In a decisively pro-policyholder decision issued by the United States Court of Appeals for the Sixth Circuit in IMG Worldwide, Inc. v. Westchester Fire Ins. Co., Nos. 13-3832, 13-3837 (6th Cir. July 15, 2014), the court righted a wrong in not only affirming a jury’s finding that an excess carrier had breached its duty to indemnify its insured, IMG, but also, in reversing the trial court’s ruling that the excess insurer, Westchester, had not breached its duty to defend, noting that to uphold the trial court’s ruling in this regard would “not only penalize IMG, the non-breaching party, but … would provide perverse incentives: encouraging insurers to disclaim their duties to defend.” 

IMG was named in a lawsuit arising from a failed real estate development project for which it had served as a consultant (the “Gastaldi suit”). Plaintiffs in Gastaldi alleged they had been sold undeveloped properties in reliance upon defendants’ promise to develop the properties into high end condominiums. IMG sought coverage for defense and indemnity costs under their commercial general liability policies from their primary carrier, Great Divide, and excess carrier, Westchester. Both insurers denied coverage. IMG subsequently incurred over $8 million in defense costs, and nearly $5 million in indemnity costs in a settlement with the Gastaldi plaintiffs.  

IMG and its primary carrier, Great Divide, agreed to settle their coverage dispute for $1.25 million, exhausting the $1 million policy limit and providing for an additional $250,000 in reimbursement for defense costs. IMG sued Westchester, its excess carrier, and prevailed in a jury trial on its claim that Westchester had breached its duty to indemnify. The court, however, had retained the question of Westchester’s liability for IMG’s defense costs, and found in favor of Westchester, holding that Westchester’s duty to defend “expired” upon IMG’s settlement with Great Divide and furthermore, was conditioned on Westchester’s retention of subrogation rights allowing it to recover payments from another insurer.

On appeal, the Sixth Circuit affirmed the jury’s finding that Westchester owed IMG a duty to indemnify it for the amounts paid in settlement. The Westchester policy provided that it would indemnify IMG for liability arising from an “occurrence” resulting in “property damage,” where “property damage” was defined to include “[l]oss of use of tangible property that is not physically injured.” Westchester argued that (a) there was no covered “occurrence,” because the only occurrence that could have led to damages attributable to IMG was the alleged misrepresentation(s) made by IMG, and (b) there was no “property damage,” but rather, simply a “loss on investment,” which was not covered.

The Sixth Circuit, like the trial court, disagreed, finding that (1) the “occurrence” did not have to be the alleged misrepresentations but rather, could be the developers’ abandonment of the project (which was a covered occurrence), and (2) the property damage occasioned thereby was covered because “under Ohio law, ‘purely economic damages’ are insurable under the ‘loss of use of tangible property’ language at issue….” Thus, the court found that the jury had adequate evidence to find that there was an “occurrence” causing “property damage,” thus triggering Westchester’s duty to indemnify IMG.

Regarding defense costs, the Sixth Circuit overturned the trial court’s ruling, finding IMG entitled to recoupment of defense costs under two separate clauses contained in the Westchester policy. The first clause provided that Westchester had a duty to defend IMG “against any ‘suit’ seeking damages for… ‘property damage’ when the ‘underlying insurance’ [Great Divide] does not provide coverage….” The Sixth Circuit found that the term “provides” could reasonably mean either “provide for” or “undertakes to deliver,” and that under the latter interpretation, Westchester’s duty to defend IMG would have been triggered “when Great Divide wrongfully denied coverage.” Finding the policy language susceptible to two reasonable interpretations, the appellate court construed the term “provides” against its drafter, Westchester, and held that “Westchester had a duty to defend IMG after Great Divide wrongfully denied coverage.”

The second clause that afforded IMG defense coverage from Westchester provided that: “[i]f no other insurer defends, [Westchester] will undertake to do so, but [Westchester] will be entitled to the insured’s rights against all those other insurers.” The Sixth Circuit concluded that no other insurer had undertaken IMG’s defense at the time IMG asked Westchester to defend it in the Gastaldi suit, given the primary carrier’s refusal to defend IMG, thus triggering Westchester’s duty to defend. In finding in favor of IMG on Westchester’s duty to defend, the Court also disagreed with the trial court’s conclusions that (1) Westchester’s duty to defend “expired” when IMG settled with Great Divide and (2) was conditioned on its retention of subrogation rights allowing Westchester to recover payments from another insurer. First, with regard to the expiration argument, the Court noted that Ohio law provides that an insurer’s duty to defend is determined at the time the underlying action is brought and thus, the district court’s conclusion that Westchester’s obligation to defend expired when Great Divide and IMG settled was incorrect, since the breach occurred several years prior to the settlement. Second, the Court found that nothing in the relevant portions of the Westchester policy made Westchester’s duty to defend contingent on a right of subrogation against the primary insurer,” concluding that “obtaining or preserving subrogation rights was not a condition precedent to Westchester’s duty.”

The IMG decision serves as a substantial victory for policyholders, as it provides support for broader indemnity coverage and likewise, reaffirms the public policy that insureds should not be left holding the bag when a primary carrier refuses to defend; the excess carrier might be obligated to step up to the plate. It should also serve as a reminder to policyholders that when a primary carrier denies its duty to defend, this denial itself may actually trigger an excess carrier’s defense obligation.