Court Dismisses Coverage Action Where Claims Were Made Before Policy Period and Barred by Prior and Pending Litigation Exclusion
A California federal court has held that a professional liability policy does not afford coverage for claims against an insured individual, who was serving as executor of his father’s estate, by his stepmother because those claims related to earlier claims by the stepmother before the policy period. Cove Partners, LLC v. XL Specialty Ins. Co., 2016 WL 461918 (C.D. Cal. Feb. 2, 2016). Wiley Rein represented the insurer. The court dismissed claims of breach of contract, bad faith, fraud, and reformation with prejudice.
The professional liability policy provided coverage to the insured company for professional services wrongful acts, which were defined to include services as a trustee and executor. The principal of the insured had been sued by his stepmother prior to the policy period in connection with his administration of his father’s estate, and the insured disclosed these suits on its application for the policy. After the policy incepted, the principal sought coverage for three additional claims by the stepmother. The insurer denied coverage on the basis that the claims were related to the claims made before the policy period. Accordingly, the claims were deemed made before the policy incepted and, in any event, coverage was barred by the policy’s prior and pending litigation and prior knowledge exclusions. The insured brought this coverage action, alleging breach of contract, bad faith, fraud, and reformation.
The court granted the insurer’s motion to dismiss with prejudice. The court held that the insured had failed to state a claim for breach of contract because the policy “clearly and unequivocally” excluded from coverage claims “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, situation, transaction, event, Wrongful Act underlying or alleged in any prior and/or pending litigation,” which the court determined included the stepmother’s earlier suits. Because the insurer had a reasonable basis for denying coverage, the court also dismissed the insured’s bad faith claim.
The court dismissed the insured’s fraud claims because the insured failed to allege any misrepresentations by the insurer and made only conclusory allegations that were insufficient to meet the heightened pleading standard required by Federal Rule of Civil Procedure 9(b). The court further held that, even if the insured could amend its pleadings to include additional factual allegations, it could not establish justifiable reliance as a matter of law. Specifically, the insured alleged that it had requested on its application that the policy cover “all liability associated with being executor and trustee” and that the insurer had not refuted this statement. The court held that the insured could not rely on its own statement in the application; that statement directly conflicted with the policy ultimately agreed to by the parties, which, like all insurance contracts, contained limitations and exclusions that defined the scope of the parties’ relationship.
Likewise, the court rejected the insured’s allegation that the policy should be construed in its favor because the insurer had failed to address the scope of the policy’s exclusionary provisions, including the prior and pending litigation exclusion. The court noted that the insured alleged that the terms of the policy were reached through “extensive negotiations,” and therefore as a “manuscript” policy, any ambiguities need not be strictly construed against the insurer.
Finally, because the insured had failed to sufficiently allege fraud or either unilateral or bilateral mistake, the court also dismissed the insured’s reformation claim.