Insuring Misrepresentations? Not In Louisiana

Posted on July 31, 2011 by Mike Aylward

Misrepresentation claims are a common feature of commercial litigation as well as more mundane suits, such as those brought by property owners who sue the former owner for concealing mold or pollution problems at the time of sale. Last month, for instance, a domestic supplier of Chinese drywall sued German-based Knauf Gypsum A.G. seeking $100 million in damages that Banner claims to have suffered as the result material misrepresentations by Knauf concerning the fitness and safety of its drywall products.

The focus of the case law addressing these coverage claims has generally been whether a misrepresentation, whether intentional or merely negligent, can ever be an “accident” given the tort’s intentional underpinnings. While the principal focus of these coverage disputes has been on whether the claims allege an “accident” or not, Preau v. St. Paul Fire & Marine Ins. Co., No. 10-30816 (5th Cir. June 23, 2011), a Louisiana case decided recently by the U.S. Court of Appeals for the Fifth Circuit, has highlighted a different means of resolving the problem for insurers that has heretofore received relatively little attention.
 

 

William Preau was a shareholder in Louisiana Anesthesia Associates (LAA), a group that provided anesthesia services to the Louisiana Regional Medical Center. Preau fired Dr. Robert Lee Berry, an LAA anesthesiologist after he was found to have abusing Demerol and other narcotics. Nevertheless, Preau wrote Dr. Berry a glowing letter of recommendation when he apply to work at Staff Care that failed to make any mention of his drug use or prior termination. Lee was duly hired by Staff Care and authorized to provide anesthesia services at Kadlec Medical Center.

On November 12, 2002, while under the influence, Berry failed to provide proper anesthesia to a patient, Kimberly Jones, reducing her to a permanent vegetative state.  Jones sued Kadlec, Berry and LAA in state court in Washington but voluntarily dismissed LAA due to a perceived lack of person jurisdiction. Kadlec ultimately settled with Jones for $7.5 million after incurring $744,000 in attorney’s fees. It then sued LAA and Preau and other shareholders in the U.S. District Court in New Orleans claiming that it had detrimentally relied upon intentional and negligent misrepresentations with respect to Preau’s failure to mention Berry’s drug abuse and prior termination in his letter of recommendation.

Preau tendered the defense of this case to its general liability insurer, which agreed to defend under a reservation of rights. However, after a Louisiana jury awarded $8.24 million to Kadlec, St. Paul disclaimed any obligation to indemnify.

In the ensuing coverage litigation, a federal District Court in Louisiana found that St. Paul failed to prove that Preau intended to cause bodily injury to Jones and therefore awarded Preau half a million dollars, representing his share of the Kadlec settlement. The parties cross-appealed with St. Paul arguing not only that the Court had misapprehended the scope of its intentional acts exclusion but had erred in holding that the damages in question were “for covered bodily injury.”

The St. Paul policy provided that the insurer would pay “any amounts any protected person is legally required to pay as damages for covered bodily injury or property damage that happens while this agreement is in effect and is caused by an event.” (The comparable ISO wording provides that the insurer will pay “all sums that the insured is legally obligated to pay as damages because of bodily injury or property damage caused by an occurrence.”)

The Fifth Circuit ruled that Preau was not “legally required” to pay damages “for covered bodily injury.” Rather, the Court found that he was legally required to pay Kadlec for the economic injuries it suffered as a result of his misrepresentation:

The economic damages Kadlec sought for Preau’s tortious misrepresentation are distinct from the damages Jones or any other party might seek for her bodily injuries. The fact that the amount of the damages that Kadlec sought was directly related to the amount it paid to defend and settle the Jones suit does not mean that Preau became legally required to pay for Jones’s bodily injury.

The Fifth Circuit emphasized that in an earlier opinion upholding Kadlec’s award against LAA and Preau, it had ruled that this was not a mere claim for contribution but rather arose out of the defendants’ breach of an independent duty owed to Kadlec. In short, the liability of Preau was not based upon causing Jones’s bodily injuries but arose out of his representations in the letter of recommendation for Dr. Berry. As a result, it reversed the lower court’s award and directed that summary judgment enter for St. Paul.

The key to Preau was the Fifth Circuit’s conclusion that the insured’s liability arose out of an independent act of negligence that was not causally related to the underlying bodily injury or property damage. Plainly, therefore, this analysis will not preclude coverage for all misrepresentation claims.

For instance, in Addison Ins. Co. v. Korsmo, 694 N.W.2d 510 (Wis. App. 2005), the Wisconsin Court of Appeals ruled that allegations of negligent misrepresentation involving the insured’s sale of bat-infested property triggered coverage under a homeowner’s policy. Despite the general rule in Wisconsin that misrepresentations cause economic loss, not “property damage,” District III held that the claimants had established a “causation nexus” between the insured’s representations and damage to the structural integrity of the home due to the large amount of guano that bats had deposited over the years of infestation.

Care should therefore be taken to analyze whether the claims against the insured are based upon the breach of an independent duty and do not involve conduct that caused or contributed to the underlying bodily injury or property damage. Nevertheless, Preau should give new prominence to a useful argument that has been unjustly neglected by counsel until now.
 
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A Supreme Interpretation of Coverage B

Posted on May 18, 2011 by Mike Aylward

It's not every day that you get a peek at how a U.S. Supreme Court justice would have ruled in an insurance coverage dispute.  And it's certainly not an everyday occurrence for an ex-SCOTUS justice to declare that your client "got it right" when he wrote a letter to the insured denying coverage.   So you'll forgive us if we have a little fun with Cynosure, Inc. v. St. Paul Fire & Marine Ins. Co., No. 10-1119 (1st Cir. May 12, 2011), a case in which we were local counsel where the First Circuit refused to find coverage for junk fax claims. 

As Coverage B mavens will recall, the issue with junk fax claims is whether the invasion of privacy language in CGL policies refers to the private content of the material that the insured publishes or communicates, as insurers contend, or can also extend to the manner of communication, without regard to whether the content of the communication is secret or private.  A number of courts, notably the Supreme Courts of Illinois and Massachusetts, have declined to consider the nuances of different privacy interests and have ruled that because either interpretation is plausible, the language in question must be ambiguous.  See, e.g. Terra Nova Ins. Co. v. Evan Fray-Witzer, 869 N.E.2d 565 (Mass. 2007).  At the same time, these cases have tended to distinguish cases that have adopted the insurer's position, such as Resource Bankshares Corp. v. St. Paul Mercury Ins. Co., 407 F.3d 631 (4th Cir. 2005), as involving non-standard language that lacks the ambiguity of the ISO CGL form.

As a result, there has evolved in recent years a dichotomy in which courts have tended to find coverage for junk fax claims under standard CGL forms but have refused to find coverage under policies issued by the St. Paul that contain slightly different wordings limiting coverage to the offense of “making known to any person or organization covered material that violates a person’s right of privacy”

This dichotomy was disrupted in 2010 when a federal district court in Massachusetts (Saris, J.) ruled that St. Paul had a duty to defend a TCPA case.  Despite footnotes in Terra Nova that seemed to distinguish cases such as Resources Bankshares, Judge Saris read the footnote and Terra Nova as compelling coverage for TCPA claims, even under policies with "making known" language.  St. Paul appealed. 

As Justice Souter posed it, the question for the First Circuit was "whether liability for violating privacy by advertising activity mean privacy understood as repose undisturbed by commercial intrusion (and thus liability for violating the TCPA), or privacy as freedom from disclosure to a third-party recipient of information that the subject of the disclosure claims an interest in not having divulged."

In this case, the court took note of the context in which this language occurred, observing that all of the other "publication" offenses focused on the content of the published material, not the manner of publication.  In any event "[w]hat logic and definition require, syntax confirms." 

On our reading, the content of the material communicated (revealing something about a third party) is necessary for a covered violation of a right of privacy. Under Cynosure’s argument, on the contrary, making known alone (to the recipient) would violate privacy without regard to content. That is, the modifying phrase “that violates a person’s right of privacy” would refer to “making known,” not to “material.” But to do that, the modifier would have to jump back over the words “to any person or organization covered material,” and that would be not only a broad jump, but an unlikely one at all, since the phrase “that violates . . .” has an obvious antecedent in its contiguous neighbor, “covered material.” While not every commercial contract term may intend to respect this convention of looking to the most direct antecedent as the subject of a modifier, the more complex a sentence is, the more likely it is that the most direct antecedent is the one that commercial contracting parties understood.

As a result, the First Circuit reversed the District Court and entered judgment for St. Paul.

St. Paul was likely fortunate in having Souter on the panel that heard its appeal.  There is always a certain tension between state and federal courts of appeal with respect to issues of insurance law (witness the conflicting views of the 7th Circuit and the Illinois Supreme Court on this issue alone).  Whereas another federal jurist might have felt more compelled to defer to as recent a precedent as Terra Nova, a former U.S. Supreme Court justice (who had himself once sat on a state Supreme Court) likely felt fewer compunctions).

The junk fax wars seem to be cooling down, as the ISO exclusion has for the most part cut off coverage under policies issued after 2004.  Efforts to compel the application of Coverage B to privacy claims proceed unabated, however, as witnessed by the recent claims arising out of the California Supreme Court's Pineda ruling last February holding that merchants can be sued for disclosing customers' zip codes without their authorization. 

Even so, it's nice to read an opinion where a court takes the time to really read an insurance policy and interpret it in accordance with plain rules of English grammar and usage.  But maybe I'm just biased, since this was our case...
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CGL Doesn't Cover Torture Claims Arising Out Of Abu Ghraig

Posted on May 15, 2009 by Mike Aylward

The Fourth Circuit  ruled yesterday  that allegations that employees of an American security firm that abetted the torture of detainees at the Abu Ghraib prison in Iraq are outside the Coverage Territory of a CGL policy issued by St. Paul. In CACI, International, Inc. v. St. Paul Fire & Marine Ins. Co., No. 08-1885 (4th Cir. May 14, 2009), the court voted 2-1 to affirm the findings of a West Virginia District Court that the alleged abuses did not occur within the territory of the United States and its possessions. The court declined to find that allegations that conduct that did occur in the United States wherein the insured was allegedly negligent in hiring these employees triggered coverage. Apart from the fact that the Complaint did not expressly allege where these acts occurred, the court ruled that it is the place of injury, not of the insured’s negligent acts, that governs the application of the Coverage Territory clause.  Justice Shedd authored a brief dissent, arguing that the claims fell within the exception for insureds working outside the territory for a “short period.”

Kudos to Walter Andrews of Hunton & Williams!

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Pigs Fly: Insurers Win on Pre-Tender Issue in Indiana

Posted on May 3, 2009 by Mike Aylward

There was a time back in the 1980’s when Indiana was viewed as a relatively conservative jurisdiction as far as insurance law went. During this era, there was also a general view that the duty to defend did not arise until such time as a claim was presented to an insurance company to defend.  Since then, however, Indiana has become a notoriously difficult jurisdiction for insurers and courts around the country have warmed to the idea that insureds can recover “pre-tender” defense costs unless their delay in giving notice caused prejudice to the insurer.

Now, in an astonishing turn of events, the Indiana Supreme Court has turned the clock back and has adopted a sensible analysis of an insurance policy that clearly distinguishes between the prejudice rules that most jurisdictions have adopted in the context of an insured’s failure to give timely notice of an accident or suit, and the requirement of tender as being a pre-condition to the duty to defend in the first instance.


The insured in Dreaded, Inc. v. St. Paul Guardian Ins. Co., had received cleanup demands from the Indiana Department of Environmental Management in November of 2000 and again in August 2003 but failed to alert its CGL carriers to these claims until March 2004. St. Paul thereafter agreed to provide a defense under a reservation of rights but declined to reimburse its insured for costs incurred prior to March 2004. The trial court entered summary judgment for St. Paul, declaring that even if a showing of prejudice was required, a delay of three and a half years in tendering the underlying claims was unreasonable as a matter of law and gave rise to a presumption of prejudice.

In December 2007, the Indiana Court of Appeals reversed, declaring that although the insured’s delay was unreasonable, the insured had raised sufficient facts to rebut any presumption that St. Paul had been prejudiced by its delay. The court took note of the fact that St. Paul did nothing after receiving notice to alter the manner in which the case was being defended and retained the same attorneys and environmental consultants. Further, the court was persuaded by evidence presented by the insured that its defense up to that point had been reasonable and appropriate. As a result, the Appeals Court held that the trial court should not have granted summary judgment to St. Paul.

On April 29, 2009, however, the Indiana Supreme Court held that although the “presumption of prejudice” rule applied with respect to an insured’s failure to give notice of an accident, in this case what was at issue was the insurer’s duty to defend. The court ruled that an insurer cannot defend a claim of which it has no knowledge and that, “The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement. Until an insurer receives such enabling information, it cannot be held accountable for breaching this duty.” As a result, the Supreme Court ruled that the insurers were not liable for reimbursing Dreaded for its pre-tender costs.

It should be admitted that some of the confusion that courts have engendered in this area arose in part from the advocacy of insurance coverage lawyers who relied on case precedents involving the voluntary payment prohibition and other breaches of the cooperation clause as a basis for arguing that insurers had no duty to reimburse for costs incurred prior to the date of tender. See, e.g. Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 976 (4th Dept. 2000).

This new opinion from the Indiana Supreme Court should remind us, however, that the stronger argument in such cases is that the requirement of tender is a condition precedent to any defense obligation arising as a matter of contract and that, as no defense obligation can exist prior to a lawsuit being tendered for defense, an insurer should have no obligation to reimburse pre-tender defense costs.
 
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