E-Alert Case Updates

Known Loss and Fortuity Doctrines Did Not Obviate Insurer’s Duties to Defend and Indemnify

Unwired Solutions, Inc. v. Ohio Security Insurance Co.
(December 8, 2016) United States District Court for the District of Maryland
by Matthew J. McCloskey, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdd.uscourts.gov/Opinions/Opinions/Unwired%20Solutions%2008%20Dec%2016.pdf

In a recent opinion, the United States District Court for the District of Maryland held that an insurance company could not avoid its duties to defend and indemnify by alleging that its insured knew that it was probable it would be sued in the underlying action prior to obtaining coverage.

On September 30, 2015, Sprint Solutions, Inc. and Sprint Communications Company (“Sprint”) filed a complaint for damages and injunctive relief against Plaintiff, which does business under the name “Linq,” and various individuals asserted to be Linq agents alleging that Linq and its agents perpetrated a “Bulk Handset Trafficking Scheme.” Specifically, Sprint alleged that Linq gained control of Sprint customer accounts in order to acquire subsidized Sprint phones for itself and sell them at a profit. As a result, Sprint asserted claims for, inter alia, unfair competition, tortious interference with contract, civil conspiracy, and federal trademark infringement.

Linq informed Ohio Security Insurance Company (“Ohio Security”), its liability insurer, of the lawsuit and asserted that Ohio Security was required to defend and indemnify Linq as a result of Sprint’s lawsuit. Ohio Security denied coverage, positing that the Sprint lawsuit did not fall within the terms of coverage in Linq’s policies. Consequently, Linq sued Ohio Security seeking a declaration that it was entitled to coverage for the Sprint lawsuit. Ohio Security answered Linq’s Complaint and simultaneously filed a counterclaim seeking a declaratory judgment that it was not required to defend or indemnify Linq. Linq moved to dismiss the counterclaim.

Judge Catherine C. Blake, writing for the Court, granted Linq’s motion to dismiss. The Court noted that Ohio Security sought two (2) distinct declarations: (1) a declaration that it had no duty to defend or indemnify based on the plain language of Linq’s policies; and (2) a declaration that it had no duty to defend or indemnify based on the known loss and fortuity doctrines. With regard to the counterclaim pertaining to the plain language of Linq’s policy, the Court granted Linq’s motion to dismiss. The Court found that the counterclaim was essentially identical to Linq’s request for a declaratory judgment, as it differed only inasmuch as it sought the opposite declaration. Nothing warranted such duplication, and it dismissed Ohio Security’s counterclaim predicated on the plain language of the policies.

With regard to Ohio Security’s counterclaim predicated on the known loss and fortuity doctrines, the Court reached the same result. As the Court explained, “[u]nder the fortuity doctrine, insurance is not available for losses the policyholder knows of, planned, intended, or is aware are substantially certain to occur,” and under the known loss doctrine, an insured “may not obtain insurance to cover a loss that is known before the policy takes effect.” Mayor & City Council of Baltimore v. Utica Mut. Ins. Co., 145 Md. App. 256, 306 & n.49 (2002). However, “[i]f liability has not been established in the underlying suit, these doctrines do not apply if the insured can mount a credible defense such that liability may not be presumed.” Here, liability had not been established in the underlying matter, and Ohio Security could “offer no explanation for why, as of today, Linq is likely to be found liable in the Sprint action – let alone that Linq knew of such likely liability years ago, before buying insurance.” Simply put, Ohio Security could not survive the motion to dismiss “simply by alleging that Linq knew, before obtaining coverage, that it was substantially probable that it would be sued by Sprint.” Because the known loss and fortuity doctrines were therefore inapplicable, the Court granted Linq’s motion to dismiss.