Arising out of Insolvency Exclusion Enforced
Since the President has nominated Brett M. Kavanaugh to be a Justice of the U.S. Supreme Court I decided it would be interesting to digest an insurance case written by Judge Kavanaugh while sitting by designation in the Ninth Circuit.
In Zurich Specialties London Limited v. Bickerstaff, Whatley, Ryan & Burkhalter, Inc., a California Corporation, No. 09-56884, D.C. No. 2:08-cv-07066-SJO-FFM, United States Court Of Appeals For The Ninth Circuit, (March 28, 2011) the district court concluded that Zurich has no duty to defend or indemnify Bickerstaff in a third-party contribution action filed by Spear, Safer, Harmon & Co. (the “underlying action”).
The professional liability policy Zurich issued to Bickerstaff unambiguously excludes “claims or ‘costs, charges and expenses’ for or arising out of . . . the insolvency or bankruptcy of the Insured or any other person, firm or organization.” Under California law, the phrase “arising out of” does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability and connotes only a minimal causal connection or incidental relationship.
The underlying action arises from the insolvency of Caduceus, a medical malpractice self-insurance fund. The Florida Department of Insurance, acting as Caduceus’ receiver, initially sued Spear Safer (the “receiver action”). The receiver action set forth allegations that Spear Safer’s “unqualified opinions on Caduceus’ financial statements, among other things, enabled Caduceus to continue to rewrite existing policies, write new insurance policies and leverage its capital well in excess of that allowed under Florida law and past the point of insolvency to the detriment of Caduceus, its policyholders and claimants.” Spear Safer then filed the underlying action against Bickerstaff, seeking contribution and alleging that Bickerstaff’s “reserve reviews and rate level recommendations . . . directly impacted and caused the insolvency of Caduceus.”
The receiver and underlying actions, which together allege that Bickerstaff played a causal role in Caduceus’ insolvency, satisfy California’s definition of the term “arising out of,” and trigger the exclusion.
Bickerstaff argues that the complaint in the receiver action alleges that Caduceus’ insolvency occurred in 1993, before Bickerstaff was retained. Thus it characterizes the underlying action as a standard malpractice claim based on work performed for an already insolvent client.
Bickerstaff misreads the allegation in the receiver action; it in fact alleges that Caduceus was either “statutorily impaired or insolvent” by 1993. Moreover, the legal definition of insolvency describes an ongoing process in which an entity is unable to meet its liabilities “as they mature.” Therefore, even if Caduceus were insolvent in 1993, the exclusionary provision would still apply because the allegation is that Bickerstaff contributed to Caduceus’ worsening financial condition.
The doctrine of concurrent causation does not apply because the alleged conduct excluded by the policy was the same as, and not independent of, the covered conduct. Under the doctrine, coverage cannot be defeated simply because a separate excluded risk constitutes an additional cause of the injury independent of the covered risk. Here the receiver and underlying actions both allege that Bickerstaff’s work contributed to Caduceus’ insolvency, and therefore the covered risk of malpractice did not exist independently of the other risk not covered by the policy but rather was directly connected to the excluded risk of insolvency.
Duty to Defend
While an insurer’s duty to defend is broader than its duty to indemnify, neither the allegations in the complaints nor any extrinsic facts known to Zurich give rise to the potential of liability under the policy. The potential of liability that would trigger the duty to defend can be found based on either a comparison of the allegations of the complaint with the terms of the policy, or consideration of extrinsic facts that reveal a possibility that the claim may be covered by the policy. Here, the complaints in the receiver and underlying actions together allege that Bickerstaff’s conduct contributed to Caduceus’ insolvency, thus squarely falling under the terms of the policy exclusion.
Bickerstaff suggests that there is a potential of liability under the policy because Caduceus’ financial situation might improve, and therefore the pleadings could be amended to reflect that it is no longer insolvent. However, an insured may not trigger the duty to defend by speculating about extraneous ‘facts’ regarding potential liability or ways in which the third party claimant might amend its complaint at some future date.
Because the Judge Kavanaugh concluded that the policy excludes coverage for Spear Safer’s contribution action, he affirmed the district court’s conclusion that Zurich did not have a duty to indemnify Bickerstaff, or to provide it with a defense.
The duty to defend is broad but it is not unlimited. When there is a clear and unambiguous exclusion the duty to defend or indemnify do not exist and the insurer has every right to refuse to defend or indemnify.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Books from Full Court Press
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An annual subscription to secondary content on the Fastcase platform includes new editions and updates published by the author as they are rolled out, so you can rest assured that your research is up to date. Go to fastcase.com for more detail and how to use the material on-line as part of your legal or insurance research or as stand-alone e-books.
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