National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Wing Enterprises, Inc. manufactures ladders that it sells through vendors. Wing maintained an insurance policy with Liberty International Underwriters that was not for commercial general liability (“CGL”), but included only products-completed operations coverage that covers injuries or property damage taking place away from Wing’s own premises and “arising out of” Wing’s products or work. The Liberty policy also contains a vendor’s endorsement covering injuries or property damage arising from Wing’s products distributed or sold in the regular course of the vendor’s business.

Advanced Ladders sells Wing’s ladders, and maintains a CGL policy with Allstate. Advanced Ladders’ Allstate policy provides coverage for both premises and operations and products-completed operations. James Colton went to Advanced Ladders to buy a Wing ladder. An Advanced Ladders employee offered Colton a “safe operations training” for the ladder. The employee extended the ladder to its full height and Colton climbed to the top; the ladder then collapsed, injuring Colton severely.

After Colton threatened to sue Advanced Ladders, Advanced Ladders tendered the claim to both Allstate and Liberty. Liberty denied the claim. Allstate determined that Colton’s injuries were caused by the apparent negligence of the Advanced Ladders employee who failed to properly set up the ladder. Allstate determined that the claim was covered under the premises and operations portion of the Advanced Ladders policy, and settled the claim for $1 million. Allstate then filed a declaratory judgment against Liberty, alleging that Liberty had a duty to defend and indemnify Advanced Ladders and that Liberty’s coverage was primary.

Allstate contended the Liberty policy covers Colton’s claim because the injury “arose out of Wing’s ladder,” and relied on cases involving CGL polices that broadly interpret the phrase “arising out of” to find that, in the CGL context, an injury need only arise out of an “occurrence” to be potentially covered. The Court of Appeals noted, however, that in the products-completed operations context, the injury must arise out of a defect in the insured’s product or work.

The Court of Appeals found that as the injury at issue was not caused by a defect in the insured’s product, the ladder, but by the negligent operations of the vendor, the injury did not arise out of a defect in the insured’s product or work. The Court acknowledged Allstate’s argument that but for the ladder Colton would not have been injured, but declined to accept the “but for” test, pointing out that ladder was merely the conveyance through which the vendor’s negligence caused the injury. Products-completed operations policies are not designed or intended to protect against such losses. Because Colton’s injury did not arise out of a defect in Wing’s ladder, the Court of Appeals held that Colton’s claims are not covered by Liberty’s products-completed operations policy.
 

Gargano v. Liberty International Underwriters, Inc., No. 08-2287 (1st Cir. July 14, 2009) concerned an attorney’s failure to give timely notice of a malpractice claim to his E&O carriers. Gargano had taken over a worker’s compensation claim after his client fired the lawyer had worked on the case for four years. Gargano ultimately obtained a large settlement but only after assuring the state court that there were no liens on the file and that he had solely been responsible for the representation of his client. Predecessor counsel sued Gargano in 2005 and ultimately recovered a substantial judgment for the insured’s fraud and misrepresentations.

Following the entry of the judgment in 2007, Gargano belatedly reported this claim to three professional liability insurers that had successively issued “claims made and reported” policies to him in 2005, 2006 and 2007. The insurers jointly moved to dismiss the insured’s claims pursuant to Fed. R. Civ. P. 12(b)(6) attaching a copy of the underlying court judgment against Gargano. On the basis of these undisputed facts and the “claims made and reported” language in the insurers’ policies, Judge Young dismissed the insured’s contractual claim, along with his assertion of bad faith. These findings were affirmed by the First Circuit.

As a preliminary matter, the First Circuit upheld the district court’s consideration of the lower court judgment in the context of a Rule 12(b)(6) motion. While noting that courts do not ordinarily consider materials outside the complaint when reviewing a motion to dismiss, a narrow exception is permitted for documents the authenticity of which are not disputed by the parties, for official public records, for documents central to the plaintiff’s claim and other documents that are referred to in the complaint itself. In this case, the court found that the superior court judgment fit squarely within this exception.

Turning to the merits of the insurers’ defenses, the court observed that the underlying malpractice action, which involved a claim first made in 2005 and not reported until 2007, ran afoul of the “claims made and reported” language in each of the insurers’ policies. As to Policy 1, the claim was received during the policy period but not reported until after it expired. As to Policy 2, the claim was neither reported nor received during the policy period. Finally, as to Policy 3, the claim was reported to the insurer during the policy period but received by the insured prior to the policy period.

Gargano argued that these terms should not be applied against him since he had never seen the policies and was unaware of their terms. (It is unlikely that any court would ever find such an argument to be credible when presented by a lawyer given the ubiquity of “claims made” terms in professional liability insurance policies.) Even so, the First Circuit found in this case that there was no basis in Massachusetts law for suggesting that the enforceability of an insurance contract was dependent on its issuance. Unless the policy makes issuance and delivery a condition to the existence of the contract itself, the court ruled that the policy was self-enforcing. In any event, the court found that Gargano could hardly have had a reasonable expectation of coverage and could not claim ignorance of the terms of the policies as they had been delivered to his insurance agent or broker. In such circumstances, the knowledge of the agent or broker is imputed to the insured.

Finally, in keeping with established principles of Massachusetts “claims made” jurisprudence, the court refused to require the insurers to establish prejudice as the result of the insured’s failure to establish these conditions to coverage. The court observed that, “To require the insurer of a claims made and reported policy to demonstrate prejudice from the insured’s failure to report a claim within the relevant policy period would defeat the fundamental concept on which claims made policies are premised with the likely result that claims made policies, which offer substantial benefits to purchasers of insurance as well as insurance companies, would vanish from the scene.”

There are several interesting aspects to this new opinion. First, it demonstrates the benefits of a Rule 12(b)(6) motion where the crucial facts supporting an insurer’s defense to coverage may not be specifically pleaded in the underlying suit but are either undisputed or are contained in documents reference din the complaint. While reference to such extrinsic sources of proof would ordinarily have required a Rule 56 motion for summary judgment in the past, which many courts will not consider until later in a suit, a growing number of courts have adopted a more expansive interpretation of Rule 12(b)(6) in the wake of the U.S. Supreme Court’s opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

Gargano also affirmatively stifles the oft-repeated but baseless contention that an insured cannot be bound by terms in an insurance policy of which it was unaware. While this argument is effective in cases where exclusions or coverage limitations are new to a policy, as where they are added in a renewal policy without due notice to the insured, such an argument is ineffective where the provisions in question are neither ambiguous nor obscure or where the policy itself was in fact delivered to the insured’s agent or broker.

Finally, Gargano is a useful reference case given that it involved a “perfect storm” of all of the permutations of trouble that an insured may face with “claims made and reported” language. For all of the foibles of Massachusetts insurance jurisprudence, it is nearly unique among the fifth states in upholding all of the key aspects of “claims made” coverage requirements for insurers. This is the rare case, however, where the facts of the case illustrate the problems presented by claims being received during the policy but not being reported on time, after the policy was issued but not being reported on time, and being reported on time but after the policy was issued.

Congratulations to MM alum Bill Bogaert who argued the case for Liberty International.