY SUSCEPTIBLE TO AN INTERPRETATION THAT THERE IS COVERAGE

Clarendon argued that Philadelphia had a duty to investigate the loss regardless of the language of the underlying complaint.  The court disagreed, holding that while an insurer must look at facts "known or readily knowable by the insurer" to determine whether a duty to defend has been triggered, that does not apply when the complaint does not adumbrate a claim.  (In other words, where coverage is unclear based on allegations in a complaint -- for example, the complaint does not allege the date of a car accident -- the insurer must investigate.  If lack of coverage is not ambiguous based on allegations in a complaint -- the complaint alleges a date of a car accident prior to the coverage period -- there is no duty to investigate.)

United States District Court for the District of Massachusetts finds duty to defend sex trafficking claim under personal injury coverage

In my last post I was discussing Ricchio v. Bijal, Inc., 2019 WL 6253275 (D. Mass.) (unpublished), a case that addresses insurance coverage for a claim of kidnapping and sex trafficking.  Peerless Indemnity Insurance Company insured Bijal, the owner of Shangri-La Motel.  Plaintiff Lisa Ricchio had been taken to the motel against her will by Clark McLean and imprisoned there, allegedly with the knowledge of Bijal and two of its employees, Ashvinkumar and Sima Patel.  She brought a civil lawsuit under federal anti-trafficking laws. 

In my last post I discussed the summary judgment decision of the United States District Court for the District of Massachusetts holding that there was no coverage under Coverage A, for Bodily Injury, because of an exclusion for bodily injury arising out of personal injury, including false imprisonment. 

The court then moved on to a discussion of coverage under Coverage B, Personal Injury Coverage.  (While personal injury and bodily injury are often used interchangeably in personal injury law, they have very different meanings in insurance policies.  Bodily injury means, generally, physical injury, like a broken leg.  Personal injury encompasses injuries that don't have a directly physical component, such as injury to reputation as a result of defamation.)

Coverage B provided coverage for "personal . . . injury caused by an offense arising out of [the insured's] business."

Peerless argued that Ricchio's claims did not amount to a personal injury because they are based upon violations of the TVPA, an anti-trafficking law, and violations of the TVPA do not constitute personal injuries.

The court dismissed that argument.  It held that the relevant question was whether Ricchio's injuries -- which were caused by violations of the TVPA -- constitute a personal injury under the policy definition.  The policy definition includes injuries arising out of false imprisonment.  Ricchio's injuries arose at least in part from her false imprisonment.  They therefore were personal injuries.

Peerless then argued that Ricchio's injuries were not caused by an offense "arising out of" Bijal's business, because Bijal is not in the business of human trafficking.

The court held that the agreement to continue renting a room to McLean, providing him with the privacy he needed to abuse Ricchio, was an activity that caused an injury that arose out of the business.  The court referenced a two part test: (1) whether the activity is one which the insured regularly engages as a means of livelihood, and (2) whether the purpose of the activity is to obtain monetary gain.  The complaint alleged that the defendants regularly rented out rooms for the purpose of making money.  Therefore, Ricchio's injuries arose out of the business.

Peerless argued that Ricchio's claims were excluded by an exclusion for "personal injury arising out of a criminal act committed by or at the direction of the insured."  Peerless argued that Ricchio's injuries were caused by criminal violations of the TVPA committed by the Patels, and therefore fell within the exclusion. 

Ricchio argued that while McLean committed criminal acts in violation of the TVPA, the other defendants in the civil case were alleged to have violated only civil provisions. 

The court agreed that it was possible to be civilly liable under the sex trafficking laws without being criminally liable.   Although the complaint alleged that the defendants acted intentionally, not negligently, that did not foreclose a duty to defend.  A duty to defend arises when a complaint shows through general allegations a possibility that the claims are covered by the policy.  Ricchio's complaint was reasonably susceptible to an interpretation finding only negligence. Peerless therefore had a duty to defend. 

Appeals Court holds insurer must defend additional insured where primary insured not named in complaint

A Greyhound bus was involved in an accident resulting in five fatalities and numerous injuries. Unicco was responsible by contract for tire maintenance on the bus.

Suits were filed against Greyhound alleging that Greyhound negligently inspected and maintained tires on the bus. One of the suits named Unicco as a defendant, and Greyhound brought third-party suits against Unicco where it was not named.

Unicco had a GL policy from Travelers under which Greyhound was an additional insured "only with respect to liability arising out of [Unicco's] ongoing operations performed for [Greyhound]" and, in a different endorsement, except with respect to "liability arising out of the independent acts or omissions of [Greyhound]."

It was undisputed that Greyhound was entitled to coverage under the ongoing operations endorsement. Travelers declined to defend or indemnify Greyhound, although it is not clear why.

In Greyhound Lines, Inc. v. Travelers Property Casualty Co. of Am., 2012 WL 987515 (Mass. App. Ct.) (unpublished), the court held that Greyhound is also entitled to coverage under the second endorsement. The complaint in the suit naming Unicco alleged that Unicco's negligent performance under the tire maintenance agreement caused or contributed to the accident.

In what is either a typo or very poor phrasing, the court stated, "the duty to defend is not . . . an all or nothing proposition." Luckily the court went on to explain that the duty to defend is, in fact, an all or nothing proposition (at least in Massachusetts). "An insurer's broad duty to defend generally extends to all counts of a complaint, even those not specifically covered by the policy." Since at least some of the counts were covered, Travelers had a duty to defend Greyhound for all counts.

The court also held that Travelers had a duty to defend Greyhound in the lawsuits in which Unicco was not named, because of "the facts reasonably known to Travelers from the lawsuits in which Unicco is named as a direct defendant and is alleged to be liable for the accident, and because similar claims for negligence with respect to the maintenance and the inspection of tires are alleged against Greyhound."

Another plug for liability insurance

I participate in a large listserve for local parents. One of the recent threads concerned problems with cakes from a local bakery. There was a long discussion about whether it was okay to post the name of the bakery or if doing so would create the risk of a libel lawsuit. One of the posters responded that for an additional $8.00 a year she added a rider to her homeowner's policy providing coverage for slander and libel. (In insurance terms slander and libel generally come within what is called "personal injury" coverage, an entirely different coverage from "bodily injury" even though the two are synonymous in other contexts.)

Years ago I defended a couple who was sued when they publicly opposed a telephone sex company renting space in the mixed use commercial and residential condominium building where they lived. After several years of litigation they not only prevailed but were awarded their attorney's fees. Had they not had personal injury insurance, however, the process could easily have bankrupted them or forced them into an unfair settlement.

Liability insurance provides not only indemnity (payment of damages to the claimant after the insured loses at trial or settles the case) but also defense, which is sometimes called lawsuit insurance. Because there is always a risk of being sued even when you have done nothing wrong, having such insurance can save you from the tens of thousands of dollars it can cost simply to have a groundless lawsuit dismissed.

Finishing up on Whittaker:

Finishing off my discussion of Whittaker Corp. v. Am. Nuclear Insurers, in which historic owners of property sought insurance coverage for costs associated with the property being declared a superfund site:

Having found that Endorsement 112 could not be considered, the court returned to the question of whether ANI had a duty to defend under the Facility Form. The court addressed three issues, all of which are so well-established under Massachusetts jurisprudence that there is no need to tarry over them.

First, the court held that the demand from the EPA that the plaintiffs investigate the contamination, and its accompanying warning of potential liability for response costs, gave rise to a duty to defend.

Second, the court then turned to Exclusion (f),the owned property exclusion, which barred coverage for "property damage to any property at the location." It held that the exclusion does not exclude coverage for costs incurred to remediate or prevent migration of contaminants off-site.

Third, the court held that the EPA notice, which demanded investigation and remediation of contamination "that exists at or near the Site," but did not directly allege any off-site migration, gave rise to a duty to defend because it raised the possibility that the owned property exclusion did not apply.

United States District Court holds that uncertainty over insurance policy terms does not create duty to defend

My next several posts will discuss Whittaker Corp. v. Am. Nuclear Insurers, __ F.2d __ (D. Mass. 2009), 2009 WL 4342512, in which historical owners of property sought insurance coverage for their costs associated with the property being declared a superfund site.

One of the issues was whether Endorsement 112, which would have excluded coverage, was properly added to the insurance policy. In a previous decision the court had held that pending the resolution of that factual question, the insurer, ANI, had a duty to defend. On a motion to reconsider, to his credit Judge Stearns reversed that ruling:

This ruling put the cart before the horse by conflating the duty to defend with the existence of coverage in the first place. Before a court can determine whether a policy imparts a duty to defend, an applicable policy must be identified.

More on an exception to the eight corners test

I posted here about an exception to the eight corners test stated in Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002).

Andrew Caplan, a partner at Burns & Levinson, sent me a comment that made me realize that my post was not as clear as it should have been. Andy wrote:

Massachusetts state and federal cases go both ways on the issue of whether information derived from outside the complaint may serve to negate the duty to defend.

Yes. Farm Family Mut. Ins. Co. v. Whepley, 767 N.E.2d 1101, 1104 (Mass. App. Ct. 2002)( finding “rare exception” to general rule); Gateway Group Advantage, Inc. v. McCarthy, 300 F. Supp. 2d 236, 246 (D. Mass. 2003) (following Farm Family); Dash v. Chicago Ins. Co., 2004 WL 1932760, *5 (D. Mass. Aug. 23, 2004) (dicta).

No. Millipore Corp. v. Travelers, 115 F.3d 21, 35-36 (1st Cir., 1997), citing Nashua Corp. v. Liberty Mut. Ins. Co., 1997 WL 89163 (Mass. Super. Ct. Feb. 18, 1997) ("Where a complaint is susceptible on its face of a reading that brings the claim within the policy, the insurer cannot rely on facts outside the complaint to justify a unilateral refusal to defend."); Sterilite Corp. v. Continental Casualty Co., 17 Mass. App. Ct. 316, 324 n. 17, 458 N.E.2d 338 (1983)("[I]t is the claim which determines the insurer's duty to defend; and it is irrelevant that the insurer may get information from the insured, or anyone else, which indicates, or even demonstrates, that the injury is not in fact covered."); Essex Ins. Co. v. Berkshire Envtl. Consultants, Inc., 2002 WL 226172, *2 (D. Mass. Feb. 7, 2002); Metallized Prods., Inc. v. Travelers Ins. Co., 2003 WL 22481398, *3 (Mass. Super. Ct. Sept. 17, 2003).

Andy is correct that in most cases an insurer may not use information outside the underlying complaint to deny defense to an insured (although such information can be used to compel a duty to defend). The exception stated in Whelpley is quite narrow: it applies to facts that are (1) undisputed and (2) will not be litigated at the underlying trial, because they are irrelevant to the underlying claim.

In my previous post I discussed an example where an insurance policy covers only blue cars. The color of the car is undisputed. It will not be litigated at trial because the color of the car is irrelevant to liability. That would fall into the Whelpley exception.

The answer to a nagging duty to defend issue

As I discussed here, the duty of an insurer to defend an insured is determined by the "eight corners test." Under that test, "if the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer has a duty to defend." (The "eight corners" comes from comparing the four corners of the complaint to the four corners of the insurance policy.)

But what about when the allegations of the underlying complaint are silent as to an issue that is important for determining coverage? For example, what if the insurance policy provides coverage for all blue cars owned by Lucy Smith? Smith is sued following a motor vehicle accident. The underlying complaint will probably allege the make and model of the car Smith was driving, but it is unlikely to state the color of the car because the color is irrelevant to Smith's liability. Can the insurer refuse to defend because its investigation reveals that the car Smith was driving at the time of the accident was yellow, and so not covered by the "blue car policy"?

Yes. In Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002), the court held that there is an exception to the eight corners test for "the existence of an undisputed extrinsic fact that takes the case outside the coverage and that will not be litigated at trial of the underlying action."

U.S. Court of Appeals defines "adumbrate"

My next several posts will discuss Essex Ins. Co. v. BloomSouth Flooring Corp., a decision just handed down by the United States Court of Appeals for the First Circuit.

The case addresses whether a liability insurance policy issued to a building contractor covers losses arising from an unpleasant odor emanating from a carpet the contractor installed. My next posts will deal with the substance of the decision.

For now, though, I want to applaud the Court of Appeals for providing a definition of "adumbrate." I have discussed how a court determines whether an insurer has a duty to defend("the eight corners test") here. The standard language is, "if the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer has a duty to defend."

Although I have quoted that language numerous times in legal briefs, I have always skimmed over the word "adumbrate" without pausing to consider what exactly it means.

The Court of Appeals has now been kind enough to provide a definition in footnote 1 of the decision: "We have defined 'adumbrate' in the liability insurance context to mean 'to give a sketchy representation of; outline broadly, omitting details . . . or to suggest, indicate or disclose partially and with a purposeful avoidance of precision.'"

SJC holds prevailing insurer not entitled to attorney's fees when it establishes another insurer's duty to defend

From my best source, Mike Tracy at Rudolph Friedmann LLP comes a decision issued today by the Supreme Judicial Court of Massachusetts:

As I have discussed in a previous post, an insured is entitled to recover attorney's fees and expenses incurred in successfully establishing in a declaratory judgment action that an insurer has a duty to defend.

In John T. Callahan & Sons, Inc. v. Worcester Ins. Co., the SJC held today that that rule does not apply when the insured's attorney's fees in the declaratory judgment action are paid by a second insurer.

Callahan was a general contractor on a construction site and was insured by Zurich. NEAC was its subcontractor, and was insured by Worcester. Callahan was an additional insured on the Worcester policy.

Lagoa, an employee of another subcontractor, was injured at the job site. He sued Callahan. Zurich agreed to defend and indemnify Callahan. Worcester refused to defend Callahan.

Callahan and Zurich brought a declaratory judgment action against Worcester, seeking a declaration that Worcester had a duty to defend and indemnify Callahan. Zurich paid the attorneys in the declaratory judgment action on behalf of itself and Callahan. Zurich and Callahan won the declaratory judgment action. Zurich sought reimbursement of the attorney's fees it incurred in the declaratory judgment action.

The SJC denied the claim for attorney's fees. It stated that the policy reason for awarding attorney's fees to insureds who are successful in establishing a duty to defend is not to punish wrongdoers or reward those who act responsibly. Rather, it is to protect the insured's right to receive the full benefit of its liability insurance contract. The court stated that Callahan received that benefit at no cost to itself because Zurich defended it.

Rather disingenuously, the court stated that Zurich also received a benefit from bringing the declaratory judgment action, because it received a judgment that Worcester reimburse it for one half of the settlement amount and attorney's fees in the underlying action. The court does not address whether that amount was more or less than the attorney's fees incurred in the declaratory judgment action.

U.S. Court of Appeals points out that duty to defend is determined by allegations of the complaint

In Narragansett Jewelry Co., Inc. v. St. Paul Fire and Marine Ins. Co., 555 F.3d 38 (1st Cir. 2009), the United States Court of Appeals for the First Circuit court reaffirmed that the "eight corners test" still determines the duty to defend under Rhode Island law.

Slane was a jewelry design company that contracted with Narragansett to develop jewelry models and molds based on Slane designs, and to produce jewelry ordered by Slane.

Slane sued Narragansett, alleging that Slane "owned certain models which it entrusted to [Narragansett] for use in the production of jewelry," and that Narragansett "caused physical damage to such models."

Narragansett sought defense and indemnity from its insurer, St. Paul. St. Paul denied coverage based on an exclusion for property damage to "[p]ersonal property that's in the care, custody, or control of [Narragansett]."

Narragansett filed a declaratory judgment action in Rhode Island. It argued that the alleged loss or damage "possibly" occurred during the shipment process, and thus not while the models were in Narragansett's care, custody or control.

The United States Court of Appeals for the First Circuit affirmed summary judgment for St. Paul, stating, "Regardless of what might be 'possible,' there are no allegations in the Slane lawsuit that support Narragansett's hypothesis." The court pointed out that the complaint specifically alleges that Narragansett caused the damages at issue.

Resolving a Coverage Conflict through a Declaratory Judgment Lawsuit

If you and your insurer disagree about whether the insurer has a duty to defend or indemnify you, either you or your insurer can file a "declaratory judgment" lawsuit. It is called a "declaratory judgment" because the plaintiff (the person filing the lawsuit) is seeking a "declaration" by the court that the plaintiff's interpretation of the insurance policy is correct.

The current law in Massachusetts is that if an insured wins a declaratory judgment lawsuit regarding the duty to defend, the insurer has to pay the attorney's fees incurred by the insured in the declaratory judgment lawsuit. This is true whether the insurer or the insured is the plaintiff in the lawsuit. Even if the insured wins a lawsuit regarding the duty to indemnify, however, the insurer is not obligated to pay the insured's attorney's fees.

There are a number of questions that remain unresolved about attorney's fees. For example, it is unclear what happens if a declaratory judgment lawsuit seeks a declaration about both the duty to defend and the duty to indemnify. In other contexts, where a party is entitled to an award of attorney's fees for some claims but not for others in the same lawsuit, the court will attempt to divide up the attorney's fees between the claims. That is always a difficult undertaking, but it would be particularly hard to divide the time spent by the attorney between the duty to defend and the duty to indemnify, because the two issues are so interrelated.

I will write more about the logistics of a declaratory judgment lawsuit in a later post.

When your insurer must pay your loss

As I discussed in my last post, an insurer has two duties: the duty to defend and the duty to indemnify. The insurer may have a duty to defend but ultimately no duty to indemnify.

While the duty to defend is determined by what is alleged in the complaint, the duty to indemnify depends on the "true" facts as determined by a court. So, going back to the example in the last post, if you are insured for injuries caused by apples falling from your apple tree, your insurer will defend you if someone states in a complaint that he or she was injured by an apple falling from your apple tree.

The case eventually goes to trial. Maybe you win at trial altogether. Your attorney convinces the jury that the plaintiff was not injured; or was not injured by something falling out of your tree. The plaintiff does not appeal. You are all set. The insurance company has paid an attorney to represent you; no damages have been found against you; and the case is over. While you have been inconvenienced and undoubtedly stressed by the lawsuit, you have not suffered any monetary loss.

But if you lose at trial, the insurer, having reserved its rights at the beginning of the case, will make a decision about whether to pay your damages awarded by the court to the plaintiff or to deny coverage. If the facts at trial demonstrated that the plaintiff was hit by an apple that fell from your tree--the very thing that your insurance policy covers--the insurer will pay the damages.

If the facts at trial showed that the plaintiff was hit by a falling acorn, then the insurer will "disclaim coverage"--refuse to pay the claim. Unless you have other insurance that will cover the claim, you will be personally liable to pay the damages assessed.

If you disagree with the insurer's view of the facts, you can file a "declaratory judgment" lawsuit. I will discuss that in a future post.

When your insurer must defend you

In my last post I talked about "reservation of rights letters" and what they mean. You might be wondering why your insurer will agree to pay for an attorney to defend you in a lawsuit but will not agree to pay any judgment against you that will come at the end of the lawsuit.

A liability insurer has two duties: the "duty to defend" and "the duty to indemnify." The duty to defend is the duty to pay an attorney to defend you in a lawsuit that is brought against you. The duty to indemnify is the duty to pay a judgment against you.

Whether or not the insurer has a duty to defend is determined by the allegations of the complaint that the plaintiff files against you in court. The insurer reads the complaint and determines whether, regardless of whether everything (or anything) in the complaint is true, the facts stated in the complaint could be covered by the insurance policy. If so, the insurer has to defend you.

For example, let's say that you have an insurance policy that provides insurance only if a person is hurt by an apple falling from your apple tree. Someone sues you and says in the complaint that they were injured when they were hit by an apple that fell from your apple tree. Your insurance company will have to defend you in that lawsuit. It doesn't matter that the person is lying and was actually hit by a falling acorn--your insurer still must defend you.

In a later post I will discuss the insurer's duty to indemnify, and why an insure might have a duty to defend but not to indemnify.