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Insurance Law News - May 2015

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Insured's Act of Pruning Neighbor's Trees Is Not an "Occurrence"

An insured's act of pruning her neighbor's trees was not an "occurrence," or "accident," within the meaning of a homeowners policy. (Albert v. Mid-Century Insurance Company (2015) 2015 WL 2398554)

Facts

Shelly Albert and Henri Baccouche were neighbors. In 2009, the Los Angeles Fire Department sent Ms. Albert a notice stating that she needed to trim brush and trees located within 200 feet of her house. In response, Ms. Albert hired a tree trimming contractor to prune some trees which were located either on, or near, the boundary between her property and Mr. Baccouche's property.

Mr. Baccouche subsequently sued Ms. Albert, alleging that Ms. Albert acting through her contractor had "hacked, cut and pruned" trees located on Mr. Baccouche's property. Mr. Baccouche's complaint against Ms. Albert included causes of action for trespass, private nuisance and negligence.

Ms. Albert tendered the defense of the lawsuit to her homeowners insurer, Mid-Century Insurance Company. During Mid-Century's investigation of the claim, Ms. Albert asserted that the trees her contractor had pruned were on the boundary line between the two properties, and that the fire department had required her to trim the trees. Mid-Century denied Ms. Albert's tender, asserting among other things that her alleged liability was not the result of an "occurrence," or "accident," as required by the Mid-Century policy.

Ms. Albert sued Mid-Century for breach of contract and bad faith. The trial court entered summary judgment for Mid-Century, citing the lack of an "occurrence." Ms. Albert appealed.

Holding

The Court of Appeal affirmed the summary judgment in favor of Mid-Century, finding that Ms. Albert's alleged liability to Mr. Baccouche in the underlying action was not the result of an "occurrence," or "accident."

Ms. Albert argued that her contractor may have been "negligent" in "excessively cutting" the trees. The appellate court rejected this argument, reasoning that Ms. Albert's contractor had intended to prune the trees, and that there were no facts suggesting that some unforeseen accident (such as a slip of the chainsaw) had caused the damage to the trees. The critical fact was that Ms. Albert – acting through her contractor – had intended to prune the trees.

Ms. Albert also argued that Mr. Baccouche's allegations in the underlying action supported a claim that Ms. Albert had "negligently supervised" the tree trimmers. The appellate court rejected that argument, reasoning that were no allegations or extrinsic facts in the underlying action supporting the elements of a claim for negligent supervision. The court emphasized that an insured cannot speculate about unpled claims in order to manufacture a potential for coverage.

Comment

The appellate court accepted the insured's claim that she believed she co-owned the trees, and that she was required to trim them. That, however, did not convert the insured's conduct into an "occurrence," or "accident." The dispositive fact was that the insured, acting through her contractor, had intended to trim the trees, and such conduct was not accidental. There was no potential for coverage and, hence, no duty to defend.

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Professional Liability Insurer Has No Duty to Defend Securities Brokerage Firm Against Third-Party Claims Where, At Time Firm Applied for Policy, Firm Was Aware of Facts That Might Result In Claims

A professional liability insurer had no duty to defend or indemnify a securities brokerage firm against various third-party claims where, at the time the brokerage firm applied for the policy, the firm was aware of facts or circumstances that might result in the claims. (Crown Capital Securities, L.P. v. Endurance American Specialty Ins. Co. (2015) 235 Cal.App.4th 1122)

Facts

Crown Capital Securities, L.P. (Crown Capital) is a securities brokerage firm..Over a period of time, various Crown Capital broker-dealers advised clients to invest in DBSI, Inc. (DBSI), a commercial real estate investment company.

In November 2008, DBSI filed for bankruptcy. In October 2009, a bankruptcy examiner issued a report in which the bankruptcy examiner concluded that DBSI had engaged in a long-term "Ponzi scheme" to defraud investors. Later that same month (October 2009), Crown Capital client George Bou-Sliman sent Crown Capital a letter in which he made a claim against Crown Capital for monetary losses he had sustained as a result of DBSI investments. Bou-Sliman also enclosed a copy of the bankruptcy examiner's report stating that DBSI had engaged in a Ponzi scheme.

About six months later, Crown Capital submitted an application for professional liability insurance to Endurance American Specialty Insurance Company (Endurance). Question 9 of the application asked whether any "claims, suits or proceedings" had been made against Crown Capital during the past five years. In response, Crown Capital answered "yes" and disclosed the Bou-Sliman claim. Question 10 then asked whether Crown Capital was "aware of any fact, circumstance, incident, situation, or accident … that may result in a claim being made against" Crown Capital. In response to that question, Crown Capital answered "no." The application further stated that "any claim or lawsuit against [Crown Capital] arising from any fact, circumstance, act, error or omission disclosed or required to be disclosed in response to Questions 9, 10 and/or 11, is hereby expressly excluded from coverage under the proposed insurance policy," and that "this Application … shall be considered physically attached to and become part of" any policy which might be issued. After receiving the application, Endurance issued a professional liability policy to Crown Capital for the period of April 1, 2010 through April 1, 2011.

Shortly after Endurance issued the policy to Crown Capital, three other Crown Capital clients – Kurt Bochner, Susan Biles and Linda Grana – all made claims against Crown Capital relating to the DBSI Ponzi scheme. Crown Capital tendered all three claims to Endurance for defense and indemnity. However, Endurance denied coverage for the three claims, asserting that Crown Capital had failed to disclose its knowledge of the DBSI Ponzi scheme to Endurance at the time Crown Capital applied for the Endurance policy.

Crown Capital subsequently sued Endurance for breach of contract and bad faith arising from Endurance's refusal to defend Crown Capital against the Bochner, Biles and Grana claims. The trial court granted summary judgment in favor of Endurance based on the exclusionary language in the application, which was deemed part of the policy. Crown Capital appealed.

Holding

The Court of Appeal affirmed the summary judgment in favor of Endurance.

The appellate court agreed that at the time Crown Capital applied for the Endurance policy, Crown Capital knew of the potential for future claims related to the DBSI Ponzi scheme. The court emphasized that when Crown Capital submitted the application to Endurance, Crown Capital was aware: (1) that DBSI had declared bankruptcy and allegedly had been operating a Ponzi scheme; (2) that Bou-Sliman had claimed a Crown Capital broker-dealer was negligent in recommending a DBSI investment to him; and (3) that other Crown Capital broker-dealers had recommended DBSI investments to other customers. According to the appellate court, those facts and circumstances indicated that other investors – such as Bochner, Biles and Grana – might also make claims against Crown Capital relating to the DBSI Ponzi scheme. As such, the claims which Bochner, Biles and Grana eventually did make against Crown Capital were excluded from coverage under the Endurance policy. It was irrelevant that the Bochner, Biles, and Grana claims did not involve the same investor, broker-dealer or investment that was at issue in the Bou-Sliman claim.

Comment

Note that the exclusion in this case was contained in the application, and the application was then attached to and deemed a part of the policy itself. Under such circumstances, the insurer could deny coverage because the claims fell within the scope of the exclusion. The insurer did not need to go through the separate process of rescinding the policy due to misrepresentations in the application.

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