Insurance Law Hawaii

Finding Insurer's Declaratory Relief Action Raises Unsettled Questions of State Law, Case is Dismissed

    The federal district court for the District of Hawaii dismissed the insurer's action for declaratory relief because it raised issues that were unsettled by Hawaii courts. Association of Apartment Owners of Lahaina Residential Condominium, et al., No. 1-24-cv-00075-JAO-BMK, Order Granting AOAO's Motion to Dismiss (D. Haw. Aug. 29, 2024). 

    The case addressed whether a property damage exclusion barred coverage over an owner's claim that a condominium association and its property manager failed to obtain adequate insurance before the condominium's property was damaged by the Maui wildfire in August 2023. Great American filed suit seeking a declaration that it had no duty to defend or indemnify the Association and the property manage, Quam Properties Hawaiiana, Inc., in connection with a demand for mediation submitted to the Association and Quam on behalf of one of the owners. 

    The policy provided errors and omissions coverage to the Association and Quam. The policy excluded "any Claim made against any Insured . . . based upon, arising out of, relating to directly or indirectly resulting from or in consequence of, or in any way involving . . . damage to to destruction of any tangible property or the loss of use of any tangible property."

    On October 6, 2023, counsel for some of the owners submitted a demand for mediation to counsel for the Association. The demand claimed that the coverage for the Association was woefully inadequate. Mediation was demanded pursuant to Hawaii's condominium statute. 

    The Association tendered the demand to Great American. Coverage was denied because the demand was not a "Claim" under the policy and the property damage exclusion barred coverage.  Great American later agreed to reimburse the costs of defense incurred in connection with the mediation under a reservation of rights, which preserved the right to file this action. A mediation occurred, but no resolution was reached, no further mediation was scheduled, and no owner filed suit against the Association and Quam.

    Great American filed a Motion for Judgment on the Pleadings. The Association responded by filing a motion asking the court to decline to exercise jurisdiction and to dismiss the case because it raised unsettled question of state law.

    The court analyzed its right to exercise discretion to retain jurisdiction under the factors enumerated in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). The court first considered whether there was a parallel state proceeding. The Association contended the mediation qualified as a parallel proceeding, particularly because it was expected to ripen into a state court lawsuit if the dispute could not be resolved. Great American objected that the Association had not cited any authority to support its contention that a non-binding mediation qualified as a parallel proceeding under Brillhart - and further that it was pure conjecture whether the owners would ever file a state court lawsuit. While the Association did not show that a presumption in favor of hearing this matter in state court existed, this did not prevent the court from ultimately concluding that state court still provided the better forum based on consideration of other factors. 

    First, insurance law was an area left to the states. Great American may be correct that because the exclusions "arising out of" and "in any way involving" language is interpreted broadly, the property damage exclusion applies. On the other hand, the Association may be correct that potential liability existed based on violations of the Hawaii condominium statutes and breach of the governing documents from the moment the property was underinsured. Because the potential liability (and harm to owners) existed separate and independent from the additional harm from the physical property damage caused by the fire, the property damage exclusion would not bar all coverage here.

    The court also found the parties' briefing on the question of concurrent or independent causation undeveloped, further risking federal court entanglement with this issue that could impact wildfire litigation in Hawaii more broadly. Because these coverage issues were not settled under Hawaii law and could have immediate reification on numerous other insurance coverage disputes related to the fire, it was one better resolved by Hawaii courts, without federal entanglement.

    There was also no compelling federal interest. Balancing these considerations (the existence of parallel proceedings, unsettled questions of state law, and federal interests), the court found that the first Brillhart factor weighed in favor of dismissal. 

    The second Brillhart factor, forum shopping, was neutral. Because diversity jurisdiction provided a basis to bring suit in federal court, Great American did not engage in forum shopping by filing suit here.

    Regarding the next Brillhart factor, duplicative litigation, the court found this factor tipped slightly in favor of dismissal. On the one hand, this finite dispute concerning Great American's obligations under the policy with regard to the demand would be entirely disposed of in either federal or state court. There was some risk, however of duplicative litigation and inconsistent results should the court opt to maintain jurisdiction over the case and the mediation ripened into a state court lawsuit. 

    Therefore, the court concluded that the Brillhart factors weighted in favor of remand because, even assuming no parallel state action or accepting that the risk of duplicative proceedings remained speculative at this point, the needless determination of state law factor weighed strongly in favor of dismissal. The Associatih's motion to dismiss was granted.

Hawaii Appellate Court Finds Agent May Be Liable for Failing to Submit Claim

    After the agent informed the insured there was no coverage and submitting a claim would be a useless effort, the Hawaii Intermediate Court of Appeal reversed the trial court's dismissal of the insured's suit against the agent. Pflueger, Inc. v. AIG Holdings, Inc., 2022 Haw. App. LEXIS 279 (Haw. Ct. App. Sept. 2, 2022).

    In May 2008, Pflueger notified its agent, Noguchi & Associates, Inc., that it had received federal grand jury subpoenas. Noguchi informed Pflueger that the subpoenas did not qualify as a "claim" under two policies issued by National Union. Consequently, Noguchi did not forward a claim or the subpoenas to National Union and did not seek clarification as to whether the grand jury subpoenas were covered under the policies. Pflueger relied upon Noguchi's representations and took no further action until its attorney submitted a demand letter tendering Pflueger's defense to Nation Union nine months later, in February 2009. 

    National Union found the claim untimely. Further, the materials submitted to National Union did not constitute a claim. The policies required the materials submitted to be an indictment, information or similar document to be a claim. 

    Pflueger filed suit against National Union and Noguchi. Pflueger alleged Noguichi was negligent and had made negligent misrepresentations. Pflueger eventually settled with National Union. 

    Prior to trial, the court granted Pflueger's motion for partial summary judgment, finding that the grand jury subpoenas constituted a "claim" as that term was defined in National Union's policy. The jury then returned a special verdict in favor of Pflueger. Noguchi appealed, and the Intermediate Court of Appeal (ICA) vacated the judgment, holding that the circuit court erred in excluding deposition testimony that was essential to Noguchi's defense. 

    On remand, Noguchi moved for summary judgment on the issue of causation, arguing there was no evidence of proximate cause against Noguchi. The circuit court agreed, finding Pflueger had put forth no evidence to establish that Noguchi's conduct was a contributing or substantial factor in National Union's decision to deny coverage. Pflueger appealed.

    The ICA held that the causation issue as framed by Noguchi (i.e., whether National Union would have denied coverage even if Noguchi had timely tendered the grand jury subpoena matter) involved a genuine issue of material fact. The issue of causation was generally left to the fact finder. Whether Noguchi's actions and inactions were legal causes of Pflueger's losses in light of National Union's denial of the claim were issues for the fact finder and could not be decided as a matter of law. The circuit court erred in granting Noguchi's motion for summary judgment. 

No Coverage for Attorney's Fee Award Found to be Sanction

    The court rejected the attorneys' claim that an award of attorney's fees awarded for pursuing a frivolous claim under the Individuals with Disabilities Education Act (IDEA) was not a "sanction" and was covered under the policy Wesco Ins. Co. v. Roderick Linton Belfance, LLP, 2022 U.S. App. LEXIS 18263 (6th Cir. July 1, 2022).

    The lawyers brought claims against schools under the IDEA. They alleged that their clients were not afforded an appropriate education. The district court ruled for the schools. After the claims failed, the schools sought their attorney's fees from the lawyers under IDEA's fee-shifting provision. The schools alleged that the lawyers presented sloppy pleadings, asserted factually inaccurate or legally irrelevant allegations, and needlessly prolonged the proceedings. 

    The lawyers asked Wesco to pay the fees under their professional liability policy. Wesco declined because the fees fell within the policy's exclusion for "sanctions." Wesco then filed a suit for a declaratory judgment that its policy did not apply. The district court granted summary judgment to Wesco.

    The attorneys appealed. The Sixth Circuit noted that "sanctions" were not defined in the policy. Here, however, the award of attorneys' fees was a coercive measure because a court compelled a party or attorney to pay it. IDEA provided for an award of fees to a prevailing party who filed a complaint found to be frivolous, unreasonable, or without foundation. The schools successfully proved this misconduct, and their complaints unambiguously requested "sanctions."  Therefore, the schools' suit thus fell within the "sanctions" exclusion in Wesco's policy. 

    Thanks to blogging colleague, Robert Thomas, for forwarding this case.

Insurers Must Defend Allegations of Faulty Workmanship

    Granting the insured's motion for partial judgment on the pleadings, the court determined the insurers had a duty to defend. Suez Treatment Solutions, Inc. v. Ace Am. Ins. Co. & Liberty Mut. Fire Ins. Co., 2022 U.S. Dist. LEXIS 59044 (S. D. N. Y. March 30, 2022). 

    Suez Treatment Solutions, Inc. held policies from Chubb and Liberty Mutual Fire Insurance Company to cover its operations in connection with the development of a pollution treatment system in North Carolina. When the project ultimately failed, an underlying action sought damages from Suez, alleging breach of contract, negligence, and fraud. Suez filed this case seeking a declaratory judgment that Chubb and Liberty were each obligated to defend and indemnify Suez in the underlying case. 

    The City of High Point hired Suez to upgrade the facilities at its wastewater treatment plant staring in 2021. Because mercury levels were too high in emissions from sewage-sludge incinerators, Suez began working on the installation of a Mercury Removal System. After installation, a leak occurred in a component known as the heat exchanger. The leak caused the system to shut down and weeks-long repairs began. 

    The underlying complaint alleged that the day after the system shut down for repairs, Suez and its subcontractor left and did not instruct High Point on how the system should be monitored during the shutdown. The shutdown caused an increase of the carbon monoxide levels. High Point contacted Suez who instructed the plant to open an outlet damper to evacuate the heat. This action caused temperatures to increase, however. A fire ignited, and the burning carbon created high concentrations of toxic sulphur-dioxide gas. It was alleged that fire created health and safety hazards at the treatment plant and surrounding area. The fire was finally extinguished almost a month after the shutdown by dumping the carbon out of the unit. 

    According to the City, Suez did nothing to repair the unit for months. When attempts to repair were made, they were fruitless. Another fire occurred during the planned start-up, causing extensive damage to the system. 

    High Point sued for breach of contract, breach of warranties, negligence, negligent misrepresentation, fraud, and unfair and deceptive trade practices.  

    When a defense was denied, Suez sued Chubb and Liberty for a declaratory judgment. The Chubb policy was a Contractors Pollution Liability and Errors & Omission Policy that ran from July 24, 2016 to July 24, 2017. Liberty issued a CGL policy with a policy period from March 1, 2016 to March 1, 2017. Suez moved for partial judgment on the pleadings.

    Chubb relied upon a Products Liability Exclusion to deny coverage. The exclusion barred coverage for any suit against Suez "arising out of or related to" "[a]ny goods, products or equipment designed, manufactured, sold, supplied or distributed by [Suez]." The underlying complaint alleged that Suez supplied the mercury removal system that caused the loss and that Suez served as a sales force and distributor. Other underlying allegations, however, related to professional services rendered at the facility, therefore falling outside the scope of the Products Liability Exclusion and triggering a duty to defend. There was a question of fact with respect to whether the damages arose entirely from the "design, manufacture, sale, supply or distribution" of the mercury removal system by Suez, or if other actions taken by Suez - such as a failure to train or supervise - also gave rise to the damage at the High Point facility. Therefore, the Products Liability Exclusion did not, at this stage, preclude coverage as a matter of law. 

    Numerous issues of fact meant that Liberty also had a duty to defend. Liberty argued there was no occurrence because the damage arose from faulty workmanship. But Liberty read the underlying complaint too narrowly. The complaint alleged damage beyond the property Suez supplied, caused by an accident or repeated exposure to conditions. For example, the underlying complaint alleged that the fire damaged other components of the system.

    The business risk exclusions in Liberty's policy also did not bar coverage because issues of fact were present. Further, although the underlying complaint alleged "design and oversight responsibilities" were breached, the Professional Liability Exclusion did not bar coverage because the underlying complaint did not allege that the property damaged arose solely out of a failure to render professional services. 

    Therefore, the court granted Suez's motion against both Chubb and Liberty, granting declaratory relief with respect to the duty to defend. 

Denial of Coverage Reversed, Remanded for Possible Reformation of Policy

    The Seventh Circuit reversed and remanded for consideration of reformation of the professional liability policy after the district court found there was no coverage. Crum & Forster Spec. Ins. Co. v. DVO, Inc., 939 F. 3d 852 (7th Cir. 2019).

    WTE-S&S AG Enterprise, LLC sued DVO for breach of contract. DVO designed and built machinery for generating electricity from cow manure which would then be sold to the electric power utility. DVO and WTE entered a Standard Form Agreement for such machinery. DVO allegedly did not properly design substantial portions of the systems, resulting in substantial damages to WTE.

    Crum defended under a reservation of rights, but later withdrew its defense. In the underlying suit, the court found in favor of WTE and ordered DVO to pay over $65,000 in damages and $198,000 in attorneys' fees. 

    Crum issued primary and excess policies to DVO, including E&O professional liability coverage. Crum agreed to pay "damages" or "cleanup costs" because of a "wrongful act." An exclusion added by endorsement precluded coverage for damages arising out of breach of contract. DVO argued the breach of contract exclusion was so broad as to render the E&O professional liability coverage illusory. The district court held the coverage was not illusory because it would still apply to third party claims. 

    The underlying complaint alleged that DVO was contracted to design and construct the machinery and, because of its faulty design, damages were incurred. That alleged claim arose out of the contract and therefore fell within the exclusion. The sole issue was whether the language in the breach of contract exclusion rendered the exclusion broader that the grant of coverage, and therefore rendered the coverage illusory. If the purported coverage proved to be illusory, a court could reform the policy to meet the insured's reasonable expectation of coverage.

    Based upon Wisconsin law, the Seventh Circuit found the policy illusory. There was no reason to believe that DVO in purchasing the coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties. Because the breach of contract exclusion made the professional liability coverage ilusory, the contract should be reformed so as to meet the reasonable expectations of DVO as to the E&O policy's coverage for liability arising out of negligence, omissions, mistakes and errors inherent in the profession. 

    On remand, the district court was directed to consider DVO's reasonable expectations in securing the coverage, and the court could reform the contract so as to give effect to that expectation. 

Claim Made During Second Consecutive Policy Period Properly Denied

    The court found that the insurer properly denied a claim made under the claims-made policy during the second policy period when the incident occurred during the first policy period. Alaska Interstate Constr. v. Crum & Forster Specialty Ins. Co., 2017 U.S. App. LEXIS 15997 (9th Cir. Aug. 22, 2017). 

    Crum & Forster (C&F) issued an initial policy to Alaska Interstate Construction (AIC) with a policy period from December 1, 2011 to May 1, 2013, and then a renewal policy with a policy period of May 1, 2013 to May 1, 2014. Both were "claims-made" policies, limiting coverage to claims made and reported during the "policy period," which was defined as "the period shown in the Declarations." 

    A claim was made against AIC by VC Sellers Reserve, LLC on January 10, 2013, during the initial policy period. AIC, however, did not report the claim until June 19, 2013, during the second policy period. The district court held that C&F was entitled to summary judgment because the claim was not made against AIC and reported to C&F during the same policy period as required by the policies. 

    According to the plain language of the policies, a claim had to be made and reported within a single policy period. An insured could not reasonably expect coverage when reporting a claim six months into the renewal policy period. 

    While there was no Alaska law on the subject, the Ninth Circuit predicted that the Alaska courts would follow the majority position and hold that, unless policy language provided otherwise, renewals of claims-made policies generally did not extend claims reporting periods. 

    The policy provided an automatic 90-day extended reporting period after the cancellation of the initial policy period. AIC argued that if the policies were viewed separately for purposes of determining the "policy period," then a policy must be viewed as effectively canceled when its policy period ended, making the extended reporting period applicable. The plain language of the policy, however, stated that cancellation and non-renewal were the events that triggered the extended reporting period. Because AIC renewed its policy, the extended reporting period did not apply. 

No Coverage for Medical Malpractice Claims

    The court determined there was no coverage for 150 underlying lawsuits which alleged that injections for back pain caused bodily injury and death. Westfield Ins. Co. v. Orthopedic & Sports Med. Ctr. of N. Ind., 2017 U.S. Dist. LEXIS 46119 (N. Ind. March 28, 2017).

    NECC made preservative-free methylprednisolone acetate (MPA). MPA was an epidural steroid medication that was administered by injection for pain management. Defendants Orthopedic and Sports Medicine Center of Northern Indiana, Inc. (OSMC) and its affiliate, ASC Surgical Ventures, LLC (ASC), purchased MPA from NECC to treat patients with back pain. In September 2012, a multistate outbreak of fungal meningitis, lumbar fungal infections and related injuries arose as a result of patients receiving injections of contaminated MPA.

    Over 150 patients and personal representatives sued OSMC ASC, and their physicians (OSMC Physicians) in state court. Most of the patients also filed complaints with the Indiana Department of Insurance. (Malpractice Complaints).

    Westfield issued CGL and umbrella policies to the OSMC defendants.The defendants requested that Westfield defend and indemnify against the lawsuits and Malpractice Complaints. Westfield refused, and filed an action for declaratory judgment in federal court against the OSMC defendants and the patients.

    Indiana law controlled the coverage dispute. The court first determined that there was no duty to defend the Malpractice Complaints which were addressed by a medical review panel. The panel had the sole duty to express its expert opinion as to whether or not the evidence supported the conclusion that the defendants acted or failed to act within the appropriated standards of care as charged in the complaint. The panel did not have jurisdiction to award damages against the OSMC Defendants, eliminating the possibility of coverage under the Westfield policies.

    Nor was there a duty to defend and/or indemnify insureds in the lawsuits. There was a difference under Indiana law between an accident/occurrence and a professional error or omission. An accident/occurrence was covered by CGL insurance, while a professional error or omission was covered by E&O insurance.

    The lawsuits alleged a professional relationship between the OSMC Defendants, who were "engaged in the business of providing health care," and the patients to whom they administered the epidural MPA injections. The failure to meet a standard of care under a contractually assumed duty was not an "accident." Although the OSMC Defendants did not intentionally commit wrongdoing, this failure did not convert their actions into an "accident." The lawsuits' claims that the OSMC Defendants were negligent in selecting NECC as a supplier of MPA and in managing the supplier relationship did not allege an "accident" under the policies.

    Even if there was an accident, the exclusions barred coverage. For example, the umbrella policies had a Professional Services Exclusion. It provided that the insurance did not apply to bodily injury "due to rendering . . . any professional service," which included "medical . . . or nursing service or treatment, any health or therapeutic service or treatment and service in the practice of pharmacy." Westfield contended this exclusion eliminated coverage because the negligence claims were based on acts taken by the OSMC Defendants in the course of providing professional services. The insureds contended that the term "treatment" in the exclusion was ambiguous, and should be construed against Westfield. The court disagreed, Because the injections constituted the rendering of a medical service or "treatment," the lawsuits' negligence claims were excluded under the Professional Services Exclusion.

    Therefore, no coverage existed and no duty to defend or to indemnify arose.

Policy Does Not Commit Insurer to Provide Supersedeas Bond

    The insured's claim that the insurer improperly refused to provide a supersedeas bond was rejected by the federal district court. James River Ins. Co. v. Interlachen Property Owners Ass'n v. Kuepers Constr., 2016 U.S. Dist. LEXIS 71825 (D. Minn. June 1, 2016).

      Kuepers Construction, Inc. constructed a townhome project on property owned by the Association. After completion of the project, the Association sued Kuepers for construction defects on the project. Kuepers tendered its defense to State Auto Insurance Company, its CGL carrier. Later, the Association amended its complaint to assert claims for professional engineering negligence and professional design negligence. Kuepers tendered these claims to James River, who had issued  an Architects and Engineers professional Liability policy. James River agreed to defend subject to a reservation of rights.

      On summary judgment in the underlying case, the design claims were dismissed as well as certain construction defect claims. The remaining claims continued to trial. James River agreed to continue to provide a defense to the action pending and through any appeal of the summary judgment order.

      The remaining construction defect claims were tried and the jury returned a verdict against Kuepers. Judgment was entered against Kuepers for $2,147,000. Kuepers requested State Auto to post a supersedeas bond to stay execution while the case was appealed. State Auto refused. Kuepers then demanded that James River post the bond. James River also refused, relying on policy language that provided James River would pay,

reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a "claim", including the cost of appeal bonds, however, we shall not be obligated to apply for or furnish appeal bonds on your behalf.

     The Association filed a notice of appeal, seeking to reinstate the design defect claims against Kuepers that had been dismissed by summary judgment. An agreement was reached whereby Kuepers stipulated to a $2,000,000 judgment on the design defect claims and assigned its rights under the James River policy to the Association. The agreement was then sent to James River.

    This action was filed by James River, seeking a determination that the agreement was collusive and unenforceable. Kuepers filed counterclaims, seeking a declaratory judgment that James River breached the policy by failing to provide the supersedeas bond and that the agreement with the Association was reasonable and enforceable.

    James River moved for summary judgment. It argued it did not neglect its duty to defend and was under no obligation to post the supersedeas bond. Kuepers breached the policy's cooperation clause by stipulating to a judgment and assigning rights under the policy to the Association. Kuepers argued that failure to provide the supersedeas bond was a material breach by James River, voiding Kuepers' cooperation obligation.

    The court disagreed with Kuepers. The policy did not obligate James River to post the supersedeas bond. The bond would have stayed execution of judgment for damages arising from the jury verdict on the construction defect claims, liabilities that James River did not agree to cover. Requiring James River to post the supersedeas bond would extend its duty to indemnify beyond the policy's coverage, since the posting of a supersedeas bond bound the appellant and its surety to pay the judgment if the appeal was unsuccessful.

    Further, since James River did not breach the policy, Kuepers was required to provide notice to James River of the stipulated judgment and assignment of policy rights. Therefore, James River's motion for summary judgment was granted.

    

       

Reinsurer Must Reimburse Health Care Organization for Settlement Costs

   The Indiana Supreme Court reversed summary judgment issued to reinsurer Continental Casualty Company (CNA) and determined it must reimburse the insured for settlement costs under the E & O policy. Wellpoint, Inc., et al. v. National Union Fire Ins. Co. of Pittsburgh, PA, et al., 2015 Ind. LEXIS 316 (Ind. April 22, 2015). 

   Anthem, Inc. was a large managed health care organization. Anthem was its own primary and excess insurer for E&O liability. It had numerous excess reinsurers. Beginning in 1998, anthem was confronted by various lawsuits alleging it and other managed care organizations failed to pay claims in a full and timely manner, thereby breaching state and federal statutes. The various lawsuits alleged substantially the same wrongful conduct, namely that after promising to pay doctors in a timely manner for their services, Anthem sought to improperly deny, delay and diminish payments due. 

   The cases were consolidated into a federal multi-district litigation proceeding in the Southern District of Florida. Claims for breach of contract, unjust enrichment, and violations of state prompt pay statutes were dismissed or dropped. Anthem then settled the underlying litigation in July 2005 without admitting and instead denying any wrongdoing or liability. The settlement called for both cash payments and implementation of specific business practices consistent with requested injunctive relief. 

   The primary reinsurer for Anthem's self-insurance E&O policy, National Union, paid and exhausted its coverage. CNA and other excess reinsurers denied coverage for Anthem's defense and settlement of the underlying litigation. The ultimate settlement amounted to $198 million.

   Anthem filed suit, claiming it had professional liability coverage under Part II of the CNA Policy, which provided that payment would be made for the "Loss of the Insured resulting from any Claim first made against the Insured . . . for any Wrongful Act of the Insured . . . but only if such Wrongful Act . . . occurs solely in rendering of or failure to render Professional Services." 

   CNA moved for summary judgment, arguing there was no coverage because claims settled in the underlying litigation did not arise out of acts that occurred "solely" in Anthem's rendering of, or failure to render, professional services. The trial court granted summary judgment to CNA.

   The Indiana Supreme Court reversed. "Professional Services" were "services rendered or required to be rendered solely in the conduct of the Insured's claims handling or adjusting . . . ." The clear language of the policy therefore extended coverage to "any Claim or Claims" resulting from "any Wrongful Act" by Anthem that occurred "solely in the rendering of or failure to render" "claims handling and adjusting" services. Therefore, the policy covered not only Anthem's actions in adjusting and paying reimbursement claims from health care providers, but also its failure to do so. 

   The wrongful acts alleged in the underlying litigation - engaging in an improper, unfair, and deceptive scheme designed to systematically deny, delay and diminish claim payments - were clearly alleged wrongful acts by Anthem in the course of its claims handling and adjusting services. Therefore, they were Wrongful Acts occurring in the rendering or failure to render Professional Services. As a matter of law, the relief sought by Anthem fell within coverage for professional liability in Coverage II of the policy.

   CNA also argued an exclusion for dishonest or fraudulent acts barred coverage. The exclusion provided, "the coverage section does not apply . . . (b) to any dishonest or fraudulent act or omission." An exception to the exclusion read, "this exclusion shall not apply to any Claim seeking both compensatory and punitive damages based upon or arising out of allegations of both fraud and bad faith in the rendering of or failure to render Professional Services." The court held that Anthem's claim of settlement losses satisified the exemption and avoided the application of the exclusion as a matter of law. 

New York Court Holds Insurer Can Rely on Exclusions After Incorrectly Denying Defense

   Reversing its prior decision, the New York Court of Appeals held that the insurer could raise policy exclusions regarding its duty to indemnify after it incorrectly denied its duty to defend. K2 Invest. Group, LLC v. Am. Guar. & Liab. Co., 2014 N.Y. LEXIS 201 (N.Y. Ct. App. Feb. 18, 2014). 

   The insured was sued for legal malpractice. His insurer, American Guarantee, refused to defend and a default judgment was entered. The insured assigned his rights against American Guarantee to the plaintiffs. When the underlying plaintiffs sued, American Guarantee said coverage was barred by two exclusions.

   In a previous decision, K2 Inv. Group, LLC v. Am Guar. & Liab. Ins. Co., 21 NY 3d 284, the court held that American Guarantee's breach of its duty to defend prevented it from relying on policy exclusions. This, however, contradicted another case issued by the court, Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y 2d 419 (1985). 

   The New York court noted that other jurisdictions had followed Servidone, including the Hawaii Supreme Court in Sentinel Ins. Co. v. First Ins. Co. of hawaii, Ltd., 76 Haw. 277, 290-297, 875 P.2d 894, 907-914 (1994). 

   The court saw no justification for overruling Servidone. When a question of insurance law was decided, insurers and insured should be able to assume that the decision would remain unchanged unless the Legislature decides otherwise.