FEDERAL DISTRICT COURT APPLIES SHIFTING FACTUAL INFERENCE TO IMPOSE DUTY TO DEFEND ON TWO LIABILITY CARRIERS
Last Tuesday, the Federal District Court for the Eastern District of Texas used fascinating logic to impose the duty to defend on two liability carriers with consecutive policy periods for a single occurrence. In Corinth Investors Holdings, LLC v. Evanston Ins. Co., No. 4:13-CV-682, 2015 WL 1321616 (E.D. Tex. Mar. 24, 2015), the insured, a medical group, had professional liability insurance policies issued by two carriers for two consecutive policy periods. The 2012 calendar year was insured by Evanston (a claims made and reported policy), and the 2013 calendar year was insured by Homeland.
In December of 2012, during Evanston’s policy period, the insured was sued. The suit was served on the insured in January of 2013, during Homeland’s policy period. Both carriers refused to defend the insured, claiming the suit was outside their respective policy periods. Homeland argued the claim was not first made during its policy period, while Evanston argued the insured did not first receive notice of the claim during its policy period. Significantly, the lawsuit against the insured alleged that the statutory pre-suit notice required for all medical malpractice suits had been provided to the insured, but did not say when it was delivered.
In a prior opinion, the district court had already ruled that Homeland in fact had a duty to defend the insured because the ambiguity in the pre-suit notice statement allowed a reasonable inference that the insured might have received the pre-suit notice on January 1, 2013, thus putting first notice of the claim in Homeland’s period and within the scope of Homeland’s coverage.
Here, the district court separately examined the question of whether Evanston had a duty to defend. Evanston argued that it could not possibly have a duty to defend because the court had already ruled that the insured’s first notice of the claim was during Homeland’s period. However, the court did not agree it was that simple, and pointed out that it had not made a factual finding of the date of first notice, but merely observed that a reasonable inference could (and legally, must) be made in favor of the insured that the first notice could have been during Homeland’s policy period. Now, the court opined that it must examine the question of Evanston’s duty to defend in a vacuum, without regard to any prior findings as to Homeland, employing all the same legal rules of construction.
Therefore, the court re-examined the pre-suit notice statement in the underlying petition, and once again construing all ambiguities and making all reasonable inferences in favor of the insured, found that an equally reasonable inference could (and therefore, must) be made in favor of the insured that the first notice also could have been during Evanston’s policy period rather than Homeland’s. Therefore, the court held that Evanston also had a duty to defend the insured. From a public policy point of view, this outcome seems poetic justice for two carriers who both denied their insured a defense for a claim that clearly had to be in one or the other of the two policy periods.
Significantly, this case was only about the duty to defend, and thus evidentiary questions concerning the actual date the insured first received notice of the claim were not discussed because the analysis was limited by the eight-corners rule, under which only the allegations (whether true or not) in the petition and the terms of the policy are considered. Although the court’s shifting inference in favor of the insured required both carriers to defend, it is important to bear in mind that the same probably cannot be true for indemnity. Ultimately, some evidence of the actual date the insured first received notice would presumably be developed and would place the claim squarely in one policy period or the other.
On a side note, the court also observed in a footnote that the return of service establishing the date the insured was served with the underlying suit, while not physically part of an original petition, is an intrinsic extension of the original petition and thus one of the “pleadings” that a court may consider under the eight-corners rule.