Lawsuits Filed Prior to Policy Inception May Still Be Covered
/Lawsuits Filed Prior to Policy Inception May Still Be Covered
Introduction
Many policyholders operate under a mistaken belief that a lawsuit filed prior to acquiring insurance can never be covered by that policy. Insurers would be quick to assure them they are correct in that assumption. The truth, however, is more nuanced. Insurance Services Office (“ISO”) Commercial General Liability (“CGL”) policies provide coverage for claims asserting continuous tortious conduct, and general principles of insurance law allow that coverage to extend even to claims where the conduct began before inception of an “occurrence” based policy.
Questions Not Asked Cannot Avoid a Defense
A typical policy application for a CGL 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?
The specific wording of your insurance application may fail to prompt a response that includes an ongoing lawsuit. The burden of asking appropriate questions rests on the insurer.[1] A policy applicant must provide honest and complete answers to questions posed, but there is no requirement to volunteer information beyond that requested by the insurance company.
Some Policies Directly Address Ongoing Lawsuits
For example, American International Company’s Copyright 2001, policy form 80517 (9/03) AH0877 issued through National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) is one such policy.[2]
That said, even National Union’s exclusion does not address a situation in which a policyholder continues to engage in activity that is alleged to wrongful and the first notice of the claim occurred in a lawsuit filed after the policy’s inception. It also fails to exclude an amended pleading that could arise in a lawsuit filed before policy inception. Amended complaints often assert distinct grounds for liability that are not communicated to the policyholder beforehand. These would constitute “fresh wrongs” that are not barred by the exclusion.
National Union’s policy form is also problematic. It may well limit coverage to policyholders under certain circumstances, but it 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.[3]
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 when construing a provision.[4]
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.[5]
A Claim Must Be More Than “Reasonably Foreseeable” to Preclude Coverage
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.
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.[6]
Thus, a Texas court held that the phrase “could have reasonably foreseen” in an exclusion could not be applied as written.[7] It reasoned that if no coverage existed whenever a claim could reasonably have been foreseen, then coverage could exist only if a claim was frivolous. Limiting a policy’s scope to frivolous claims would necessarily deprive the policyholder of its reasonable expectations of coverage.
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, as Nation Union did, to provide that no coverage would be permitted under such circumstances. Absent such an exclusion, contract law favors an insured who procures coverage that may be responsive to the claims at issue.
[1] Harford Mut. Ins. Co. v. Z&D Realty, LLC, No. 19-1583 (RMB/SAK), 2022 U.S. Dist. LEXIS 233640, *22 (D.N.J. Dec. 29, 2022) (“In refusing to rescind the automobile insurance policy, the Hanna court explained that the insurer ‘incurred the insurance risk because it neglected to ask the pertinent questions which, if answered truthfully, would have induced it not to accept the risk.’ Id. at 72, 719 A.2d 683. However, the court acknowledged that a prospective insured may not misrepresent or conceal risks that directly implicate a question propounded by the insurer or that are at the core of the subject policy. See id. at 70, 73, 719 A.2d 689.”)
[2] The policy contains an exclusion for matters “arising out of, based upon or attributable to any pending or prior crisis, claim, or ‘Suit’ as of the inception date of this policy[.]”
[3] 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.)
[4] 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.”)
[5] 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.”)
[6] Allan d. Windt, Insurance Claims and Disputes § 6:46, pp. 857-58, Loss in Progress/Known Risk Rule (4th ed. 2001).
[7] Westport Insurance Corp. v. Atchley, Russell, Waldrop & Hlavinka, LLP, 267 F. Supp. 2d 601, 607 (E.D. Tex. 2003).