Heartbreak in the First Circuit: Court Dismisses Suit Against Insurer Over Coverage for Claims Related to Attorney’s Rocky Affair with Client
In Sanders v. The Phoenix Insurance Co. (1st Cir. Dec. 7, 2016), the First Circuit held that a homeowner’s insurance company had no duty to defend or indemnify its insured, a divorce attorney, against claims stemming from his “on-again/off-again intimate relationship” with his client. The First Circuit affirmed the lower court’s dismissal of a complaint filed by the assignee of the insured attorney against his insurer, Phoenix Insurance Company , for its failure to provide coverage.
As background, Phoenix issued a homeowner’s insurance policy to a divorce attorney referred to as “John Doe,” who allegedly engaged in an intimate relationship with his client, Andersen. One night, after Doe had promised to meet Andersen at her apartment and failed to do so, Andersen committed suicide. Approximately a year after Andersen’s death, her husband, Sanders, sent a demand letter to Doe pursuant to Massachusetts General Laws Chapter 93A. Doe notified Phoenix, as some of the “meretricious interludes” occurred in Doe’s home. Phoenix denied coverage under the homeowner’s policy, explaining the claim did not involve an “occurrence” and that the policy’s professional services exclusion otherwise barred coverage. Later, Sanders notified Phoenix of the parties’ intent to mediate the dispute and invited Phoenix to participate. Phoenix declined. Doe, Doe’s law firm, and Sanders reached a settlement, with Doe agreeing that $500,000 represented his personal liability to Sanders and then assigning to Sanders his rights and interests under the policy, along with any extracontractual claims Doe had against Phoenix. Separately, Doe’s law firm settled with Sanders, with its insurer paying $500,000 for a release of all claims against the firm. Sanders then sued Phoenix, alleging that Phoenix breached its duty to defend and indemnify Doe and engaged in unfair settlement practices.
Phoenix argued it was under no obligation to provide Doe with a defense in the absence of a lawsuit. The key language of the policy quoted by the First Circuit provided that Phoenix would “provide a defense at [its] expense of counsel of [its] choice, even if the suit is groundless, false or fraudulent. [Phoenix] may investigate and settle any claim or suit that [it] decide[s] is appropriate.” Since Sanders never initiated a lawsuit against Doe related to Andersen’s death, Phoenix maintained it had no duty to defend Doe. Sanders argued other provisions of the policy obligated Phoenix to defend against pre-suit claims.
The First Circuit agreed with Phoenix that the plain language of the policy did not obligate it to defend its insured pre-suit, and Sanders’ cobbling together of other policy provisions did not change that fact. The First Circuit further distinguished Massachusetts precedent whereby the duty to defend was triggered pre-suit by a letter sent by the EPA notifying a party of its potential responsibility for the release of hazardous substances under CERCLA. Specifically, the First Circuit explained that a Chapter 93A letter was more similar to a demand letter “sent in anticipation of garden-variety personal injury litigation,” whereas the failure to participate in the administrative process related to the EPA notice would “all but forfeit[ ] the insured’s case.” The First Circuit also concluded that Phoenix’ duty to defend was not triggered by the insurer’s notice of the mediation. As to the duty to indemnify, the First Circuit explained that the plain language of the relevant policy provision only obligated the insurer to indemnify in situations where there was a final judgment or settlement agreement executed by Phoenix, neither of which happened here. And, as to Sanders’ claims of unfair and deceptive trade practices based upon Phoenix’s failure to settle, the First Circuit concluded that Phoenix had “no duty to settle absent a duty either to defend or to indemnify.”
This decision’s significance lies not in its salacious facts but rather in its limitation on the recognized triggers of an insurer’s duty to defend. While policyholders may seek to expand the acknowledged triggers, a Rule 93A letter is not such a mechanism. Massachusetts coverage practitioners should familiarize themselves with this decision.