Down to Cases: When Agents Leave.
Insurance producers live in a competitive world. When an agent from one firm moves to another and brings along his clients, the old employer may sue the new employer and the employee for breach of non-competition agreements or other tortious conduct. The suits are usually pursued aggressively and because both parties are insurance experts, they will draw the complaint to prevent the defendant from obtaining a defense or indemnity from the defendant's insurer.
Matthew T. Szura & Co. and Mayfair Insurance Agency are competing providers of insurance products and services. In February 2009, Mayfair filed an action in Michigan state court against Szura and Doug Charon, alleging that Charon breached his confidentiality agreement and fiduciary duties when he left Mayfair, joined Szura, and sold Szura's insurance products to Mayfair's customers.
Mayfair also alleged that Szura tortuously interfered with the confidentiality agreement in the Charon-Mayfair employment contract and with Mayfair's business relationships and expectancies.
Szura asked General Insurance to defend the agency in the suit pursuant to an E&O policy that General Insurance had issued to Szura. When General Insurance refused to defend the firm, Szura brought action against General Insurance, claiming it was obligated to defend Szura in the Mayfair litigation. Szura also asserted claims for breach of contract and bad faith.
The district court concluded that the E&O policy covered only "errors and omissions in connection with providing insurance services to Szura's customers, if one of those customers brought suit against Szura based on the insurance services it received." Because the suit is unrelated to services provided for Szura's clients, there was no duty to defend. The Sixth Circuit Court of Appeals affirmed the conclusion in Matthew T. Szura & Co. Inc. v. General Insurance Co.
As a general matter, questions of contract interpretation are questions of law that the Sixth Circuit Court of Appeals will review as if it was the original court. If it finds the contract is clear and unambiguous, the court need not determine issues of fact and instead interprets the contract based on the intent of the parties as expressed in the plain language of the contract.
An insurer's duty to defend the insured in certain types of litigation derives from contract rather than statute, and the scope of the duty is defined by the specific terms to which the parties agreed. The clear and unambiguous language of the contract, rather than the parties' reasonable expectations, must determine the scope of coverage under an insurance contract.
General Insurance's obligation to defend Szura in the Mayfair litigation depends on whether Mayfair's claims against Szura is a "covered claim." The court looked to the coverage provision, which stipulated that General Insurance "will pay on behalf of the insured damages that the insured becomes legally obligated to pay because of claims made against the insured for wrongful acts arising out of the performance of professional services for others."
The E&O policy committed General Insurance to defend Szura against certain negligence claims; Mayfair's suit against Szura alleged intentional torts rather than negligence; and General Insurance therefore had no duty to defend Szura in the Mayfair litigation.
General Insurance is required to defend Szura against all arguably covered claims. The E&O policy covered claims "made against the insured for wrongful acts arising out of the performance of professional services for others." Because the policy defines wrongful act as "any actual or alleged negligent act, error or omission, Personal Injury, or Advertising Injury," the policy "covers only liability for negligent conduct." It does not require General Insurance to provide Szura with a defense to allegations of intentional misconduct.
The Sixth Circuit concluded that the duty to defend is not limited by the precise language in the underlying complaint. Rather, the insurer has the duty to look beyond the allegations in the complaint to determine whether coverage is possible. The court considers if the allegations in the suit alleged negligence or other torts to determine whether an act, error or omission requires the insurer to defend.
Had Mayfair alleged negligent conduct, General Insurance would have been required to defend Szura in that suit and indemnify Szura for any damages, unless the Szura employee was ultimately determined to have acted fraudulently or maliciously rather than negligently. In that event, General Insurance would be relieved of its duty to defend Szura as soon as a trial verdict, court ruling, regulatory ruling, or legal admission established that the employee had acted fraudulently or maliciously. Because Mayfair sued Szura for intentional misconduct rather than a negligent act, error, or omission, however, the initial claims were not covered and the exclusions do not apply.
MISCONDUCT vs. NEGLIGENCE
Mayfair Insurance Agency asserted three separate causes of action against Szura in its complaint, each of which claims alleged intentional misconduct--not negligence.
Szura argued that General Insurance had a duty to defend the agency against intentional misconduct as well as negligent acts, errors and omissions because the "Exclusions" section of the E&O policy states: "We will defend the insured against such claim unless or until the dishonest, fraudulent, criminal, malicious or knowingly wrongful act has been determined by any trial verdict, court ruling, regulatory ruling or legal admission."
The Sixth Circuit concluded that Szura misunderstood the exclusion, which cannot expand the scope of coverage.