Defendants in litigation often (wrongfully) presume that if they are alleged to have acted “intentionally,” they prima facie have no insurance. However, in many instances, intentional conduct claims are covered, despite continued insurer efforts to convince policyholders that if the claim includes the word “intent,” the coverage response may include the word “denial.”
Thus, before a company concludes that it should not pursue coverage for intentional conduct claims, it should carefully consider the allegations against it, its policy language and applicable case law. The following summarizes three important considerations with respect to intentional conduct claims.
1. What was intended—the act or the injury? General liability policies often include “expected or intended” exclusions. And some states have legislated to preclude coverage for willful conduct. The frequently asked question is: What must the insured have intended, for purposes of negating coverage? Insurers and policyholders debate whether intending the act is sufficient, or if the policyholder must also have intended the harm. Or, is the standard somewhere in between?
A commonly used example makes the point: A driver speeds down a crowded street. The driver hits (and injures) a pedestrian. The driver intended to drive fast, but did not intend to hit the pedestrian. Alternatively, the driver intends to hit another car, but did not know that there was a pedestrian behind the car who is injured when the driver hits the other car.
When the pedestrian sues and alleges his injuries resulted from intentional conduct by the driver, the insurer likely will deny coverage. Depending upon the state, however, the fact that the driver intended the act, but not the ultimate consequences of the act may be sufficient to challenge the coverage denial.
This issue recently was addressed by a California court in State Farm v. Frake. In this case, the defendant intended to playfully hit his friend, but did not intend the level of injury suffered by his friend. The court, based upon the facts, ruled against coverage. Insurers have relied upon this ruling to perpetuate their myth that regardless of the facts or circumstances, no coverage ever applies if an injury flows in any manner from the policyholder’s intentional conduct. However, this is not true.
At most, the decision clarifies that the facts matter, and there is no absolute rule that applies in this context. In fact, the court explicitly recognized that “when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity,” then coverage may apply. In other words, in the speeding car example, the driver did not intend for the other car to hit the pedestrian.
The law in this area continues to develop. However, before a policyholder acquiesces to insurer claims that only the act matters, they should carefully review the allegations against them and the cases that the insurers claim support their position. Often, the cases do not stretch as far as insurers suggest.
2. Who is alleged to have acted intentionally? Companies frequently are sued for the willful conduct of their employees or agents. For example, a company president might be alleged to have committed fraud with respect to information conveyed to customers and both the president and company are sued. In that circumstance, the claim against the president is direct, but the claim against the company may be for vicarious liability. In many instances, even if the president is found to have the requisite intent to preclude coverage, the company still may be insured.
A number of courts have held that an insurer must pay for the claims against the company when the basis for the claim is vicarious liability. In fact, courts have found that unless the company’s board of directors or other senior management knew about and authorized/ratified the president’s willful conduct, the company did not have the requisite intent regarding the ultimate injury to negate coverage. This rule has even been applied when the claim against the company is for punitive damages. A caveat to this rule, of course, is whether case law in a particular state or specific policy language requires a different result.
3. Which coverage applies? The analysis regarding coverage for intentional conduct claims also is impacted by the coverage being considered. In the speeding driver example, the policyholder likely would pursue coverage under the bodily injury provisions of his general liability policy. If the insurer can show the requisite intent, then the claim may not be covered. However, a different rule would apply if the claim involved the policy’s personal injury coverage. That coverage is triggered if the claim involves one of the explicitly enumerated offenses in the policy, many of which involve intentional conduct.
For example, certain policy forms cover malicious prosecution, libel, slander and other intentional torts. If a policyholder is sued for malicious prosecution, the underlying claimant must prove willful conduct. That fact should not operate as an automatic coverage bar. If it did, the coverage arguably would be illusory—the policyholder paid premium for malicious prosecution coverage, which, by its nature, involves intentional conduct. The insurer expressly agreed to cover such claims and, thus, should not in most states after a claim is made be able to avoid coverage based upon the intentional nature of the claim.
Policyholders also should evaluate insurer efforts to avoid coverage for fraud claims under directors and officers or errors and omissions policies. Those policies typically exclude coverage for fraudulent, criminal and other willful acts. But, often the exclusion applies only if such conduct is established by a final judgment. If a lawsuit alleges fraud, but is settled before a final judgment, the insurer should pay for the settlement despite a fraud exclusion.
Conclusion: Regarding coverage for intentional conduct claims there are no absolutes. Thus, policyholders should look to the specific nature of the allegations against it, and law and policy language to determine whether important insurance resources may be available to pay for expensive litigation.