By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on December 5, 2016
Courts' analysis of whether multiple acts, errors, omissions or claims are interrelated or related and subjected to single or multiple limits of liability has tended to be fact-specific and sometimes result-oriented. Courts have reached widely varying conclusions regarding the extent to which claims must be related in order to constitute a single claim under an insurance policy. Courts interpreting insurance policies with interrelated wrongful acts provisions typically weigh the specific allegations in the complaints, the degree of contemporaneousness and whether any common scheme or method of operation underlies the acts.
As a result, it is difficult to articulate any clear, predictable guidelines for what types of acts courts will deem sufficiently "interrelated." Insurers should involve counsel to analyze the facts of potentially related claims and the implications of law in the jurisdiction that governs the policy(ies). Additionally, insurers should consult with counsel in drafting their polices and defining the term "interrelated wrongful acts" as it is to be construed under the policy.
What Type of Interpretation Favors the Insurer?
The most expansive view of interrelatedness is not always the most favorable one for insurers, although this is counter intuitive. In particular, an excess insurer will presumably seek to separate claims such that they arise under as many policy periods as possible. Doing so minimizes the likelihood that primary layers of coverage will be exhausted, and the excess carrier thus liable.
Where different policy years are underwritten by different carriers, subsequent insurers should argue for a liberal interpretation of interrelatedness, one that construes claims such that liability falls with the carrier who underwrote the policy covering the earliest claim. In response, the insurers who underwrote earlier policies are wise to advocate fora narrow interpretation of interrelatedness, one that relegates later claims to later policies.
An insurer would benefit from multiple claims being deemed related where a claim relates back to an earlier policy which has been substantially eroded or exhausted by a related claim. An insured would benefit from a finding that claims are interrelated where such a finding brings the claims within a single deductible or self-insured retention amount. An insured may also benefit from a finding that claims are interrelated where a claim made during one policy period relates back to an earlier policy period and the available limits under the earlier policy are higher than limits under the policy that was in effect when the subsequent claim is first made.
One court has stated that related acts provisions allow an insurer to confine claims to a single liability limit, but also allow the insured to retroactively purchase a new policy by having a claim covered by a prior policy. See In re DBSL Inc., Nos. 08-12687 (PJW),09-52031 (PJW), (Bankr. D. Del. July 22, 2011) (citing G-1 Holdings Inc. v. Reliance Insurance Co., 586 F.3d 247, 257-58 (3d Cir. 2009).
Complex decisions such as these should be navigated by insurers in close communication with their in-house and coverage counsel. This strategic decision is a difficult one, and the interrelated wrongful acts clauses in the policy(ies) must be closely reviewed. Further, the facts which underlie the various claims must be examined,potentially through the discovery process. Finally, an insurer may need to advise the insured of its reservation of rights with regard to a number of different policies, or find itself without recourse after a judgment against its insured.
Insurers should also consult with coverage counsel before assuming that the language of the policy is unambiguous, or likely to lead to a particular judicial result. The Supreme Court of New York ruled in 2014 that an insurance policy was ambiguous with respect to whether its requirement of notice of "any" claim pertains to claims that are related under the provisions for "Interrelated Wrongful Acts." The court ruled in favor of the insured,finding that it was unclear whether or not the insured was required to give notice of the subsequent claims which related-back. Sirius XM Radio Inc. v. XL Speciality Insurance Co., 117 A.D.3d 652, 987 N.Y.S.2d 324, 326 (2014). Counsel can also advise as to whether or not the complaint against the insured alleges facts which bring the claim within the policy that the insurer issued. Moreover, an insurer may be permitted to use extrinsic evidence to deny a duty to defend based on facts irrelevant to the merits of the underlying litigation, such as whether the claim was first made during the policy period,whether the insured party reported the claim to the insurer as required by the policy, or whether the underlying wrongful acts were related to prior wrongful acts. Edwards v.Lexington Insurance Co., 507 F.3d 35, 40-41 (1st Cir. 2007).
Claims Arising from Related Wrongful Acts
Claims-made insurance policies typically provide that separate claims arising out of the same or related wrongful acts will be deemed to constitute a single claim, first made on the date that the earliest claim was made. The basic principle of a claims-made policy is typically stated as follows: "Coverage under this Policy shall apply only with respect to Claims deemed to have been first made during the Policy Period and reported in writing to the Insurer in accordance with the terms herein." A provision regarding interrelated wrongful acts typically reads in part, "All Claims, including all D&O Claims, arising from the same Wrongful Act and all Interrelated Wrongful Acts shall be deemed one Claim and such Claim shall be deemed to be first made on the earliest date that any of the Claims is first made against an Insured under this Policy or any prior policy." The effect of such interrelated wrongful act provisions is that related claims made during two different policy periods will be deemed to constitute a single claim falling into the first policy year, and thus subject to a single retention and policy unit. However, there are no widely used standard-form claims-made policies, and there are thus many types of provisions which are subject to varying interpretations. That said, most courts have found that related acts provisions are unambiguous, and encompass causal or factual relationships.
A majority of recent decisions have held that the term "related" is unambiguous, and encompasses both logical and causal relationships, even where it is not defined in the policy. E.g., N. Am. Specialty Insurance Co. v. Royal Surplus Lines Insurance Co., 541F.3d 552, 557-58 (5th Cir. 2008) (applying Texas law) (holding that the undefined term,"related" includes matters that are logically or causally related); Eagle Am. Insurance Co. v. Nichols, 814 So. 2d 1083, 1086-87 (Fla. Dist. Ct. App. 2002) (stating that the undefined term "related" encompasses logically related connections).
In Friedman Prof'l Mgmt. Co. v. Norcal Mut. Insurance Co., 15 Cal. Rptr. 3d 359 (Cal.Ct. App. 2004), a medical malpractice suit was brought against a surgery center and its owner in 1994. The center's malpractice insurer defended under a policy issued in 1993.Then, in 1996, another lawsuit was filed by the same patient against the same surgery center and its owner. The second suit asserted a cause of action for sexual battery arising out of the center's attempts to stop the bleeding that occurred during the operation that went awry and formed the basis of the 1994 lawsuit. The court found that the test for relatedness is whether a claim is either logical or causally related to another claim. The court held that these claims were causally related, and there was no coverage under the policy that was in effect at the time of the lawsuit.
However, Texas courts have held that claims brought by separate patients treated at separate times are not considered related claims. See Harris Methodist Health Sys. v.Employers Reinsurance Corp., 3:96-CV-0054-R, (N.D. Tex, 1997) (holding that claims brought by various different patients who contracted Hepatitis C from hospital employee were separate, rather than related claims). The policy in that case provided that any actor omission "together with all related acts or omissions in the furnishing of services to any one person shall be considered one medical incident." Id. In that case, the court stuck to a strict interpretation of the policy language to decide that each incident to each different person was an unrelated act.
Interestingly, the Supreme Court of Connecticut explicitly distinguished the facts in Lexington Insurance Co. v. Lexington Healthcare Grp., Inc., 311 Conn. 29, 84 A.3d1167 (Conn. 2014) from those in Harris Methodist, but still arrived at the same conclusion that the medical acts to different parties were not related. In Lexington, the court held that although the subject policy did not contain language, like that of Harris Methodist, which limits related incidents to those involving the same patient, there was still plenty of case law to support the similar finding that different losses to different patients are not related.
By contrast, a federal court under Tennessee law, has held that 71 claims for botched surgeries at the same hospital constituted a single occurrence under the relevant insurance policy. CHS/Cmty. Health Sys. Inc. v. Lexington Insurance Co., No. 3:11-CV00449,(M.D. Tenn. 2013). In that case, the insurer argued that each of the 71 harmful surgeries performed by either of the two doctor defendants should be considered a separate "medical incident" under the policy. Id. The insurer's goal was to require Quorum, the company that managed the hospital, to satisfy $5 million to $6 million self-insured retentions for each of the claims, before the insurer's coverage kicked in. The court rejected this position and found that all of the botched surgeries were one occurrence of mismanagement by Quorum. Id. As such, Quorum was only responsible for one self-insured retention before the insurer became liable for coverage under the policy.
Furthermore, in Home Insurance Co. v. Spectrum Info. Techs., 930 F. Supp. 825(E.D.N.Y. 1996), prior to the inception of the renewal policy at issue, several lawsuits against the insured were consolidated into an existing class action. Several additional lawsuits were filed after the inception of the renewal policy, which alleged some of the same acts as the other complaints, in addition to new allegations. These complaints were consolidated with the class action. The insured argued that each of the complaints filed after the policy inception constituted a separate claim first made during the policy period.
The court in this case ruled that each lawsuit represented a separate claim, despite the consolidation of the suits. The policy defined a claim as a "written demand by a third party for monetary damages, including the institution of suit or a demand for arbitration."Because the definition allowed for a claim to be made without the institution of a suit,the terms "claim" and "suit" were not held to be synonymous. The court refused to enforce an exclusion for claims that arise from, or are in any way related to, a fact,circumstance or situation underlying or alleged in a claim, potential claim or any prior or pending litigation reported during or covered by a preexisting policy. The court construed the exclusion narrowly, to bar coverage only for the portion of the claims that were premised on the same allegations as the pre-policy claims.
Applicable Limits of Liability Triggered by Separate Transactions or Claims
Insurance policies may offer separate limits of liability for each claim or policy year, as well as an aggregate limit of liability that may be for an amount higher than the per claim or per year limits of liability. Where claims arise from wrongful acts relating to more than one transaction, an insured may seek to trigger the higher aggregate limit of liability by arguing that each transaction constitutes a separate claim or loss and that the aggregate—rather than the lower per claim limit of liability—is available for the claims.
Where a court determines that a related act provision in a policy is unambiguous and is defined to include both logical and causal connections, the court then evaluates whether the claims at issue fall within the provision. In determining the amount of available coverage, courts will examine and apply the policy's interrelated or related acts provisions to determine whether a sufficient factual or causal nexus exists between the transactions to consider them single or multiple claims. Courts have emphasized a wide range of factors in making that determination.
In Am. Commerce Insurance Brokers Inc. v. Minn. Mut. Fire & Cas. Co., 551 N.W.2d224 (Minn. 1996), the policy provided for a $250 deductible and a $10,000 limit of liability per occurrence. The court found that the phrase "series of related acts" was not ambiguous and reasoned that "a court may consider several factors in concluding whether dishonest acts are a part of a 'series of related acts,' including whether the acts are connected by time, place, opportunity, pattern, and most importantly, method or modus operandi." Under this analysis, the court agreed with the insurer's position that the employee's 155 acts of embezzlement constituted two occurrences: one for her act of issuing unauthorized payroll checks to herself and the other for taking funds received from customers as insurance premiums.
The court in Southbridge Capital Management LLC v. Twin City Fire Insurance Co., No.X04CV020103527S, (Conn. Super. Ct. Sept. 8, 2006), took into consideration "whether the parties are the same, whether the claims all arise from the same transaction(s),whether the wrongful acts are contemporaneous and ... whether there is a common scheme or plan."
At least one court in Florida has applied the same factors as the Southbridge court—in Capital Growth Fin. LLC v. Quanta Specialty Lines Insurance Co., No. 07-80908-CIV,(S.D. Fla. July 30, 2008), the plaintiff investment firm sued Quanta seeking a declaration that Quanta wrongfully failed to defend and indemnify it under a claims-made errors and omissions professional liability policy brought by a series of investor claims involving"allegations of unsuitable aggressive investments and churning practices attributed to two financial advisors associated with the insured's Nebraska City office." On July 9,2006, an arbitration entitled Bernice M. Bonebrake TTE, et al. v. Capital Growth Fin. LLC et al. was filed against Capital Growth during the policy period of the claims made and reported professional liability which Quanta issued to Capital Growth. Quanta tendered and provided a defense to Capital Growth in the Bonebrake arbitration. Then,in June 2007, after the Quanta policy expired, several other investors filed National Association of Securities Dealers arbitration claims against Capital Growth. While these claims involved additional or different investments from those involved in the Bonebrake Arbiration, for the most part, they all shared the common allegation that the two financial advisors "engaged in a pattern of churning and unsuitable, aggressive and risky investments for clients expressing conservative trading objectives," in addition to other similar allegations.
Capital Growth notified Quanta of the subsequent arbitrations and demanded a defense and indemnity, contending that all of the subsequent arbitrations were treated as a"single claim," as that term was defined in the policy. The court stated that in order to trigger Quanta's duty to defend, the injuries alleged in the subsequent arbitrations must arise from "wrongful acts" which are interrelated with the wrongful acts alleged in the Bonebrake Arbitration. The sole question in determining the duty to defend the subsequent arbitrations was "whether the allegations of these claims facially demonstrate a sufficient factual nexus with the Bonebrake Arbitration to trigger an'interrelation' between them."
The court analyzed the facts and circumstances surrounding the allegation and determined that the claims were to be treated as a "single claim" within the meaning of the policy claim accrual date. The court accordingly found that Quanta owed its insured a duty to defend against these claims. However, the court stated that variations in the"methodology of abusive trading practices" and types of misrepresentations allegedly employed by the financial advisors to induce the investments may be relevant to whether the subsequent arbitrations were "interrelated" with Bonebrake for purposes of triggering coverage as a "single claim" falling within the policy period. Therefore, the court held that there was a genuine issue of material fact as to whether the wrongful acts were "interrelated" with those alleged in the Bonebrake arbitration for purposes of construing a "single claim" covered by the policy.
The policy involved in Continental Casualty Co. v. Howard Hoffman & Associates, Nos.1-10-0957, 1-10-1080, (Ill. App. Ct. Aug. 15, 2011), contained a related acts provision that defined "related acts or omissions" to mean "all acts or omissions ... that are temporally, logically, or causally connected by any common fact, circumstance,situation, transaction, event, advice or decision," and the court found that this definition was unambiguous. Id. at *3.