Application of “pending or prior litigation” exclusions are generally fact-intensive inquiries that have generated a significant amount of litigation. As such, the recent decision by the United States District Court for the Eastern District of Washington in Wendel v. Travelers Cas. and Surety Co of America, 2011 U.S. Dist. LEXIS 24867 (E.D.Wash. March 10, 2011) is an interesting, and for insurers, a satisfying decision in that the court not only upheld the application of the exclusion on summary judgment, but also held that the insurer properly denied a defense obligation – a proposition that is always treacherous in Washington state.
Wendel involved two lawsuits that while unrelated, both made reference to a sordid interoffice affair involving the insured, a dentist, and one of his employees, Christa Yount. Another of the insured’s employees, Dorinda Wiseman, learned of the affair. Ms. Wiseman was terminated from her employment sometime thereafter. In retaliation for being fired, Ms. Wiseman’s then-domestic partner called the insured’s wife and advised her of the affair. The insured thereafter fired his paramour, Ms. Yount, who committed suicide only hours later.
In May 2004, Ms. Wiseman sued the insured for wrongful termination. Her complaint set forth all the details of the insured’s affair with Ms. Yount and her later suicide. In the following year, the insured purchased a new employment practices liability (EPL) policy from Travelers. The policy was renewed on several occasions through 2008. In 2007, the estate of Christa Yount sued the insured, alleging that the insured improperly pressured Ms. Yount into the affair. The suit alleged causes of action for negligence, sexual harassment, infliction of emotional distress and outrage. After conducting an investigation into the matter, Travelers denied coverage for the Yount lawsuit, including denial of a defense, based on the policy’s “prior litigation” exclusion, which precluded coverage for “any Claim … for, based upon, or arising directly or indirectly out of any fact, circumstance, situation, transaction, event or Wrongful Employment Practice … underlying or alleged in any prior and/or pending civil, criminal, administrative or regulatory proceeding as of the applicable Prior and Pending Proceeding Date … .”
The insured argued that Traveler’s reliance on the exclusion was improper as there was no factual nexus between the Wiseman and the Yount lawsuits. The insured also argued that the exclusion was overly broad and therefore unenforceable. Finally, the insured argued that under Washington law, Travelers should have provided a defense under a reservation of rights and brought an immediate declaratory judgment action to determine whether the exclusion applied, rather than denying coverage outright. The court disagreed with each point. The court found that the exclusion had clear application as the initial suit by Ms. Wiseman, filed prior to the applicable “Prior and Pending Proceeding Date,” alleged the details which later were the basis of the Yount lawsuit. Moreover, the court held that the exclusion was unambiguous and therefore enforceable.
Perhaps most significantly, at least for the purpose of insurers considering a denial of coverage in the State of Washington, the court held that Travelers was not required to have provided a defense and commenced a declaratory judgment action. Because the Wiseman lawsuit contained the allegations that were the factual predicate of the later filed Yount lawsuit, Travelers could rely on its exclusion, which the court found “sufficiently clear on its fact to negate a defense … .” Moreover, the court held that Travelers could rely on “undisputed evidence” outside the scope of the complaint (i.e., the complaint filed in the Wiseman lawsuit) to deny coverage “when the extrinsic evidence does not bear upon the allegations’ truth or scope, but rather, concerns only a discrete independent coverage issue.” While the court acknowledged that this was a matter of first impression in Washington, it nevertheless found persuasive authority from other jurisdictions that extrinsic evidence that is unrelated to the merits of the underlying case can be considered in making a coverage determination.