Insurers May Owe an Obligation to Defend Ongoing Lawsuits

INTRODUCTION

Some policyholders, if queried, might presume that a lawsuit which incepts before they have a policy in force could not trigger coverage under that later-issued policy of insurance.  Insurers would argue that no insurer would issue a policy that had a defense obligation as of the date of its inception so that a notice provided contemporaneously with the policy’s issuance would trigger any rights thereunder.  Generally accepted insurance coverage principles, as applied to standardized commercial general liability policies, do not preclude coverage for claims/lawsuits alleging continuous tortious conduct which incept prior to issuance of “occurrence” based insurance.  This article will explore circumstances where post-claim/lawsuit coverage may be available to policyholders.

CGL UNDERWRITERS TYPICALLY DO NOT ASK POLICYHOLDERS IF CLAIMS EXIST THAT COULD MATURE INTO A LAWSUIT

Questions Not Asked Cannot Avoid a Defense

A typical policy application for a Commercial General Liability insurance policy asks for operational data about the company, the number of its employees, facilities, revenue, and, on occasion, losses suffered by the company in litigation, as well as a sense of what activities the company is presently engaged in and whether it has immediate plans for expansion, and similar inquiries. 

It is atypical for a Commercial General Liability policy application to ask any of the following questions: 

1. Are you aware of any conduct you presently engage in that will soon be the subject of a lawsuit against your company due to prior communications from an injured potential claimant such as a demand to license, cease and desist letter, or other communication threatening legal action against the company that you believe will potentially fall within the scope of coverage of the policy to be issued? 

 2. If you have received such a communication, have you continued to engage in the conduct which is alleged to be wrongful, and do you intend to do so in the future as part of the company’s ongoing operations? 

 3. If the company is engaged in operations which it believes may lead it to seek potential coverage under the policy to be issued, or has already received the lawsuit, which it has not yet provided notice for, to its prior insurer or the carrier who will be on risk after the new policy incepts, do you plan to provide prompt notice to the new carrier excepting the quest for pre-tender fees?  

CGL Policy Applications Could Address Ongoing Claims

For example, American International Company’s policy form applies issued through National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), for example, Copyright 2001, policy form 80517 (9/03) AH0877 did so.

The National Union policy does not address, however, the circumstance where a policyholder continues to engage in conduct which is alleged to be wrongful where the first notice of such a claim occurred in a lawsuit filed after the inception of the policy.  Nor does it address an amended pleading that arose in a lawsuit that was filed prior to policy inception but then asserted distinct grounds for liability that was other than that previously asserted and was not communicated to the policyholder prior to the policy’s inception.

 Absent Equivalent Policy Language, Coverage for Pending Lawsuits Is Available

One appropriate consideration in determining whether a proposed meaning for a policy is reasonable is whether there have been modifications from the disputed policy language in other policy forms issued by that insurer or other insurers.  This clarifies the range of policy language choices available to the insurer and what deliberate choices the insurer made in selecting policy language – both of which should be considered by construing a provision.[1].

National Union’s change in policy form, referenced above, also clarifies that, absent such specific language, National Union, and other insurers who could have chosen to use similar limiting language, cannot complain about a policyholder’s quest for coverage where a lawsuit may have been filed against the policyholder which the carrier learned of after the inception of its policy.  Indeed, National Union, as well as a host of other insurers, may have no legal grounds for avoiding a defense duty in those circumstances[2].

Vague Language Shifting A Burden to The Policyholder to Disclose Material Information Abdicate The Insurers Duty to Underwrite It’s Policy

A leading pro-insurer treatise writer concedes that there are circumstances where an insurer may have a duty to defend a lawsuit (filed before issuance of a policy) where the conduct at issue, during the policy period, is similar to that which precipitated that lawsuit[3].

As Windt acknowledged:

Most courts . . . have, justifiably, held that it is not enough to forfeit the insured’s liability coverage simply because the insured had reason to know that a claim might be made against it . . . . [T]he insured must have known that there was a substantial probability that a liability claim would be made against it. . . . [T]here is no loss of coverage unless the legal liability of the insured has been a certainty.

Thus, a Texas court held that the phrase “could have reasonably foreseen” in an exclusion could not be applied as written[4], since (a) if no coverage existed whenever a claim could reasonably have been foreseen, then (b) coverage could exist only if a claim was frivolous. Only frivolous claims would constitute claims that could not reasonably have been foreseen.

Absent Advise of A Change in Coverage None Arise

National policy form was also problematic. It may well limit coverage to policyholders under certain circumstances but does not call attention to this fact via any contemporaneous communication to the insured.  Most jurisdictions provide that a specific reduction in coverage must be brought to the insured’s attention by the insurer when a change in coverage occurs.  Davis[5]

CONCLUSION

Where a lawsuit is filed against a policyholder, insurance coverage may subsequently be procured that might provide a defense for the allegations therein; absent any misstatements in policy applications or misleading characterizations of a company’s activities, operations and legal history, a defense may be properly available.  A mere “claim in progress” will not bar a defense in most jurisdictions. 

The fact that a policyholder may know of claims or a lawsuit filed against it does not mean that its liability and exposure for same is also known.  To the extent insurers wish a different result, they can readily amend their policies to provide, as did National Union, that no coverage would be permitted under such circumstances.  Absent same, contract law favors an insured who procures coverage that may be responsive to the claims at issue.

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[1] Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 763 (2001),( “The policy before us . . . contains not a criminal act exclusion but an illegal act exclusion.  Had Safeco wanted to exclude criminal acts from coverage, it could have easily done so.  Insurers commonly insert an exclusion for criminal acts in their liability policies.”)

[2]  Fireman’s Fund Ins. Cos. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 852 (2001)  (“[A]n insurance company’s failure to use available language to exclude certain types of liability gives rise to the inference that the parties intended not to so limit coverage.”).

[3] Allan d. Windt, Insurance Claims and Disputes § 6:46, pp. 857-58, Loss in Progress/Known Risk Rule (4th ed. 2001)

[4] Westport Insurance Corp. v. Atchley, Russell, Waldrop & Hlavinka, LLP, 267 F. Supp. 2d 601, 607 (E.D. Tex. 2003),

[5] Davis v. United Servs. Auto. Ass’n, 223 Cal. App 3d 1322, 1325 (1990). (The inclusion of a notice entitled “Important Notice,” stating that three new exclusions were added to the policy, was held to be insufficient notice to the insured of a change in coverage where the exclusions were placed in a section labeled “Clarification of Coverage” rather than in the “Reduction” section. The court found that “[A] general admonition to read the policy for changes is insufficient.)