Everyone knows an insurer’s duty to defend is broader than its duty to indemnify. When an insurer disclaims on its duty to defend, the lack of coverage or the applicability of an exclusion has to be crystal clear. In a recent case, the Third Circuit affirmed an order requiring the insurer to defend an underlying case under a professional liability policy. I thought the analysis was interesting.
In Navigators Specialty Insurance Co. v. Inventiv Health Clinical, Inc., No. 19-2462 (3rd Cir. Sept. 8, 2020) (Not Precedential), the policyholder, a company involved in clinical drug trials, purchased a Life Sciences Products-Completed Operations and Professional Services Liability Coverage Policy. The policyholder ended up in an arbitration with a third-party it contracted with for the drug trials. The policyholder sought coverage under the policy for the arbitration. After initially agreeing to defend, the carrier disclaimed coverage after a claim for professional malpractice was dismissed by the arbitrator as duplicative.
The insurer brought a declaratory judgment action in support of its disclaimer. The policyholder moved for summary judgment and the carrier moved for judgment on the pleadings. The district court granted the policyholder’s motion and directed the insurer to defend the arbitration. The Third Circuit affirmed.
In affirming, the court found that the policy was plain and unambiguous in its grant of coverage for wrongful acts in the rendering of professional services. The court also found that the exclusion barring professional liability claims due to wrongful acts “based on or arising out of delay in delivery of or failure to complete your product or your work [.]” was also plain and unambiguous. The nub of the case was this delay exclusion and its relationship to the underlying allegations.
In affirming summary judgment on the duty to defend for the policyholder, the appellate court held that the insurer had to defend the policyholder in the underlying arbitration because at least some of the underlying allegations and damage claims against the policyholder were predicated on performance failures, existing separate and apart from delays. In other words, even though the professional malpractice claim was dismissed as duplicative and even though many of the allegations and claims were based on delay (falling within the exclusion), there were enough claims of performance failures that were not delays falling within the exclusion.
The court found that not all the delays and failures alleged were inexorably intertwined and that there appeared to be failures that existed separate and apart from the allegations of delays and failure to complete the work. The court held that the underlying claims could be read as including references to both delays and failures that existed separately from one another.
The court, construing the policy under New Jersey law, read the exclusion narrowly and held the insurer to the burden to show that all the claims fell within the exclusion. This, according to the court, the insurer could not do because there were “claims that purely allege failures to perform tasks as required by the contract.” The court construed the ambiguities in the allegations in favor of the insured to find the duty to defend. So even though there was a valid exclusion, because there were claims that fell outside the exclusion and remained covered under the policy, the insurer had to defend the arbitration.
This case demonstrates (once again) that the duty to defend is very broad. To avoid the duty to defend because of an exclusion, an insurer has to demonstrate that none of the allegations fall outside the exclusion as a matter of law.