Court Coordinates Successive Claims Made Policies
November 17, 2009
The 7th U.S. Circuit Court of Appeals recently held that an earlier claims made policy having an extended reporting period that overlapped with a later claims made policy, was a "prior policy" for purposes of policy exclusion in the later policy, which excluded coverage for claims "arising from" professional services reported under a "prior policy." James River Insurance Co. v. Kemper Casualty Insurance Co., 2009 WL 3447447 (7th Cir. Oct. 28 2009).
The insurer issuing the second policy, James River, was represented by Michael L. Resis of Smithamundsen LLC. Mitchell D. Rose and Edward F. Ruberry of Bollinger, Ruberry & Garvey represented Kemper, issuer of the first policy.
Both policies provided attorney professional malpractice coverage, on a claims made basis, to insured attorneys who had represented a wife in a divorce case. As part of the property settlement the attorneys were successful in negotiating a portion of the husband's employee stock options in the husband's employer, for the benefit of the wife.
A delay occurred in the transfer of the stock options to the wife, however, necessitating further litigation against the husband. During the pendency of that litigation, the husband's employer declared bankruptcy, and the stock options evaporated. The wife's malpractice action against the attorneys alleged that the method of conveyance they had chosen for the stock options caused the delay, and thus ultimately caused the options to become worthless.
The Kemper policy was in effect for the period September 2000 to September 2002, and the James River policy was in effect for the period November 2004 to November 2005. Most of the attorneys' alleged wrongdoing occurred during the Kemper policy, but some of the wrongdoing extended into the James River policy period.
The attorney malpractice action was filed during the James River policy period, and during an extend five-year reporting period, which had been purchased by the attorneys under the Kemper policy. Kemper provided defense and indemnity to the attorneys, while James River appears to have declined coverage.
James River brought the current action against Kemper seeking a declaration that it had no duty of defense or indemnification. It relied principally on an exclusion in its policy that excluded coverage for any claim "arising from . . . any common fact, circumstances, transactions advice or decision involved in a 'professional service' reported as a claim or potential claim under any prior Policy."
The district court granted summary judgment in favor of Kemper holding that, with the extended reporting period in effect, Kemper's policy was not "prior" to James River's. James River took this appeal.
In an opinion by Judge Richard A. Posner, the 7th Circuit reversed. He first addressed the issue of burden of proof with respect to applicability of the exclusions relied on by James River. Kemper argued that James River had the burden, which Posner said was correct, but he distinguished between two possible grounds for imposing the burden on James River. One was simply that James River is the plaintiff and plaintiffs typically have the burden of proof, except with respect to defenses.
The other possible ground, said Posner, is that insurers under Illinois law usually have the burden of proving the applicability of exclusions, at least in litigation with insureds, and such a burden is usually binding on federal courts in diversity actions, such as this one. He noted, however, that this was not litigation between an insured and insurer, and that, moreover, Kemper was the "real" plaintiff, not James River, for Kemper was seeking a money judgment against James River. James River had brought the lawsuit to protect itself from being found to have refused the insured's demand for coverage in bad faith.
Posner opined that it is sensible to place the burden of proof of an affirmative defense on the defendant, rather than making the plaintiff prove a negative, and the sense of the rule is not diminished because the "defendant" has made itself a "plaintiff" by filing the declaratory judgment action. He then suggested that maybe there should be no general rule for the burden, but that a court should look at other factors.
Ultimately, Posner said that it did not really matter how the Illinois Supreme Court would decide the burden in this case, because there were no fact issues, and no reason for Kemper to have raised the matter in the first place.
Apart from agreeing with Kemper that James River had the burden, Posner's whole discussion of burden thus appears to be dicta, in which he came to no clear conclusion. He ended the discussion by noting that Illinois law "treats exclusions in an insurance policy as affirmative defenses," which, he said, is a rule with "substantive motivation" and therefore binding on the federal courts.
Posner then took up the meaning of "arising from" as appeared in the James River exclusion for claims reported under prior policies. In what appears to be more dicta, Posner distinguished between "but for" causation, which is one test Illinois courts apply in interpreting "arising from," and "legal cause" which means foreseeability. He noted that "but for" causation goes beyond foreseeability – citing events that would not have happened "but for" Columbus discovering America – and that people buy insurance to protect against just such liability-causing activities that are not foreseeable.
Posner suggested that partitioning claims between successive insurers could be accomplished by asking what sense it would make for defense and indemnification to be shared between two insurance companies. While sharing and apportionment between insurers is sometimes unavoidable, Posner believed it evident that James River here excluded coverage in situations in which the wrongful acts committed during its policy period were a continuation of acts committed during the policy period of the previous insurer.
As for the district court's conclusion that the Kemper policy was not a "prior policy," in Posner's view the extended reporting period purchased under the Kemper policy did not extend the duration of that policy, because the claim reported during the extended period must have arisen prior to the end of the period.
Since the insureds' alleged misconduct occurred within the Kemper policy period, and the underlying suit was filed during the Kemper policy "tail," the Kemper policy applied, according to Posner, thereby triggering the prior-policy exclusion under the James River policy.
The court therefore reversed the judgment of the district court and remanded with instructions to enter declaratory judgment in favor of James River.
