The Delaware Supreme Court ruled that a plaintiff lawyer’s letter informing a company of potential herbicide injury suits was not a “claim for damages” that an insurer could use to raise a late notice issue and escape its coverage obligations. The letter, which was sent one year before the policies at issue were incepted, warned the insured company that the firm was retaining clients who allegedly developed Parkinson’s disease as a result of exposure to the company’s herbicide. Then, during the policy period, several lawsuits were filed. The insurer initially agreed to provide a defense subject to a reservation of rights. However, after receiving a copy of the letter, the insurer filed a coverage action claiming the letter constituted a claim that was made prior to the inception of the policy period. 

The court determined that the letter and related communications did not constitute a “claim for damages” under the policies because it did not identify any specific claimants and did not include a demand or request for monetary relief. The vague threat of potential litigation could not satisfy the definition of a claim. This is an example of an insurer taking an inconsistent position. Although it is clear that the letter would never have been accepted as a notice of a claim by an insurer, here, the insurer attempted to use that same letter to avoid coverage. This highlights the critical importance of reaching out to brokers early and often to ensure proper notification of claims and potential claims, even when circumstances indicate an insurer would unlikely accept a given matter as a notice of claim.

An oil and gas exploration company (the “Company”) settled a class action securities fraud case for the total amount of available insurance proceeds under the policies. Prior to the settlement, the Company’s insurers denied coverage for the action based primarily on untimely notice and refused to advance defense costs. 

Per the settlement agreement, the shareholders would pursue the Company’s interests in the coverage action to fund the settlement, as well as reimburse the Company for its self-funded defense costs. The shareholders agreed to release the Company regardless of the outcome of the litigation. The settlement agreement was approved without objection from the insurers. 

The insurers argued the settlement was not binding on them and was inadmissible to establish coverage or the amount of Loss. The court held that an Insured’s legal obligation to pay could be established by a settlement agreement regardless of an admission of liability or a release. However, under Texas law, a settlement is only binding on a liability insurer when it was the result of an adversarial process. Because the Company was released regardless of the outcome, it had no meaningful incentive to ensure the settlement amount represented its potential liability or the shareholders’ actual damages. Rather, the settlement amount was tied solely to the available insurance proceeds with no consideration of the losses suffered by the shareholders. The Company and shareholders could not rely on the agreement as evidence of coverage or amount of Loss. 

As an update to our February publication, the Third Circuit, a high-positioned federal court, has declined a pharmaceutical drug manufacturer’s (the “Manufacturer”) request for an en banc (i.e. special procedure that involves all judges of a court to hear a case at hand) rehearing. The Manufacturer was seeking indemnification for a settlement agreement reached in a class action lawsuit in which the Manufacturer was accused of artificially inflating stock prices by misrepresenting the results of a clinical drug study.

In its request for an en banc rehearing, the Manufacturer argued that "[b]y holding that excess attachment required each underlying insurer to pay its limit and to separately and affirmatively 'admit liability' for the claim, the panel gave no regard to the practical implications of its interpretation that rendered recovery under the excess policy 'impossible.'" The Third Circuit denied the Manufacturer’s request for a rehearing because no judge on the panel sought a rehearing and the majority of the judges within the circuit also did not vote in favor of a rehearing. 

The Fourth Circuit affirmed that a health clinic’s founder’s misrepresentation in its insurance application was material and the clinic’s professional liability policy may be rescinded under Virginia state law. Patients sued the clinic and founder for employing an in-house psychologist who was untrained and unlicensed. Although the clinic asked for proof of credentials and licensing before hiring, the employee provided only a fake diploma, which the clinic allegedly accepted without further investigation. After the employee began working as a psychologist, the state regulatory board investigated her for practicing without a license; however, the investigation was resolved as “undetermined.” 

Following the investigation, the clinic applied for professional liability insurance. The application included a question regarding whether the applicant or any employees had been the subject of “disciplinary investigative proceedings.” The founder answered “no” and the policy was issued. During the initial policy period, the clinic filed claims based on subsequent complaints stemming from the psychologist’s alleged fraud. The carrier paid some expenses and later renewed the policy, albeit at a higher premium. The psychologist was eventually arrested and convicted of fraud. The conviction was followed by the civil lawsuits at issue. 

The insureds sought coverage from their professional liability carrier, who in turn filed a declaratory judgment action to rescind the policy based on a material misrepresentation in the insurance application. The lower court found that the misstatement was material. The decision was appealed.  The Insureds argued there was a question whether the founder knew their answer on the application was false and whether the answer was material. 

Under Virginia law, an insurer may rescind a policy if they can prove the insured made a material misstatement in the policy application. A misstatement is material if it would reasonably influence a carrier’s decision to issue a policy or to increase the premium. The court held the founder’s subjective knowledge concerning her statement was irrelevant because in Virginia, unless the statement was made “to the best of [the applicant’s] knowledge,” proof of falsity is sufficient regardless of intent. The application question unambiguously encompassed the investigation pre-dating the application and therefore the statement was false. As to materiality, the court inferred that because the carrier increased its premium upon renewal, it likely would have done the same if the application was answered truthfully, making the misstatement a material one.