(Article from Insurance Law Alert, December 2015)
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Reversing an Ohio federal district court decision, the Sixth Circuit ruled that a wrongful acts exclusion was ambiguous and should be construed to require subjective knowledge on the part of the policyholder that a prior wrongful act would result in a claim. Maxum Indem. Co. v. Drive West Ins. Svs., Inc., 2015 WL 7292722 (6th Cir. Nov. 18, 2015) (unpublished decision).
Starting in 2011, Mulberry, a wholesale insurance broker, issued quotes and binders for insurance coverage to National Condo & Apartment Insurance Group (“NCAIG”). NCAIG later learned that the quotes and binders were fraudulent. Later that year, Mulberry and NCAIG received cease-and-desist letters informing them that the quotes and binders were not authorized. Mulberry also received a notice from the Illinois Department of Insurance, indicating that certain binders of insurance purportedly issued by Mulberry might not be legally valid.
Sometime later, several property owners sued NCAIG when they learned their insurance was not valid. NCAIG demanded indemnification from Mulberry. Mulberry, in turn, sought coverage under an errors and omissions policy issued by Maxum in 2012. Maxum denied coverage based on an exclusion that applied to “[a]ny claim arising out of or resulting from any ‘wrongful act’ . . . [y]ou had knowledge of or information related to, prior to the first inception date of . . . coverage with us, and which may result in a ‘claim.’” In coverage litigation, an Ohio district court ruled that the exclusion barred coverage because the underlying claims arose from wrongful conduct “of which Mulberry had related information” prior to the policy’s March 2012 inception date. The Sixth Circuit reversed.
Applying California law, the Sixth Circuit ruled that the exclusion was ambiguous and must therefore be construed in favor of coverage. Maxum argued that the exclusion applied to “all claims where the insured simply had information prior to the coverage period relating to a ‘wrongful act’ that resulted in a claim.” Under this interpretation, the exclusion would bar coverage. In contrast, NCAIG contended that the exclusion encompassed “only those claims arising from wrongful acts that [Mulberry] subjectively believed, prior to inception of the Policy, would result in claims.” Finding both interpretations reasonable, the court endorsed the latter view, and held that Maxum had not established such subjective knowledge on the part of Mulberry. Although Mulberry had received several cease-and-desist letters from insurers and a notice from the Department of Insurance prior to the policy inception date, the court held that these notices did not establish subjective awareness of potential litigation. In reaching this conclusion, the court emphasized that none of the correspondence included demands for relief or threatened litigation. The court therefore reversed the trial court’s summary judgment ruling in Maxum’s favor and granted NCAIG’s summary judgment motion on the breach of the duty to defend and indemnify under the policy.