The Fifth Circuit Court of Appeals recently held that a CGL policy did not cover a lawsuit by one employer against another employer for misrepresentations in a letter of recommendation, even though these misrepresentations ultimately led to bodily injury.  Preau v. St. Paul Fire & Marine Ins. Co., No. 10–30816 (5th Cir. June 23, 2011).

The insured was a shareholder in Louisiana Anesthesia Associates (“LAA”).  LAA fired one of its doctors after he was found to be abusing prescription drugs.  When the doctor then sought employment with Kadlec Medical Center (“Kadlec”), the insured wrote a letter of recommendation that omitted the doctor’s drug abuse and firing.  Kadlec hired the doctor.  The doctor then improperly applied anesthesia to a patient because he was under the influence, leaving the patient in a permanent vegetative state.  Kadlec settled with the patient, and then sued LAA and the insured for misrepresentations.  A jury awarded $8.2 million to Kadlec.

A coverage dispute ensued between the insured and his CGL insurer over the judgment.  In the coverage litigation, the district court held that the underlying judgment was for “covered bodily injury.”  The insurer appealed, and the Fifth Circuit overturned the district court’s determination.  The court found that the insured was not “legally required” to pay damages “for covered bodily injury.” Rather, he was “legally required” to pay Kadlec for the economic injuries it suffered as a result of his misrepresentation.  Economic losses, the court noted, are not covered under a CGL policy.  The court held that Kadlec’s suit against the insured – and the duty owed by the insured to Kadlec – were distinct from the damages the patient sought from Kadlec for her bodily injuries.  “The fact that the amount of the damages that Kadlec sought was directly related to the amount it paid to defend and settle the [patient’s suit] does not mean that [the insured] became legally required to pay for [the patient’s] bodily injury,” said the court.

For a copy of the court's decision, please click here.