Insurance producers live in a competitive world. When an agentfrom one firm moves to another and brings along his clients, theold employer may sue the new employer and the employee for breachof non-competition agreements or other tortious conduct. The suitsare usually pursued aggressively and because both parties areinsurance experts, they will draw the complaint to prevent thedefendant from obtaining a defense or indemnity from thedefendant's insurer.

Matthew T. Szura & Co. and Mayfair Insurance Agency arecompeting providers of insurance products and services. In February2009, Mayfair filed an action in Michigan state courtagainst Szura and Doug Charon, alleging that Charon breached hisconfidentiality agreement and fiduciary duties when he leftMayfair, joined Szura, and sold Szura's insurance products toMayfair's customers.

Mayfair also alleged that Szura tortuously interfered with theconfidentiality agreement in the Charon-Mayfair employment contractand with Mayfair's business relationships and expectancies.

Szura asked General Insurance to defend the agency in the suitpursuant to an E&O policy that General Insurance had issued toSzura. When General Insurance refused to defend the firm, Szurabrought action against General Insurance,claiming it was obligated to defend Szura in the Mayfairlitigation. Szura also asserted claims for breach of contract andbad faith.

The district court concluded that the E&O policy coveredonly “errors and omissions in connection with providing insuranceservices to Szura's customers, if one of those customers broughtsuit against Szura based on the insurance services it received.”Because the suit is unrelated to services provided for Szura'sclients, there was no duty to defend. The Sixth Circuit Court ofAppeals affirmed the conclusion in Matthew T. Szura & Co. Inc. v. General InsuranceCo.

CASE ANALYSIS

As a general matter, questions of contract interpretation arequestions of law that the Sixth Circuit Court of Appeals willreview as if it was the original court. If it finds the contract isclear and unambiguous, the court need not determine issues of factand instead interprets the contract based on the intent of theparties as expressed in the plain language of the contract.

An insurer's duty to defend the insured in certain types oflitigation derives from contract rather than statute, and the scopeof the duty is defined by the specific terms to which the partiesagreed. The clear and unambiguous language of the contract, ratherthan the parties' reasonable expectations, must determine the scopeof coverage under an insurance contract.

General Insurance's obligation to defend Szura in the Mayfairlitigation depends on whether Mayfair's claims against Szura is a“covered claim.” The court looked to the coverage provision, whichstipulated that General Insurance “will pay on behalf of theinsured damages that the insured becomes legally obligated to paybecause of claims made against the insured for wrongful actsarising out of the performance of professional services forothers.”

The E&O policy committed General Insuranceto defend Szura against certain negligence claims; Mayfair's suitagainst Szura alleged intentional torts rather than negligence; andGeneral Insurance therefore had no duty to defend Szura in theMayfair litigation.

General Insurance is required to defend Szura against allarguably covered claims. The E&O policy covered claims “madeagainst the insured for wrongful acts arising out of theperformance of professional services for others.” Because thepolicy defines wrongful act as “any actual or alleged negligentact, error or omission, Personal Injury, or Advertising Injury,”the policy “covers only liability for negligent conduct.” It doesnot require General Insurance to provide Szura with a defense toallegations of intentional misconduct.

The Sixth Circuit concluded that the duty to defend is notlimited by the precise language in the underlying complaint.Rather, the insurer has the duty to look beyond the allegations inthe complaint to determine whether coverage is possible. The courtconsiders if the allegations in the suit alleged negligence orother torts to determine whether an act, error or omission requiresthe insurer to defend.

Had Mayfair alleged negligent conduct, General Insurance wouldhave been required to defend Szura in that suit and indemnify Szurafor any damages, unless the Szura employee was ultimatelydetermined to have acted fraudulently or maliciously rather thannegligently. In that event, General Insurance would be relieved ofits duty to defend Szura as soon as a trial verdict, court ruling,regulatory ruling, or legal admission established that the employeehad acted fraudulently or maliciously. Because Mayfair sued Szurafor intentional misconduct rather than a negligent act, error, oromission, however, the initial claims were not covered and theexclusions do not apply.

MISCONDUCT vs. NEGLIGENCE

Mayfair Insurance Agency asserted three separate causes ofaction against Szura in its complaint, each of which claims allegedintentional misconduct—not negligence.

Szura argued that General Insurance had a duty to defend theagency against intentional misconduct as well as negligent acts,errors and omissions because the “Exclusions” section of theE&O policy states: “We will defend the insured against suchclaim unless or until the dishonest, fraudulent, criminal,malicious or knowingly wrongful act has been determined by anytrial verdict, court ruling, regulatory ruling or legaladmission.”

The Sixth Circuit concluded that Szura misunderstood theexclusion, which cannot expand the scope of coverage.