The U.S. District Court for the District of Massachusetts has ruled that an insurer was not estopped from denying coverage for claims it did not reference in the reservation of rights letter it sent to its insured.
The Case
American Guarantee & Liability Insurance Company (“AGLI”) issued John F. Lamond, then a licensed attorney, a professional liability insurance policy covering the period from May 20, 2007 through May 20, 2008. During the policy period, Mr. Lamond represented Sean F. Murphy and two companies in which he was the principal – Tremont Realty Investments, LLC, and Seamur Enterprises, LLC (collectively, “Murphy”) – in the purchase of several lots of land for development.
Prior to the closing, Mr. Lamond allegedly learned that the land was the site of an Indian burial ground and was subject to a preservation restriction, but he nonetheless certified to Murphy's mortgagor – Hill Financial Services Company – that titles to the land were free from any encumbrances.
After the purchase, the preservation restriction became known and Murphy was unable build on the land as planned and defaulted on the mortgage. Hill foreclosed on the lots, but could not develop or sell them because of the burial ground.
In 2009, Hill brought suit against Murphy and Mr. Lamond in a state court in Massachusetts. Murphy, in turn, brought third party claims against Mr. Lamond for, inter alia, professional negligence and violations of Mass. Gen. Laws Ch. 93A.
After Hill initiated the state court lawsuit, AGLI sent Mr. Lamond a letter informing him that although it had arranged for an attorney to defend him, it was “reserv[ing] all rights and defenses available under the Policy and at law to deny coverage on any of the [ ] bases” identified in the letter. Specifically, the reservation letter quoted that Mr. Lamond's policy:
does not apply … “[t]o any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication or admission by an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest[.]”
It also stated:
[T]he [Hill] Complaint alleges the Insured's failure to advise of the Indian issue was deceitful and claims the Insured's failure to advise Hill Financial of the Indian issue was done so fraudulently so that Hill Financial would loan money…. To the extent that this exclusion applies, American Guarantee may be able to deny coverage and reserves the right to do so.
The reservation letter also noted that the definition of covered damages under the policy excluded
4. criminal or civil fines, penalties (statutory or otherwise), fees or sanctions;
5. punitive, exemplary or multiple damages; …
7. legal fees, costs and expenses paid to or incurred or charged by the Insured …
To the extent that Claimant may seek relief that is not included in the definition of “Damages,” American Guarantee may be able to deny coverage and reserves the right to do so.
AGLI did not send Mr. Lamond a second reservation letter specifically addressing Mr. Murphy's third-party claims.
After a jury trial, Mr. Lamond was ordered to pay damages to Mr. Murphy.
While the appeal of the jury verdict was pending, AGLI sought a declaration that the terms of Mr. Lamond's policy excluded coverage of the assessed damages.
Mr. Lamond contended that AGLI was estopped from denying coverage to him because it did not issue a second reservation of rights letter in the underlying state court litigation. The insurer moved for summary judgment.
The Court's Decision
The court ruled that AGLI was not estopped from denying coverage to Mr. Lamond.
In its decision, the court stated that, as a threshold matter, the absence of a second reservation letter was “not reasonably understood as a representation that AGLI did not intend to reserve its rights with respect to [Mr.] Murphy's third party claims against [Mr.] Lamond in light of the first letter.”
The court found that the reservation letter was “clear” that what was excluded under the policy was Mr. Lamond's “conduct and certain categories of damages, and not a technical formulation of the legal claims.” It observed that the policy excluded “any intentional, criminal, fraudulent, and malicious or dishonest act or omission by an Insured,” noting that the disclaimer letter identified the allegations that Mr. Lamond's “failure to advise of the Indian issue was deceitful and … [his] failure to advise … was done so fraudulently.” Because Mr. Murphy's third-party claims were “based on the same allegations of misconduct,” no new issues were raised, it found.
The court then said that, assuming that the absence of a second letter implied a conflicting message from the first letter, Mr. Lamond's reliance, “without any efforts to rectify the two positions, was not reasonable.” According to the court, the record was “devoid of any evidence” that Mr. Lamond had obtained assurance or clarification from AGLI on his interpretation of the absence of a second letter. It ruled that, as a matter of law, he could not “rel[y] on one of a pair of contradictories simply because it facilitate[d] the achievement of [his] goal.”
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].