CGL Insurer’s Duty to Defend Broader Than Duty to Indemnify and Based on Allegations in Underlying Complaint

David Adelstein | Florida Construction Legal Updates | February 9, 2019

The duty to defend an insured with respect to a third-party claim is broader than the duty to indemnify the insured for that claim.  The duty to defend is triggered by allegations in the underlying complaint. However, an insurer is only required to indemnify its insured for damages covered under the policy.   A recent case example demonstrating the duty to defend is broader than the duty to indemnify can be found in Southern Owners Ins. Co. v. Gallo Building Services, Inc., 2018 WL 6619987 (M.D.Fla. 2019).  

In this case, a homebuilder built a 270-unit condominium project where the units were included in 51-buildings.  Upon turnover of the condominium association to the unit owners, the condominium association served a Florida Statutes Chapter 558 Notice of Construction Defects letter. There was numerous nonconforming work spread out among various subcontractor trades including nonconforming stucco work.  The homebuilder incurred significant costs to repair defective work and resulting property damage, and relocated unit owners during repairs.  The homebuilder then filed a lawsuit against implicated subcontractors.  One of the implicated subcontractors was the stucco subcontractor.

The stucco subcontractor’s insurer filed an action for declaratory relief claiming it had NO duty to defend or indemnify the subcontractor in the underlying action because the subcontractor had a stucco/EIFS exclusion through an endorsement in its policy, referred tp as the “Exterior Finishing System and Stucco Exclusion.”  The subcontractor’s policy also did not contain a subcontractor exception to the “your work” exclusion.

Regarding the elimination of the subcontractor exception to the “your work” exclusion, the Court noted that the elimination of the subcontractor exception was largely irrelevant since the stucco subcontractor was a subcontractor so its work was not the entire project (unlike the homebuilder or general contractors’ work). Rather, the stucco subcontractor’s work was its scope of work and the underlying complaint referenced damages beyond the stucco subcontractor’s own work to other building components.  Thus, based on the allegations in the underlying complaint, the “your work” exclusion was not a basis to deny the duty to defend.

Regarding the stucco exclusion, the homebuilder argued that the subcontractor performed work outside of stucco work and the underlying complaint contained allegations unrelated to the application of stucco including framing work, miscellaneous work, and wrapping the buildings.  In other words, the Court did not have sufficient evidence that each allegation of nonconforming work related to the stucco subcontractor related to or arose out of the installation of stucco to trigger the full application of the stucco exclusion. Thus, this was not a basis to deny the subcontractor the duty to defend.

At this time, it is uncertain the magnitude of covered damages under the policy in light of the stucco exclusion and property damage resulting from the subcontractor’s defective work (certainly an issue to consider).  However, the insurer owed the subcontractor a duty to defend based on the allegations in the underlying complaint demonstrating the importance of crafting allegations in the underlying complaint.   The insurer’s indemnification obligation for covered damages, however, may be a different story and it is uncertain how a stucco subcontractor could have an endorsement that contains a stucco exclusion.  Take a look at your policy and, particularly, endorsements that further restrict coverage to ensure you do not have an exclusion relating to your own scope of work that would negate the value of the policy to you for property damage claims.

New Construction Coverage From Liberty Mutual, Ironshore Targets Integrated Projects

Insurance Journal | September 14, 2017

Liberty Mutual and Ironshore’s dedicated construction practices have introduced an Integrated Primary Wrap Up/Project Specific program offering general liability (GL) and professional liability (PL) protection for medium and large construction projects developed through design-build or integrated project delivery (IPD). Workers’ compensation (WC) coverage will be available as a separate policy.

The new product helps better manage risk for projects that leverage design-build and IPD systems by offering an integrated policy addressing the GL and PL exposures inherent with these approaches.

According to Aldo Fucentese, vice president, National Insurance Specialty Construction, the new integrated product helps remove the potential gaps in coverage intrinsic to the design-build and integrated project delivery methods.

The new Primary Wrap Up/Project Specific policy has separate policy primary limits for GL and designers & contractors professional liability insurance (DCPL). GL is underwritten on an occurrence basis, and DCPL as a claims-made policy with retroactive protection. Completed operations and extended reporting period cover are available as are program extensions, including rectification coverage. Protective & indemnified party coverage is offered by Ironshore on a separate follow form excess policy with difference in conditions/difference in limits protection. GL & PL clash deductible can be available for additional premium.

“The design-builder’s professional liability exposures are related to the professional services assumed in the agreement with the owner and then subcontracted to design professionals on the project,” said Ben Beauvais, executive vice president, Casualty & Construction, Ironshore. “The level of project risk that the design-builder undertakes according to the contract agreement may vary from very onerous to fair-and-equitable. The professional liability coverages and the included risk management services are tailored to provide an integrated solution to design-build contractors’ complex exposures.”

Related Acts Provisions in Professional Liability Policies

Christopher Fredericks and Gregory S. Mantych | International Law Office | February 7, 2017

Introduction

Of the various provisions found in insurance policies, few lend themselves to existential exploration more than those concerning ‘related’ acts. What makes two separate acts related? Does the relationship come down to the similarities or the differences? Does one act have to cause or directly lead to the other? Is anything related? Is everything related? These can be tough questions for a graduate philosophy course, much less an insurance attorney. However, the answers to these questions could mean the difference in millions (and even billions)(1) of dollars of insurance coverage. Such provisions are frequently found in professional liability and various claims-made policies.(2) The exact wording can vary depending on the policy.(3) Examples of policy wordings which contain the concept of ‘related’ include:

  • “Two or more claims arising out of a single act, error or omission or series of related acts, errors or omissions shall be treated as a single claim”;(4)
  • “Any claim or claims arising out of the same or related wrongful acts, shall be considered first made during the policy term in which the earliest claim arising out of such wrongful acts was made”;(5)
  • “Claims alleging, based upon, arising out of or attributable to the same or related wrongful acts shall be treated as a single claim regardless of whether made against one or more than one of you”;(6) and
  • “[A]ll Claims for Wrongful Acts based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events” (defining related claims).(7)

While wordings and definitions may vary in policies (where the terms are defined at all), substantial consequences can pivot on the interpretation of the word ‘related’. Whether the relation of claims stands to benefit the insured or the insurer depends in part on the size of the total loss, the insured’s deductible or self-insured retention and the presence of a per-claim and aggregate limit. This becomes increasingly important with a policy’s inclusion of both a per-claim limit and an aggregate limit. If higher limits are needed to absorb the entire loss, the separation of multiple claims and their allocation to separate per-claim policy limits will benefit the insured. The insurer would inversely prefer to relate all of the claims in order to cap the extent of their exposure at the single per-claim limit amount. On the other hand, if there are many smaller claims, the insured’s individual deductibles may limit severely the amount available for the insured’s defense and indemnity.(8) Where multiple unrelated claims may fail to erode the insured’s separate deductibles, the consolidation of related acts into a single claim could quickly reach the insurer’s coverage layer. Thus, insureds and insurers are often compelled to push for a certain interpretation of a related acts provision depending on the different variable at stake.

To complicate matters further, the timing of related claims can add an additional variable to the equation. If two claims made in two different policy periods are unrelated, two limits of liability (and two different towers of insurance) are implicated. If the claims are related, the limit of only one policy period applies (and one tower of insurance).

Defining ‘related’

Courts across various jurisdictions have struggled to pin down the meaning of ‘related’. Some of the most common questions include the following:

  • Is the term ambiguously broad?
  • Does ‘related’ mean logically connected, causally connected or both?

Policies may specifically include language requiring a logical or causal connection. In the absence of such clarification (or sometimes despite it), courts’ interpretations have varied. While the oft-cited cases below may help to steer the ship, it is obvious from the resultant case law that murky waters may still lie ahead.

In Arizona Property & Casualty Insurance Guaranty Fund v Helme the Arizona Supreme Court asked whether ‘related’ implied a logical or causal meaning. One doctor negligently diagnosed a patient and another doctor negligently operated on the patient. The patient died as a result of an undiagnosed and untreated fracture dislocation of his cervical vertebrae. The Arizona Supreme Court held that the two physicians negligently failed to look at x-rays in connection with consultation and surgery on separate days which resulted in two unrelated occurrences, rather than a single occurrence, under the professional liability policy. Thus, the patient’s survivors could recover for two separate covered claims.

In interpreting ‘related’, the court looked to the dictionary definition, which defines ‘relate’ as “show[ing] or establish[ing] a logical or causal connection between”.(9) The court rejected the notion of a logical relationship because the term implied a subjective approach, and thus was too ambiguous. According to the court, a logical connection relies on the subjective “mental process of the reviewer” and incidents could be logically related for a “wide variety of indefinable reasons”.(10) Instead, the court found that acts were “related” if they were “causally connected” because a causal connection depends, to a much greater extent, on objective facts in the record.(11)

Therefore, the court held that the proper construction of the policy is that even though there have been multiple acts, there will be a single occurrence only if the acts are causally related to each other as well as to the final result.(12) It went on to hold that because there was no causal connection between the negligent acts of the two physicians who examined the plaintiff (in the sense that one error did not cause the other), the plaintiff’s claims against each physician did not arise out of a series of related acts under the multiple claims provision of the policy.(13)

However, the Seventh Circuit in Gregory v Home Insurance Co found that the concept of logical connection was not as ambiguous as the Helme court held it to be.(14) Gregory involved a class action that arose out of an offering for sale of episodes in a videotape series. Investors brought claims against an attorney alleging that he misrepresented:

  • the status of videotapes as securities; and
  • the tax consequences of investment in videotapes.

The court found these acts sufficiently related to constitute a single claim under the policy.

Although Gregory agreed with the Helme court to the extent that the common understanding of the word ‘related’ covers a broad range of connections, both causal and logical, it did not reduce its interpretation of the term to such a narrow construction. The court noted that while a logical connection could be considered too tenuous to reasonably be called a relationship (as the subjectivity fears in Helme warned), the rule of restrictive reading of broad language would come into play in such instances.(15) The court therefore saw no reason to exclude ‘logically connected’ when interpreting ‘related’. Thus, the facts of the case comfortably fit within the common concept of logically connected and were considered sufficiently related to be considered a single claim under the insured law firm’s professional liability policy.

Bay Cities Paving & Grading v Lawyers’ Mutual Ins Co continued Gregory‘s reasoning and similarly found the phrase ‘related acts’ to be unambiguous.(16) In Bay Cities the attorney for a contractor that was owed money on a construction project failed to serve a stop notice on the construction project’s construction lenders, and then failed to file timely a complaint to foreclose a mechanic’s lien. The contractor contended that it was asserting two separate claims within the meaning of the policy, while the insurer argued that only one claim was asserted.

The California Supreme Court agreed with the insurer because, first and foremost, the contractor’s suit against his attorney was a single claim pursuant to the policy’s definition of ‘claim’. However, even if the contractor’s action could be viewed as comprising two claims within the policy’s definition, the court reasoned that the claims arose out of a series of related acts, errors or omissions. In ruling so, the court aligned itself with Gregory:

We agree with the court in Gregory, that the term ‘related’ as it is commonly understood and used encompasses both logical and causal connections. Restricting the word to only causal connections improperly limits the word to less than its general meaning. ‘Related’ is a broad word, but it is not therefore a necessarily ambiguous word. We hold that, as used in this policy and in these circumstances, ‘related’ is not ambiguous and is not limited only to causally related acts.“(17)

General rules in determining relatedness

While the narrow interpretation of ‘related’ found in Helme may make life easier for attorneys, insurers or any party attempting to forecast accurately whether two claims will relate, most courts have found the reasoning of Gregory and Bay Cities more persuasive.(18) However, such breadth contributes to a variety of case law progeny which can be overwhelming. Secondary sources have identified a number of factors that courts and attorneys have used as footholds when attempting to determine ‘relatedness’.(19) Some of the prevalent factors include:

  • the identity of the claimants – claims made by the same party generally favour relatedness, while claims made by separate claimants generally weigh against relatedness;
  • the number of underlying causes or acts – a single act producing multiple claims is often viewed as endorsing relatedness as opposed to separate acts producing separate claims, albeit similar; and
  • the number of underlying results – separate wrongful acts contributing to the same ultimate harm weigh in favour of relatedness, whereas if separate acts lead to different harms, that fact weighs against relatedness.(20)

Recent case law

Armed with the above foundational case law as well as some general rules, one would expect to classify a set of underlying acts efficiently and correctly determine their relatedness. However, as some of the most recent cases invoking the concept show, interpretations continue to vary and often rely on the specific facts at hand.

In August 2016 the Eastern District of Pennsylvania decided Westport Insurance Corpation v Mylonas. In Mylonas the client retained the attorney to form a corporation on his behalf and to provide related legal services.(21) The client sued the attorney for malpractice after the attorney transferred corporate shares to creditors, which resulted in the creditors taking over the company and pushing the client out. The suit alleged negligence, breach of fiduciary duty and breach of contract involving at least two separate acts of malpractice. The attorney tendered the defence to its professional liability carrier. Eventually, the court found in favour of the client in the amount of $525,000. A subsequent dispute arose between the attorney and his carrier as to whether the individual allegations of malpractice constituted separate claims (implicating the $1 million aggregate limit) or related acts to constitute a single claim (implicating the $500,000 per claim limit).

While the opinion noted that Pennsylvania courts have not yet defined ‘related’, the court borrowed the reasoning of cases such as Gregory which determined that ‘related’ should be read to cover a broad range of connections, both causal and logical. The court applied something akin to a same or related transaction or occurrence test to determine the number of claims, noting that “where a single attorney committed multiple errors with respect to a single client arising out of work performed by [the attorney] for [the company]” they amount to a single claim under the policy.(22) While the attorney was retained to perform multiple legal services, it is from the administering of these legal services that the client’s legal malpractice claims arose. For this reason, the acts were related and continuous and therefore constituted a single claim under the insurance policy. Such a result was not unexpected considering the number of parties involved and the underlying causes.

In February 2016 the Central District of California decided Liberty v Davies Lemmis in which seven separate lawsuits were filed against a transactional real estate firm.(23) Each involved a similar alleged scheme, which is that, in the course of negotiating a property acquisition transaction, the real estate broker made false representations to investors that the sellers would pay all commissions relating to the transaction, when in reality the purchase price of the property was marked up to include a commission payment. All of the lawsuits alleged that the firm which represented the broker participated in the drafting of the documents relating to the proposed investment and had knowledge of the misrepresentations but failed to disclose them. All of the lawsuits included causes of action for intentional or negligent misrepresentation.

Because the seven actions arose out of 23 distinct transactions which occurred between 2003 and 2009, the court reasoned that they were clearly not based on the same wrongful act. Nevertheless, the court set out to determine whether the underlying alleged wrongful acts were sufficiently related such that the separate actions should be treated as a single claim.

It was the Connecticut Supreme Court’s view that, while the underlying actions were brought by different plaintiffs, they all arose from a single course of conduct – that is, a unified policy of making alleged affirmative misrepresentations to investors in order to induce them to invest in commercial real estate acquisitions facilitated by the broker. Thus, the allegations contained in the complaints were sufficiently related such that they should be considered a single claim for purposes of the per-claim limit contained in the insurance policy.

The court’s reasoning in Liberty may prove counterintuitive to the general rule established by precedent that separate wrongful acts that produce separate harms are usually not related. However, the inclusion of a scheme is often seen as a relating factor. Courts have discussed the difference between a ‘common motive’ (a common purpose amongst disparate acts often different in scope and time) and a ‘common scheme’ (often involving the same claimant, contract, transaction, or outcome) when attempting to determine relatedness.(24) When the only similarity between the acts is the furthering of some general business practice or desire, courts are less likely to relate multiple acts based on this common motive. Alternatively, a common scheme is more likely to result in a “common fact, circumstance, situation, transaction, or event” between multiple acts and result in a logical or causal connection that runs throughout the events.(25)

Another recent case that may contradict the general rules at first blush is Lexington Insurance Co v Lexington Healthcare Company, Inc, which was decided in 2014. In Lexington multiple residents of a Connecticut nursing home tragically died or were injured when the facility was set ablaze by another resident.(26) As a result, 13 negligence actions seeking damages for wrongful death or serious bodily injury were filed against the facility. The case concerned the amount of professional liability insurance coverage available for these claims and whether the individual defendants’ injuries or death constituted separate medical incidents or collectively comprised ‘related medical incidents’ as defined in the policy.

The insurer maintained that the individual claims arose from related medical incidents because all of the injuries or deaths stemmed from the same root cause – namely, the admission of the individual who started the fire to the facility and the failure to supervise her properly. Therefore, it argued that a single policy limit applied to all of the individual claims collectively rather than to each claim individually. This would seem logical considering the general trend in the case law. Specifically, when one act (the negligent supervision resulting in a fire) results in multiple harms (individual deaths or injuries), courts will often find that resultant claims are related and tied together by that single initial act.

However, the Connecticut Supreme Court held that the various negligence claims stemming from the same nursing home fire were not sufficiently related to constitute a single ‘medical incident’ within the meaning of the professional liability policy. Consequently, the $500,000 per medical incident limit provided in the policy applied to each individual claimant, rather than all the claims as a whole. The court concluded that the phrase ‘related medical incidents’ did not clearly and unambiguously encompass incidents in which multiple losses are suffered by multiple people, when each loss has been caused by a unique set of negligent acts, errors or omissions by the insured, even though there might have been a “common precipitating factor”.(27) It reasoned that the individual claims arose from different medical incidents because the insured “owed each individual defendant a separate duty, committed different acts of negligence as to each and caused each discrete harm”.(28)

Comment

As evidenced above, courts continue to struggle with understanding related acts provisions. On top of that, some commenters believe that courts approach the analysis of these issues with an unconscious bias in favour of whatever outcome will maximise the amount of insurance available.(29) The various factors can result in uncertainty when attempting to analyse a case as an attorney, policyholder, insurer or court. Ultimately, the definition of ‘related’ will rely most heavily on:

  • the definitions found in the policy;
  • past practice between the insurer and the insured;
  • the individual facts of the case; and
  • applicable case law in the given jurisdiction.

However, insurers and insureds can attempt to mitigate any uncertainty that may exist on the topic through routine consistency in their applications. Insurers can benefit themselves by interpreting ‘related’ consistently as it may apply across all insureds and policy periods. If a certain interpretation of ‘related’ is subsequently contested by an insured, an insurer can point to its standard operating practice in past matters as a testament to its approach. A consistent application of what an insurer deems ‘related’ will, in turn, enable insureds to anticipate such interpretations before a court necessarily intervenes.

Endnotes

(1) See, eg, SR Int’l Bus Ins Co Ltd v World Trade Ctr Properties, LLC, 445 F Supp.2d 320 (SDNY 2006) (the leaseholder of the both buildings of the World Trade Centre argued that the terrorist attacks of September 11 2001 individually constituted two separate occurrences entitling him to two separate $3.5 billion claims, whereas the insurers argued that the entire terrorist plot constituted the occurrence and thus only a single $3.5 billion limit was implicated).

(2) For the sake of discussion, the focus of this update is generally narrowed to professional liability policies.

(3) Further, these provisions can go by many names such as ‘related acts provision’, ‘interrelated acts provision’ or ‘related wrongful acts provision’.

(4) Bay Cities Paving & Grading, Inc v Lawyers Mut Ins Co, 855 P 2d 1263, 1264 (Cal 1993). See also Gregory v Home Insurance Co, 876 F 2d 602, 604 (7th Cir 1989).

(5) Continental Casualty Co v Wendt, 205 F 3d 1258, 1260 (11th Cir 2000).

(6) Liberty Ins Underwriters, Inc v Davies Lemmis Raphaely Law Corp, 162 F Supp 3d 1068, 1070 (CD Cal 2016).

(7) Highwoods Properties, Inc v Executive Risk Indemnity, Inc, 407 F 3d 917 (8th Cir 2005).

(8) Andrew Downs, “Seven Things About Professional Liability Coverage”, FDCC Blog, www.thefederation.org/blogcfcx/client/index.cfm/2013/8/19/Seven%20Things%20About%20Professional%20Liability%20Coverge%20Part%204:%20%20Related%20and%20Interrelated%20Acts.

(9) Arizona Prop & Cas Ins Guar Fund v Helme, 153 Ariz 129, 134, (1987) (quoting Webster’s Third New International Dictionary Unabridged, at 1916 (1965)).

(10) Helme at 134.

(11) Id.

(12) Id at 136

(13) Compare with N Am Specialty Ins Co v Royal Surplus Lines Ins Co, 541 F 3d 552, 558 (5th Cir 2008) (finding that poor nutritional care followed by shoulder injury caused mobility problems which caused sores, skin ulcers and similar conditions and all stemmed from a pattern of negligence and incompetence and thus the claims were related).

(14) Gregory v Home Ins Co, 876 F 2d 602 (7th Cir 1989).

(15) Id at 606.

(16) Bay Cities Paving & Grading, Inc v Lawyers’ Mut Ins Co, 855 P 2d 1263 (1993).

(17) Id at 1274.

(18) 5 Legal Malpractice § 38:16 (2017 ed); see also Continental Cas Co v Brooks, 698 So 2d 763 (Ala 1997); Eagle American Ins Co v Nichols, 814 So 2d 1083 (Fla Dist Ct App 4th Dist 2002); Bar Plan Mut Ins Co v Chesterfield Management Associates, 407 S W.3d 621 (Mo Ct App ED 2013).

(19) See John E Zulkey, “Related and Interrelated Acts Provisions: Determining Whether Your Claims Are Apples and Oranges, or Peas in a Pod”, 50 Tort Trial & Ins Prac LJ 83, 100-103 (2014).

(20) Id. See also John Zulkey, “Related Acts Provisions: Patterns Amidst the Chaos”, 50 Val U L Rev 633, 641-645 (2016).

(21) Westport Ins Corp v Mylonas, 2016 WL 4493192 (ED Pa Aug 26 2016).

(22) Id at *7.

(23) Liberty Ins Underwriters, Inc v Davies Lemmis Raphaely Law Corp, 162 F Supp 3d 1068 (CD Cal 2016).

(24) WC & AN Miller Dev Co v Cont’l Cas Co, 2014 WL 5812316, at *7 (D Md Nov 7 2014), aff’d, 814 F 3d 171 (4th Cir 2016).

(25) The Mylonas and Lemmis cases are currently on appeal to the Third Circuit and Ninth Circuit, respectively.

(26) Lexington Ins Co v Lexington Healthcare Grp, Inc, 311 Conn 29, (2014).

(27) Lexington at 49.

(28) Lexington at 41.

(29) See Kevin LaCroix, “D&O Insurance: Meditations on the Meaning of ‘Relatedness'”, The D&O Diary, www.dandodiary.com/2012/02/articles/d-o-insurance/do-insurance-meditations-on-the-meaning-of-relatedness/.

Related Acts Provisions in Professional Liability Policies

Christopher Fredericks and Gregory S. Mantych | International Law Office | February 7, 2017

Introduction

Of the various provisions found in insurance policies, few lend themselves to existential exploration more than those concerning ‘related’ acts. What makes two separate acts related? Does the relationship come down to the similarities or the differences? Does one act have to cause or directly lead to the other? Is anything related? Is everything related? These can be tough questions for a graduate philosophy course, much less an insurance attorney. However, the answers to these questions could mean the difference in millions (and even billions)(1) of dollars of insurance coverage. Such provisions are frequently found in professional liability and various claims-made policies.(2) The exact wording can vary depending on the policy.(3) Examples of policy wordings which contain the concept of ‘related’ include:

  • “Two or more claims arising out of a single act, error or omission or series of related acts, errors or omissions shall be treated as a single claim”;(4)
  • “Any claim or claims arising out of the same or related wrongful acts, shall be considered first made during the policy term in which the earliest claim arising out of such wrongful acts was made”;(5)
  • “Claims alleging, based upon, arising out of or attributable to the same or related wrongful acts shall be treated as a single claim regardless of whether made against one or more than one of you”;(6) and
  • “[A]ll Claims for Wrongful Acts based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions or events” (defining related claims).(7)

While wordings and definitions may vary in policies (where the terms are defined at all), substantial consequences can pivot on the interpretation of the word ‘related’. Whether the relation of claims stands to benefit the insured or the insurer depends in part on the size of the total loss, the insured’s deductible or self-insured retention and the presence of a per-claim and aggregate limit. This becomes increasingly important with a policy’s inclusion of both a per-claim limit and an aggregate limit. If higher limits are needed to absorb the entire loss, the separation of multiple claims and their allocation to separate per-claim policy limits will benefit the insured. The insurer would inversely prefer to relate all of the claims in order to cap the extent of their exposure at the single per-claim limit amount. On the other hand, if there are many smaller claims, the insured’s individual deductibles may limit severely the amount available for the insured’s defense and indemnity.(8) Where multiple unrelated claims may fail to erode the insured’s separate deductibles, the consolidation of related acts into a single claim could quickly reach the insurer’s coverage layer. Thus, insureds and insurers are often compelled to push for a certain interpretation of a related acts provision depending on the different variable at stake.

To complicate matters further, the timing of related claims can add an additional variable to the equation. If two claims made in two different policy periods are unrelated, two limits of liability (and two different towers of insurance) are implicated. If the claims are related, the limit of only one policy period applies (and one tower of insurance).

Defining ‘related’

Courts across various jurisdictions have struggled to pin down the meaning of ‘related’. Some of the most common questions include the following:

  • Is the term ambiguously broad?
  • Does ‘related’ mean logically connected, causally connected or both?

Policies may specifically include language requiring a logical or causal connection. In the absence of such clarification (or sometimes despite it), courts’ interpretations have varied. While the oft-cited cases below may help to steer the ship, it is obvious from the resultant case law that murky waters may still lie ahead.

In Arizona Property & Casualty Insurance Guaranty Fund v Helme the Arizona Supreme Court asked whether ‘related’ implied a logical or causal meaning. One doctor negligently diagnosed a patient and another doctor negligently operated on the patient. The patient died as a result of an undiagnosed and untreated fracture dislocation of his cervical vertebrae. The Arizona Supreme Court held that the two physicians negligently failed to look at x-rays in connection with consultation and surgery on separate days which resulted in two unrelated occurrences, rather than a single occurrence, under the professional liability policy. Thus, the patient’s survivors could recover for two separate covered claims.

In interpreting ‘related’, the court looked to the dictionary definition, which defines ‘relate’ as “show[ing] or establish[ing] a logical or causal connection between”.(9) The court rejected the notion of a logical relationship because the term implied a subjective approach, and thus was too ambiguous. According to the court, a logical connection relies on the subjective “mental process of the reviewer” and incidents could be logically related for a “wide variety of indefinable reasons”.(10) Instead, the court found that acts were “related” if they were “causally connected” because a causal connection depends, to a much greater extent, on objective facts in the record.(11)

Therefore, the court held that the proper construction of the policy is that even though there have been multiple acts, there will be a single occurrence only if the acts are causally related to each other as well as to the final result.(12) It went on to hold that because there was no causal connection between the negligent acts of the two physicians who examined the plaintiff (in the sense that one error did not cause the other), the plaintiff’s claims against each physician did not arise out of a series of related acts under the multiple claims provision of the policy.(13)

However, the Seventh Circuit in Gregory v Home Insurance Co found that the concept of logical connection was not as ambiguous as the Helme court held it to be.(14) Gregory involved a class action that arose out of an offering for sale of episodes in a videotape series. Investors brought claims against an attorney alleging that he misrepresented:

  • the status of videotapes as securities; and
  • the tax consequences of investment in videotapes.

The court found these acts sufficiently related to constitute a single claim under the policy.

Although Gregory agreed with the Helme court to the extent that the common understanding of the word ‘related’ covers a broad range of connections, both causal and logical, it did not reduce its interpretation of the term to such a narrow construction. The court noted that while a logical connection could be considered too tenuous to reasonably be called a relationship (as the subjectivity fears in Helme warned), the rule of restrictive reading of broad language would come into play in such instances.(15) The court therefore saw no reason to exclude ‘logically connected’ when interpreting ‘related’. Thus, the facts of the case comfortably fit within the common concept of logically connected and were considered sufficiently related to be considered a single claim under the insured law firm’s professional liability policy.

Bay Cities Paving & Grading v Lawyers’ Mutual Ins Co continued Gregory‘s reasoning and similarly found the phrase ‘related acts’ to be unambiguous.(16) In Bay Cities the attorney for a contractor that was owed money on a construction project failed to serve a stop notice on the construction project’s construction lenders, and then failed to file timely a complaint to foreclose a mechanic’s lien. The contractor contended that it was asserting two separate claims within the meaning of the policy, while the insurer argued that only one claim was asserted.

The California Supreme Court agreed with the insurer because, first and foremost, the contractor’s suit against his attorney was a single claim pursuant to the policy’s definition of ‘claim’. However, even if the contractor’s action could be viewed as comprising two claims within the policy’s definition, the court reasoned that the claims arose out of a series of related acts, errors or omissions. In ruling so, the court aligned itself with Gregory:

We agree with the court in Gregory, that the term ‘related’ as it is commonly understood and used encompasses both logical and causal connections. Restricting the word to only causal connections improperly limits the word to less than its general meaning. ‘Related’ is a broad word, but it is not therefore a necessarily ambiguous word. We hold that, as used in this policy and in these circumstances, ‘related’ is not ambiguous and is not limited only to causally related acts.“(17)

General rules in determining relatedness

While the narrow interpretation of ‘related’ found in Helme may make life easier for attorneys, insurers or any party attempting to forecast accurately whether two claims will relate, most courts have found the reasoning of Gregory and Bay Cities more persuasive.(18) However, such breadth contributes to a variety of case law progeny which can be overwhelming. Secondary sources have identified a number of factors that courts and attorneys have used as footholds when attempting to determine ‘relatedness’.(19) Some of the prevalent factors include:

  • the identity of the claimants – claims made by the same party generally favour relatedness, while claims made by separate claimants generally weigh against relatedness;
  • the number of underlying causes or acts – a single act producing multiple claims is often viewed as endorsing relatedness as opposed to separate acts producing separate claims, albeit similar; and
  • the number of underlying results – separate wrongful acts contributing to the same ultimate harm weigh in favour of relatedness, whereas if separate acts lead to different harms, that fact weighs against relatedness.(20)

Recent case law

Armed with the above foundational case law as well as some general rules, one would expect to classify a set of underlying acts efficiently and correctly determine their relatedness. However, as some of the most recent cases invoking the concept show, interpretations continue to vary and often rely on the specific facts at hand.

In August 2016 the Eastern District of Pennsylvania decided Westport Insurance Corpation v Mylonas. In Mylonas the client retained the attorney to form a corporation on his behalf and to provide related legal services.(21) The client sued the attorney for malpractice after the attorney transferred corporate shares to creditors, which resulted in the creditors taking over the company and pushing the client out. The suit alleged negligence, breach of fiduciary duty and breach of contract involving at least two separate acts of malpractice. The attorney tendered the defence to its professional liability carrier. Eventually, the court found in favour of the client in the amount of $525,000. A subsequent dispute arose between the attorney and his carrier as to whether the individual allegations of malpractice constituted separate claims (implicating the $1 million aggregate limit) or related acts to constitute a single claim (implicating the $500,000 per claim limit).

While the opinion noted that Pennsylvania courts have not yet defined ‘related’, the court borrowed the reasoning of cases such as Gregory which determined that ‘related’ should be read to cover a broad range of connections, both causal and logical. The court applied something akin to a same or related transaction or occurrence test to determine the number of claims, noting that “where a single attorney committed multiple errors with respect to a single client arising out of work performed by [the attorney] for [the company]” they amount to a single claim under the policy.(22) While the attorney was retained to perform multiple legal services, it is from the administering of these legal services that the client’s legal malpractice claims arose. For this reason, the acts were related and continuous and therefore constituted a single claim under the insurance policy. Such a result was not unexpected considering the number of parties involved and the underlying causes.

In February 2016 the Central District of California decided Liberty v Davies Lemmis in which seven separate lawsuits were filed against a transactional real estate firm.(23) Each involved a similar alleged scheme, which is that, in the course of negotiating a property acquisition transaction, the real estate broker made false representations to investors that the sellers would pay all commissions relating to the transaction, when in reality the purchase price of the property was marked up to include a commission payment. All of the lawsuits alleged that the firm which represented the broker participated in the drafting of the documents relating to the proposed investment and had knowledge of the misrepresentations but failed to disclose them. All of the lawsuits included causes of action for intentional or negligent misrepresentation.

Because the seven actions arose out of 23 distinct transactions which occurred between 2003 and 2009, the court reasoned that they were clearly not based on the same wrongful act. Nevertheless, the court set out to determine whether the underlying alleged wrongful acts were sufficiently related such that the separate actions should be treated as a single claim.

It was the Connecticut Supreme Court’s view that, while the underlying actions were brought by different plaintiffs, they all arose from a single course of conduct – that is, a unified policy of making alleged affirmative misrepresentations to investors in order to induce them to invest in commercial real estate acquisitions facilitated by the broker. Thus, the allegations contained in the complaints were sufficiently related such that they should be considered a single claim for purposes of the per-claim limit contained in the insurance policy.

The court’s reasoning in Liberty may prove counterintuitive to the general rule established by precedent that separate wrongful acts that produce separate harms are usually not related. However, the inclusion of a scheme is often seen as a relating factor. Courts have discussed the difference between a ‘common motive’ (a common purpose amongst disparate acts often different in scope and time) and a ‘common scheme’ (often involving the same claimant, contract, transaction, or outcome) when attempting to determine relatedness.(24) When the only similarity between the acts is the furthering of some general business practice or desire, courts are less likely to relate multiple acts based on this common motive. Alternatively, a common scheme is more likely to result in a “common fact, circumstance, situation, transaction, or event” between multiple acts and result in a logical or causal connection that runs throughout the events.(25)

Another recent case that may contradict the general rules at first blush is Lexington Insurance Co v Lexington Healthcare Company, Inc, which was decided in 2014. In Lexington multiple residents of a Connecticut nursing home tragically died or were injured when the facility was set ablaze by another resident.(26) As a result, 13 negligence actions seeking damages for wrongful death or serious bodily injury were filed against the facility. The case concerned the amount of professional liability insurance coverage available for these claims and whether the individual defendants’ injuries or death constituted separate medical incidents or collectively comprised ‘related medical incidents’ as defined in the policy.

The insurer maintained that the individual claims arose from related medical incidents because all of the injuries or deaths stemmed from the same root cause – namely, the admission of the individual who started the fire to the facility and the failure to supervise her properly. Therefore, it argued that a single policy limit applied to all of the individual claims collectively rather than to each claim individually. This would seem logical considering the general trend in the case law. Specifically, when one act (the negligent supervision resulting in a fire) results in multiple harms (individual deaths or injuries), courts will often find that resultant claims are related and tied together by that single initial act.

However, the Connecticut Supreme Court held that the various negligence claims stemming from the same nursing home fire were not sufficiently related to constitute a single ‘medical incident’ within the meaning of the professional liability policy. Consequently, the $500,000 per medical incident limit provided in the policy applied to each individual claimant, rather than all the claims as a whole. The court concluded that the phrase ‘related medical incidents’ did not clearly and unambiguously encompass incidents in which multiple losses are suffered by multiple people, when each loss has been caused by a unique set of negligent acts, errors or omissions by the insured, even though there might have been a “common precipitating factor”.(27) It reasoned that the individual claims arose from different medical incidents because the insured “owed each individual defendant a separate duty, committed different acts of negligence as to each and caused each discrete harm”.(28)

Comment

As evidenced above, courts continue to struggle with understanding related acts provisions. On top of that, some commenters believe that courts approach the analysis of these issues with an unconscious bias in favour of whatever outcome will maximise the amount of insurance available.(29) The various factors can result in uncertainty when attempting to analyse a case as an attorney, policyholder, insurer or court. Ultimately, the definition of ‘related’ will rely most heavily on:

  • the definitions found in the policy;
  • past practice between the insurer and the insured;
  • the individual facts of the case; and
  • applicable case law in the given jurisdiction.

However, insurers and insureds can attempt to mitigate any uncertainty that may exist on the topic through routine consistency in their applications. Insurers can benefit themselves by interpreting ‘related’ consistently as it may apply across all insureds and policy periods. If a certain interpretation of ‘related’ is subsequently contested by an insured, an insurer can point to its standard operating practice in past matters as a testament to its approach. A consistent application of what an insurer deems ‘related’ will, in turn, enable insureds to anticipate such interpretations before a court necessarily intervenes.

Endnotes

(1) See, eg, SR Int’l Bus Ins Co Ltd v World Trade Ctr Properties, LLC, 445 F Supp.2d 320 (SDNY 2006) (the leaseholder of the both buildings of the World Trade Centre argued that the terrorist attacks of September 11 2001 individually constituted two separate occurrences entitling him to two separate $3.5 billion claims, whereas the insurers argued that the entire terrorist plot constituted the occurrence and thus only a single $3.5 billion limit was implicated).

(2) For the sake of discussion, the focus of this update is generally narrowed to professional liability policies.

(3) Further, these provisions can go by many names such as ‘related acts provision’, ‘interrelated acts provision’ or ‘related wrongful acts provision’.

(4) Bay Cities Paving & Grading, Inc v Lawyers Mut Ins Co, 855 P 2d 1263, 1264 (Cal 1993). See also Gregory v Home Insurance Co, 876 F 2d 602, 604 (7th Cir 1989).

(5) Continental Casualty Co v Wendt, 205 F 3d 1258, 1260 (11th Cir 2000).

(6) Liberty Ins Underwriters, Inc v Davies Lemmis Raphaely Law Corp, 162 F Supp 3d 1068, 1070 (CD Cal 2016).

(7) Highwoods Properties, Inc v Executive Risk Indemnity, Inc, 407 F 3d 917 (8th Cir 2005).

(8) Andrew Downs, “Seven Things About Professional Liability Coverage”, FDCC Blog, www.thefederation.org/blogcfcx/client/index.cfm/2013/8/19/Seven%20Things%20About%20Professional%20Liability%20Coverge%20Part%204:%20%20Related%20and%20Interrelated%20Acts.

(9) Arizona Prop & Cas Ins Guar Fund v Helme, 153 Ariz 129, 134, (1987) (quoting Webster’s Third New International Dictionary Unabridged, at 1916 (1965)).

(10) Helme at 134.

(11) Id.

(12) Id at 136

(13) Compare with N Am Specialty Ins Co v Royal Surplus Lines Ins Co, 541 F 3d 552, 558 (5th Cir 2008) (finding that poor nutritional care followed by shoulder injury caused mobility problems which caused sores, skin ulcers and similar conditions and all stemmed from a pattern of negligence and incompetence and thus the claims were related).

(14) Gregory v Home Ins Co, 876 F 2d 602 (7th Cir 1989).

(15) Id at 606.

(16) Bay Cities Paving & Grading, Inc v Lawyers’ Mut Ins Co, 855 P 2d 1263 (1993).

(17) Id at 1274.

(18) 5 Legal Malpractice § 38:16 (2017 ed); see also Continental Cas Co v Brooks, 698 So 2d 763 (Ala 1997); Eagle American Ins Co v Nichols, 814 So 2d 1083 (Fla Dist Ct App 4th Dist 2002); Bar Plan Mut Ins Co v Chesterfield Management Associates, 407 S W.3d 621 (Mo Ct App ED 2013).

(19) See John E Zulkey, “Related and Interrelated Acts Provisions: Determining Whether Your Claims Are Apples and Oranges, or Peas in a Pod”, 50 Tort Trial & Ins Prac LJ 83, 100-103 (2014).

(20) Id. See also John Zulkey, “Related Acts Provisions: Patterns Amidst the Chaos”, 50 Val U L Rev 633, 641-645 (2016).

(21) Westport Ins Corp v Mylonas, 2016 WL 4493192 (ED Pa Aug 26 2016).

(22) Id at *7.

(23) Liberty Ins Underwriters, Inc v Davies Lemmis Raphaely Law Corp, 162 F Supp 3d 1068 (CD Cal 2016).

(24) WC & AN Miller Dev Co v Cont’l Cas Co, 2014 WL 5812316, at *7 (D Md Nov 7 2014), aff’d, 814 F 3d 171 (4th Cir 2016).

(25) The Mylonas and Lemmis cases are currently on appeal to the Third Circuit and Ninth Circuit, respectively.

(26) Lexington Ins Co v Lexington Healthcare Grp, Inc, 311 Conn 29, (2014).

(27) Lexington at 49.

(28) Lexington at 41.

(29) See Kevin LaCroix, “D&O Insurance: Meditations on the Meaning of ‘Relatedness'”, The D&O Diary, www.dandodiary.com/2012/02/articles/d-o-insurance/do-insurance-meditations-on-the-meaning-of-relatedness/.

Retroactive Dates Punch Gaps into Insured’s Coverage

Dwain Clifford | The Policyholder Report | October 20, 2016

Most professional-liability policies are written on a “claims-made” basis, which provides coverage for lawsuits filed against the insured during the policy period — even for damages caused by some professional negligence that occurred long before the policy was issued (and, perhaps, for some mistake at a time when the insured had no insurance coverage at all).

But as the insured recently learned in Sunshine v. General Star Nat’l Insurance Co., yawning gaps can open up in insurance coverage that was otherwise dutifully purchased year after year through the often-misunderstood, and often-overlooked, mischief wrought by the policies’ “retroactive date.”

In Sunshine, Sunland Appraisal was a “real estate appraisal service” that purchased its one-year professional-liability policies every year, which Sunland apparently believed provided seamless coverage from year to year. In December 2008, while one of these policies was in force, Sunland had appraised a property for a homeowner. After the homeowner defaulted on a loan several years later, the mortgage company sued Sunland in November 2013 for alleged inaccuracies in the appraisal. The mortgage company won.

Which policy pays?

Neither one. Both policies had a “retroactive date” provision, which protects insurers from having to pay claims for damages arising out of a negligent act before that date. For the 2008 policy, this date was February 24, 2006. And for the mortgage company’s claim, this date stretches back far enough, but claims-made policies provide coverage for lawsuits filed during the policy period. Because the lawsuit wasn’t filed until November 2013, the first insurer escapes.

For the 2013 policy, the retroactive date was May 24, 2010. This policy would normally cover the lawsuit filed in November 2013, but the retroactive date stretched back only to 2010, two years after the bungled appraisal in 2008. Because the negligent act occurred before the retroactive date, the second insurer escapes and the insured is bare of any coverage at all.

Sunland had sued both insurers, arguing that, unless one of the insurers stepped up to pay, the insured’s coverage had surely been “illusory” all along. This argument lost. After all, if the mistake from 2008 had discovered been right away, and the lawsuit filed that year, the first insurer would have been on the hook. This possibility of limited coverage was enough to leave Sunland with years of premium payments and a claim falling straight through a gap opened by the retroactive dates.

This pinch can be especially keen when an insured moves its coverage to another insurer because many insurers will write coverage with a retroactive date set for the same time that the insurer begins its new relationship with that insured. For an initial year of coverage under these terms, the bad act, the resulting harm, and the lawsuit would all have to happen in a single year to trigger coverage. To put it mildly, that just isn’t worth much, but it’s also a fine point about coverage that a reasonable insured could miss.

The safest practice to avoid a gap like Sunland fell through is to purchase policies without any retroactive date, or at least a date far enough in the past that potential claims would be barred by a statute of ultimate repose. This may be expensive, but the three-year “window” of coverage in Sunland’s policy illustrates how easily an insured can be bare of coverage even though policies have been renewed every year on time.