Wade Clark Mulcahy LLP

<p style="text-align: justify;">On October 1, 2021, the United States District Court for the Eastern District of Pennsylvania, in <em><a href="https://www.wcmlaw.com/wp-content/uploads/2021/10/Jeffers.pdf">Jeffers</a> Farms, Inc. v. Liberty Insurance Underwriters, et al</em>., analyzed whether an insurance policy’s “prior acts exclusion” barred coverage.</p>
<p style="text-align: justify;">By way of brief background, Liberty Insurance Underwriters Inc. (“Liberty”) issued two insurance policies providing directors, officers and company liability coverage to Jeffers Farms, Inc. (“Jeffers”). The policies provide coverage to Jeffers, as well as Jeffers’ directors and officers, for any losses they become legally obligated to pay as a result of claims made against them during the covered period. In June 2018, the Estate of Ann J. Hogarty (the “Estate”) filed a lawsuit against Jeffers demanding Jeffers issue 60 shares of Class A stock to the Estate as required by a 1961 amendment to Jeffers’ bylaws. The Estate also alleged Jeffers failed and refused to issue the requested A shares and Jeffers, “through its officers and directors over the years, . . . engaged in misrepresentation and fraud to prevent the transfer of the A shares of stock to Ann Hogarty, and after her death, to her Estate”.</p>
<p style="text-align: justify;">Subsequently, Jeffers sought coverage for the underlying lawsuit. In response, Liberty disclaimed coverage. As a result, Jeffers commenced the instant lawsuit alleging Liberty breached the terms of the insurance policy and acted in bad faith in violation of 42 Pa.C.S.A. § 8371. Liberty then filed a motion to dismiss.</p>
<p style="text-align: justify;">The court first considered whether Jeffers sufficiently alleged a breach of contract claim. Specifically, the court analyzed whether Jeffers plausibly alleged Liberty is obligated to defend it in the underlying lawsuit. In making this determination, the court considered Pennsylvania’s well-established principle that an insurer has a duty to defend if the complaint potentially comes within the policy’s coverage. In its motion to dismiss, Liberty argued the policies’ prior acts exclusion bars coverage. In pertinent part, the exclusion provides, Liberty “shall not be liable under any Insuring Clause in this Coverage Part for Loss on account of any Claim made against any Insured…based upon, arising out of, or attributable to any Wrongful Act taking place in whole or in part prior to 02/18/2016”. Based on the plain language of the policies, the court determined that, pursuant to the exclusion, coverage is not triggered for a claim based on a “wrongful act” that took place prior to February 18, 2016. Since the underlying action alleges acts and omissions that began in 1961, the court reasoned the policy’s wrongful act exclusion precludes coverage and therefore, there is no duty to defend Jeffers. Accordingly, the court granted Liberty’s motion to dismiss with respect to Jeffers’ breach of contract claim. Since bad faith claims cannot survive a determination of no coverage, in a footnote, the court noted Liberty had good cause to deny coverage. Thus, the court dismissed Jeffers’ bad faith claim as well.</p>
<p style="text-align: justify;">In response to Liberty’s motion to dismiss, Jeffers argued Pennsylvania’s “reasonable expectations” doctrine applies. The court disagreed. Focusing on the specific allegations in the complaint, the court determined the complaint fails to allege any information regarding Jeffers’ procurement of the insurance policies or whether the policies it obtained differed from what Jeffers bargained for. Further, the court noted Jeffers failed to allege any specific conduct attributable to Liberty that created an expectation that the claims alleged in the underlying action would be covered under the policies. Finally, the court concluded that Jeffers mere mention of this doctrine in its response to Liberty’s motion to dismiss was insufficient to overcome the plain language of the policy. Ultimately, the court granted Liberty’s motion to dismiss. However, the court permitted Jeffers leave to amend its complaint to include allegations about its reasonable expectations of the policies’ coverage.</p>
<p style="text-align: justify;">Thanks to Lauren Berenbaum for her contribution to this post. Please contact <a href="mailto:LBerenbaum@wcmlaw.com">Lauren</a> with any questions.</p>