Massachusetts Court Allows Consideration of Extrinsic Evidence

In its recent decision in BioChemics, Inc. v. AXIS Reinsurance Co., 2013 U.S. Dist. LEXIS 111218 (D. Mass. Aug. 7, 2013), the United States District Court for the District of Massachusetts had occasion to consider when an insurer is entitled to rely on extrinsic evidence for determining its duty to defend.

AXIS insured BioChemics under a claims made and reported directors and officers policy for the period November 13, 2011 to November 13, 2012.  BioChemics sought a defense in connection with an SEC enforcement action filed during the period the policy was in effect.  BioChemics also sought a defense for two SEC subpoenas issued by the SEC during the policy period.  AXIS, however, took the position that BioChemics was not entitled to coverage for these matters because they related back to a series of subpoenas served by the SEC prior to the policy’s date of inception, at a time when BioChemics was insured by a different carrier.   In support of its position, AXIS relied on a provision in its policy’s Limits of Liability section stating that:

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 earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy . . . .

Notably, the subpoenas served by the SEC both prior to and subsequent to the AXIS policy’s date of inception all had the same SEC matter identification and number.

BioChemics filed a declaratory judgment action and subsequently moved for summary judgment on the duty to defend before the commencement of discovery, asserting that the duty to defend is based solely on the complaint and the policy, and that as such, discovery was not necessary.  AXIS opposed the motion, asserting that at the very least, it was entitled to discovery into communications between BioChemics and the SEC so that it could confirm whether, in fact, the subpoenas served prior to its policy’s inception were interrelated with the subsequent subpoenas and the enforcement action, thus comprising a “single, ongoing claim” first made prior to the policy period.

The court acknowledged a line of cases cited by BioChemics standing for the proposition that insurers cannot rely on extrinsic evidence for the purpose of determining a duty to defend.  The court went on to note, however, that this line of cases does not apply to extrinsic facts that will not be litigated in the underlying matter.  The court further observed that in the context of claims made and reported policies, the rule against consideration of extrinsic facts cannot be rigidly applied since coverage issues such as the timing of the claim are unlikely to be alleged in the underlying complaint.  While the court acknowledged it a close question, it ultimately held that:

… an insurer may 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.

As such, the court allowed AXIS to proceed with discovery into the interrelatedness issue, and denied BioChemics’ motion for summary judgment without prejudice.  The court further held that under Massachusetts law, AXIS was not required to provide BioChemics with a defense pending determination of the duty to defend issue.

Eleventh Circuit Allows Consideration of Extrinsic Evidence

In its recent decision in American Safety Indemnity Co. v. T.H. Taylor, 2013 U.S. App. LEXIS 5072 (11^thCir. March 14, 2013), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, had occasion to consider when and under what circumstances an insurer can rely on extrinsic evidence in determining whether a duty to defend is triggered.

American Safety insured T.H. Taylor under a commercial general liability policy.  T.H. Taylor had been hired as a general contractor to construct a residential home.  Prior to completion of the project, with approximately 20% of the project yet to be completed, the owners suspended construction.  As of that time, T.H. Taylor had been paid nearly the full value of the original budget.  T.H. Taylor and the owners were sued in several underlying lien actions filed by subcontractors and suppliers in Alabama state court.  In these suits, the owners asserted a cross-claim against T.H. Taylor, alleging a cause of action for fraud.  Specifically, the owners alleged that T.H. Taylor intentionally misrepresented the status of the construction project as well as how much the subcontractors and suppliers had been paid.  The cross-claim specifically alleged that T.H. Taylor made these representations, knowing them to be false, for the purpose of receiving an advance on a construction loan.

The state court dismissed the owners’ cross-claims on the basis of a provision in the construction contract requiring all disputes to be arbitrated.  The owners later commenced an arbitration proceeding against T.H. Taylor, but in doing so, the arbitration petition did not allege any specific causes of action, nor did it contain the specific assertions regarding T.H. Taylor’s intent to deceive.  Instead, the petition alleged only that T.H. Taylor presented requests for payment in an amount not equal to the work that actually had been performed.  American Safety took the position that the specific assertions in the cross-claims filed in state court precluded any finding of an “occurrence,” and that as such, it had no duty to defend.  T.H. Taylor, on the other hand, argued that American Safety could not look beyond the arbitration petition in determining whether it had a duty to defend.

The United States District Court for the Middle District of Alabama held in favor of American Safety, and on appeal, the Eleventh Circuit agreed.  The court noted that Alabama law requires that in determining a duty to defend, an insurer cannot rely solely on the theories of liability pled by a plaintiff, but instead must consider the specific factual assertions in a complaint.  If these factual assertions “could reasonably support a legal theory of recovery that is an insured risk under the policy, the insurer has a duty to defend the claim.”  The court further noted, however, that T.H. Taylor’s arbitration proceeding contained no specific legal theories or specific detail concerning the operative facts.  Under such circumstances, observed the court, Alabama law permits an insurer to look beyond the pleadings to examine other available evidence in determining a duty to defend.  As such, the court concluded that it was permissible for American Safety to have relied on the facts alleged in the underlying cross-claim in determining a duty to defend:

The principal determinant in a duty-to-defend inquiry is the state of the pleadings in the underlying litigation, and here, those pleadings did not cease to exist simply because of a change of forum from the state court to private arbitration. The arbitration proceeding was ordered by the court and was ancillary to the state court litigation. It constituted a continuation of the same dispute between the same parties arising out of the same facts. Additionally, even if the arbitration complaint is viewed as somehow displacing the owner's cross claim as well as the claims made by the plaintiffs in the state court litigation, such that the arbitration complaint became the principal pleading driving the duty-to-defend issue, those underlying pleadings in the state court would still be admissible evidence with respect to the proper interpretation to be made of the non-specific complaint in arbitration.

As such, and having agreed that the allegations in the cross-claims supporting a conclusion of intentional rather than accidental conduct, the Eleventh Circuit agreed that American Safety had no duty to defend. 

Illinois Federal Court Allows Consideration of Extrinsic Evidence

In its recent decision in Nautilus Ins. Co. v. Ricciardi Dev., LLC, 2012 U.S. Dist. LEXIS 161244 (N.D. Ill. Nov. 9, 2012), the United States District Court for the Northern District of Illinois had occasion to consider when and under what circumstances an insurer can rely on facts extrinsic to a complaint in evaluating whether it has a duty to defend.

The insured, Ricciardi Development was named as a defendant an underlying suit alleging that it negligently owned and maintained an apartment building in Chicago, Illinois, where a roof porch guard rail collapsed, causing plaintiffs to fall to the ground.   Among other things, it was alleged that Ricciardi has work performed on the porch rails that allowed for the accident.  Notably, the complaint alleged that the accident happened on May 24, 2009, and that Ricciardi owned and renovated the building sometime prior to that date.   The complaint did not allege a specific date on which such work was performed.

At the time of the accident, Ricciardi was insured under a general liability policy issued by Nautilus Insurance Company.  By endorsement, the Nautilus policy excluded coverage for bodily injury resulting from Ricciardi’s work completed prior to September 11, 2008 and specifically stated that Nautilus would have no duty to defend any claim alleging bodily injury arising out of Ricciardi’s work, or work completed for Ricciardi, prior to September 11, 2008.  Having learned from its own investigation that Ricciardi only owned the building only from 2000 through 2005, and thus could not have performed work subsequent to 2008, Nautilus filed suit against Ricciardi, seeking a judicial declaration that it had no duty to defend or indemnify on the basis of this exclusion.

On motion for summary judgment, the court agreed that the exclusion was clear and unambiguous, and thus applied to claims against Ricciardi involving work performed by or for it prior to September 11, 2008.  The underlying suit, however, did not allege the date on which various porch repairs were performed.  The court reasoned, therefore, that if it could only consider allegations contained in the underlying complaint, then Nautilus would have a duty to defend, explaining “[b]ecause September 11, 2008, the policy's cut-off date, is prior to May 24, 2009, the complaint alleges a claim that potentially could fall within the policy's coverage.”  The court further reasoned, however, that if it could rely on facts extrinsic to the complaint, then there was no potential for coverage since any work Ricciardi performed with respect to the porch necessarily was completed prior to 2005 when Ricciardi sold the premises.

The court observed the general rule of Illinois law, which is that an insurer may consider only the facts alleged in the underlying complaint in determining a duty to defend.   It noted, however, an exception to this rule applicable when an insurer elects to file a declaratory judgment action regarding its duty to defend.   Under such circumstances, explained the court, Illinois case law generally supports the proposition that consideration of such extrinsic facts is required except when these facts are central to the determination of an issue in the underlying suit.  Looking to these cases, the court concluded that:

… this court can and must consider the undisputed extrinsic evidence set forth by Nautilus—that Ricciardi sold the property on February 22, 2005, and completed the work on the porch and guardrail before then—in determining whether Nautilus has a duty to defend  Ricciardi and Development. There is no basis for concern that considering this evidence would "tend[] to determine an issue crucial to the determination of the underlying [state court] lawsuit." … Indeed, the opposing sides in the underlying suit unanimously agree in this case that Ricciardi sold the property in February 2005 or, at a minimum, that he did not own the property as of September 11, 2008. … If that fact were contested in or significant to the underlying suit, the opposing sides in that suit would not have agreed on that fact here.

Thus, concluding that consideration of extrinsic facts was permissible and that these facts were dispositive of the policy’s exclusion, the court agreed that Nautilus had no duty to defend.

Florida Court Allows Extrinsic Facts for Determining Duty to Defend

In its recent decision in Composite Structures, Inc. v. Cont'l Ins. Co., 2012 U.S. Dist. LEXIS 147320 (M.D. Fla. Oct. 12, 2012), the United States District Court for the Middle District of Florida considered if and when an insurer can rely on facts extrinsic to a complaint for the purpose of determining a duty to defend.

The insured, Marlow Marine Sales was named as a defendant in an underlying suit brought by two individuals claiming bodily injuries as a result of exposure to carbon monoxide fumes while working aboard a yacht designed, manufactured and sold by Marlow.  Marlow subsequently tendered the matter to its general liability insurer, Continental.  One month after suit was filed, during which time Continental was still in the process of investigating Marlow’s right to coverage, plaintiffs in the underlying suit filed a memorandum of law specifying the time period during which they were exposed to the fumes.  Continental learned of this filing and relied on the information contained therein to deny coverage based on a pollution exclusion that only applied if the insured did not learn of the occurrence within seventy-two (72) hours of its commencement.   Continental relied on the information contained in the subsequently filed memorandum, which was not otherwise in the complaint, to conclude that this exception to the exclusion was inapplicable.

Marlow agreed that it did not learn of the occurrence within the seventy-two hour window.  It nevertheless contended that it was entitled to a defense since Continental only learned of the facts relevant to the coverage defense from a pleading filed subsequent to the complaint.  Marlow argued that Continental could not rely on such extrinsic facts in determining its defense obligation, but instead its duty to defend could only be determined by the complaint, which contained no facts one way or the other relevant to the application of the exception to the exclusion.  In light of this silence, Marlow contended that Continental was required to have provided a defense.

The court agreed that under Florida law, consideration of the duty to defend is typically restricted to the allegations in the complaint.  Citing to the Florida Supreme Court decision in Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5(Fla. 2004), however, the court acknowledged an exception to this rule where the insurer’s defense to coverage “is based on factual issues that would not normally be alleged in the underlying complaint.”  While the underlying suit against Marlow contained allegations relevant to the pollution exclusion, it did not contain allegations bearing on the issue of when Marlow became aware of the alleged occurrence.  The court nevertheless went on to consider whether these facts should have been asserted in the underlying suit.  The court answered this question in the negative, explaining that such facts were irrelevant in a products liability suit alleging causes of action for negligence and strict liability:

Neither cause of action requires a plaintiff to allege the specific date on which he informed the defendant of his injuries or the specific date on which the defendant informed its insurer. Indeed, before filing suit, an injured plaintiff is unlikely to be privy to information regarding the date on which a defendant informs its insurer of the incident. Those facts "would not normally be alleged in the underlying complaint," and therefore, the duty to defend can only be determined by examining outside evidence.

The court agreed that these facts extrinsic to the underlying complaint conclusively established that Marlow was not aware of the alleged occurrence within the seventy-two hour period necessary to trigger the policy’s exception to the pollution exclusion.   Thus, underlying the circumstances, the court held that “Continental was well within its rights to deny coverage.”