(Article from Insurance Law Alert, January 2025)
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Holding
Reversing a trial court decision, an intermediate appellate court in Arkansas ruled that a general liability insurer had no duty to defend an underlying lawsuit based on the absence of claims alleging a covered “occurrence.” American Ins. Co. v. Red Apple Enterprises Ltd., 2025 Ark. App. LEXIS 22 (Ark. App. Jan. 15, 2025).
Background
Red Apple, a land developer, was sued by a competitor for alleged misconduct in connection with the development of a parcel of land. The suit alleged numerous theories of recovery, including fraud, intentional interference with business expectancy, breach of contract, negligence and nuisance. American Insurance Company (“AIC”) initially agreed to defend under a reservation of rights, but after three tort claims were dismissed, AIC notified Red Apple that it was terminating its defense based on the absence of any remaining claims that could be covered by the policy.
Thereafter, Red Apple sued AIC, seeking damages for the defense costs it incurred after AIC withdrew its defense. A trial court granted Red Apple’s motion for partial summary judgment, ruling that AIC owed a defense for several remaining claims in the suit, including negligence, intentional interference, malicious prosecution, damage to business reputation, nuisance, and fraud. The court awarded Red Apple compensatory damages, penalties, and pre- and post- judgment interest.
Decision
The appellate court reversed, ruling that the trial court erred in holding that AIC owed a duty to defend Red Apple in the underlying suit. The appellate court reasoned that the suit did not allege property damage caused by an “occurrence” and that intentional acts exclusions barred coverage. In so ruling, the court emphasized the intentional nature of the acts alleged against Red Apple, including fraudulent representations, deception, and manipulation. Such conduct could not constitute an “occurrence,” defined by the policy as an “accident.”
With respect to the nuisance claim, the court reasoned that the conduct alleged in the underlying complaint, which related to Red Apple’s use of a parcel of land in violation of local restrictions, was knowing and/or deliberate and thus could not be attributed to an occurrence. Similarly, all the remaining claims stemmed from allegations of fraudulent misrepresentation or other intentional conduct.
Additionally, the court held that coverage was not available under the “personal and advertising injury” section of the policy, which covered injury arising out of several enumerated offenses. The trial court had found that allegations relating to malicious prosecution and damage to business reputation were potentially covered under this provision. The appellate court disagreed. First, the appellate court held that the malicious prosecution claim arose prior to the policy’s inception date. Second, the appellate court held that the damage to reputation claim did not fall within any enumerated offense in the personal and advertising coverage section.
Finally, the court noted that coverage would be barred in any event by policy exclusions relating to damages “expected or intended from the standpoint of the insured,” for “injury caused by an insured’s knowing violation of another’s rights,” and “for injury caused by an insured’s publication of knowingly false material.”
Comments
The decision reinforces the well-established principle that for purposes of determining an insurer’s duty to defend, the nature of the factual allegations in the underlying suit are determinative, rather than the labels of the claims asserted. Here, the appellate court emphasized that negligence claims do not necessarily trigger the duty to defend where the gravamen of the complaint is intentional conduct.