A Meritorious Claim Can Sting When It Becomes the Basis for Coverage
A recent ruling from the federal court in Oregon highlights the changing world of insurance-policy language and provides a cautionary tale to insureds. In Bennett v. Unites States Liability Ins. Group, (D. Oregon April 25, 2014), the court analyzed several insurance-policy provisions to determine whether an underlying legal claim triggered the insurer’s duty to defend. Janet Bennett, the insured, was sued by her ex-husband for mishandling money that she earned through her business. Bennett reported the claim to her business’s liability insurer to pick up her defense, which was denied. In upholding this denial, Judge Michael Simon found that Bennett’s mishandling of the money (that is, inappropriate billing and mischaracterization of that money) was not a “professional service” as defined under the policy because those activities were not part of the services that she rendered. Rather, those activities were simply the collection of fees for the professional services that she rendered.
But that’s not really the bad news for insureds. Because the court sided with the insurer on this argument, it did not address whether any other exclusion applied, hence the bad news. In particular, Bennett’s policy excluded coverage for a “don’t poke the hornet’s nest” scenario. That is, the exclusion purports to bar coverage for a professional-malpractice claim simply because it was brought as a counterclaim to the original suit filed by the insured against its client for failure to pay.
The “hornet’s nest” exclusion applies to “fee disputes or suits for fees initiated by the Insured against a past or current client of the Insured.” Practically speaking, this exclusion would put any insured in peril of having no coverage, for claims that would otherwise be covered, simply because the insured filed suit first to get a deadbeat client to pay its bills. Even more alarming, it is not a stretch of the imagination that an insurer could further extend this exclusion to apply to cases where an insured is sued first but then initiates a valid counterclaim. Judge Simon expressly stated that he did not “reach the issue of whether such an exclusion is valid,” but, it would be patently unfair to force an insured to forgo a perfectly good claim for unpaid fees against a client, or to forgo a legitimate counterclaim, simply because of the threat of a claim by that client.
Coverage counsel should be involved early on in the litigation of disputes that, on their face, have nothing to do with coverage, and this “hornet’s nest” exclusion is an excellent example of why insureds must be properly advised on how they pursue litigation. This is necessary, not only to ensure that the insurer picks up the defense of a lawsuit, but also to maintain that valuable defense.
Bennett v US Liability Ins Group Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, then you may do so by visiting www.next.westlaw.com.