Breach of Contract & Intentional Act Not Insured
Carl Hemphill asked the Third Circuit to find that his liability
insurer, Landmark American Insurance Co., is obligated to defend him in a
lawsuit by a former employee. That employee brought a panoply of claims
against Hemphill in his original complaint. None is covered by
Hemphill's policy with Landmark. In Carl Hemphill; MJC Labor Solutions,
LLC v. Landmark American Insurance Company, No. 20-2544, United States
Court of Appeals, Third Circuit (April 5, 2023) applied the four corners
rule to resolve the dispute.
FACTS
Carl Hemphill and MJC Labor (together, Hemphill) provide temporary
employee placement and visa application processing services to workers
from Mexico and Central America. Hemphill is insured by a miscellaneous
professional liability (MPL) policy with Landmark, covering claims
"arising out of [] negligent act[s], error[s] or omission[s]" "in the
rendering or failure to render . . . permanent and/or temporary
placement services[.]"
Former MJC client Jose Castillo sued Hemphill (the Castillo Lawsuit),
alleging violations of federal human trafficking, wage-and-hour, and
unfair trade practices laws, as well as claims for breach of contract
and unjust enrichment.
The parties have since settled the Castillo Lawsuit, but the
reimbursement of legal defense costs, incurred in the underlying suit,
remain in dispute.
ANALYSIS
Landmark declined to defend Hemphill on the grounds that Castillo's
allegations arose from Hemphill's intentional actions, occurring after
Castillo had been placed as an employee, rather than from negligent
actions in providing placement services.
If the underlying complaint avers facts that might support recovery
under the policy, coverage is triggered, and the insurer has a duty to
defend.
Under Pennsylvania law, the question of whether a claim against an
insured is potentially covered is answered by comparing the four corners
of the insurance contract to the four corners of the complaint. Courts
applying Pennsylvania law must not stray from the operative complaint in
determining duty-to-defend issues, even when later proceedings reveal
the existence of a covered claim.
The District Court Conclusion
The District Court found that: "Hemphill could not expect Landmark to
cover him for any claim not listed in the Landmark policy, and
Castillo's complaint does not allege a covered claim."
Insured's Reasonable Expectations
An insured's reasonable expectations may occasionally prevail over the
express terms of a contract, but only in very limited circumstances to
protect non-commercial insureds from policy terms not readily apparent
and from insurer deception.
Hemphill claims that the fact that Landmark defended a different lawsuit
created a reasonable expectation that it would defend the Castillo
Lawsuit. Landmark subjected its defense of the earlier Lawsuit to a
complete reservation of rights.
The Duty to Defend
An insurer's duty to defend is determined solely from the language of
the complaint against the insured. It is the potential, rather than the
certainty, of a claim falling within the insurance policy that triggers
the insurer's duty to defend.
As for Castillo's start date, his allegations amount to nothing more
than a breach-of-contract claim: he alleges that his contracted-for
start date was delayed and that he lost money and employment
opportunities as a result. Landmark expressly carved out
breach-of-contract claims in its policy with Hemphill. It has no duty to
defend this one, or any other claim in Castillo's suit.
ZALMA OPINION
The four corners rule allowed the insurer to refuse to defend or
indemnify its insured because Castillo's suit was basically for breach
of contract and did not meet any of the requirements of the policy which
limited its coverages and did not promise to defend a claim of breach
of contract.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
