Case Briefs

Second Circuit Affirms Excess Insurer's Right to Timely Notice

A five-year delay in providing an excess insurer notice of a twice-tried medical malpractice claim led the U.S. Court of Appeals for the Second Circuit to vindicate the excess insurer's denial of coverage. The insured's attempt to seek excuse for the delay based upon reliance on advice of counsel also fell on deaf ears at the Second Circuit. Huntington Hospital (“Huntington”) sued defendant New England Insurance Company (“New England”) for breach of contract after New England denied coverage for failure to provide the notice required by the contract. See Huntington Hospital v. New England Reinsurance Company, No. 07-cv-4961 (2d Cir. Feb. 3, 2009).

The medical malpractice giving rise to the claim occurred in 1983, and suit was filed against Huntington in 1985. The case first went to trial against Huntington in March 2000, but ended with a deadlocked jury. The second trial went forward the following month and resulted in a jury verdict in an amount greater than Huntington's primary insurance coverage. After review of the claim, New England denied coverage based upon Huntington's failure to provide timely notice leading to Huntington's lawsuit. The U.S. District Court for the Southern District of New York granted summary judgment in New England's favor, and Huntington appealed. The Second Circuit affirmed the district court's decision. The court noted that the terms of the excess policy in issue required Huntington to give New England notice “as soon as practicable” upon the occurrence of an event “reasonably likely to involve” the excess policy. A post-verdict notice five years after suit was filed did not satisfy the conditions precedent of the policy. The Second Circuit further rejected the argument that Huntington's late notice should be overlooked due to its alleged reliance on advice from counsel as to whether New England's excess policy might be implicated by the underlying claim. The court found that any such reliance on the part of Huntington could not justify its failure to provide New England with timely notice. As the court concluded, “The notice here was untimely as a matter of law, and Huntington's apparent reliance on deficient advice is not sufficient to justify its total failure to inform New England that the excess insurance policy might be invoked.

The Insured v. Insured Exclusion in a Derivative Action Suit

The Northern District of Texas has navigated around prior authority in the district to apply an insured v. insured exclusion to a shareholder derivative action brought by two plaintiffs, only one of whom was an “Insured.” The court granted summary judgment finding no duty to defend or indemnify based on the plain meaning of the insured v. insured exclusion. See Carolina Cas. Ins. Co. v. Sowell et al., No. 07-CV-1783 (N.D. Tex. Feb. 17, 2009). The underlying lawsuits concern damage to leased property in New Orleans caused by Hurricane Katrina.

The court's analysis distinguished an earlier case decided by the Western District of Texas, Federal Insurance Co. v. Infoglide Corp., 05-CV-189 (W.D. Tex July 18, 2006), which had reached a contrary conclusion after interpreting a similar insured v. insured exclusion. That court had held that “the proper construction of the insured v. insured exclusion is that the inclusion of an 'insured' as a plaintiff where there are also plaintiffs who are not 'insureds' does not bar coverage.” The Sowell court declined to follow Infoglide because the Infoglide court had interpreted the portion of the insured v. insured exclusion that applied to direct, rather than derivative, actions.

Carolina Casualty issued a directors' and officers' liability policy to a group of affiliated companies that were engaged in the oil and gas supply business in New Orleans. Subsequently, certain properties leased by the insureds suffered damage as a result of the hurricane. An individual insured, James Sowell, brought a shareholder derivative suit against several directors and officers of one of the insured entities, DOUS, LLC. Sowell alleged, inter alia, that the individual defendants had breached their fiduciary duties by failing to procure adequate insurance for the damaged property. Another DOUS shareholder, Robert Welsh, who was not an insured under the terms of the policy, later intervened as a plaintiff in the litigation.

The insured v. insured exclusion at issue excluded claims made “by, on behalf of, or in the right of the Insured Entity, or by any Directors or Officers,” but contained an exception for “any derivative action by any security holder of the Insured Entity, but only if such Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of any Insured or the Insured Entity.”

The court held that the insured v. insured exclusion was unambiguous and therefore applied its plain meaning. Specifically, the court held that the shareholder derivative action was excluded by the insured v. insured exclusion because it was brought by an insured, Sowell, on behalf of an insured, DOUS. In addition, the court noted that although Welsh, who was not an insured, was serving as plaintiff of this action, the entire claim was nevertheless excluded because Welsh was not bringing his claims “totally independent of any Insured.” Thus, Sowell's presence and instigation of the claim as a co-plaintiff was sufficient to preclude the application of the shareholder derivative action exception to the insured v. insured exclusion.

Defense Costs in a Disgorgement Action Are Not a Covered Loss

The Supreme Court of the State of New York, New York County, has denied a hedge fund insured's demand for policy limits in defense costs and granted summary judgment in favor of Select Insurance Company. Select insured the plaintiff under a Mutual Fund and Directors and Officers Errors and Omissions Liability Insurance Policy issued by Select with a policy limit of $10 million. In July and September 2003, respectively, the attorney general of the state of New York and the Securities and Exchange Commission commenced investigations into the plaintiff's trading practices relating to market timing and late trading of mutual funds. In order to resolve these proceedings, the hedge fund entered into settlement agreements and agreed to pay $148 million in disgorgement. The hedge fund did not seek reimbursement from Select for the disgorgement payment, but did seek reimbursement for more than $19 million in defense costs paid as a result of the investigations. Select denied liability for Loss (as defined by the Policy) resulting from the investigations. The fund then brought suit against Select.

The court found decisive the definition of “Loss” and related key terms as set forth in the policy:

'Loss' means that amount, including Defense Costs, which the insured(s) or the Insured Company shall become legally obligated to pay or for which the Insured Company legally indemnifies the Insured(s) as a result of a Claim first made against the Insured(s) and/or the Insured Company during the Policy Period ' provided, however, that Loss shall not include ' punitive or exemplary damages, criminal or civil fines or penalties imposed by law ' or matters uninsurable under the law pursuant to which this Policy is construed.

Under the policy “'Defense Costs' means that part of Loss consisting of costs, charges and expenses incurred in the defense of claims.” Under the Select policy “'Claim' means any judicial or administrative proceeding ' against (1) the Insured Company or any Insured(s) for a Wrongful Act as a result of which the Insured Company or such Insured(s) may be subjected to a binding adjudication of liability for damages or other relief ' “

The court after reviewing these policy provisions stated that “[a]s explained in Vigilant Ins. Co. v. Credit Suisse First Boston Corp. [10 A.D.3d 259, 529 [1st Dep't 2004] ["Vigilant"]) 'disgorgement of 'ill-gotten funds is not insurable under the law' because such disgorgement does not constitute 'damages' or a 'loss' as those terms are used in insurance policies.' Moreover, where defense costs are a component of uninsurable loss, a party may not be reimbursed for those costs as they 'are only recoverable for covered claims.'” In granting Select's motion for summary judgment, the court held that “[plaintiff]'s efforts to distinguish Vigilant are unavailing. The policy provisions here and in Vigilant are virtually identical. Both define 'Loss' as including defense costs but not matters uninsurable under governing law. The reasoning of Vigilant ' that disgorgement of improperly acquired funds is not a covered loss, and that defense costs in connection with a claim for disgorgement are therefore also not a covered loss ' is equally applicable here.”

Statute of Limitations for Insured's Fraud Claim
Cannot Be Decided Against the Insured on Demurrer

In Broberg v. The Guardian Life Insurance Co. of America, 171 Cal. App. 4th 912 (March 2, 2009), the Court of Appeal of California addressed whether an insured's fraud claim against its life insurer was “time barred.” In particular, the insured alleged that when he purchased a whole life insurance policy from Guardian Life Insurance Co. of America in 1993, Guardian's agent falsely represented that if the insured paid premiums for 11 years, dividend earnings during that time period would be sufficient to cover premiums for subsequent years. However, the insured alleged that he learned that he had been deceived by Guardian when at the end of the eleventh year he received a premium bill. Guardian at that time stated that because dividend earnings were too low during the prior 11 years, premium payments would continue, and that the possibility of such a circumstance was spelled out in a disclaimer contained in materials provided to the insured at the time of policy issuance. The insured thus sued for fraud, negligent misrepresentation, and certain statutory violations. Guardian demurred, claiming that the insured's claims were time barred because the insured should have discovered any claimed fraud at the time he purchased the policy in 1993. Thus, according to Guardian, his fraud claim accrued at that time. The trial court agreed and sustained Guardian's demurrer without leave to amend, based upon its conclusion that the disclaimer in the materials provided to the insured was sufficient to give the insured at least “inquiry notice” that he might be required to pay premiums beyond the “11-year cutoff.”

The appellate court reversed. The court first stated that the applicable limitations period for the insured's fraud claim was three years, and that the period began to run “only when the aggrieved party discovered 'the facts constituting the fraud.'” The court then addressed when the insured should be charged with “discovering” Guardian's claimed fraud ' at the time of policy issuance based upon the “disclaimers,” or when he first was informed that he would have to continue paying premiums. According to the court, to answer that question, the court first was required to resolve clear factual issues regarding whether the insured “reasonably relied” upon the agent's representations regarding premium payments ' “whether reliance on a misrepresentation was reasonable is a question of fact for the jury, and may be decided as a matter of law only if the facts permit reasonable minds to come to just one conclusion.” Because the matter was decided at the demurrer stage, the court concluded that the trial court was not in a position to conclude that “the disclaimers in the policy ' are so clear and so obvious that, as a matter of law, [the insured's] claims of delayed discovery and reasonable reliance must be rejected.”

The court then addressed whether the trial court could decide as a matter of law that the insured should have discovered the fraud when the policy first was issued because of the “disclaimer” language. In other words, the court questioned whether the trial court was able to conclude that the disclaimer was adequate to place the insured on “notice.” According to the court, “a plaintiff will be denied recovery only if his conduct is manifestly unreasonable in the light of his own intelligence or information. It must appear that he put faith in representations that were 'preposterous' or 'shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth.'” The court concluded that a question of fact existed “concerning the presence or absence of a manifest unreasonableness in [the insured's] reliance on Guardian Life's deceptive policy illustration and its agent's promise that out-of-pocket premiums would not be required after the 11th year of the policy.” In deciding whether this issue could be resolved on demurrer, the court recognized the long-standing rule of California insurance policy interpretation that “when interpreting limitations of coverage in an insurance policy, the Supreme Court has repeatedly cautioned, to be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be “conspicuous, plain and clear ' [and that] any such limitation must be placed and printed so that it will attract the reader's attention.” The court concluded that because the placement and format of the relevant disclaimer language was not “conspicuous,” the question of whether the disclaimer provided sufficient notice to trigger the applicable statute of limitations was not an issue that could be “decided as a matter of law on demurrer.”

Second Circuit Affirms Excess Insurer's Right to Timely Notice

A five-year delay in providing an excess insurer notice of a twice-tried medical malpractice claim led the U.S. Court of Appeals for the Second Circuit to vindicate the excess insurer's denial of coverage. The insured's attempt to seek excuse for the delay based upon reliance on advice of counsel also fell on deaf ears at the Second Circuit. Huntington Hospital (“Huntington”) sued defendant New England Insurance Company (“New England”) for breach of contract after New England denied coverage for failure to provide the notice required by the contract. See Huntington Hospital v. New England Reinsurance Company, No. 07-cv-4961 (2d Cir. Feb. 3, 2009).

The medical malpractice giving rise to the claim occurred in 1983, and suit was filed against Huntington in 1985. The case first went to trial against Huntington in March 2000, but ended with a deadlocked jury. The second trial went forward the following month and resulted in a jury verdict in an amount greater than Huntington's primary insurance coverage. After review of the claim, New England denied coverage based upon Huntington's failure to provide timely notice leading to Huntington's lawsuit. The U.S. District Court for the Southern District of New York granted summary judgment in New England's favor, and Huntington appealed. The Second Circuit affirmed the district court's decision. The court noted that the terms of the excess policy in issue required Huntington to give New England notice “as soon as practicable” upon the occurrence of an event “reasonably likely to involve” the excess policy. A post-verdict notice five years after suit was filed did not satisfy the conditions precedent of the policy. The Second Circuit further rejected the argument that Huntington's late notice should be overlooked due to its alleged reliance on advice from counsel as to whether New England's excess policy might be implicated by the underlying claim. The court found that any such reliance on the part of Huntington could not justify its failure to provide New England with timely notice. As the court concluded, “The notice here was untimely as a matter of law, and Huntington's apparent reliance on deficient advice is not sufficient to justify its total failure to inform New England that the excess insurance policy might be invoked.

The Insured v. Insured Exclusion in a Derivative Action Suit

The Northern District of Texas has navigated around prior authority in the district to apply an insured v. insured exclusion to a shareholder derivative action brought by two plaintiffs, only one of whom was an “Insured.” The court granted summary judgment finding no duty to defend or indemnify based on the plain meaning of the insured v. insured exclusion. See Carolina Cas. Ins. Co. v. Sowell et al., No. 07-CV-1783 (N.D. Tex. Feb. 17, 2009). The underlying lawsuits concern damage to leased property in New Orleans caused by Hurricane Katrina.

The court's analysis distinguished an earlier case decided by the Western District of Texas, Federal Insurance Co. v. Infoglide Corp., 05-CV-189 (W.D. Tex July 18, 2006), which had reached a contrary conclusion after interpreting a similar insured v. insured exclusion. That court had held that “the proper construction of the insured v. insured exclusion is that the inclusion of an 'insured' as a plaintiff where there are also plaintiffs who are not 'insureds' does not bar coverage.” The Sowell court declined to follow Infoglide because the Infoglide court had interpreted the portion of the insured v. insured exclusion that applied to direct, rather than derivative, actions.

Carolina Casualty issued a directors' and officers' liability policy to a group of affiliated companies that were engaged in the oil and gas supply business in New Orleans. Subsequently, certain properties leased by the insureds suffered damage as a result of the hurricane. An individual insured, James Sowell, brought a shareholder derivative suit against several directors and officers of one of the insured entities, DOUS, LLC. Sowell alleged, inter alia, that the individual defendants had breached their fiduciary duties by failing to procure adequate insurance for the damaged property. Another DOUS shareholder, Robert Welsh, who was not an insured under the terms of the policy, later intervened as a plaintiff in the litigation.

The insured v. insured exclusion at issue excluded claims made “by, on behalf of, or in the right of the Insured Entity, or by any Directors or Officers,” but contained an exception for “any derivative action by any security holder of the Insured Entity, but only if such Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of any Insured or the Insured Entity.”

The court held that the insured v. insured exclusion was unambiguous and therefore applied its plain meaning. Specifically, the court held that the shareholder derivative action was excluded by the insured v. insured exclusion because it was brought by an insured, Sowell, on behalf of an insured, DOUS. In addition, the court noted that although Welsh, who was not an insured, was serving as plaintiff of this action, the entire claim was nevertheless excluded because Welsh was not bringing his claims “totally independent of any Insured.” Thus, Sowell's presence and instigation of the claim as a co-plaintiff was sufficient to preclude the application of the shareholder derivative action exception to the insured v. insured exclusion.

Defense Costs in a Disgorgement Action Are Not a Covered Loss

The Supreme Court of the State of New York, New York County, has denied a hedge fund insured's demand for policy limits in defense costs and granted summary judgment in favor of Select Insurance Company. Select insured the plaintiff under a Mutual Fund and Directors and Officers Errors and Omissions Liability Insurance Policy issued by Select with a policy limit of $10 million. In July and September 2003, respectively, the attorney general of the state of New York and the Securities and Exchange Commission commenced investigations into the plaintiff's trading practices relating to market timing and late trading of mutual funds. In order to resolve these proceedings, the hedge fund entered into settlement agreements and agreed to pay $148 million in disgorgement. The hedge fund did not seek reimbursement from Select for the disgorgement payment, but did seek reimbursement for more than $19 million in defense costs paid as a result of the investigations. Select denied liability for Loss (as defined by the Policy) resulting from the investigations. The fund then brought suit against Select.

The court found decisive the definition of “Loss” and related key terms as set forth in the policy:

'Loss' means that amount, including Defense Costs, which the insured(s) or the Insured Company shall become legally obligated to pay or for which the Insured Company legally indemnifies the Insured(s) as a result of a Claim first made against the Insured(s) and/or the Insured Company during the Policy Period ' provided, however, that Loss shall not include ' punitive or exemplary damages, criminal or civil fines or penalties imposed by law ' or matters uninsurable under the law pursuant to which this Policy is construed.

Under the policy “'Defense Costs' means that part of Loss consisting of costs, charges and expenses incurred in the defense of claims.” Under the Select policy “'Claim' means any judicial or administrative proceeding ' against (1) the Insured Company or any Insured(s) for a Wrongful Act as a result of which the Insured Company or such Insured(s) may be subjected to a binding adjudication of liability for damages or other relief ' “

The court after reviewing these policy provisions stated that “[a]s explained in Vigilant Ins. Co. v. Credit Suisse First Boston Corp. [10 A.D.3d 259, 529 [1st Dep't 2004] ["Vigilant"]) 'disgorgement of 'ill-gotten funds is not insurable under the law' because such disgorgement does not constitute 'damages' or a 'loss' as those terms are used in insurance policies.' Moreover, where defense costs are a component of uninsurable loss, a party may not be reimbursed for those costs as they 'are only recoverable for covered claims.'” In granting Select's motion for summary judgment, the court held that “[plaintiff]'s efforts to distinguish Vigilant are unavailing. The policy provisions here and in Vigilant are virtually identical. Both define 'Loss' as including defense costs but not matters uninsurable under governing law. The reasoning of Vigilant ' that disgorgement of improperly acquired funds is not a covered loss, and that defense costs in connection with a claim for disgorgement are therefore also not a covered loss ' is equally applicable here.”

Statute of Limitations for Insured's Fraud Claim
Cannot Be Decided Against the Insured on Demurrer

In Broberg v. The Guardian Life Insurance Co. of America , 171 Cal. App. 4th 912 (March 2, 2009), the Court of Appeal of California addressed whether an insured's fraud claim against its life insurer was “time barred.” In particular, the insured alleged that when he purchased a whole life insurance policy from Guardian Life Insurance Co. of America in 1993, Guardian's agent falsely represented that if the insured paid premiums for 11 years, dividend earnings during that time period would be sufficient to cover premiums for subsequent years. However, the insured alleged that he learned that he had been deceived by Guardian when at the end of the eleventh year he received a premium bill. Guardian at that time stated that because dividend earnings were too low during the prior 11 years, premium payments would continue, and that the possibility of such a circumstance was spelled out in a disclaimer contained in materials provided to the insured at the time of policy issuance. The insured thus sued for fraud, negligent misrepresentation, and certain statutory violations. Guardian demurred, claiming that the insured's claims were time barred because the insured should have discovered any claimed fraud at the time he purchased the policy in 1993. Thus, according to Guardian, his fraud claim accrued at that time. The trial court agreed and sustained Guardian's demurrer without leave to amend, based upon its conclusion that the disclaimer in the materials provided to the insured was sufficient to give the insured at least “inquiry notice” that he might be required to pay premiums beyond the “11-year cutoff.”

The appellate court reversed. The court first stated that the applicable limitations period for the insured's fraud claim was three years, and that the period began to run “only when the aggrieved party discovered 'the facts constituting the fraud.'” The court then addressed when the insured should be charged with “discovering” Guardian's claimed fraud ' at the time of policy issuance based upon the “disclaimers,” or when he first was informed that he would have to continue paying premiums. According to the court, to answer that question, the court first was required to resolve clear factual issues regarding whether the insured “reasonably relied” upon the agent's representations regarding premium payments ' “whether reliance on a misrepresentation was reasonable is a question of fact for the jury, and may be decided as a matter of law only if the facts permit reasonable minds to come to just one conclusion.” Because the matter was decided at the demurrer stage, the court concluded that the trial court was not in a position to conclude that “the disclaimers in the policy ' are so clear and so obvious that, as a matter of law, [the insured's] claims of delayed discovery and reasonable reliance must be rejected.”

The court then addressed whether the trial court could decide as a matter of law that the insured should have discovered the fraud when the policy first was issued because of the “disclaimer” language. In other words, the court questioned whether the trial court was able to conclude that the disclaimer was adequate to place the insured on “notice.” According to the court, “a plaintiff will be denied recovery only if his conduct is manifestly unreasonable in the light of his own intelligence or information. It must appear that he put faith in representations that were 'preposterous' or 'shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth.'” The court concluded that a question of fact existed “concerning the presence or absence of a manifest unreasonableness in [the insured's] reliance on Guardian Life's deceptive policy illustration and its agent's promise that out-of-pocket premiums would not be required after the 11th year of the policy.” In deciding whether this issue could be resolved on demurrer, the court recognized the long-standing rule of California insurance policy interpretation that “when interpreting limitations of coverage in an insurance policy, the Supreme Court has repeatedly cautioned, to be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be “conspicuous, plain and clear ' [and that] any such limitation must be placed and printed so that it will attract the reader's attention.” The court concluded that because the placement and format of the relevant disclaimer language was not “conspicuous,” the question of whether the disclaimer provided sufficient notice to trigger the applicable statute of limitations was not an issue that could be “decided as a matter of law on demurrer.”