In Kreger v. General Steel Corp, No. 07-575, 2009 U.S. Dist. LEXIS 88074 (E.D. La. Sept. 23, 2009), the federal district court in Louisiana was placed in a difficult position of predicting whether a Colorado Supreme Court would find a duty to defend a claim for emotional distress.
In the underlying suit, plaintiff sought damages from the insured for fraud, unfair and deceptive trade practices, conspiracy, negligence, negligent misrepresentation, fraud in the inducement, breach of contract and detrimental reliance. The complaint alleged no physical harm, but included a claim for damages for "severe mental anguish and emotional damages." The plaintiff claimed in his deposition that the stress of the dispute caused him to lose sleep for eight months. The insurer denied a defense, contending none of the allegations triggered coverage under the CGL policy.
The Louisiana court first had to decide whether Louisiana or Colorado law controlled. Relying on Louisiana choice of law rules, it was determined this dispute between a Colorado insurer and Colorado insured over a policy issued in Colorado was properly determined by Colorado law.
Making its best judgment on how the Colorado Supreme Court would rule on whether the insurer must defend a claim for emotional distress, the Louisiana court noted Colorado sets a high bar for insurance companies seeking to avoid their duty to defend. Accordingly, the alleged negligence claim constituted an occurrence under the policy for purposes of determining whether there was a duty to defend. The alleged loss of sleep causing the physical manifestation of emotional distress was enough to trigger a duty to defend.
