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In its recent decision in Navigators Ins. Co. v. Amsterdam, 2015 U.S. Dist. LEXIS 64385 (E.D. Pa. May 18, 2015), [enhanced version available to lexis.com subscribers], the United States District Court for the Eastern District of Pennsylvania had occasion to consider whether an insurer can rely on allegations in a complaint in order to disclaim a duty to defend.
Navigators insured the Resnick Amsterdam Lesher, P.C. accounting firm under a professional liability policy for the period November 1, 2012 to November 1, 2013. While the policy was in effect, the firm and one of its employees were named as defendants in an underlying suit brought by a former client alleging that the Resnick employee had emailed derogatory and damaging information about that client to a website in 2010 and 2011. The Resnick firm tendered the suit to Navigators, and at the same time, advised Navigators that the allegations in the underlying suit were false and that the communications had been forged by plaintiffs in the underlying suit.
While Navigators undertook the defense of the Resnick firm and the individual employee, it later initiated a coverage action, seeking a declaration that it had no duty to defend or indemnify on the basis that prior to the policy period, the employee knew that the alleged conduct would be the basis of a claim. Navigators contended that this knowledge ran afoul of a condition in the policy’s insuring agreement stating that coverage was unavailable for any facts or circumstances that the “insured had a basis to believe … might reasonably be expected to be the basis of a claim” prior to the policy’s date of inception.
In considering the issue, the court noted that Navigators’ contention was based solely on allegations contained in the underlying complaint. Those same allegations, explained the court, were vehemently denied by the Resnick firm and the employee. The court concluded that because the allegations had not yet been proven, Navigators could not substantiate its coverage defense, since if those allegations later proved false, as the insured maintained, then the individual employee necessarily could not have anticipated a claim prior to the policy’s inception. As the court explained:
The mere allegation that Felderstein sent e-mails disclosing confidential information about Cannella does not establish that he had knowledge that anything he did could give rise to a claim against him and Resnick. It is not proof. On the contrary, Resnick and Felderstein have not only denied the allegation, they have presented evidence demonstrating that the e-mails were fabricated. In other words, they maintain that the claim is groundless and fraudulent. Therefore, because both the policy itself and established legal principles require the insurer to defend even groundless, false, or fraudulent claims against the insured, Navigators is not relieved of its duty to defend Resnick and Felderstein.
While the court agreed that Navigators had a duty to defend, it nevertheless concluded that Navigators could have no duty to indemnify, since if the allegations in the complaint did prove accurate, then Navigators’ prior knowledge defense would prove applicable, as would an exclusion applicable to intentional acts. On the other hand, if the insureds succeeded in the underlying suit, then there would be no damages requiring indemnification.
Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP
Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.
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