Contents
- Duty to Defend Assessed Solely on Conduct Alleged in Complaint – By David K. Subramanian
- "Doe" Defendant Status in Prior Suit Insufficient to Support Statute of Limitations Defense – By Jamison R. Narbaitz
- Gunmaker Denied Coverage for Municipality Cost-Recovery Suits – By Laura Goodman
Duty to Defend Assessed Solely on Conduct Alleged in Complaint
In Steadfast Insurance Company v. Caremark RX, Inc. et. al.,—N.E.2d—, 00-No. 1-04-3423, 2005 WL 1981053 (Ill. App. Ct. Aug. 17, 2005), the Appellate Court of Illinois, First District, concluded that the inclusion of language in a complaint usually associated with negligent conduct was insufficient to trigger a professional liability insurer’s duty to defend or to indemnify where the specific factual allegations contained in the complaint involved only intentional conduct.
Caremark Rx, which provided pharmacy benefit management services to various health plan sponsors throughout the country, was named as a defendant in two ERISA class actions brought on behalf of the Georgia Pacific Corporation Health and Accident Plan ("the Plan") and all other similarly situated plans. Essentially, the complaints maintained that Caremark was involved in a secret "kickback" scheme with drug manufacturers that ultimately caused increases in prescription drug costs to the Plan.
Caremark tendered the defense of the suits to Steadfast Insurance Company, which had issued a managed care professional liability policy to Caremark. Steadfast rejected the tender and initiated this action for declaratory relief as to its defense and indemnity obligations. In its motion for summary judgment, Steadfast argued that it had no duty to defend or indemnify given that the complaints alleged only intentional conduct, while the policy’s coverage grant encompassed only negligent conduct. Steadfast also maintained that the allegations contained in the complaints fell within the ambit of the policy’s intentional acts exclusion. Caremark filed a cross-motion for summary judgment, arguing that Steadfast owed it a duty to defend.
The trial court concluded that the complaints triggered Steadfast’s duty to defend, and granted Caremark’s motion. The trial court reserved ruling on estoppel issues with regard to the indemnification obligation. Steadman appealed, seeking a reversal and entry of judgment in its favor on both the defense and indemnification issues.
The First District rejected Caremark’s claim that allegations contained in the complaint referring to Caremark’s duty to act with "care, skill and prudence" (and its purported breach of that duty) triggered the duty to defend. The court observed that although these terms are usually associated with negligent conduct, the facts alleged in the complaint— as opposed to the labeling or characterization of those facts—referenced only intentional conduct. The court emphasized that phrases used throughout the complaints, such as "mislead and conceal," "scheme and device," and "intentionally and willfully," are "the paradigm of intentional conduct and the antithesis of negligent actions."
Notably, the appellate court also rejected Caremark’s argument that there was a potential for coverage arising from the complaint’s failure to specify, in one count, whether Caremark acted negligently or intentionally in failing to disclose the existence of the "kickback" scheme. The court held that the "failure to disclose" claim could not be read in isolation because it incorporated the factual allegations contained in the other counts, and thus was clearly part of the purported scheme to mislead and defraud. In this regard, the court noted that "[i]t is the actual complaint, not some hypothetical version, that must be considered" for purposes of assessing an insurer’s duty to defend.
Having determined that the trial court erred in finding a duty to defend, the First District then went on to address Steadfast’s duty to indemnify. The court held that since "no duty to indemnify can exist in the absence of a duty to defend," the trial court should have granted Steadfast’s motion for summary judgment on the issue of its indemnity obligation as well.
David K. Subramanian
"Doe" Defendant Status in Prior Suit Insufficient to Support Statute of Limitations Defense
In Eaton Hydraulics Inc. v. Continental Casualty Company,—Cal.App.4th—, —Cal.Rptr.3d—, 2005 WL 2234089 (Cal.App. 2 Dist., Sept. 15, 2005), the California Court of Appeal, Second Appellate District, held that a claim against an umbrella insurance carrier was not barred by the four-year statute of limitations where a prior action naming the umbrella carriers as "Doe" defendants was tolled.
The U.S. Environmental Protection Agency initiated various administrative enforcement proceedings against Eaton Hydraulics Inc. between 1991 and 1997 for costs incurred by the government to clean up soil and groundwater contamination. Eaton sought coverage from its insurers in connection with the administrative enforcement proceedings.
In April 1996, Eaton sued several primary and excess carriers, asserting that the various policies covered the administrate enforcement proceedings ("the Vickers action"). Eaton specifically named its primary carriers as defendants, but named its excess carriers as "Doe" defendants. The Doe defendants were never identified or served with the lawsuit. Ultimately, Eaton and its primary insurers entered into a tolling agreement, and stipulated to dismiss the Vickers action without prejudice to future actions seeking defense and indemnity from the carriers.
In 1999, the EPA claims culminated in a lawsuit filed by the United States and the State of California against Eaton and other defendants ("the ITT Industries action"). The parties settled the lawsuit in May 2000, and judgment was entered against Eaton on August 2, 2000.
On September 28, 2001, Eaton filed suit against the primary carriers named in the Vickers action, plus four umbrella insurers, including Continental Casualty Company ("CNA"). Eaton sought declaratory relief, and damages for breach of contract and bad-faith breach arising out of the insurers’ failure to defend Eaton in the ITT Industries action.
CNA demurred, contending that Eaton’s claims were barred by the four-year statute of limitations imposed by California Civil Procedure Code §337. CNA argued that Eaton’s claims against it were barred because more than four years had elapsed since Eaton filed the Vickers action, and CAN was not a signatory to the Vickers tolling agreement.
Eaton countered that the statute of limitations did not begin to run until August 1998, when the California Supreme Court held in Foster-Gardner, Inc. v. National Union Fire Insurance Company, 18 Cal.4th 857 (1998), that the duty to defend attaches only to "suits" and not to administrative proceedings. Eaton argued that the court’s decision triggered the statute of limitations because the Foster-Gardner decision negated any chance of coverage for the EPA claims under the primary policies.
The trial court sustained CNA’s demurer, ruling that Eaton knew about the accrual of a cause of action against its carriers arising from the EPA claims in April 1996, but did not file the action against CNA until September 28, 2001, more than four years later.
The California Court of Appeal reversed for three reasons. Id. at *6.
First, the appellate court noted that a cause of action accrues when the insurer breaches its duty to defend, noting "[t]he question whether the statute of limitations has run against CNA depends, in the first instance, on whether and when it refused to defend Eaton." CNA was never identified or served as a Doe defendant in the Vickers action. Therefore, the court found that the Vickers complaint could not be read as a lawsuit seeking a defense from CNA at the time of its filing.
The trial court presumably was relying on the allegations in the Vickers complaint when it stated that Eaton knew about the accrual of a cause of action against its carriers arising from the EPA claims in April 1996. However, the appellate court noted that CNA was never identified or served as a Doe defendant in the Vickers action. Therefore, the Vickers complaint could not be read as a lawsuit seeking a defense from CNA at the time of its filing.
Second, the court reiterated the well-settled law that an insurer’s duty to defend is continuing, and that the statute of limitations is equitably tolled from the time the cause of action accrues until the underlying action is terminated by final judgment. The fact that Eaton filed the Vickers action against other insurers in April 1996 did not, of itself, trigger the statute as to CNA. Id. at *4-5.
Finally, the court held that CNA, as an umbrella or excess insurer, had no obligation to defend unless and until Eaton’s primary coverage was exhausted. Even the primary insurers’ refusal to defend while still on the risk did not trigger CNA’s duty to defend. Id.
Jamison R. Narbaitz
Gunmaker Denied Coverage for Municipality Cost-Recovery Suits
The Florida Supreme Court ruled that a commercial liability policy excluded coverage for cost lawsuits filed by a municipality against a gun manufacturer for medical and other services incurred by the municipality as a result of gun violence in its community. In Taurus Holdings, Inc. v. U.S. Fidelity and Guaranty Company, —So.2d—, 2005 WL2296481 (Fla.Sup.Ct., Sept. 22, 2005) the Florida high court responded to the question certified to it by the Eleventh Circuit Court of Appeals: "Does a ‘products-completed operations hazard’ exclusion in a commercial general liability policy of insurance bar coverage and therefore eliminate an insurer’s duty to defend the insured gun manufacturer in [the municipality suits]?"
The insurer argued that damages alleged in the underlying suits "arise out of" completed, non-defective products, and thus are excluded from coverage." The insured argued that the exclusion applied only to defective products. The state high court considered the "broad language" in the policy excluding from coverage "all bodily injury and property damage occurring away from premises you own or rent and arising out of your product." While acknowledging that other states are divided on the issue, the court held that the plain reading of the exclusion refers to all products, not just products that are defective, and answered the certified question in the affirmative.
Laura Goodman
Insurance Law Update is prepared by attorneys on Sedgwick's Insurance Industry Team. For more information please contact Laura Goodman, Editor and Special Counsel in Sedgwick's San Francisco office.
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