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Insurance Law

Goldgerg Segalla’s Professional Liability Monthly – October, 2010


Subjective Statements of Underwriter Insufficient in Rescission Action

Policyholder Under Medical Malpractice Policy Defeats Rescission Claim - Loses Coverage Under Exclusion

States Can Proceed With Challenge to Healthcare Bill

Six Women File Suit Against Citigroup Claiming Gender Bias

Lloyd's Off the Hook for Stanford Defense Costs subscribers may access the enhanced versions of the cases below.  Non-subscribers may access the free, unenhanced versions on lexisONE, if available.



CIVIL ACTION NO. 10-10120-RGS October 6, 2010)

2010 U.S. Dist. LEXIS 106778 []

Contract Exclusion Applies to Bar Coverage

AccountAblity filed suit against Radianse Inc. and an employee alleging tortious interference with contractual relations and violations of the Massachusetts Fair Business Practices Statute.  With regard to the former, AccountAblity alleged that as a result of Radianse's tortious interference with a "Consulting Agreement" AccountAblity sustained "irreparable harm and other damages."

Radianse sought coverage under a D&O policy issued by defendant.  However, coverage was denied based, in part, upon an exclusion precluding coverage for all losses arising out of a contract or agreement.  At a minimum, plaintiff sought a defense in the underlying action.  In support of this claim, Radianse argued that the underlying claim arose out of tort law and not contract.  The court disagreed noting that the exclusion applies to all claims "in any way related to any liability under any contract or agreement."  Accordingly, the court held that the insurer was not required to provide coverage in response to the underlying claim.

Impact:   Here, the exclusion at issue is very broad and encompasses the claims arising out of the underlying action.  The underlying interference claim, as pled, fell within the scope of the exclusion.


(CIVIL ACTION NO. 09-3393 September 30, 2010)

2010 U.S. Dist. LEXIS 104326 []

Policyholder Fails to Provide Timely Notice Pursuant to Claims-Made Policy

Plaintiff manufactured and distributed after-market automobile parts for limousines.  The plaintiffs were sued by a former business associate and RNC Systems, Inc., in two separate actions alleging breach of contract and other commercial torts.

In response to these two actions, plaintiff sought coverage under the professional liability policy issued by defendant.  Defendant denied coverage based solely upon failure to give notice during the policy period or any extended reported period.  The plaintiffs had initially obtained coverage in March 2006.  The policy continued through June 15, 2007.  The policy was renewed for the time period of June 15, 2007 through June 15, 2008 and then renewed again for the next calendar year.  It was agreed that the 2007/2008 policy governed coverage for the underlying actions.

Defendant argued that the claims arose during the 2007/2008 policy; that the policy expired on June 15, 2008; and, that plaintiffs failed to report these claims until 90 days after the policy expired.

In response, plaintiffs argued that the renewed policy was not a claims-made policy.  The prior policy included an endorsement clearly requiring notice of a claim within 60 days of the termination of the policy.  The renewal policy included a declarations page incorporating the terms of the previous policy.  The plaintiffs argued that the declarations page did not explicitly encompass "Endorsement 4" which required notice of the claim within 90 days of the policy expiring and, therefore, the policy was not a claims-made policy but an occurrence-based policy.

The court disagreed holding that the incorporation of Endorsement 4 was supported by the plain reading of the renewed policy, which incorporates "any endorsement attached" to the expired policy.  The court held this language was not ambiguous and Endorsement 4 was incorporated into the policy.  Accordingly, the court held that the plaintiffs failed to comply with the notice provision, and coverage was barred.

Impact:   This was a creative argument by the policyholders to try and maintain coverage.  However, it was apparent that the policy had incorporated the notice provisions in the previous policy and the argument was not likely to succeed.


(CASE NO. 2:09-CV-238 September 29, 2010)

2010 U.S. Dist. LEXIS 104172 []

The Court Finds Insuring Agreement Ambiguous

The plaintiff issued a real estate agent's or broker's professional liability policy to Metropolitan Real Estate LLC and its agent, Jeffrey Scott.  The policy states that the plaintiff will provide coverage for amounts a policyholder is legally required to pay for damages resulting from real estate professional services.  The policy precludes coverage for claims arising out of criminal, dishonest, or fraudulent acts.

In September 2005, Castle Arch filed an action against Anagram Investments.  On March 22, 2006, Castle Arch filed an amended complaint naming Metropolitan and Scott as parties to Castle Arch's suit.  The first amended complaint alleged only one cause of action, fraud, against Metropolitan and Scott.  In January 2007, counsel for Metropolitan and Scott filed a notice of withdrawal of representation from the suit.  Subsequently, Castle Arch filed a second amended complaint on February 15, 2007 adding a cause of action against Metropolitan and Scott for negligence/negligent misrepresentation and intentional interference with economic relations.

In July 2007, Castle Arch filed a motion for partial summary judgment against Metropolitan and Scott based upon fraud and negligence/negligent misrepresentation.  After counsel for Metropolitan and Scott again withdrew, Metropolitan and Scott provided notice of the Castle Arch claim to plaintiff.  This notice was provided days before Castle Arch's motion was returnable.  The plaintiff provided a defense to Metropolitan and Scott and instituted the instant coverage action seeking a declaration of rights under the policy.

The plaintiff contended that Metropolitan and Scott failed to provide notice until after the 2006 policy had expired.  In response, the policyholder argued that notice was not required under the policy because the only claim asserted in 2006 was one for fraud, which was not a covered loss.

In looking at the insuring agreement, the court concluded that a plausible reading of the 2006 policy required Metropolitan and Scott to report the Castle Arch suit to St. Paul during the 2006 policy period.  The court stated, on the other hand, that another plausible reading was that Metropolitan and Scott were not required to provide notice because the only claim against them was not covered by the policy.  After determining that the policy was ambiguous, the court denied the insurer's motion for summary judgment.

Impact:   This is an interesting case in that the court determined that a relatively standard notice provision was ambiguous.  Here, it was argued that the initial complaint triggered a requirement on the part of the policyholder to provide notice to St. Paul.  The fact that the claim was arguably not covered would not appear to vitiate the notice requirements under the policy.  It is unclear whether this decision will form a basis for any other courts to determine such language is ambiguous.



(CIVIL ACTION NO. 09-950 September 30, 2010)

2010 U.S. Dist. LEXIS 140693 [

Subjective Statements of Underwriter Insufficient in Rescission Action

Defendant Jawich is a physician admitted to practice in Illinois.  In 2008, Jawich filled out an application to obtain coverage from plaintiff.  Dr. Jawich submitted his application on September 18, 2008.  In the course of the application, he identified two previous malpractice claims.

On September 18, 2008, hours after he sent in his application to the defendant, Jawich learned that Linda Green had filed a complaint asserting professional negligence against him.  While Jawich learned of the Green action after submitting his materials to the defendant but before learning whether he had been approved for coverage, he elected not to notify the defendant about the suit while a decision on his application was pending.  On September 30, 2008, defendant formally issued a professional liability policy providing coverage from October 1, 2008 to October 1, 2009.

When the defendant learned of the Green action, the insurer agreed to provide a defense under a reservation of rights.  The malpractice action was subsequently discontinued with respect to Jawich.  The plaintiff, in turn, instituted this coverage action seeking rescission of the insurance policy based upon Jawich's failure to disclose the Green lawsuit.

Plaintiff moved for summary judgment its rescission argument citing the testimony of the underwriter that approved the application.  The underwriter testified that had she been aware of the third malpractice action, she would not have issued the policy and that based upon her experience, three prior claims was her "magical number" and she never issued a policy where three prior claims had been asserted.

In evaluating the evidence provided by the insurer, the court concluded that the insurer failed to present sufficient evidence to justify removing the issue of whether the misrepresentation was material from the jury.  While the insurer cited the underwriter's experience and judgment as a basis for rendering the misrepresentation materials, the underwriter did not elaborate as to what aspects of her experience or judgment led her to formulate the three claim rule.

The court stated that the underwriter's statements and testimony were subjective in nature and did not address whether the Green lawsuit meets the objective materiality standard.  Accordingly, the court denied the insurer's motion.

Impact:   Typically, an insurer in a rescission action can present underwriting guidelines to support the contention that a policy would not have been issued had correct information been known.  Here, it appears that the insurer relied solely upon the subjective testimony of the underwriter and did not cite any standard underwriting guidelines.  The use of such guidelines is important and often pivotal in successfully litigating rescission actions.


(CIVIL ACTION NO. 09-7433 September 27, 2010)

2010 U.S. Dist. LEXIS 101317 [

Insurer's Knowledge of Facts Outside of the Complaint Sufficient to Trigger Duty to Defend

Napoli, Kaiser & Dern (NKD) is a law firm that participated in the settlement of certain lawsuits in New York State involving the diet drugs, Fen-Phen and Redux.  Subsequently, NKD was named in a series of actions alleging that NKD manipulated diet drug settlements to the detriment of a number of plaintiffs.  Each time NKD was named in an action, it submitted the claim to Westport for coverage under its lawyers' professional liability policy.  Westport denied coverage each time a claim was tendered cited an exclusion precluding coverage for claims arising out of dishonest, fraudulent, or malicious acts.

Included in the claims asserted against NKD was an intervenor complaint alleging that NKD fraudulently, unfairly, and unjustly assigned individual settlement amounts to cases where NKD was representing clients directly in furtherance of a scheme allowing NKD to obtain attorney's fees far in excess of what they were entitled to receive.  The intervenors also alleged that NKD knowingly made a number of misrepresentations to intervenors in the New York Supreme Court in order to induce settlements and win court approval for those settlements.

The court noted that on their face, the allegations of the intervenor complaint are based upon fraudulent and intentional misconduct, thereby bringing them within the scope of the exclusion.  However, the court referenced a prior coverage action between Westport and NKD that related to the same alleged misconduct.  In the course of that action, as acknowledged by Westport, the underlying plaintiffs alleged the breach of NKD's fiduciary duties to its client and accused NKD of negligence.  Based upon this information, the court held that Westport had actual knowledge of other possible claims the intervenors could bring in connection with the factual allegations against NKD and that any negligence or breach of fiduciary duty claims would be covered by the insurance policy pursuant to the district court's ruling in the underlying action.

Impact:   The court here cited well established law in the State of New York that an insurer may not hide behind the allegations of a complaint.  To the extent an insurer is aware of extrinsic facts suggesting coverage may exist, the court may look beyond the four-corner rule.  That said, this case does not present the typical situation in which this principle has been applied.  Here, the intervenor plaintiffs clearly alleged a cause of action within the scope of the exclusion.  The fact that a similar action included different claims and triggered coverage does not necessarily mean that coverage is triggered in this case. 



(CIVIL ACTION NO. 09-273  October 1, 2010)

2010 U.S. Dist. LEXIS 105014 []

Policyholder Under Medical Malpractice Policy Defeats Rescission Claim - Loses Coverage Under Exclusion

Plaintiff Sheinbaum was a professionally trained nurse who was educated and certified in Denmark in 1972.  Ms. Sheinbaum was not licensed or registered in the United States.  She never provided nursing services in the U.S., however, she was hired to provide services as an overnight companion to patients recovering from recent medical procedures, such as surgery.

In 2004, Sheinbaum applied for a nurses' professional liability insurance policy which included a question asking Sheinbaum to check one of four boxes indicating whether she was an R.N., L.P.N./L.B.N., a nurse's aide, or home health aide.  Sheinbaum checked the box for R.N. indicating that she was a registered nurse.  The application also included an affirmation that the applicant had answered the questions to the best of the applicant's knowledge and had not withheld any information that could influence the decision of the insurance company.

Subsequently, Karen Feld filed a lawsuit against Sheinbaum alleging that Sheinbaum failed to meet the relevant standard of care while retained to care for Feld after a surgery.  Feld's complaint included claims sounding in negligence, breach of contract, and punitive damages.  Sheinbaum sought coverage under the American Casualty professional liability policy.  The insurer denied coverage based upon a material misrepresentation in the application and the application of a policy exclusion.

With respect to the material misrepresentation, the insurer argued that Sheinbaum misrepresented her status as a registered nurse on the application.  The court noted that although generally an insurer must prove only the falsity of a representation to prove that it was a misrepresentation, when the insurer asks the insured to aver only to the insured's knowledge and belief, the insurer must clearly prove that the insured's answers were knowingly false.

Here, Sheinbaum argued that her answer was not false as she is indeed a registered nurse, albeit a registered nurse in Denmark.  The court noted that the application did not reference or ask whether the applicant was a registered nurse in the Commonwealth of Virginia or any other geographic location, only if the applicant was a registered nurse.  Since Sheinbaum was, the court concluded that no reasonable finder of fact could conclude that Sheinbaum's representation in the application was knowingly false.

In the alternative, the insurer argued that coverage was excluded under an exclusion eliminating coverage for claims resulting from professional services provided while the applicant's license was suspended, revoked, or no longer valid.

The court stated that the purpose of the exclusion is to exclude coverage for the practice of nursing without a valid license.  Here, the court stated that Sheinbaum did not have a valid registered nursing license when performing services for Ms. Feld in the District of Columbia and, therefore, the policy does not cover Sheinbaum's alleged provision of nursing services in the District.

Impact:   This case presents an interesting twist with respect to the material misrepresentation standard.  The policy required that the applicant aver the veracity of the statements to the best of the applicant's knowledge.  This places a higher burden on an insurance company seeking to rescind an insurance policy.  Here, the insurer could not meet its burden, as the applicant validly believed she was a "registered" nurse, albeit in a different country.


States Can Proceed With Challenge to Healthcare Bill 

A federal court judge recently ruled that U.S. states could continue their suit to invalidate President Obama's healthcare statute.  The judge expressly stated that he was not deciding the merits of the case, but that the dispute could continue.

For more information, click here.

Six Women File Suit Against Citigroup Claiming Gender Bias

Six former Citigroup employees have filed suit against Citigroup alleging that the economic downturn was an excuse used by Citigroup to cover bias in determining which employees were to be laid off.

For more information, click here.

300 Homes to be Repaired by Chinese Drywall Manufacturer

Knauf Plasterboard Tianjin (KPT) has agreed to participate in a remediation effort to repair 300 homes damaged by Chinese drywall.  The homes are across Alabama, Mississippi, Louisiana and Florida.

For more information, click here.

First it was the Mortgages, Now its the Foreclosures

There is increasing likelihood that lenders will soon face class action lawsuits over foreclosure practices across the U.S. Criticism has come as some allege lenders have been using faulty paperwork to evict struggling homeowners.

For more information, click here.

Lloyd's Off the Hook for Stanford Defense Costs

A federal judge determined that Lloyd's is not responsible for defense costs arising out of the Stanford Ponzi scheme litigation.  The judge held that there was a "substantial likelihood" that the evidence would show the policy's money laundering exclusion would apply to bar coverage.

For more information, click here

This edition of Professional Liability Monthly was originally published in The Insurance and Reinsurance Report blog.

Goldberg Segalla's Professional Liability Monthly provides a timely summary of decisions from across the country concerning professional liability policies, and is published monthly. Cases are organized by topic. In addition, it provides the latest information regarding news in the professional liability industry.

Goldberg Segalla LLP is a Best Practices law firm with offices in Philadelphia, New York, Princeton, Hartford, Buffalo, Rochester, Syracuse, Albany, White Plains and on Long Island and with affiliated offices in Europe. The Global Insurance Services Practice Group routinely handles matters of national and international importance for both domestic and foreign insurers, cedents and reinsurers. This includes: comprehensive audit, policy review, regulatory advice, and positioning disputes for resolution at the business level (either through interim funding or non-waiver agreements), negotiations among counsel, mediation or fully-involved arbitration or litigation. For more information on Goldberg Segalla's Global Insurance Services Group, please contact either Daniel W. Gerber or Richard J. Cohen.

   The editors, Sharon Angelino, Brian R. Biggie, and Richard J. Cohen, appreciate your interest and welcome your feedback.