One of the celebrities we lost in 2013 was the novelist Tom Clancy. I wasn’t a Clancy devotee, but I have to admit that “Red Storm Rising” and “The Hunt for Red October” were excellent military thrillers. In “Red October,” the KGB officer on board the Russian submarine (Red October) thinks that, rather than surrendering to the Americans, the Captain (played by Sean Connery in the movie) is evacuating the crew and planning to scuttle the ship and go down to Davy Jones’ locker with it. The KGB officer tells the Captain, “You’ll receive the Order of Lenin for this.” What the KGB officer doesn’t know, of course, is that the Captain is actually planning to defect and turn the sub over to the U.S. Navy. There goes the Order of Lenin.
In the Russian Navy, I’m guessing that if you get caught trying to defect, the penalty involves a hanging rope or a firing squad. In American business, on the other hand, if you try to defect and get caught, the result is litigation. (Some people may argue that the latter is worse.) Here’s a question, though: If executives leave a company and steal that company’s clients, do they potentially have insurance coverage for the resulting lawsuit by their former employer? The knee-jerk reaction, of course, is “no,” because a basic tenet of insurance law is that coverage doesn’t exist for intentionally caused harm. And, in fact, that’s what the Sixth Circuit held in a recent decision involving competing insurance brokerages. I’d like to delve into the coverage issue a bit more deeply in this post, however.
The Sixth Circuit case I refer to is Szura v. General Accident Ins. Co. The fact pattern is familiar to anyone who deals with professional services organizations. Szura and Mayfair are competing insurance brokerages. A broker, Doug Charon, leaves Mayfair to go to Szura. Charon then contacts Mayfair’s clients to sell them insurance products. Mayfair sues, alleging breach of a noncompete. One of the counts in the complaint is for “tortious interference with business relationship.”
Szura tenders the lawsuit to its E&O carrier, General Insurance. General denies the claim.
The E&O policy contains the familiar language providing coverage for liability arising from wrongful acts performed in the course of providing “professional services.” “Professional Services” are essentially defined to include services performed for others in the policyholder’s capacity as an insurance agent. “Wrongful Act” means “any actual or alleged negligent act, error or omission, Personal Injury, or Advertising Injury.” The policy excludes coverage for “any claim . . . arising out of any dishonest, fraudulent, criminal, or malicious act, error, or omission or acts of a knowingly wrongful nature committed by or at the direction of any insured.”
So, regardless of whether tortious interference is deemed a “wrongful act performed in the course of providing professional services,” the E&O policy excludes coverage for acts of “a knowingly wrongful nature.” End of story, right? So held the Sixth Circuit, writing: “The Errors and Omissions 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.”
The decision gets interesting, though, when the Court writes this: “Szura argues that General Insurance had a duty to defend Szura against intentional misconduct as well as negligent acts, errors, and omissions because the ‘Exclusions’ section of the Errors and Omissions 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, whether appealed or not.’ Szura misunderstands the effect of this exclusion. Exclusions limit the scope of coverage; an exclusion cannot expand the scope of coverage beyond that provided in the insuring agreement.”
The argument that “exclusions cannot create coverage” is a favorite of the insurance defense bar (see the current battles going on in the construction defect coverage world, over the “your work” exclusion). If we examine the language closely, however, we can see that the exclusion in Szura is not being used to “create” coverage. Coverage exists until a knowingly wrongful act has been proven. That’s what the policy says.
Is it possible to interfere with someone’s prospective economic advantage negligently? Suppose, for example, Charon had contacted Mayfair’s clients without knowing that they were Mayfair’s clients? Or, suppose Mayfair’s clients had contacted him, without having been solicited?
California, for one, specifically recognizes a tort of negligent interference with contractual relations, and has a model jury charge on that topic, which you can read here. The gist of the cause of action is that the defendant should have known of a relationship that probably would have resulted in a future economic benefit to the plaintiff, and failed to act with reasonable care. And in People Express Airlines v. Consolidated Rail Corp., 100 N.J. 246, 495 A.2d 107 (1985), the New Jersey Supreme Court wrote as follows at Note 4: “The notion that the defendant must have breached a duty independent of the negligent interference with economic expectations assumes that the defendant’s negligence–fortuitously resulting only in economic losses–is not a tort. Whether the law recognizes the injury as compensable is a matter of policy; but clearly an ‘independent’ tort has been committed, and no parasitic relationship with another tort should be required before determining whether the injury is compensable. Further, the rule-of-damages rationale does not explain why the application of concepts of duty and proximate cause, which serve negligence well in cases where the plaintiff is physically harmed, cannot function equally well in cases in which there has been no physical harm.”
What happens in many insurance coverage cases is natural and understandable. A judge (being a human being) sees that someone has done something that the judge considers to have been wrong or malicious. The judge, consciously or unconsciously, does not want the wrongdoer to avoid punishment by accessing insurance coverage. So, while the defense bar often refers to results-driven decisions, that knife cuts both ways. I think it’s important to remember that policyholders generally do not buy insurance for commercial advantage; instead, they buy it to protect themselves against catastrophic loss. Under the language of the policy, unless and until the carrier proves knowingly malicious conduct, coverage should exist. (Unfortunately, though, I’m not wearing a black robe.)
You can read the full Szura decision by clicking here.