First Circuit Analyses and Upholds “Claims Made” Limitations to Coverage -- by Michael Aylward

A new opinion by the First Circuit illustrates the growing impact of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) shaping Rule 12(b)(6) as a significant tool for dismissing baseless coverage claims early on in a case.   The holding also reaffirms strong existing Massachusetts precedents governing how "claims made" policies apply.

Gargano v. Liberty International Underwriters, Inc., No. 08-2287 (1st Cir. July 14, 2009) concerned an attorney's failure to give timely notice of a malpractice claim to his E&O carriers.  Gargano had taken over a worker's compensation claim after his client fired the lawyer had worked on the case for four years.  Gargano ultimately obtained a large settlement but only after assuring the state court that there were no liens on the file and that he had solely been responsible for the representation of his client.  Predecessor counsel sued Gargano in 2005 and ultimately recovered a substantial judgment for the insured's fraud and misrepresentations.

Following the entry of the judgment in 2007, Gargano belatedly reported this claim to three professional liability insurers that had successively issued "claims made and reported" policies to him in 2005, 2006 and 2007.  The insurers jointly moved to dismiss the insured's claims pursuant to Fed. R. Civ. P. 12(b)(6) attaching a copy of the underlying court judgment against Gargano.  On the basis of these undisputed facts and the "claims made and reported" language in the insurers' policies, Judge Young dismissed the insured's contractual claim, along with his assertion of bad faith.  These findings were affirmed by the First Circuit.

As a preliminary matter, the First Circuit upheld the district court's consideration of the lower court judgment in the context of a Rule 12(b)(6) motion.  While noting that courts do not ordinarily consider materials outside the complaint when reviewing a motion to dismiss, a narrow exception is permitted for documents the authenticity of which are not disputed by the parties, for official public records, for documents central to the plaintiff's claim and other documents that are referred to in the complaint itself.  In this case, the court found that the superior court judgment fit squarely within this exception.

Turning to the merits of the insurers' defenses, the court observed that the underlying malpractice action, which involved a claim first made in 2005 and not reported until 2007, ran afoul of the "claims made and reported" language in each of the insurers' policies.  As to Policy 1, the claim was received during the policy period but not reported until after it expired.  As to Policy 2, the claim was neither reported nor received during the policy period.  Finally, as to Policy 3, the claim was reported to the insurer during the policy period but received by the insured prior to the policy period.

Gargano argued that these terms should not be applied against him since he had never seen the policies and was unaware of their terms.  (It is unlikely that any court would ever find such an argument to be credible when presented by a lawyer given the ubiquity of "claims made" terms in professional liability insurance policies.)  Even so, the First Circuit found in this case that there was no basis in Massachusetts law for suggesting that the enforceability of an insurance contract was dependent on its issuance.  Unless the policy makes issuance and delivery a condition to the existence of the contract itself, the court ruled that the policy was self-enforcing.  In any event, the court found that Gargano could hardly have had a reasonable expectation of coverage and could not claim ignorance of the terms of the policies as they had been delivered to his insurance agent or broker.  In such circumstances, the knowledge of the agent or broker is imputed to the insured.

Finally, in keeping with established principles of Massachusetts "claims made" jurisprudence, the court refused to require the insurers to establish prejudice as the result of the insured's failure to establish these conditions to coverage.  The court observed that, "To require the insurer of a claims made and reported policy to demonstrate prejudice from the insured's failure to report a claim within the relevant policy period would defeat the fundamental concept on which claims made policies are premised with the likely result that claims made policies, which offer substantial benefits to purchasers of insurance as well as insurance companies, would vanish from the scene."

There are several interesting aspects to this new opinion.  First, it demonstrates the benefits of a Rule 12(b)(6) motion where the crucial facts supporting an insurer's defense to coverage may not be specifically pleaded in the underlying suit but are either undisputed or are contained in documents reference din the complaint.  While reference to such extrinsic sources of proof would ordinarily have required a Rule 56 motion for summary judgment in the past, which many courts will not consider until later in a suit, a growing number of courts have adopted a more expansive interpretation of Rule 12(b)(6) in the wake of the U.S. Supreme Court's opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). 

Gargano also affirmatively stifles the oft-repeated but baseless contention that an insured cannot be bound by terms in an insurance policy of which it was unaware.  While this argument is effective in cases where exclusions or coverage limitations are new to a policy, as where they are added in a renewal policy without due notice to the insured, such an argument is ineffective where the provisions in question are neither ambiguous nor obscure or where the policy itself was in fact delivered to the insured's agent or broker.

Finally, Gargano is a useful reference case given that it involved a "perfect storm" of all of the permutations of trouble that an insured may face with "claims made and reported" language.  For all of the foibles of Massachusetts insurance jurisprudence, it is nearly unique among the fifth states in upholding all of the key aspects of "claims made" coverage requirements for insurers.  This is the rare case, however, where the facts of the case illustrate the problems presented by claims being received during the policy but not being reported on time, after the policy was issued but not being reported on time, and being reported on time but after the policy was issued.

Category: Insurance
Posted by: Michael Aylward | Posted on: 7/21/2009 | Permalink & Comments

The Impact of the New Guardianship Laws on Hospitals and Nursing Homes in Massachusetts

The Massachusetts legislature has dramatically changed the guardianship laws by enacting the Massachusetts Uniform Probate Code (MUPC) effective July 1, 2009.  These changes significantly impact discharge planning from hospitals and admissions to long-term and skilled-care facilities.

HIGHLIGHTS INCLUDE:

Elimination of Guardianship of the Estate.

• Guardians are appointed for the care of the person only and if property is involved, a separate petition is required to appoint conservator of the estate.  Two filing fees are required.

Limited Guardianships/Conservatorships favored over full guardianships.

• Patients may retain rights in some areas but not in others, for example, a patient may have a guardianship and conservatorship in place but retain the right to vote.

Guardians do NOT have the authority to move a person to a nursing home without a specific Court finding that the admission is in the person's best interest.

     How does this impact a hospital?

• This could prevent a patient under guardianship from being transferred from a hospital to a nursing home.
• This could potentially cost the hospital resources and money given that a patient remains in the hospital who has been determined to no longer need hospital-level of care.

     How does this impact a nursing home?

• It is a violation of the law if the nursing home accepts a patient who is under guardianship where there is no specific Court authority for transfer to the facility.  This could expose the nursing home to liability.
• After a nursing home accepts a hospitalized patient, it may take significant time to transfer if awaiting Court approval.  This could cost the nursing home money given that it may be "holding" a bed for the hospitalized patient.

Health Care Proxy takes precedence over guardianship absent Court Order.  A guardian may not revoke a Health Care Proxy.

Guardians do NOT have the authority to consent to treatment where a substituted judgment determination is required unless the Court issues findings, approves, authorizes and endorses a treatment plan in its Order or Decree.

The term "ward" is replaced by "incapacitated person" for guardianships and "protected persons" for conservatorships.

Some persons are excluded from serving as guardians.

     This includes:

• Any person who is being investigated or has charges pending for committing an assault and battery that resulted in serious bodily injury to the incapacitated person; or
• is being investigated or has charges pending for the neglect of the incapacitated person.

The District Court, not the Probate Court, has the jurisdiction to commit a person to a mental health facility.

• A guardianship matter may be pending in Probate Court, and a separate matter may need to be initiated in District Court if the person requires an involuntary civil commitment to an inpatient psychiatric unit.

Guardians are required to submit a report to the Court within 60 days of appointment and at least annually thereafter.

• Until July 1, 2009, only Roger's Monitors needed to file annual reports with the Court.  Typically, counsel for the nursing home/petitioner coordinates this process on an annual basis.  The MUPC requires that all guardians, whether or not there is a Roger's component, file a report with the Court which will likely financially impact facilities.

Counsel may be appointed on any guardianship matter, not just cases where substituted judgment or Roger's is applicable.

• The Court may order the petitioner to pay the fees related to appointment of counsel.  As such, the nursing home/hospital petitioner may bear this expense unless the Court determines the person under guardianship is indigent or orders the Commonwealth to reimburse counsel fees.

Category: Procedural Rules
Posted by: Kristen Lambert | Posted on: 7/3/2009 | Permalink & Comments

SJC Limits Tort Liability Of Medical Providers To Non-Patient Third Parties

In Leavitt v. Brockton Hospital, Inc., (June 9, 2009), the SJC determined whether a hospital, and two of its registered nurses, owed a duty of care to an unrelated third party. The plaintiff was a police officer who was injured in a car accident while responding to the scene of a reported accident in which a medicated patient was struck by a car while walking home from the hospital after a procedure.  The police officer argued that the hospital owed him a duty of care that was breached when it released the patient without an escort while the patient was still medicated. 

The SJC affirmed the trial court's order granting the defendant's motion to dismiss.  In affirming the order dismissing the complaint, the SJC concluded that a medical professional does not owe a duty to a third person to control a patient (excluding a patient of a mental health professional) arising from any claimed special relationship between the medical professional and the patient.    The court stressed, however, that this was not a failure to warn case.  (The SJC had previously recognized in Coombes v. Florio, 450 Mass. 182 (2007) the liability of a third party in a situation where a physician had failed to warn a patient of the effects of prescribed medication.)  Moreover, the SJC also determined that the police officer's injury was not "caused" by any action by the hospital because the injury fell outside the scope of foreseeable risk arising from any negligent conduct that would make the hospital's alleged misconduct tortious.  The harm that the police officer suffered - injury from a collision not involving the patient - arose not from the "same general type of danger" (harm to the patient or to those injured by the patient as result of being released while medicated) that the hospital allegedly should have taken reasonable steps to avoid, but from "some other danger" (the collision between the police cruiser and another vehicle unrelated to the patient).  The SJC also rejected the claim that the hospital was liable under the "rescue" doctrine.  The court reasoned that not all injuries to rescuers are within the scope of foreseeable risk: the injury to the police officer was not the result of a risk that would have been anticipated to arise from the rescue.

The court's limitation of tort liability of medical providers to non-patient third parties would seem to extend to a situation where a third-party non-patient was directly injured by a medicated patient. The court, however, was direct in noting that this was not a "failure to warn" case.  In addition, the court's decision is instructive on a procedural ground.  Although causation is generally a question for a jury to decide, the court stated that the issue of causation could be determined as a matter of law where there is "no set of facts that could support a conclusion that the plaintiff's injuries were within the scope of liability".  In addition, the court noted its adoption of the new, "stricter", standard of reviewing the adequacy of a complaint challenged by a motion to dismiss – factual allegations plausibly suggesting (not merely consistent with) an entitlement to relief are required.

Category: Tort Practice
Posted by: Tom Federico | Posted on: 6/10/2009 | Permalink & Comments

US Supreme Court To Determine Test For Deciding Corporation’s Principal Place Of Business

The Supreme Court granted certiorari in the case of Hertz Corp. v. Friend, Melinda, et al in an order dated June 8, 2009.  The issue to be decided by the Court is whether, for purposes of determining principal place of business for diversity jurisdiction citizenship, a court can disregard the location of a nationwide corporation's headquarters - i.e., its nerve center.

Melinda Friend and John Nhieu filed a putative class action in California state court seeking damages for alleged violations of California's wage and hour laws.  Hertz removed the action to the District Court.  The putative plaintiffs filed a motion to remand and argued that Hertz was a citizen of California and that diversity of citizenship did not exist between Hertz and members of the putative class. The district court granted the plaintiffs' motion based on the court's conclusions that "a plurality" of Hertz' business activities occur in California and that "Hertz is not the type of litigant that diversity jurisdiction was designed to protect." Hertz sought review of the remand order by the Ninth Circuit. The Ninth Circuit concluded that the district court had correctly applied the circuit's "place of operations" test as articulated in Industrial Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1094 (9th Cir. 1990)("the 'nerve center' test should be used only when no state contains a substantial predominance of the corporation's business activities") and Toseo Corp. v. Communities for a Better Env't, 236 F.3d 495, 500 (9th Cir. 2001)(substantial predominance "requires only that the amount of corporation's business activity in one state be significantly larger than any other state in which the corporation conducts business"). In its order, the Ninth Circuit further refined this test in finding that no "policy concerns" justified taking California's population into account when determining whether a corporation's business activities in California were significantly larger than in any other single state.

For purposes of diversity jurisdiction, the circuit courts have created four different tests to determining a corporation's principal place of business: (1) the Seventh Circuit's "nerve center test," which focuses on locating the corporation's "brain," and ignores all other business operations as irrelevant; (2) the Ninth Circuit's "place of operations test," which focuses on the locations of the corporation's business operations, while generally ignoring its nerve center; (3) the Third Circuit's "center of corporate activities test" which focuses on finding the center of day-to-day corporate-wide activity and management, with the locations of other business activities being relevant, but less important, factors; and (4) the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits' "totality of the circumstances test" which hinges on no particular facet of corporate activities, but rather on the company as a whole, including its character, business purpose, nerve center, management center and locations of operations.

In its petition for writ of certiorari, Hertz argued that a test for determining a corporation's principal place of business for purposes of diversity jurisdiction should be guided by: (1) the ordinary meaning of those words, i.e., the most important, consequential or influential place of business in comparison to all others; (2) the underlying purposes of diversity jurisdiction, e.g., protecting out-of-state citizens against the bias of local tribunals and promoting the free flow of commerce; and, (3) Congress' expressed reasons for adding the principal place of business provision to 28 U.S.C. § 1332(c)(1), i.e., "a simple [and] practical" method for readily determining the existence of jurisdiction, which also allows judges to protect against "frauds and abuses of federal jurisdiction by corporations which are primarily local in character."  It argued that the place of operations test, "reduces a corporation's nerve center to an afterthought, does not comport with the ordinary meaning of the statute, is not tailored to address the 'evil' which prompted Congress to amend the statute, and is inconsistent with the underlying purposes of diversity jurisdiction".

Category: Procedural Rules
Posted by: Tom Federico | Posted on: 6/9/2009 | Permalink & Comments

Calif. Court Of Appeals Upholds Trial Court’s Exclusion Of Expert Testimony In Mold Case – By MM Partner Tom Federico

In Dee v. PCS Property Management, Inc. ___ Cal. App.4^th ___ (5/28/2009), a tenant brought suit against her landlord stemming from stemming from her exposure to mold in her apartment.  On appeal, the plaintiff challenged the trial court's exclusion of proposed expert testimony that her numerous ailments, ranging from an increased risk of cancer to fibromyalgia, were caused by her exposure to mold. The Court of Appeals upheld the trial court's exclusion of this expert testimony where the plaintiff's experts had relied on unsupported assumptions and inadmissible blood and brain tests. 

One of the plaintiff's experts, Gary J. Ordog, acknowledged that no mycotoxin was found in the plaintiff's unit at the time she was living there. Specifically, Ordog admitted that trichothecene, aflatoxin, and satratoxin were not identified on the premises at the relevant time period. Based on section 801 of the California Evidence Code, the trial court excluded evidence of a causal connection between toxic mold and cancer. "[H]is testimony at the 402 hearing . . . was conclusive that he has no sufficient evidence of a causal connection." The court excluded Ordog's proposed testimony on a causal connection between toxic mold exposure and cancer, brain damage, reproductive harm, and future birth defects based on section 801. The court further concluded that Ordog's testimony lacked foundation because there was no proof "that the inhalation of mycotoxins caused her injury." The court explained that it "listened carefully to Dr. Ordog, and I [concluded] that what occurred was in the main speculation, and when it wasn't speculation, it was 'I know it when I see it,' and 'I know it based on my experience'; and we don't know what that experience was."

Category: Procedural Rules
Posted by: Tom Federico | Posted on: 6/3/2009 | Permalink & Comments

Lease Agreement In Conjunction With A Construction Project Not Governed By G.L. C. 149, §29C.

Category: Construction Law
Posted by: Tom Federico | Posted on: 5/19/2009 | Permalink & Comments

Recent Appeals Court Decision regarding "open and obvious" defense in snow and ice cases.

Barrasso v. Hillview West Condominium Trust

The recent Appeals Court decision in Barrasso v. Hillview West Condominium Trust, Civil Action No. 07-P-1057 (April 21, 2009), stresses the importance of raising the "open and obvious" defense in snow and ice cases.  In this case, during a three day snowstorm, a plow company had cleared snow from a condominium's parking lot and placed some of the snow in front of a trash dumpster.  On the morning after the storm ended, the plaintiff attempted to throw out a bag of trash and, in doing so, alleges he fell on a piece of compacted snow and ice that was in the three foot wide, waist deep snowbank that covered the front of the dumpster.  In its decision, the Appeals Court reiterated that the law distinguishes between actionable cases in which one created and altered the snow conditions, and inactionable cases in which there was mere exposure to a remaining natural accumulation of snow or ice.  In Hillview, the Appeals Court held that the evidence presented was sufficient "to raise a genuine issue of material fact" as to whether the plaintiff was injured as a result of an unnatural accumulation of snow and ice.  Consequently, it overturned the lower court's grant of summary judgment. 

The concurring opinion is a reminder that defense attorneys should make two arguments in a summary judgment motion involving snow and ice.  First, that the  snow and ice was natural, and second, in the alternative, the snow and ice was an open and obvious danger for which there can be no liability.  Specifically, in reviewing the case, Judge Kantrowitz stated that the issue in Hillview was duty -- namely, "Did the defendants owe the plaintiff a duty to refrain from creating the snowbank or to remedy what they had created?"  Judge Kantrowitz restated that the law provides that ordinarily one does not have a duty to protect lawful visitors of dangerous property conditions if such dangers "would be obvious to persons of average intelligence."  In this case, he acknowledged that several facts suggested that "the danger of climbing over such a snowbank immediately after a major snowstorm was an obvious one to persons of average intelligence."  Yet, as there was no record of the argument being made below, the Appeals Court could not assess it in making its decision.  As such, in his concurring opinion Judge Kantrowitz concluded by stating that "While it is difficult to imagine how, once [the open and obvious argument were] raised, it would not prove successful, I leave for another day."

Category: General Liability
Posted by: MMBlog Administrator | Posted on: 5/6/2009 | Permalink & Comments

Vermont adopts 'time of risk' approach in environmental case.

Category: Insurance
Posted by: Michael Aylward | Posted on: 8/20/2008 | Permalink & Comments

Additional Insured Coverage and Blanket Endorsements

Category: Insurance
Posted by: Tom Federico | Posted on: 8/18/2008 | Permalink & Comments

Supreme Judicial Court of Massachusetts tightens pleading standards.

The Massachusetts Supreme Judicial Court ("SJC") announced in June in Iannacchino v. Ford Motor Co. SJC-10059, 2008 WL 2375179 (Mass. June 13, 2008), that it would adopt the more "refined" pleading standard laid out by the U.S. Supreme Court in Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1965 (U.S. 2007). 

In Twombly, a class of plaintiffs alleged that actions by the regional local telephone carriers -- the residuals of AT&T -- violated Section 1 of the Sherman Act .  Such a claim demanded, at a threshold level, an agreement (conspiratorial in nature, perhaps, but minimally an agreement of some kind) between local providers.  Finding that the Plaintiffs provided no such foundation for the claim, the Supreme Court ordered Plaintiffs' complaint dismissed, "[b]ecause the plaintiffs . . . have not nudged their claims across the line from conceivable to plausible."  More broadly, the Court "retired" consistently misconstrued language from Conley v. Gibson, 355 U.S. 41 (1957), that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."  The Court held that "[w]hat is required at the pleading stage are factual 'allegations plausibly suggesting (not merely consistent with)' a valid cause of action.  " 

In Iannacchino, a class of plaintiffs sued Ford Motor Company in the Superior Court of Massachusetts, on claims of breach of warranty and violations of the Commonwealth's consumer protection act, M.G.L. ch. 93A.  Ford moved for judgment on the pleadings pursuant to Mass. R. Civ. P. 12(c) which was granted as to all counts save a breach of implied warranty count that the lower court held was sufficient to show that the vehicle line at issue was unmerchantable.  The Supreme Judicial Court found that the complaint insufficiently pled facts sufficient to support each and every allegation of M.G.L. c. 93A and breach of warranty  – allegations which were factually dependent upon alleged violations of federal motor vehicle safety standards.  The SJC, finding that plaintiff's allegations were conclusory and factually deficient, largely echoed the pronouncements in Twombly, and in doing so has, in practice, set the pleading bar higher for Plaintiffs seeking to proceed with any civil action in the Commonwealth.   The "plain statement" of the complaint, must "possess enough heft to 'sho(w) that the pleader is entitled to relief.'" 

Category: Consumer Protection
Posted by: Anthony E. Abeln | Posted on: 6/30/2008 | Permalink & Comments