Prior Knowledge Exclusions Apply Where Insured Received Three Letters from Potential Claimants and Issued Two Litigation Holds Before Policy Incepted
In a case in which Wiley represented the insurer, the United States District Court for the Eastern District of Virginia, applying New York law, has held that three prior knowledge exclusions barred coverage under an architects and engineers professional liability policy as a matter of law where, before the policy period incepted, the insured (1) knew that a pressure vessel in a boiler system which it had serviced had exploded, causing property damage and bodily injury; (2) received three pre-suit letters from potential claimants; and (3) issued two internal litigation holds. ChemTreat, Inc. v. Certain Underwriters at Lloyd’s of London, No. 19-cv-63 (E.D. Va. Sept. 21, 2020).
The underlying action arose out of an accident that occurred when the pressure vessel in a plant’s boiler system failed, causing an explosion which resulted in property damage and bodily injury to an employee working in the boiler room. At the time, the insured provided water treatment services for the boiler system, including water quality testing of the pressure vessel. Several days after the explosion, the insured’s employee who worked at the plant in question notified the insured’s billing department that an explosion had occurred. Following the explosion, the insured received two letters from the boiler system manufacturer, placing the insured on notice of potential claims against it, requesting that the insured report the matter to its insurer, and demanding the preservation of all evidence. The insured also received a letter from counsel for the injured individual, alleging that the insured had provided services in connection with the pressure vessel as well as training related to the equipment and demanding the preservation of all evidence. After the receipt of these letters, the insured issued two litigation holds to preserve potentially relevant evidence. The insured did not provide notice to its insurer of the explosion or any of the pre-suit correspondence.
The injured individual ultimately filed suit against the insured water treatment company, its employee who serviced the plant, and a number of other parties. The insured then reported the claim under its architects and engineers professional liability policy, which incepted after the insured’s receipt of the pre-suit correspondence. The insurer denied coverage, and the insured filed this coverage action.
On cross-motions for summary judgment, the court ruled in favor of the insurer, holding that the insurer had no duty to defend or indemnify the insured because three exclusions related to the insured’s prior knowledge of a claim or potential claim before the policy incepted—the Retroactive Limitation Clause, the Excluding Matters Exclusion, and the Prior Knowledge Exclusion—applied.
The court determined that, prior to the policy’s inception, the insured had subjective knowledge of the explosion, its connection to the pressure vessel involved in the explosion, and three letters from potential plaintiffs other than its customer. The court further held that an objectively reasonable insured with that knowledge would have expected a claim might be made before the policy incepted. In particular, the court noted that the pre-suit correspondence should have alerted the insured to a potential claim and that the insured’s issuance of litigation holds following receipt of that correspondence further demonstrated that a reasonable insured in its position might have expected a claim. The court rejected each of the insured’s arguments as to why it purportedly did not have knowledge of a potential claim, concluding that such arguments improperly relied on the insured’s hindsight or subjective belief regarding the likelihood or merits of a potential claim. Thus, the court held that the language of each of the exclusions unambiguously barred coverage for the underlying action and precluded any bad faith claim.