The United States District Court for the District of Massachusetts recently held that an insurer had no duty to defend or indemnify its insureds where the insureds’ claims “arose out of” acts that occurred prior to the policy’s retroactive date. Ferguson v. General Star Indemnity Co., C.A. No. 05-11970-JGD (D. Mass. September 18, 2008).
The plaintiff hired an attorney to assist her with filing tax returns for the estate of her deceased brother in 1994. The attorney, however, allegedly failed to timely file the tax returns, waiting to file them until July 1996 (more than a year and a half after the due date). Additionally, the attorney allegedly failed to make an election to defer the payment of the taxes. As a result of these failures, the estate allegedly incurred approximately $224K in penalties and unnecessary interest.
The plaintiff filed a malpractice suit in 2001, alleging that, in addition to failing to file the taxes in a timely manner and make the election to defer the taxes, the attorney and his partner became “obstacles in connection with the payment of taxes” by falsely assuring the plaintiff on numerous occasions that the tax issues would be taken care of.
The insureds notified their professional liability insurer of the suit and the insurer denied coverage on the ground that the events that gave rise to the claim occurred prior to the policy’s 1997 retroactive date. The insureds assigned their rights under the policy to the plaintiff and she brought suit against the insurer seeking payment of the judgment entered against the insureds, as well as all damages to which the attorneys were entitled and treble damages under G.L. c. 93A, § 11. Both parties moved for summary judgment in November 2007.
The court noted that the policy excludes from coverage all claims “arising out of negligent act(s), error(s), or omission(s)” which took place prior to the September 12, 1997 retroactive date. The court further noted that Massachusetts case law instructs that “arising out of” language be read expansively, requiring courts to consider “the source from which [the injury] originates rather than the specific theories of liability alleged in the complaint of the underlying civil action.”
Although the plaintiff argued that the negligent behavior continued after the retroactive date, the court found that the plaintiff’s injuries “arose from” the attorneys’ failure to file the tax return and make the payment election in 1994. The court further explained that, although the plaintiff had alleged a “continuous scheme,” the scheme began before the retroactive date, and no separate or distinguishable duties arose after the retroactive date.
Accordingly, the court granted the insurer’s Motion for Summary Judgment.
For a copy of the decision, please click here.