No Duty to Defend? New Case Sheds Light on Indemnity-Only Coverage

Recently, the United States District Court for Massachusetts entered a decision on an insured’s motion for judgment seeking an order that its Excess Insurers had the duty to advance defense costs under their Directors & Officers liability policies.

The decision on the insured’s motion in Argonaut Insurance et al. v. Windsor Property Management et al. highlights the differing rules for liability policies providing a duty to defend the insured and policies providing only a duty to advance defense costs.

Personal liability policies and most but not all commercial liability policies require the insurer to defend the insured. A typical provision in such policies might state: “We will have the right and duty to defend the insured against any ‘suit’ seeking [bodily injury or property] damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply.” For this type of policy, a duty to defend arises when the allegations of a lawsuit against the insured suggest any possibility of policy coverage. See Agency Checklists’ article of February 28, 2023, “Understanding The Duty to Defend: Partington Builders v. Nautilus Ins.”

Indemnity-only policies with a duty to advance defense costs can include Directors and Officers (D&O) Liability Insurance, Errors and Omissions (E&O) Insurance, Employment Practices Liability Insurance (EPLI), Cyber Liability Insurance, Fiduciary Liability Insurance, and Management Liability Insurance.

In such indemnity policies, the insurer’s obligation is generally limited to reimbursing the insured for covered losses, including legal fees, up to a policy’s liability limit, but only after liability is established.

Windsor sued for price-fixing of rental apartment rents

Windsor Property Management Company (Windsor) is the 17th largest real estate property manager in the United States.

In December of 2022, Windsor and its parent company were sued in three class actions that were consolidated into a multidistrict litigation class action (“underlying litigation”). The lawsuit, In re RealPage, Inc. Rental Software Antitrust Litigation, alleged that Windsor, among other defendants, conspired to boost its apartment rental prices by illegally sharing and receiving proprietary rental information through RealPage with other landlords owning thousands of rental units around the country.

Windsor’s Director and Officers’ coverage

At the time it was sued, Windsor had primary Directors & Officers (D&O) coverage with a $5 million limit and a $500,000 retention per claim issued by the Federal Insurance Company (Chubb). In addition, Argonaut Insurance Company issued a follow-form excess policy providing $5 million in coverage after the $5 million limit of the Chubb policy was exhausted. Finally, Zurich American Insurance Company issued a second excess policy, providing $5 million in coverage after both the Chubb and Argonaut policy limits were exhausted, for a total of $15 million in coverage. (Argonaut and Zurich, “Excess Insurers”)

The Chubb primary policy also included a set of General Terms and Conditions which, among other things, delineated Windsor’s duties should any claim be made under the primary policy. On defense costs, Section VII of the General Terms and Conditions of Chubb’s primary policy stated:

(A) It shall be the duty of the Insured and not the duty of the Company to defend Claims made against the Insured. The Insured shall have the sole obligation under this Policy to retain defense counsel, which shall be subject to the approval of the Company, which shall not be unreasonably withheld.

Chubb advances defense costs, reserving its rights, but the Excess Insurers deny and sue

Windsor duly reported the underlying litigation to Chubb and the Excess Insurers and requested confirmation of coverage and an agreement to advance defense costs.

After first refusing to advance defense costs, Chubb reconsidered and agreed to advance Windsor’s defense costs, subject to a reservation of rights.

The Excess Insurers denied any coverage obligation for the underlying litigation, citing an exclusion in the Primary Chubb Policy that barred coverage for losses from claims “based upon, arising from, or in consequence of performing or the failure to perform any professional service” (the Professional Services Exclusion).

After denying coverage, the Excess Insurers filed a coverage lawsuit against Windsor on April 15, 2024, asking the federal court in Boston to grant declaratory relief on two counts:

(1) a declaratory judgment that the Professional Services Exclusion in the Primary Chubb Policy excluded coverage for the underlying litigation and

(2) a declaratory judgment that payments made by Chubb for defense costs incurred by Windsor in the underlying litigation did not qualify as payments of Loss that would deplete the underlying insurance limit and trigger the excess policies.

Windsor answered with counterclaims, asserting causes of action for (1) a declaratory judgment on its coverage under the excess policies, (2) breach of contract, and (3) unfair claim practices in violation of Massachusetts General Law Chapter 93A.

Windsor’s motion for judgment on the duty of the Excess Insurers to advance defense costs

Multidistrict class action litigation in federal courts can run up defense costs quickly. Soon after answering the excess insurer’s declaratory judgment, Windsor filed a motion for judgment on the pleadings to pin down the obligation of the Excess Insurers to advance defense costs when and if the underlying litigation exhausted Chubb’s $5 million.

In its motion, Windsor argued that the claims in the underlying litigation were not “based upon, arising from, or in consequence of the performance or failure to perform professional services.” Therefore, the Professional Services Exclusion was inapplicable and the Excess Insurers were obligated to advance defense costs once the Chubb Policy’s limits were exhausted.

Windsor further argued that the Excess Insurers had an independent duty to advance defense costs, contending the allegations in the underlying lawsuit, even if they did not definitively establish coverage, raised the possibility of coverage and, therefore, triggered the Excess Insurers’ duty to advance defense costs.

The Excess Insurers opposed Winsor’s motion, countering that their policies were indemnity policies, not duty-to-defend policies. They emphasized to the Court that their follow-form policies explicitly placed the duty to defend on the insured, Windsor, and not on the Excess Insurers. Finally, they argued that the applicability of the Professional Services Exclusion, which Windsor argued did not apply, needed to be ruled upon by the Court before any obligation to advance defense costs could arise.

Court’s analysis of the duty to advance defense costs

The U.S. District Court focused its analysis on interpreting the insurance policy’s language, starting with the distinction between the “duty to defend” and the “duty to advance defense costs.” The court clarified that the primary policy explicitly disclaimed any duty to defend, stating,

“It shall be the duty of the Insured and not the duty of the Company to defend Claims made against the Insured.”

According to the Court, this policy disclaimer left Windsor responsible for managing the defense.

Windsor also argued that the Chubb policy’s Amplifier Endorsement, stating that “Defense Costs shall be advanced on a current basis,” created an independent duty for the Excess Insurers to advance defense costs. However, the court interpreted the Amplifier Endorsement within the broader context of Section VII of the policy, particularly Section VII(E), which allowed the insurer to impose conditions on advancing defense costs, such as requiring a written agreement guaranteeing repayment if coverage was ultimately denied.

Thus, the court found that the Amplifier Endorsement did not create an unconditional obligation for the Excess Insurers to advance defense costs.

The court also highlighted that any ambiguity in the policy should be resolved in favor of the insured, but only if the language itself was genuinely ambiguous. Here, the court found no ambiguity, concluding that the policy’s language clearly limited the Excess Insurers’ obligations.

Ultimately, the court denied Windsor’s’ motion for partial judgment on the pleadings, determining that the Excess Insurers had no duty to defend and no independent duty to advance defense costs.

The Key Distinctions: Duty to Defend vs. Indemnity Policies

This decision underscores a crucial distinction between two types of liability insurance policies:

1. Duty to Defend Policies: In these policies, the insurer assumes a broad obligation to defend the insured against covered claims. The “potential coverage” standard applies, meaning that if the allegations in the complaint even potentially fall within the policy’s coverage, the insurer is obligated to provide a defense. The defense provided must encompass all the counts in the complaint, whether potentially covered or not.

2. Indemnity Policies: In contrast, indemnity policies primarily focus on reimbursing the insured for covered losses, including defense costs, but only after liability is established or a settlement is reached. This distinction becomes particularly significant when disputes arise over the applicability of exclusions, as seen in this case. The court’s decision suggests that, in indemnity policies, insurers may delay advancing defense costs until the applicability of specific exclusions is determined.

Further litigation due over the Professional Service Exclusion

The denial of Windsor’s motion for the Excess Insurers to advance defense costs does not end the litigation.

Whether the Excess Insurers will have to indemnify Windsor rests on whether they can convince the Court that Windsor’s actions in setting rents constitute a professional service barring coverage.

The Professional Services Exclusion states: “The Company shall not be liable for Loss on account of any Claim under this Coverage Part: “based upon, arising from, or in consequence of performing or the failure to perform any professional service;…” (Emphasis in original).

Massachusetts case law has defined a professional service in the context of liability policy as

A ‘professional’ act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual.”

While the Excess Insurers argue that Windsor’s calculating and setting rental rates for its various apartments satisfies the definition of professional services, the application of this definition to Windsor’s activities would seem to break new legal ground.

Agency Checklists will keep its readers posted on the resolution of this interesting case.

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.