First Circuit holds that church group splintering off from church is not covered by church's directors and officers coverage

The definition of the word chutzpah is when a man kills both his parents and then begs for the court's mercy because he is an orphan.

Typically I would not apply a Yiddish word to a church dispute.  And yet . . .

In January, 2017, members of the Newton Presbyterian Church (NPC) voted to withdraw from the national Presbyterian organization.  The withdrawing members called themselves the Newton Covenant Church (NCC).  The schism arose because the withdrawing members disagreed with the progressive stance of the national organization with respect to same-sex marriage and the ordination of gay, lesbian, bisexual, and transgender ministers.

NPC and the Boston affiliate of the national organization sued NCC and its officers, alleging that they had unlawfully exerted control over real property and bank accounts owned by NPC, had rejected the church's authority to resolve an ecclesiastical schism, and had conducted a vote not authorized under the constitution of  national organization. They sought in part a declaratory judgment that NPC owned church property at 75 Vernon Street in Newton, Massachusetts.

The Massachusetts Superior Court granted partial summary judgment to NPC.  It also held that NPC is the sole and exclusive owner of the real property and ordered NCC and its members to vacate the premises.  The parties subsequently settled. 

NCC had requested a defense from Great American Insurance Company (GAIC) under a Directors and Officers policy GAIC had issued to NPC. NCC asserted that it  was the same legal entity as NPC. GAIC denied the claim.

In Newton Covenant Church v. Great Am. Ins. Co., 956 F.3d 32 (1st Cir. 2020), the United States Court of Appeals for the First Circuit held that NCC was not covered by the policy.  The policy defined "Insured" as the "Organization" and "Insured Persons."  The policy defined the "Organization" as the entity named in the declarations, which in this case was the NPC.  The policy defined "Insured Persons" as "persons who were, now are, or shall be directors, trustees [or] officers . . . of the Organization."

The court held that there was no coverage even to the extent that NCC claimed that it was a segment of the original NPC, and therefore within the definition of Insured, because the policy contained an exclusion for claims between insureds.  The same exclusion excluded coverage to the extent that NCC claimed that it was the original NPC and had simply undergone a name change.  "Because insureds would be on both sides of the litigation, the exclusion would apply."

View webinar on Insurance Issues for New Personal Injury Attorneys

On May 6, 2020 I moderated a Boston Bar Association panel on Insurance Issues for New Personal Injury Attorneys.  Many thanks to panelists Frank Riccio and Andy Caplan, who did a stellar job.  You can view the webinar here.

Free Boston Bar Association webinar: Insurance Issues for New Personal Injury Attorneys

This Wednesday, May 6, 2020 from 12:30 to 1:30 PM I will be moderating a Boston Bar Association panel discussion webinar with Frank Riccio and Andy Caplan on Insurance Issues for New Personal Injury Attorneys. 

Like all BBA webinars at this time, it is free for both members and non-members.  If you are a member you can sign up here.  If you are not a member, send me an email (my contact information is on the left) and I'll put you in touch with someone at the BBA who will give you a link to log in. 

First Circuit holds that deemed-made clause in claims-made policy requires only notice of the possibility that a claim will be brought against the policyholder

On September 23, 2013, the SEC began investigation of an investment advisory firm called F-Squared.  An investigation order (the "Formal Order") indicated that the SEC had information that tended to show that from at least January 1, 2009, F-Squared had distributed false and misleading advertisements to clients or prospective clients in violation of law. 

On October 2, 2013, the SEC served a subpoena on F-Squared in connection with the investigation. On October 18, 2013, upon request from F-Squared, the SEC provided it with a copy of the Formal Order.

F-Squared had been issued a primary insurance policy by Columbia Casualty Company for two consecutive policy years.  For the first year, October 3, 2012 to October 3, 2013, F-Squared had an excess policy from Federal Insurance Company,  The total limit between the two insurers for that  policy year was $10 million.

For the second policy year, October 3, 2013 to October 3, 2014 F-Squared had additional excess coverage from Zurich and XL, for a total of $20 million in coverage.

The policies were claims made policies that provided coverage for "any claim first made against F-Squared during the policy period."  The policies had a "deemed-made" clause under which a claim is deemed "first made" upon "an insured being identified by name in an order of investigation [or] subpoena . . .  as someone against whom a civil. criminal, administrative or regular proceeding may be brought."

F-Squared notified the insurers of the investigation and requested coverage under the policies. Columbia and Federal paid their combined $10 million policy limit for the 2012-2013 policy year.

The other excess insurers denied coverage on the basis that the SEC investigation constituted a claim that was first made prior to the 2013-2014 policy year.

F-Squared filed for bankruptcy.  Craig Jalbert, in his capacity as trustee of the F2 Liquidating Trust, sued the excess insurers.   He argued that the deemed-made clause was inapplicable because the Formal Order did not state that the SEC would bring a proceeding against F-Squared.  He argued that the phrase "may be brought" in the deemed-made clause required a "reasonable possibility," not a  "weak possibility" of a claim.  He asserted that the Formal Order did not indicate whether and to what extent SEC proceedings against F-Squared were a reasonable possibility.

In Jalbert v. Zurich Services Corp. 953 F.3d 143 (1st Cir. 2020), the United States Court of Appeals for the First Circuit disagreed.  It held that the deemed-made clause precluded coverage because the word "may" in the clause required only notice of a possiblity that a proceeding will be brought, and the Formal Order expressed such a possibility.

Insurance coverage for loss of income from business interruptions due to coronavirus

Last time I posted about coronavirus liability insurance issues, a little more than a month and a lifetime ago, I had no idea that I would be writing this post from my home office, taking my temperature every few hours because I need to go three days with  no fever before I can stop self-quarantining away from my kids.  I am grateful for how lucky I have been: that my kids are old enough that they've been able to handle little supervision beyond my pestering them by text; that I did not get sicker; that friends and acquaintances and even strangers have helped my family out in all kinds of ways, from deliveries of toilet paper to making masks for us; and that I have a law practice will survive my not working for a couple of weeks.

Many businesses are worried that they will not survive.  One of the questions for them is whether they can recoup their coronavirus losses from their general liability insurance.  These are the major issues that arise from that question: 

·       Does the business interruption insurance provide coverage for loss of income from coronavirus?  

As with every insurance question, the first place to look is the language of the policy. 

Most policies provide business interruption coverage in the case of "direct physical loss or damage" to the insured property (such as a fire loss).  

There will no doubt be litigation over whether the coronavirus itself is damage to the property, at least where there were known cases of coronavirus at the business which caused it to shut or lose revenue.  

Many policies have an exclusion for losses due to viruses or bacteria.  The courts will have to address whether a “pandemic” comes within that exclusion  

Many policies also provide business interruption coverage if the losses are caused by “civil authority,” where access to the business is prohibited by an act of government.  (For example, after the Boston Marathon bombings, the government shut down businesses near the bomb site.)  Such losses do not require direct physical loss or damage to the business property, but are generally limited in scope to a few weeks.  

·       Is there any chance that insurance will provide coverage even if coverage seems to be excluded by the language of the policy?

The Massachusetts legislature is considering a bill under which insurers would pay business interruption losses from coronavirus up to the policy limit for small businesses.  The insurers would then by reimbursed by the state.  There’s a good summary of the bill here.  

·       What do I do if my insurer denies my business interruption claim?

Don’t give up without consulting with an attorney.  Insurers may reflexively deny claims.  You may have a policy that provides coverage, or a court decision may come down in the future interpreting your policy as providing coverage.  You want to make sure you don’t lose any rights. 

·       What do I do in my insurer says that there is coverage for my business interruption claim?

You should consider hiring a public adjuster to help you make sure you are submitting the full value of your claim.  Public adjusters are non-attorneys who advocate for policyholders on the amount of loss, almost always on a contingency fee.  

·       Upcoming Boston Bar Association webinar

The Insurance and Reinsurance Committee of the Boston Bar Association will be holding a webinar on these issues on Friday April 17, 2020 from noon to 1 PM.  (I am one of the chairs of this committee but the credit for putting the program together goes to my co-chair Sara Perkins Jones as well as to Nathan Cole.)  You do not need to be a member of the BBA to participate in this webinar.  

First Circuit affirms judgment that insurer acted in bad faith in shutting down investigation that would have made insured's liability clear

Last summer I posted about Capitol Specialty Ins. Co. v. Higgins, in which the United States District Court for the District of Massachusetts held that an insurer, Capitol Specialty Insurance Corp., had acted in bad faith and was liable for treble damages when it failed to investigate fully and settle a claim by Kailee Higgins, a minor who worked at a strip club owned by policyholder PJD. Higgins alleged that she was injured in a drunk driving accident after drinking at the club. 

The United States Court of Appeals for the First Circuit has now affirmed that decision in all respects except for the determination of  prejudgment interest.  __ F.3d __ (1st Cir. 2020), 2020 WL 1164681.

Capitol tendered its policy limit after attorney's fees it had paid. PJD and Higgins then entered into a consent judgment for $7.5 million.  They agreed that Centerfolds would pay Higgins $50,000 and assign its claims against Capitol to Higgins.

Higgins then sued Capitol for bad faith settlement practices under Mass. Gen. Laws chs. 93A and 176D on her own behalf and as assignee of PJD's claim against Capitol.  The United States District Court ruled in Higgins' favor on her own claim, assessed actual damages of $1.8 million against Capitol, and trebled actual damages to $5.4 million.

Both parties appealed.  Higgins argued that the District Court should have adopted the $7.5 million consent settlement amount as actual damages and that it failed to rule on the claims against Capitol assigned to her by PJD.

Capitol appealed the findings against it, the calculation of actual damages, and the award of prejudgment interest on treble damages rather than actual damages.

The First Circuit first addressed the question of actual (or single) damages.  It noted that under Mass. Gen. Laws ch. 93A the amount of actual damages is the amount of a judgment.  The court affirmed the District Court's finding that the consent judgment was not a judgment within the meaning of the statute.  Higgins argued that the consent judgment should be the basis for damages because it was reasonable and non-collusive. The First Circuit held that the District Court had found, in using the phrase "not an arm's length transaction," that the $7.5 million judgment was sufficiently collusive as to preclude it from being a judgment within the meaning of the statute.

Massachusetts Lawyers Weekly  quoted me on that aspect of the case.   As I pointed out there, allowing parties to call a settlement a "consent judgment" and then making the settlement amount the basis for 93A damages would result in consent judgments that are farther and farther from the actual value of the case. After all, when they have agreed that the claimant will not collect the judgment from the policyholder, the policyholder has nothing to lose by agreeing to whatever figure the claimant suggests.  The larger the number, the more the claimant will recover from the insurer if they prove a 93A violation.

The First Circuit next rejected Higgins' claim that she was entitled to additional damages from the claim against Capitol assigned to her by PJD.  "Given that Capitol met its duty to defend and that, as to indemnity, Capitol offered the policy limit to Higgins, we are doubtful the insurer violated a duty to PJD."

The First Circuit also held that there was no evidence of any monetary loss as to the assigned claim, which is required under Mass. Gen. Laws ch. 93A §11.  Higgins argued that Capitol's actions caused PJD monetary loss by exposing it to a judgment in excess of the policy limit, causing an erosion of the policy limit to attorneys' fees, causing it to pay $50,000 in exchange for the covenant not to sue, and causing it to incur fees and expenses to its personal counsel while defending the court action.

The First Circuit rejected those arguments.  There was no evidence that Capitol could settle the claim within the policy limit.  The erosion of funds for attorney's fees was actually less than Capitol should have spent in investigating the claim.  Capitol's actions did not cause PJD to pay the $50,000 in settlement or the necessity of personal counsel because its exposure was above the policy limit. 

The First Circuit then addressed Capitol's argument that the District Court had erred in holding that it failed to conduct a reasonable investigation, in violation of  Mass. Gen. Laws ch. 176D.  Capitol had shut down its investigation after minimal and inadequate work had been done on it, when its own investigator had told it more work needed to be done, its attorney immediately realized there was a good likelihood of liability, and it should have known that there was a good likelihood of liability.  

For those reasons, the First Circuit  affirmed the District Court's finding that Capitol's action's had been willful, knowing and in bad faith, making it liable for multiple damages.

Finally, the First Circuit agreed that the District Court had erred when it calculated prejudgment interest on the trebled damages rather than single damages.  The court held that if there had been a judgment, prejudgment interest would have applied to the entire amount.  With no judgment, it applied only to single damages.

Summer camp insurance and coronavirus

I received an email from a sleepaway camp where I'm considering sending my younger daughter this summer.  The camp advised families to strongly consider purchasing camp insurance because of the potential impact of coronavirus.

I took a look at the policy being offered for that camp and another one my daughter will attend.  Although they vary in some of the details, the pertinent coverages are the same.  The insurer will reimburse me for camp fees if:

1)  My daughter cannot attend camp because she is sick.
2)  My daughter cannot attend camp because she is personally quarantined.

The policies do not provide for a return of fees if the camps are closed because of coronavirus.

I have reached out to a couple of camp directors to ask whether fees will be returned by the camp itself if camp is cancelled.  The response I'm getting is that they have never had to deal with a situation like this before and they are looking into it.

Some thoughts and takeaways:

1)   Sleepaway camp is the best. Attending and working at them were bright spots in my life, and my younger daughter has loved hers as well.  (My older daughter . . .  let's just say every camp is not right for every kid.)

2)  Before deciding on whether to purchase camp insurance for your child, read the policy that is offered.  If it's like the ones that I have seen, your calculation should not be based on how likely you think that it is that the camp will close.  It should be based on how likely you think it is that the camp will remain open but your child will not be able to attend because he or she is personally sick or quarantined.

3)  I'm not trying to join in the coronavirus fear-mongering.  Whether or not camps close or stay open may well have more to do with the perception of the dangers of coronavirus than the actuality of how dangerous it is.

4)  Obligatory reminder: wash your hands.