Coverage Gap Created by Inept Changes in Insurers and Policy Wording

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Often insureds will change insurers to save premium or obtain promised additional coverages. However, switching insurance providers can be tricky and dangerous to the insured. The separate insurance policies-drafted by, and entered into with, different providers-may not necessarily align. Gaps in coverage may appear that can leave even the best intentioned policyholders entirely exposed. A “Claims Made” policy provides different coverages than an “occurrence” based policy.

In Derek Slaughter, Gabriel Campana, And City Of Williamsport v. The Charter Oak Fire Insurance Company, State National Insurance Company, Inc., and Steven Helm, No. 4:21-CV-01284, United States District Court, M.D. Pennsylvania (June 17, 2022) the USDC explains why changing insurers and policy types needs the assistance of a professional risk manager and insurance coverage expert.

The City of Williamsport found itself in a problem of coverage created by its changes of coverage without first determining that the coverages do not conflict.

The City switched providers for its public entity liability insurance in January 2019. It was then sued in 2021 by a police officer who claimed retaliation based on prior suits he filed against the City in 2017 and 2018. After an officer filed two suits during the coverage period of the City’s former insurer, State National Insurance Company, Inc. he then filed a 2021 suit during the coverage period of the City’s current insurer, The Charter Oak Fire Insurance Co.

The current insurer disclaims coverage for claims in any way factually connected to prior suits filed outside its coverage period. The former insurer does not follow this same practice, and, critical here, disclaims any obligation to defend or indemnify the City for any future claims arising out of pending or prior litigation. The City placed itself squarely upon the horns of a dilemma and a place where no insurance applies.
BACKGROUND

Specifically, Officer Helm sued Williamsport and its Police Chief in April 2017 for violating his First Amendment freedom of association rights by allegedly retaliating against him for his activities as the president of the police officer’s union. Helm then filed a second, one-count suit in November 2018, raising the same claim based on similar conduct. Ultimately, Helm and Williamsport resolved these suits by settlement agreement.
The Insurance Policies

To safeguard the City’s finances from employee lawsuits like those filed by Helm, Williamsport maintains public entity liability insurance that covers, among other things, losses resulting from “wrongful employment practice[s].” From January 1, 2016, to December 31, 2018, the City contracted with State National for this coverage. Under its public entity liability insurance policy, State National committed to “pay on behalf of [Williamsport] all ‘loss’ resulting from ‘employment practices wrongful act(s)’ but only with respect to ‘claims’ first made against [Williamsport] during the ‘policy period.’” That said, State National disclaimed any “obligat[ion] to make any payment [or] to defend any ‘suit’ in connection with . . . future ‘claims’ arising out of any pending or prior litigation or hearing.”

After its agreement with State National expired in December 2018, Williamsport switched insurers. The City contracted with Charter Oak for public entity liability insurance, with coverage beginning on January 1, 2019, and continuing through the present. Charter Oak’s basic agreements were the same as those by State National.

However, Charter Oak’s coverage extends only to suits “first made or brought against [the City] . . . during the policy period.” And the Charter Oak policy contains an important qualifier regarding the concept “first made or brought” and that was it excluded similar prior acts.
ANALYSIS

In its motion for judgment on the pleadings, Williamsport asks the Court to declare that both Charter Oak and State National possess two distinct but related duties: (a) the duty to defend the City in the lawsuit Helm initiated in April 2021; and (b) the duty to indemnify the City for any losses stemming from the April 2021 suit.
Duty to Defend

Under Pennsylvania law, determining whether an insurer has a duty to defend its insured involves the court to endeavor to ascertain the intent of the parties as manifested by the language of the written instrument, which requires reading the policy as a whole and construing the contract in accordance with the plain meaning of terms. The court must enforce language that is clear and unambiguous; if language is ambiguous, it must be construed against the insurer and in favor of the insured.
Charter Oak

Charter Oak contended that Helm’s 2021 claims do not trigger coverage because they fall within an enumerated exception.

Charter Oak’s policy establishes a duty to defend claims or suits seeking damages for wrongful employment practice offenses-such as discrimination, retaliatory action, and wrongful failure to promote-that were “first made or brought” during the policy period (i.e., starting January 1, 2021). The 2017 and 2018 lawsuits were indisputably “first made or brought” prior to the Charter Oak coverage period. The court next determined if the 2017 and 2018 lawsuits involve wrongful employment practice offenses “related” to those in the 2021 action.

The Court concluded that Helm “connects the retaliatory actions occurring between 2018 and 2020 [i.e., the basis of his 2021 claims] to the retaliatory actions against him referenced in [the 2017 and 2018 lawsuits], ” thereby establishing “a common connection and link of related causes, facts and circumstances.” Therefore, the Charter Oak policy was faced with lawsuits that involve “related wrongful employment practice offenses.”

Although the city properly notified the insurer of the claim within the policy period, which began in July 2005, the policy clearly and unambiguously excluded any claim “alleging, based upon, arising out of or attributable to any prior or pending litigation . . . filed on or before the effective date of the [insurance] policy” or the “same or substantially the same wrongful act, fact, circumstance or situation underlying or alleged therein.”

The Charter Oak policy does not cover claims or suits filed within the coverage period if a separate suit involving “related” wrongful employment practice offenses was “first made or brought” prior to the coverage period. Since the 2017 and 2018 suits were “first brought or made” prior to the Charter Oak coverage period, Helm’s 2021 suit does not trigger coverage.
State National

The City probably thought that because Helm’s 2017 and 2018 suits were considered “related” to his 2021 claims, thereby absolving Charter Oak of its duty to defend Williamsport, the prior suits would necessarily compel coverage by State National, Williamsport’s public entity liability insurance provider from January 2016 through December 2018. But that was not the case.

State National’s public entity liability insurance policy contains several exclusions, explaining that State National “will not be obligated to make any payment nor defend any . . . future ‘claims’ arising out of any pending or prior litigation or hearing.”

This language is clear and unambiguous: State National’s coverage obligations extend only to claims first made against Williamsport during the policy period; claims brought after the coverage period-even those that arise out of pending or prior litigation first brought during the coverage period-do not trigger coverage.
Duty to Indemnify

The duty to defend is broader than the duty to indemnify, and, therefore, if an insurer has no duty to defend, it likewise has no duty to indemnify. Because the Court found that neither Charter Oak nor State National must defend Williamsport from Helm’s April 2021 claims, neither Defendant must indemnify Williamsport for these claims.
CONCLUSION

Read together, the Charter Oak and State National insurance policies leave the City without coverage. Despite maintaining public entity liability insurance without interruption, the City has no coverage for the officer’s 2021 suit.
ZALMA OPINION

Individuals, businesses, corporations, and governmental entities must never assume that a new policy will protect them in the same way as an earlier policy. It is essential that the insured, the city in this case, read both policies and if they don’t understand – as most people insured do not – employ an expert in insurance coverage and risk management before agreeing to replace one policy with another that may have different terms and conditions. In this obligation the City of Williamsport failed and must defend itself to the claims of the officer and, if it loses, pay the judgment out of city funds.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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