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Prior Knowledge Exclusion Unambiguous and Effective to Bar Coverage
Prior Knowledge Exclusion Unambiguous and Effective to Bar Coverage
By Courtney E. Scott, Esq. of Tressler LLP
Maxum Indemnity Company (Maxum) won summary judgment in a dispute with insured brokerage Mulberry Insurance Services (Mulberry), as the policy’s prior knowledge exclusion was unambiguous and precluded coverage for underlying claims against Mulberry for alleged fraudulent sales of insurance policies. Maxum Indem. Co. v. Drive West Ins. Servs., 2015 U.S. Dist. LEXIS 12468 (S.D. Ohio Feb. 3, 2015).Maxum issued a claims-made professional liability policy to Mulberry, a wholesale insurance brokerage agency, for the period March 1, 2012, to October 15, 2012 (the Policy). Allegedly, a "rogue" insurance agent sold and collected premiums for policies on behalf of Mulberry that he lacked the authority to sell. Mulberry allegedly bound over $120 million in coverage on behalf of insurers that had not authorized Mulberry to issue policies on their behalf. Prior to the effective date of the Maxum Policy, Mulberry had received cease and desist letters from these insurers, and a letter from the Illinois Department of Insurance advising Mulberry that it had issued binders of insurance that may not be legally valid.Mulberry faced lawsuits from a number of entities to or through whom the agent had sold unauthorized policies, including National Condo & Apartment Insurance Group (NCAIG), a retail insurance broker facing claims from its own clients in connection with the questionable binders issued by Mulberry. NCAIG, among others, were named as nominal defendants in Maxum’s action against Mulberry seeking rescission of Mulberry’s policy and a declaration that Maxum owed no duty to defend or indemnify Mulberry. Mulberry, as well as certain nominal defendants, failed to appear or defend the declaratory action, and the court entered default judgment against Mulberry, holding that Maxum had no duty to defend or indemnify Mulberry. NCAIG and two other defendants responded to Maxum’s lawsuit, and were the only parties against whom Maxum’s declaratory judgment action remained pending.Maxum moved for summary judgment only on its declaratory judgment claim, seeking an order that coverage for Mulberry was barred by the Policy’s prior knowledge exclusion, and that it owed no duty to NGAIC or any other party with respect to the claims at issue. The prior knowledge exclusion in the Policy provides:
This insurance does not apply to . . .[a]ny "claim" arising out of or resulting from and "wrongful act" . . .[y]ou had knowledge or information related to, prior to the first inception date of the continuous claims-made coverage with us, and which may result in a "claim."
Maxum argued that the exclusion barred coverage because the "claim" brought by NCAIG and others referred to and arose out of the subject of the pre-inception cease and desist letters, i.e., "improperly writing policies and collecting premiums without authority to do so." In a bit of a plot twist, NCAIG obtained a default judgment against Mulberry in a separate action during the pendency of Maxum’s coverage action, conferring judgment creditor standing that enabled NCAIG to assert direct claims against Maxum to recover policy proceeds based on Maxum’s allegedly improper denial of coverage. NCAIG cross-moved for summary judgment. It argued that Maxum’s denial of coverage was improper, and that the breach of its duty to defend Mulberry rendered it bound to satisfy the default judgment obtained by NCAIG against Mulberry.Briefing on the cross-motions was extensive, with NCAIG devoting dozens of pages criticizing Maxum’s denial of coverage, and arguing that Mulberry may have known of the agent’s issuance of unauthorized policies, but did not have knowledge of actual claims from NCAIG or anyone else prior to the Policy’s inception. NCAIG argued that the exclusion required that Mulberry have knowledge of actual claims, rather than knowledge only of wrongdoing, and that the "may result" language required evaluation of the insured’s subjective knowledge. Maxum argued that the exclusion unambiguously barred coverage for any claims related to the agent’s wrongdoing because Mulberry had received cease and desist letters prior to the Policy period notifying it of wrongful acts that may have resulted in claims.The court stated that the sole issue was whether the prior knowledge exclusion was ambiguous, or whether on its face it barred coverage for claims asserted by NCAIG and others against Mulberry. Judge Black held that the exclusion was clear on its face, and that the claims NCAIG sought to assert "arise from [the agent’s] wrongful acts of which Mulberry had related information prior to the insured time-period," rejecting any other interpretation as "strained."
Tressler Comments
Prior knowledge issues arise with some frequency, and are often thorny. Disputes can arise over whether the language of the exclusion requires a subjective or objective standard or whether the correct person(s) at the insured had the required knowledge. Acquiring sufficient information about the insured’s knowledge to issue a timely denial of coverage, especially with a duty to defend policy, can be challenging for carriers. The decision is useful to carriers with similar language to that in the Maxum Policy, but equally interesting for the issues and arguments the court found it unnecessary to address, including the subjective/objective standard, choice of California or Ohio law and the ultimately-mooted issue of underlying claimant NCAIG’s standing to seek or assert a claim for policy proceeds after default by the insured in the underlying and coverage action. The parties’ briefs are available on PACER and may be of interest to parties confronting a similar fact pattern.
