Why it matters: This case addresses the standard for pleading a missing insurance policy where the alleged insured, a private educational institution, cannot directly allege that the policy existed. In 2013, the school received a demand letter concerning conduct during the 1967-1968 school year (the nature of the conduct was not stated). The school had evidence that the insurer, New Hampshire Insurance Company, had sold coverage to the school at some point, but had not found evidence of coverage at the relevant time. The school provided notice of the claim to New Hampshire, which refused to defend on the ground that there was no evidence of coverage. The school then filed a declaratory judgment action against the insurer.

The district court granted the insurer’s motion to dismiss, but the U.S. Court of Appeals for the First Circuit reversed. The school’s complaint cited indirect, circumstantial evidence that New Hampshire had issued a policy during the relevant time period with $1 million limits. The appellate court ruled that the school’s reliance on sworn statements of former employees and contemporaneous financial audits that tended to support the school’s position established “a plausible basis, beyond a mere possibility,” that the insurer issued the policy in question. This case then provides a good example for how to bring a coverage action where proof of the policy’s existence is uncertain.

Detailed discussion: In 2013, Cardigan Mountain School, a private middle school, received a demand letter making a claim arising from events that allegedly occurred during the 1967-1968 academic year. The school gave notice and sought a defense from New Hampshire Insurance Company.

Cardigan could not locate the applicable policy, but engaged in background research about coverage. It found an outside audit report for Cardigan dated September 1971 stating that the school had a “Special Multi-Peril” insurance policy from New Hampshire. The report was accompanied by an affidavit from one of the two individuals who prepared the report, stating that the auditors would have noted in the report if the school had changed carriers between the 1969-1970 school year and the 1970-1971 school year. This information was included with Cardigan’s complaint.

Cardigan also included with the complaint the affidavit of Cardigan’s business manager between 1967 and 1970, who expressed his certainty that the school had insurance during his tenure and that he did not believe the school changed carriers during his years as business manager. He also recalled working with a local insurance brokerage to secure coverage, which brokerage “had a close association with” New Hampshire and advised “most of its commercial clients like Cardigan” to place their commercial lines of insurance with New Hampshire.

The insurer rejected the request, explaining that it had not been able to locate any policy covering the school for that time period and therefore had no duty to defend.

Cardigan—which had not found a copy of the policy in its own records—filed a declaratory action seeking a judgment decreeing the existence of, and its rights under, a policy issued by New Hampshire. A federal district court granted the insurer’s motion to dismiss the suit and the school appealed.

The First Circuit Court of Appeals focused its opinion on the existence of the policy and not whether the policy—if it existed—covers the claim. The panel first reviewed the evidence set forth in the school’s complaint.

An accounting firm prepared an audit report for Cardigan dated September 1971, which stated that the school had a “Special Multi-Peril” insurance policy from NHIC. The report was accompanied by an affidavit by one of the two individuals who prepared it, stating that he believed if the school had changed carriers between the 1969-1970 school year and the 1970-1971 school year, the auditors would have noted the change in the report.

The school also provided the affidavit of Cardigan’s business manager between 1967 and 1970, who expressed his certainty that the school had insurance during his tenure and that he did not believe the school changed carriers during his years as business manager. He also recalled working with a local insurance brokerage to secure coverage, which brokerage “had a close association with” NHIC.

The insurer argued that the audit report was inconclusive and the other “evidence” was speculative and should be disregarded under Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

The First Circuit disagreed.

“The allegations in the school’s complaint … are specific and factual,” the court wrote. “The complaint refers to individuals with relevant knowledge who are recalling facts plausibly known to them. Those allegations are thus like the allegations of actual events in Iqbal and of parallel conduct in Twombly that the Supreme Court took as true; they are specific and appear to be based on the knowledge of particular individuals. They are not bare recitations of the legal conclusion the suit seeks to prove. We thus conclude that the school’s allegations set forth above are entitled to the presumption of truth at the motion to dismiss stage.”

The court then found that the circumstantial evidence presented by Cardigan was sufficient to support the reasonable inference that the insurance policy at issue was in place—although it noted the question was close.

Cardigan did “make a plausible showing that New Hampshire Insurance Company issued an insurance policy to the school for the 1967-1968 school year,” the panel concluded. “The school’s allegation of the existence of a New Hampshire Insurance Company policy for the 1970-1971 school year is directly supported by the school’s audit report from that year. And the school’s factual allegations tending to show no change in coverage in the preceding three years are enough to plausibly support the existence of coverage in the 1967-1968 school year.”

The court acknowledged that the factual allegations were circumstantial but said no requirement existed for direct evidence.

“The school has alleged specific facts concerning an audit report that tend to show that it had an insurance policy from New Hampshire Insurance Company as of 1971,” the panel wrote. “And the school has then linked that allegation to the recollections of specific individuals who were involved in the relevant events and are of the view both that the school had a general liability policy in the preceding years, including the crucial 1967-1968 school year, and that there had been no change in carrier during that period of time.”

The court was not persuaded by New Hampshire’s contention that the language of the individuals was vague and indefinite (affidavits stating “I do not believe” that the carriers changed, for example), noting that it was required to draw all reasonable inferences in favor of the school at this stage of the proceedings.

So the business manager’s “lack of a belief that there was a change in coverage (even phrased as it was) is itself a relevant, factual assertion tending to suggest that no such change in coverage occurred,” the court said.

“This case is not one in which a plaintiff has selected an insurance company at random and filed a declaratory judgment action against it in the hopes that the plaintiff might get lucky and find a policy,” the court said. “The school’s complaint instead provides a plausible basis, beyond a mere possibility, for believing that New Hampshire Insurance Company issued the policy in question.”

To read the opinion in Cardigan Mountain School v. New Hampshire Insurance Co., click here.