The excess insurer had a duty to defend after the primary carrier improperly refused its defense obligations. IMG Worldwide, Inc. v. Westchester Fire Ins. Co., 2014 U.S. App. LEXIS 13703 (6th Cir. July 15, 2014).
IMG was sued for over $300,000,000 for alleged fraud, conversion, civil theft and violations of the Florida Deceptive and Unfair Trade Practice Act (FDUTPA). The lawsuit stemmed from a real estate development project. The plaintiffs had invested in the project and alleged that the developer had sold them undeveloped properties with the promise they would be developed. IMG was a consultant on the project and also licensed to the developer the use of the IMG name and logo in marketing materials. IMG had no contractual obligation to actually develop the property or finance the project.
IMG sought coverage from its primary carrier, Great Divide, and from its excess carrier, Westchester. Both denied coverage and refused to defend.
After failing to get out of the underlying suit on its motion for summary judgment, IMG settled for nearly five million dollars. Its defense costs were over eight million dollars. IMG then settled with Great Divide. Great Divide agreed to pay IMG $1,250,000, exhausting the one million dollar policy limit and providing $250,000 towards defense costs. In exchange, IMG released Great Divide from all claims arising out of the underlying lawsuit.
IMG sued Westchester. Westchester argued there was no "occurrence" because the only possible occurrence was the alleged misrepresentations made by IMG in violation of the FDUTPA. Under Ohio law, a misrepresentation was not an "accident."
The jury found there was "property damage" and an "occurrence." Therefore, Westchester had breached its excess policy in not indemnifying and damages were awarded in the amount of $3,900,000. The trial court retained the question of whether Westchester was also liable for reimbursement of IMG's defense costs over the $250,000 contributed by Great Divide. After trial, the court ruled that Westchester was not required to reimburse IMG for the defense costs incurred in the underlying case. The trial court reasoned that Westchester's obligations expired when IMG settled with Great Divide.
On appeal, the Sixth Circuit agreed there was an "occurrence." IMG could be potentially liable for unintentionally contributing to a misleading impression that caused damage. Westchester also argued that the damages in the underlying suit were for "economic damages," specifically a loss on investment which was not covered under the policy. But under Ohio law, purely economic damages were insurable under the "loss of use of tangible property" language at issue in the policy.
Westchester also breached its duty to defend.The policy required Westchester to defend the insured "when the underlying insurance does not provide coverage." Therefore, Westchester was responsible for defending when Great Divide wrongfully denied coverage. The district court's conclusion that Westchester's promise to defend expired when Great Divide and IMG settled was incorrect because the breach had occurred several years prior to the settlement.
IMG was entitled to all of the defense costs minus the $250,000 contribution from Great Divide. Westchester argued that all the defenses costs should be set off because Great Divide was obligated to pay for the full amount of IMG's defense, and IMG released Great Divide from that obligation. The court rejected the argument as there was no basis for applying a credit or set-off under the circumstances of this case.