One Reservation of Rights is Sufficient
Insurance companies faced with a claim seeking defense and indemnity that on its face appears to be due to a cause that is specifically excluded usually result in a defense provided under a reservation of rights. The defense is provided and once the case is resolved the insurer can then refuse to indemnify if the facts support such a denial.
In American Guarantee & Liability Insurance Company v. John F. Lamond; Sean F. Murphy; Tremont Realty Investments, Llc; Seamur Enterprises, Llc; and Colucci, Colucci, Marcus & Flavin, P.C., United States District Court, D. Massachusetts 2016 WL 1312008 (04/04/2016) the USDC for the District of Massachusetts, was asked to determine whether American Guarantee & Liability Insurance Company (AGLI) is estopped from denying professional liability insurance coverage to defendant John F. Lamond because it did not issue to Lamond a second reservation of rights letter in the underlying state court litigation.
AGLI issued Lamond, then a licensed attorney, a professional liability policy covering the period from May 20, 2007, through May 20, 2008. During the policy period, Lamond represented defendant Sean F. Murphy and two defendant companies in which he is the principal – Tremont Realty Investments, LLC, and Seamur Enterprises, LLC (collectively Murphy) – in the purchase of several lots of land for development. Prior to the closing, Lamond learned that the land was the site of an Indian burial ground and was subject to a preservation restriction. He nonetheless certified to Murphy’s mortgagor – Hill Financial Services Company – that titles to the land were free from any encumbrances. After the purchase, the truth was discovered, and Murphy was unable to build on the land as planned and defaulted on the mortgage. Hill foreclosed on the lots, but could not develop or sell them because of the burial ground.
In 2009, Hill brought suit against Murphy and Lamond in the Norfolk Superior Court. Murphy, in turn, brought third-party claims against Lamond for, inter alia, professional negligence and violations of Mass. Gen. Laws Ch. 93A.
In May of 2009, after Hill initiated the state court lawsuit, AGLI sent Lamond a letter informing him that while it had arranged for attorney Joseph Berman of the law firm of Looney & Grossman to defend him, it was “reserv[ing] all rights and defenses available under the Policy and at law to deny coverage on any of the [ ] bases” identified in the letter. Specifically, the reservation letter quoted that Lamond’s policy does not apply … “[t]o any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest[.]”
The Hill] Complaint alleged the Insured’s failure to advise of the Indian issue was deceitful and claims the Insured’s failure to advise Hill Financial of the Indian issue was done so fraudulently so that Hill Financial would loan money. To the extent that this exclusion applies, American Guarantee advised its insured by the reservation of rights that it may be able to deny coverage and reserves the right to do so.
The reservation letter also noted that the definition of covered damages under the policy excluded “criminal or civil fines, penalties (statutory or otherwise), fees or sanctions; … 5. punitive, exemplary or multiple damages; … legal fees, costs and expenses paid to or incurred or charged by the Insured …”
AGLI did not send Lamond a second reservation letter specifically addressing Murphy’s third-party claims. In 2013, Murphy’s claims against Lamond were tried to a jury, which awarded $20,000 to Murphy for Lamond’s professional negligence, and $397,000 in actual damages for Lamond’s deceptive acts and practices under Chapter 93A, doubled by the jury to $794,000 after it found that Lamond had acted willfully. … Pursuant to Chapter 93A, the court also awarded $111,190.62 in attorneys’ fees to Murphy.
To prevail on their negligent misrepresentation claims, the defendants must establish in this context that the plaintiff, in the course of their business, profession or employment, or in any other transaction in which they had a pecuniary interest, supplied false information for the guidance of others in their business transactions without exercising reasonable care or competence in obtaining or communicating the information, that those others justifiably relied on the information, and that they suffered pecuniary loss caused by their justifiable reliance upon the information.
The absence of a second reservation letter is not reasonably understood as a representation that AGLI did not intend to reserve its rights with respect to Murphy’s third party claims against Lamond in light of the first letter.
The policy excluded “any intentional, criminal, fraudulent, and malicious or dishonest act or omission by an Insured.” The letter identified the allegations that Lamond’s “failure to advise of the Indian issue was deceitful and … [his] failure to advise … was done so fraudulently.” The court noted that as Murphy’s third-party claims were based on the same allegations of misconduct, no new issues were raised.
Assuming, for the sake of argument, that the absence of a second letter implied a conflicting message from the first letter, Lamond’s reliance, without any efforts to rectify the two positions, was not reasonable.
The record is devoid of any evidence that Lamond obtained assurance or clarification from AGLI on his interpretation of the absence of a second letter. As a matter of law, he cannot now “rel[y] on one of a pair of contradictories simply because it facilitates the achievement of [his] goal.”
With respect to the Chapter 93A claim, defendants also allege that AGLI engaged in unfair and deceptive business practices by failing to settle Murphy’s claims against Lamond in good faith.
AGLI’s duty to settle the claims against Lamond does not arise until liability has become reasonably clear. Determining if a claim is covered by the policy is essential to evaluating the reasonableness of the insurer’s response to a demand.
Having identified the specific provisions of the policy that excluded coverage of Lamond’s conduct and damages in its reservation letter (those policy exclusions having also been confirmed by this court), it was never reasonably clear that AGLI’s policy covered the claims against Lamond. Absent such clarity, AGLI had no duty to settle Lamond’s claims.
A reservation of rights informs the insured that there is a problem with coverage and that there exists a possibility that if certain facts are proved there would be no coverage. In this case a trial court established that the lawyer acted fraudulently to cause damage to the parties suing him. That was sufficient to establish there was no coverage under the policy and his failure to seek clarification is his problem, not that of the insurance company. The loss was clearly excluded.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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