Keep Viking Pump in Your Long-Tail Claim Toolbox “Long-tail” claims involve personal injury or property damage from alleged exposure to injury-causing products, such as asbestos or PFCs, over a number of years and multiple policy periods. Courts in various jurisdictions use different methods to identify the insurance policies applicable to these long-tail claims. One of the most important coverage cases of 2016 demonstrates that policyholders engaged in allocation disputes with insurers may succeed in securing “all sums” allocation even in so-called pro rata states.

The “all sums” method of allocation permits recovery of up to the limits of liability under any policy in effect during the periods when personal injury or property damage occurred. (The all sums method derives its name from the standard insuring clause promising to pay all sums above the self-insured retention “the insured shall become legally obligated to pay …”)

The “pro rata” method of allocation, on the other hand, limits each insurer’s liability to its pro rata share of the total loss incurred. Jurisdictions differ as to allocation for years with missing policies or policies issued by insolvent insurers. Certain jurisdictions allocate these years to the policyholder; others do not.

In the Matter of Viking Pump, Inc., 52 N.E. 3d 1144 (N.Y. 2016), New York’s highest court held that the policy language rather than a blanket rule determines whether the all sums or pro rata method of allocation is appropriate. This ruling sent shockwaves through the insurance industry because in 2002 the court had applied (and appeared to have adopted) the pro rata method.

The court held that the all sums method applied to allocate the excess insurers’ liability for asbestos-related losses in Viking Pump because the “non-cumulation” clause and “continuing coverage” clause in the followed primary policy was inconsistent with the pro rata method.

The non-cumulation clause in the policy (also known as a “prior insurance” clause) was substantially identical to the clause that first appeared in the London Market in 1960 to prevent policyholders from recovering under both a then-standard “accident-based” liability policy, as well as a subsequent now-standard “occurrence-based” policy. (Ironically, according to law professor Christopher French in an article cited by the court, some insurers have over the years attempted to expand non-cumulation clauses to eliminate their liability for long-tail claims altogether.) The continuing coverage clause extends coverage for continuing injuries after the policy period ends.

The Viking Pump court observed that pro rata allocation is based on policy language limiting liability to only those losses occurring during a particular policy period. In other words, “no two insurance policies, unless containing overlapping or concurrent policy periods, would indemnify the same loss or occurrence.” The presence of the non-cumulation and continuing coverage provisions, the court said, does not square with that principle. Those provisions “plainly contemplate that multiple successive insurance policies can indemnify insureds for the same loss or occurrence by acknowledging that a covered loss or occurrence may also be covered in whole or in part under any other excess policy.”

The court also held that “vertical exhaustion” is appropriate when an all sums allocation is applicable. This permits the policyholder to exhaust the layers of coverage in a specific policy year. (“Horizontal exhaustion” requires all applicable primary and umbrella excess layers to be exhausted before triggering any additional excess insurance.)

This week in Olin Corporation v. OneBeacon American Insurance Co., the Second Circuit extended Viking Pump, holding that once a layer is exhausted, the presence of a prior insurance clause reduces the limits of any applicable prior policies, whether or not the same insurers issued the prior policies.

The likely influence of Viking Pump cannot be overstated. This seminal case will be considered by courts around the country when called upon to decide allocation issues and should be included in the policyholder’s long-tail claim toolbox.

erosionA recent Fifth Circuit case highlights the potential risks of purchasing a defense-within-limits policy: If an insurer is obligated to hire independent counsel due to a conflict of interest, that counsel’s fees may erode your policy limits.

When an insurer accepts coverage of a liability claim, the insurer typically has the right to choose counsel to defend the policyholder as well as to control the defense. When an insurer defends under a reservation of rights, however, a conflict of interest arises between insurer and policyholder. Many states obligate the insurer in this situation to pay for independent defense counsel selected by the policyholder to obviate the conflict. For example, in Mississippi, a policyholder’s right to independent counsel paid by the insurer is known as the “Moeller” rule.

The Fifth Circuit recently decided just how far the rule extends. In Federal Insurance Co. v. Singing River Health Systems, the insurer agreed to defend a public hospital system, Singing River Health System (SRHS), and various officers, under a reservation of rights in multiple lawsuits stemming from alleged underfunding of a pension plan. The policy and policy application clearly stated that defense costs would erode the limits of liability. SRHS nevertheless argued that defense costs paid under Moeller should not erode the policy limits.

The policy defined covered “loss” to include defense costs that SRHS was “legally obligated to pay.” Because the insurer, not SHRS, is “legally obligated to pay” for Moeller counsel, SRHS reasoned that such costs should fall outside the limits. The federal district court agreed, holding that at a minimum, the phrase “legally obligated to pay” was ambiguous and should be construed in favor of SRHS.

During oral argument before the Fifth Circuit, the insurer reported that it had expended over $3 million in defense costs on a policy with $1 million limits.

The panel held that the district court’s ruling pushed the Moeller rule too far. The court cited a more recent Mississippi Supreme Court decision holding that the policyholder must meet the policy’s deductible requirement before the insurer’s Moeller obligation is triggered. The Fifth Circuit held that the insurer’s duty to pay for independent defense counsel is similarly subject to the terms of the policy, including the policy limits. The court also rejected SRHS’s public policy arguments against enforcement of the defense‑within-limits provision.

At oral argument, one of the judges quipped that perhaps SRHS underfunded its insurance coverage. While not apropos from a legal perspective, as a practical matter it is a valid point. SRHS had the option to purchase a separate limit of liability for defense costs and chose not to do so. However, even if there had been a separate limit, defense costs were triple the policy limit with the underlying litigation still ongoing. Failure to realistically assess risks and secure sufficient insurance coverage for those risks can be the ultimate peril.

self driving carIf you weren’t already convinced, this Drive.ai video of a self-driving system demonstrating an extended drive, at night, in rainy conditions, without human intervention, shows how close we may be as a society in which human driving is a luxury activity.

Drive.ai is far from the only company developing and testing AV systems. Waymo, Alphabet’s AV subsidiary, logged more than 635,000 autonomous miles driven on California public roads in 2016 (all other competitors combined logged 20,286 autonomous miles in California). Recently, Ford announced plans to develop a Society of Engineers (SAE) Level 4 AV (no steering wheel, accelerator, or brake pedal) for use in a commercial application (such as ride-hailing of package delivery) by 2021. General Motors, which, along with Ford, strongly supported legislation to allow AV testing and deployment in Michigan beginning this March announced that it will begin production of its AV line early this year. Tesla’s Autopilot option, an advanced driver-assist feature that Tesla describes as offering “full self‑driving capability” but requires driver monitoring has logged over 200 million miles since it was released in 2015.  Tesla estimates that fully autonomous driving could be technically feasible in two years, even if the regulatory framework is not developed enough to allow fully AV yet.

The Regulatory Hurdle

With major industry players fully engaged, Tesla predicts that AV will be technically feasible for a wide-scale deployment in two years.  The adoption of AV regulations in all fifty states may take several years, but, given the potential increases in safety (an estimated 90% of accidents are caused by human error) and the substantial backing of the auto industry, implementing the regulatory framework is likely only a matter of time.  While the National Highway Traffic Safety Administration’s (NHTSA) AV Policy only provides voluntary guidelines for AV manufacturers and a model policy for state regulation of driverless technology, NHSTA affirmed that it intends to pursue an “ambitious approach to accelerate the highly automated vehicle revolution.”

Common Industry Terminology

NHTSA’s AV Policy adopted AV terminology from SAE, which categorizes vehicles by levels of human control.  Level 0 vehicles require constant human control, while Level 5 vehicles will need no help from humans. Level 3 vehicles utilize “conditional automation” in which “the human driver will respond appropriately to a request to intervene.”

Policyholder Impact

AV’s impact on the auto insurance industry – and by extension, commercial auto insurance – is not fully known. While most accidents are caused by human error, the rise of AV introduces a new source of error: misjudgments by the underlying AV system. Experts cannot yet draw any statistically significant conclusions about the safety of AV due to the relatively small sample size (experts estimate that it will take billions of vehicle miles to draw accurate conclusions). Uber is aggressively pursuing AV, but faced criticism when one of its AVs ran a traffic light in San Francisco. Uber blamed the incident on the human driver, who failed to intervene, rather than on the AV system itself. A NHTSA report following a fatal crash involving a Tesla with the Autopilot feature engaged, revealed that after Tesla introduced the Autopilot feature, the number of crashes dropped by 40%.

Assuming that Tesla’s Autopilot data reflects a true decrease in automobile accidents for AV, we might expect insurance premiums for all cars to drop. However, some experts contend that Level 3 AV (similar to Tesla’s Autopilot feature) may present more safety concerns than complete human control or Level 5 AV. Nidhi Kalra, co-director of the Rand Center for Decision Making Under Uncertainty, testified during a recent U.S. congressional hearing that “[t]here’s evidence to suggest that Level 3 may show an increase in traffic crashes . . . I don’t think there’s enough evidence to suggest that it should be prohibited at this time, but it does pose safety concerns.”  Experts question whether inattentive humans may fail to intervene quickly enough, causing the AV to take no action in a dangerous situation because it expects intervention, or the inattentive human may intervene and make the situation worse because of a lack of situational awareness. If this holds true, we might expect premiums to come down only for Level 5, and not for Level 3 or 4 AV.

In addition to the premium question, AV will likely also impact current coverage forms. In the United Kingdom, the Centre for Connected and Autonomous Vehicles recommended new regulations requiring auto insurance policies to include a separate coverage grant for AV. While the UK motor-vehicle insurance scheme is driver-specific rather than vehicle-specific, the authorized driver provision in U.S. policies poses similar questions for insureds. Commercial Auto Policy standard ISO form language for the “Who Is An Insured” provision defines “‘insureds’: [as] a. You for any covered ‘auto’. b. Anyone else while using with your permission a covered ‘auto’ you own, hire, or borrow except […] c. Anyone liable for the conduct of an ‘insured’ describe above but only to extent of that liability.” The standard ISO form defines “insured” as “any person or organization qualifying as an insured in the Who Is An Insured provision of the applicable coverage.” Insurers must determine whether AV falls within this definition of an “insured” and whether to revise or endorse the standard ISO form to capture AV exposure.  In addition, insurers must assess the impact of AV on the omnibus provision c., which defines as an “insured” “[a]nyone liable for the conduct of an “insured” described above but only to the extent of that liability.” This provision extends liability coverage to anyone vicariously liable for the actions of an insured; its impact on AV must be determined.

The Future of AV and Commercial Auto Coverage

For the foreseeable future, commercial auto policies will remain critical components of every commercial insured’s policy portfolio. Accidents will continue to occur, and insureds will need legal representation in any ensuing litigation, which implicates auto insurers’ duty to defend. Insureds will also need comprehensive and collision insurance to repair damaged vehicles.  Many insureds may drive a variety of vehicles, including Level 0 vehicles fully controlled by the driver, and will need traditional permissive-driver liability protection.

Numerous liability questions may arise in accidents involving Level 4 and 5 AV vehicles, including:

  • Who will be responsible for any liability? The passenger sitting in the driver’s seat but not driving? The product manufacturer? A third-party purportedly causing or contributing to the accident?
  • Will insurers use vehicle ratings for property damage coverage but use different metrics for liability coverage?
  • Will insureds see less frequency of claims on their business auto liability coverage, resulting in lower premiums and impacting insurance company premium volume?
  • And, of course, will standard and manuscript insurance policies change in response to this new world?

 

 

A Close Look at Policy Wording Is Essential to Ensure Coverage for Cyber RisksAs the demand for insurance coverage for cyber-related losses continues to grow, more insurance companies are offering cyber insurance policies and endorsements, but the market is far from mature and the available policies far from complete. Insurers have not adopted a unified approach to cyber policies, nor do they offer identical coverages. Due to the variance between available cyber insurance policies and endorsements, policyholders should carefully weigh their cyber risks against proposed cyber coverage to understand the scope of coverage actually available to address company exposures. Insureds should closely examine policy wording, rather than relying on policy labels or marketing materials.

One of the first published cases interpreting a cyber policy illustrates this point. When hackers accessed 60,000 credit card numbers in P.F. Chang’s customer database, the restaurant chain’s cyber policy covered the costs of the forensic investigation into the cause of the data breach to prevent a recurrence, as well as the costs of defense against customer lawsuits arising from the breach, to the tune of some $1.7 million (P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co.). Most cyber policies include coverage for first-party losses as well as liability to third parties. Unfortunately, P.F. Chang’s cyber policy did not cover the nearly $2 million in expenses imposed by credit card issuers such as MasterCard to pay for such items as notifications to cardholders and reissuance of credit cards compromised by the breach. Many cyber policies offer coverage for these types of fines and penalties, albeit for an additional premium.

Those expenses, including fines and penalties, were passed through to P.F. Chang’s via its Master Services Agreement with the restaurant’s third-party credit card processor, Bank of America Merchant Services (BAMS). The agreements between servicers such as BAMS and credit card associations require the servicers to abide by Payment Card Industry Data Security Standards (PCI-DSS) and pay for losses arising from a data breach. These rules and obligations were incorporated into the contract between P.F. Chang’s and BAMS, requiring P.F. Chang’s to reimburse BAMS for any PCI-DSS assessments.

P.F. Chang’s and other restaurants and retailers rely on these servicers to process credit-card transactions on a daily basis. Yet in no less than three places, P.F. Chang’s cyber policy excluded liability assumed under a contract such as the one with BAMS. The “reasonable expectations” doctrine in Arizona that favors policyholders could not save P.F. Chang’s from the court’s interpretation of the plain wording of the policy.

A contractual liability exclusion is a standard exclusion in most commercial general liability policies. However, the exclusion typically incorporates exceptions for “insured contracts.” CGL policies incorporate this exclusion because these policies are primarily intended to cover a third party’s tort claims against a policyholder, not a policyholder’s financial losses arising from a contract. CGL policies also typically exclude coverage for fines and penalties such as those imposed by credit card associations. The P.F. Chang’s decision highlights the need for contractual liability, fines and penalties coverage for policyholders who accept credit card payments.

On January 27, 2017, the Ninth Circuit granted a joint stipulation to dismiss P.F. Chang’s appeal of the district court’s decision after the parties reached a settlement. We do not know the details of this settlement, although this settlement preserved this insurer-friendly decision to the detriment of policyholders.

This watershed case is a cautionary tale. The wild world of cyber-related risks is difficult to pin down – ranging from the obvious but mundane, such as theft of a company laptop, to the worst case scenario of a system-wide hack that could cause a major disruption and loss of business and extensive liability. As P.F. Chang’s shows, it pays to assess your company’s risks and closely examine your policy to ensure you have the coverage you need.

Are Federal Courts Increasingly Likely to Grant Rescission of Insurance Contracts?Recent court decisions across a variety of industries highlight the importance of submitting complete and accurate insurance applications and renewals. When submitting an application for insurance, the applicant should accurately and completely answer all application questions and fulfill all document and data requests. Oversights, misstatements, and missing documents can lead to rescission of the insurance policy and leave the organization or individual without any coverage for a claim.

When faced with a claim or potential claim, insurance companies can and will review both the applicable policy, policy applications, and the underwriting files to determine potential defenses to coverage. After a claim arises, an insurer that discovers a discrepancy in the application, renewal, or underwriting file will likely attempt to rescind the policy and deny coverage for the claim, potentially unraveling the organization’s risk management planning and creating substantial, unexpected liabilities.

Under the wrong circumstances, insurance company rescission arguments can persuade a judge or jury because the insurance company may create the impression that the organization misled or misrepresented key details to obtain lower premiums. The insurer’s ability to frame a coverage dispute as a referendum on the policyholder’s honesty, rather than a simple contract dispute, can profoundly impact the course of the litigation. Some courts’ apparent willingness to more liberally permit rescission presents a worrying trend that should be closely monitored, coupled with a thorough review of policy applications to mitigate the potential of rescission.

Five Best Practices to Minimize Rescission Risk

  • Carefully review the reported values and conditions of assets in other company documents, especially publicly reported documents (because these documents are often incorporated by definition into the application), and ensure that the values and conditions reported on insurance applications are consistent and accurate.
  • Assess and review the scope of the organization’s operations during policy renewal to disclose all relevant business activities and avoid inadvertent omission of related business operations and new business operations to avoid an insurer contention that the organization misrepresented the scope of its operations in its renewal application.
  • Disclose prior related incidents or losses to ensure that an insurer cannot use an earlier claim or loss to rescind the policy.
  • Do not rely on good intentions as a defense to rescission. Under some state laws, courts may uphold rescission based on the insured’s material misrepresentation even if the alleged misrepresentation was accidental and not intentional.
  • Be aware of differing legal standards for disclosure of material information in insurance applications. An applicant should always answer questions fully and accurately and provide all requested supporting documents. In certain circumstances, however, such as the marine market and some foreign markets, the applicant may have an affirmative duty to disclose all material information, regardless of whether the underwriter requested the information. An insured must know whether a heightened duty to disclose applies under the governing law.

Recent Cases Underscore the Need for Accurate Applications and Disclosures

Failure to Report Prior Losses Leads to Rescission of Policy 

Just this month, the Third Circuit Court of Appeals affirmed a lower court decision rescinding a product contamination insurance policy based on four material misrepresentations in the policyholder’s application upon which the insurer relied.  In H.J. Heinz Co. v. Starr Surplus Lines Insurance Co., following an advisory jury’s determination that the policyholder failed to disclose at least two prior incidents involving contamination of baby food, the federal judge upheld rescission even though the insurance company purportedly ratified the policy by invoking the policy’s choice‑of‑law provision. On appeal, the policyholder argued that the insurance company’s attempt to enforce the choice‑of‑law provision in the policy ratified the policy and precludes rescission. The policyholder also argued that the insurance company knew of the prior product contamination issues through news reports in the insurance company’s file. The appellate court rejected both of these arguments and in strong language criticized the insured for failure to disclose prior losses: “For the ten-year period identified in the Application, Heinz disclosed only one loss in excess of a $5 million SIR. In reality, however, Heinz experienced three losses exceeding a $5 million SIR, totaling more than $20 million, a figure far exceeding the single $5.8 million disclosed loss. Heinz’s misrepresentations were of such magnitude that they deprived Starr of ‘its freedom of choice in determining whether to accept or reject the risk upon full disclosure of all the facts which might reasonably affect that choice.” The appellate court also found that the evidence established the insurer’s reliance on these misrepresentations: “Starr underwriters testified that they looked to Heinz’s loss history in calculating the appropriate risk and conducting their loss ratio analysis.”

This appeal presents an interesting test case: The policyholder’s position that rescission is inappropriate because the insurance company ratified the contract is legally sound, but the insurance company’s argument that the omission of two potentially related prior incidents from the application highlights the risks of incomplete disclosures in insurance applications. The Third Circuit held oral argument on December 6, 2016, and took the matter under advisement.

Failure to Disclose Additional Business Activities Leads to Rescission of Policy

The Seventh Circuit Court of Appeals recently upheld the rescission of an insurance policy sold to a doctor and a related MRI center because both made material misrepresentations in their insurance policy applications. In Essex Insurance Co. v. Galilee Medical Center S.C., the court, applying Illinois law, upheld rescission because the applications stated that the doctor and the MRI center did not perform non‑traditional weight loss procedures or treatments, but a post-claim investigation indicated otherwise.

After a patient sued the doctor and the MRI center for complications from a non-FDA approved weight loss treatment, the court found that the doctor recommended non‑traditional weight loss procedures and treatments to a client while at the MRI center and then completed those treatments at a different location. The court rejected the MRI center’s argument that the doctor performed the non-traditional weight loss procedure at another location and that the doctor’s actions at the MRI center were limited to making a referral to himself for the non‑traditional weight loss procedure.

Incorrect Reporting of Property Condition Leads to Rescission of Policy

The Second Circuit Court of Appeals affirmed a lower court’s decision to rescind two insurance policies for misrepresentations regarding the condition of a dry dock that sank after the policyholder attempted to repair the structure. In Fireman’s Fund Insurance Co. v. Great American Insurance Co., two insurance companies, an excess property insurer and a marine pollution insurer, sought rescission of their respective insurance contracts because the policyholder’s insurance application and renewals valued a dry dock owned and operated by the policyholder at several million dollars, when internal documents show that, due to deterioration and lack of repairs by a prior owner, the dry dock had no monetary value.

Applying admiralty law, which requires a heightened duty of “utmost good faith” of disclosure on the part of the applicant, the court rescinded the marine policy because the policyholder, over a period of multiple years, reported that the value of the dry dock as if it were in good condition when it was in need of repairs. The court upheld rescission despite the policyholder’s argument that it provided all the information requested on the insurance application and the underwriter did not request surveys or additional information about the condition of the dry dock. This holding highlights the need to ascertain when a heightened duty to disclose applies for certain types of policies.

Similarly, applying Mississippi law, the court upheld rescission of the excess property policy because the applicant reported the value of the dry dock as if it were in good condition and reported the likelihood of a maximum probable loss – the dry dock sinking – as an “extremely low probability.” The court rejected the applicant’s arguments that it did not complete an application, but rather provided a property insurance submission of its own creation, and that the insurer did not request additional information about the condition of the dry dock in light of the “material misrepresentation” of the condition of the dry dock in the insurance submission. The court rescinded the policy even though the insurer did not intend to deceive the insurer. The court did not require intent or a reckless disregard of the facts often required for a misrepresentation defense.

More States Applying “No-Prejudice Rule” on Notice to Claims-Made PoliciesIn a majority of states, an insurer cannot deny coverage based on a policyholder’s late notice of a claim without showing that the delay prejudiced the insurer. This “notice-prejudice rule” is an advance over the traditional “no-prejudice” rule that allows insurers to deny claims based on late notice regardless of the circumstances leading to the delay. The Wyoming Supreme Court, the most recent court to adopt the notice-prejudice rule, described the rationale for the rule in Century Surety Company v. Jim Hipner, LLC: most policyholders lack the leverage to negotiate for better policy terms; forfeiture of coverage on a mere technicality gives an unwarranted windfall to the insurer; and states have an interest in ensuring that accident victims are compensated. The court also held that a policy provision attempting to “contract around” the notice-prejudice rule violated public policy.

Nevertheless, more states are limiting the notice-prejudice rule to occurrence policies and applying the no-prejudice rule to claims-made policies. The New Jersey Supreme Court  applied the no-prejudice rule to a claims-made policy that required written notice of a claim “as soon as practicable” in Templo Fuente De Vida Corp. v. National Union Fire Insurance Co.  The court agreed with National Union’s contention that the policyholder’s notice of a D&O claim more than six months after service of the lawsuit violated the notice provision. Despite longstanding precedent in New Jersey following the notice-prejudice rule, the New Jersey Supreme Court refused to apply the notice-prejudice rule to claims-made policies with clear and unambiguous terms. The court discounted the equitable concerns behind the notice-prejudice rule because purchasers of claims-made policies are “knowledgeable insureds, purchasing their insurance requirements through sophisticated brokers.”

Despite this court’s application of the no-prejudice rule to a claims-made policy, policyholders should not presume this is a blanket rule, even in New Jersey. In Templo Fuente, the policyholder gave no reason for its delay in providing notice. An explanation could have dissuaded the court from denying coverage. In addition, not all purchasers of claims-made policies are “sophisticated.” Finally, the goal of avoiding an unwarranted windfall to the insurer appears to equally apply to a claims-made policy. Unlike an occurrence policy, which can be triggered years after the policy period expires, coverage under a claims-made policy is limited. In order for coverage to apply, the policyholder must give notice of the claim within the policy period or any applicable extended period, as did the policyholder in Templo Fuente.

To avoid a forfeiture of coverage, policyholders should establish a protocol for giving notice of claims and potential claims under all potentially applicable insurance policies, including umbrella and excess policies. In Century Surety, the policyholder had notified the primary insurer but not the umbrella insurer, perhaps believing that the claim would not exceed the primary policy’s limits. The policyholder’s failure to notify the umbrella insurer did not forfeit coverage in that case, but would have under the no-prejudice rule.

Even If Insurer Has No Duty to Defend, It Could Have Duty to IndemnifyPaying attorneys’ fees and other costs of a defense against a third-party lawsuit can deal a tremendous blow to a policyholder’s bottom line. Not surprisingly, some of the hardest fought battles between policyholders and insurers center on whether insurers have a duty to defend. Because an insurer’s duty to defend is broader than its duty to indemnify, when a lower court rules that a particular insurer has no duty to defend, many policyholders walk away from their policies and look for other sources of recovery. A recent case demonstrates that policyholders should not let their insurers off the hook so easily.

In Hartford Casualty Insurance Company v. DP Engineering, L.L.C., the appeals court held that insurers might have a duty to indemnify even though they had no duty to defend. Entergy hired the policyholder engineering company to assist in removing and refurbishing a 520-ton component at a nuclear power plant. The gantry used to lift the component collapsed, killing one worker, injuring others, and causing “massive damage” to the plant. The insurers contended that they had no duty to defend or indemnify the policyholder in the multiple lawsuits that arose from the incident, based on the professional services exclusions in the policies. The district court agreed with the insurers.

The Fifth Circuit Court of Appeals disagreed with this line of reasoning. Even though the insurers had no duty to defend because the actions alleged in the complaints fell within the professional services exclusions, the court said, the insurer could still have a duty to indemnify. The insurers’ duty to indemnify could only be determined after a final adjudication of the lawsuits because the allegations did not “conclusively foreclose” the development of facts involving the insured’s non-professional services, which would trigger coverage under the policies.

This case is a reminder not to walk away from coverage in the face of a loss on the duty to defend. Policyholders pay premiums to secure both the duty to defend and the duty to indemnify, and should fight for both coverages to avoid responsibility for a settlement or judgment that could be as damaging to the bottom line as the costs of defense.