The United States District Court for the District of Connecticut, applying Connecticut law, has denied cross-motions for summary judgment, finding that fact issues remain with regard to whether the insured reasonably could have expected a pre-policy period enforcement notice to give rise to claim. Wallingford Grp., LLC v. Arch Ins. Co., 2020 WL 4464629 (D. Conn. May 11, 2020).
In 2013, the insured, a civil engineering firm, agreed to perform surveying and other services to improve a parcel of real property in Connecticut. Several months later, the firm received a notice of investigation from the Army Corps of Engineers which stated, among other things, that the ACOE did not have a record that it issued a permit for the project, and that it would investigate the firm’s work at the site.
Later, in 2016, the firm signed an application for a professional liability policy. In doing so, the firm did not disclose the ACOE enforcement notice and also declared that it was unaware of any claim or loss. During the policy period, the firm received a demand letter from two parties that it contracted with to perform the work. The parties sought reimbursement of expenses they incurred to resolve the ACOE investigation and to re-perform some of the firm’s work at the site. The insurer denied coverage for the claim after concluding that the ACOE enforcement notice triggered the policy’s prior notice exclusion. The parties sued the firm during the policy period, and the insurer reiterated its position that it had no defense or indemnity obligation based on the prior knowledge exclusion.
The firm ultimately settled the suit, and as part of that settlement, assigned all claims and rights it had against the insurer to the parties. A coverage action ensued. In considering whether the prior knowledge exclusion applied to bar coverage, the court applied a two-part “subjective-objective test.” The test first considers whether the firm had “actual knowledge of a suit, act, error or omission” (the subjective prong) and second whether “a reasonable person might expect a claim or a suit to result” (the objective prong).
Here, the court found that the subjective prong of the test was satisfied, stating that the ACOE enforcement notice is a “relevant fact” that occurred before the policy period, and that the firm had actual knowledge of the notice. The court determined that the objective prong was not satisfied, however, finding that genuine issues of material fact remained. While the insurer argued that a reasonable person would have expected a claim under the circumstances – pointing to how the ACOE notice advised of the potential for fines or liability – the assignees argued that the notice was the only communication that the firm received from the ACOE and that the purpose of the notice was merely to inform the firm of permit requirements. The court determined that “[a]lthough [the firm]’s testimony that [it] lacked subjective knowledge may constitute disingenuous, after-the-fact justifications, credibility issues are not appropriately resolved on summary judgment and must be decided by a jury.”
Finally, the insurer also sought a declaration that the policy was void because of “material misrepresentations” in the application. Because the court held that genuine issues of fact remained as to the firm’s objective knowledge of the enforcement notice, it also found that questions remained as to whether the firm “knowingly made” a material misrepresentation to the insurer.