In the resolution of a coverage dispute between two professional liability insurers, Judge Posner recently had occasion to parse the meaning of the metaphysical phrase “arising from” in an exclusion to claims-made coverage and to limn the teleological contours of claims made coverage.
In James River Ins. Co. v. Kemper Cas. Ins. Co., 2009 WL 3447447 (7th Cir. Oct. 28, 2009), the Seventh Circuit reversed the district court’s holding that a prior-policy exclusion in a professional liability insurance policy did not bar one insurer’s claim for contribution from another insurer for the expense of defending and settling a malpractice claim against a law firm that had been insured in successive policy years by the insurers.
Kemper issued the insured a claims-made professional liability insurance policy for the policy period September 27, 2000 to September 27, 2002, with a retroactive date of January 1, 1937. At the expiration of the Policy, Kemper granted the insured an extended reporting period, which extended the reporting period for claims until September 27, 2007.
James River in turn issued the insured a claims made professional liability insurance policy for the period November 8, 2004 to November 8, 2005, with a retroactive date of November 8, 2002.
The insured had represented the wife in a divorce action in December 1999, effecting a property settlement with her former husband in which the former husband awarded her a sizeable share of his employee stock options. In February 2000, the employer informed the parties that the method by which the property settlement had attempted to effectuate the transfer of the stock options was invalid. Two months later, the insured commenced a proceeding on the wife’s behalf against her ex-husband in state court. Unfortunately, in July 2001, the employer filed for bankruptcy, and the stock options evaporated. In 2003, the Illinois appellate court dismissed the proceeding to recover the options.
The wife responded by filing a malpractice action against the insured. Kemper defended the insured and settled the claim. Kemper then demanded contribution from James River, which in turn filed a declaratory judgment action in federal district court, seeking a declaration that it had no duty to defend or indemnify its insured against a malpractice claim. The district court granted summary judgment to Kemper. In an opinion authored by Judge Posner, the Seventh Circuit reversed, holding that the prior policy exclusion in the James River policy excluded coverage for the insured’s claim. 2009 WL 3447447, at *6.
The insured reported the malpractice suit to both insurers when the claim was filed in May 2005. The only event that had taken place during the James River policy period was the issuance of the Illinois appellate court opinion dismissing the proceeding to recover the options. Judge Posner was skeptical that this event had any significance, evincing his “puzzlement that a judicial ruling could be an act of malpractice rather than at most evidence of malpractice by a lawyer handling the case in which the ruling was rendered.” 2009 WL 3447447, at *3.
The prior policy exclusion in the James River policy excluded any claim “directly or indirectly arising from any common facts, circumstances, transaction advice or decision involved in a ‘professional service’ report as a claim or potential claim under any prior policy.’” 2009 3447447, at *3. Ostensibly applying Illinois law, Judge Posner’s held that the prior policy exclusion barred Kemper’s claim for contribution.
His holding was based on two determinations. First, he concluded that the insured’s alleged misconduct occurred within the Kemper policy period. In reaching this conclusion, Judge Posner made some rather arresting observations about the meaning of the phrase “arising from.” He cautioned that the phrase must not be read too broadly:
We mustn’t press the concept of “arising from” too hard, however. What if the defendants in the malpractice suit, because their resources had been depleted by the suit, cut corners in handling an unrelated matter during James River’s policy period and were sued for malpractice; would James River’s prior-policy provision exclude coverage for that suit? It would not, because “arising from” implies a tighter connection than a mere “but for” cause creates. Maybe if Columbus hadn’t discovered America, the federal courts of appeals would not have been created in 1891; but it would be odd to say that the federal appellate judiciary “arose from” Columbus’s voyages.
2009 WL 3447447, at *4.
He acknowledged that “Illinois cases say that ‘arising from’ is satisfied by a showing of ‘but for’ causation.” Id. Nonetheless, he concluded that under the holdings of those cases “a claim need not have been foreseeable to be deemed to arise from an act by the insured.” Id. That is, “if Illinois understood ‘but for’ literally to mean just a condition that had to exist for the event in question to occur (a subsequent act of malpractice, in this case), liability insurance companies would have no way of setting premiums equal to expected costs; they would be insuring against the range of possible claims so vast that an estimate of the probability that a claim within that range would actually be filed would be arbitrary.” Id.
He observed that “one doesn’t purchase liability insurance just to protect oneself against being sued for inflicting foreseeable injuries; one buys protection against any claim arising from the potential liability-causing activity in which one engages, and a claim can arise from the activity without being foreseeable.” Id. But again, Judge Posner observed that there are limits to what can be said to “arise from” some event:
But they [limits] are not based on unforeseeability. If Christopher Columbus had bought insurance against liability for claims arising out of his voyages and had later been sued for assaulting an Indian in Hispaniola, he could not have required the insurance company to defend him on the ground that had it not been for his voyage to Hispaniola, he would not have assaulted anyone there.”
2009 WL 3447447, *5.
In Judge Posner’s view, “[a] way to help partition liability between successive insurers, and thus decide when a claim made during the policy period of a second insured should be deemed to arise out of activities during the policy period of the first insurer, is to ask what sense it would make for the defense of the malpractice suit and the cost of the indemnification of the defendants in that suit, to be shared between two insurance companies.” Id. Framed in that manner, he concluded that apportionment of defense and indemnity costs was unreasonable in this instance, remarking that “there is no reason to manufacture occasions for such apportionment.” Id. That is, “it is apparent that the second insurer (James River) excluded coverage in situations in which the wrongful act submitted during its policy period were a continuation of wrongful acts committed during the policy period of the previous insurer—and they were.” Id.
Second, Judge Posner rejected the district court’s conclusion that owing to the extended reporting period option in the Kemper policy, the Kemper policy was not “prior” to the James River policy. In reaching this conclusion, Judge Posner observed that the “extended-reporting-period option (or ‘tail coverage,’ as it is called) may seem a curious animal.” Id. “The insurer is protected to a degree by the dollar limits on liability in the policy; yet because of the potential for adverse selection (that is, the purchase of insurance by persons who have above-average likelihood of experiencing the insured-against-event), such ‘tail’ coverage must be rated for the individual risk.” Id.
In final analysis, Judge Posner concluded that “nothing in the prior-policy exclusion of James River’s policy limits the time within which a claim under a prior policy must be reported for the exclusion to apply.” 2009 WL 3447447, at *6. “The lawyers’ alleged misconduct occurred within the policy period, and the suit was filed during the tail.” Id. “Therefore, Kemper’s policy applies, and it therefore follows that James River’s policy does not, since it excludes coverage of conduct covered by a prior insurer; all the wrongful acts alleged in the malpractice suit arose from events that took place in Kemper’s policy period.”
