The U.S. District Court of Appeals for the First Circuit recently held that Zurich American Insurance Company was obligated to defend Electricity Maine, LLC in a class action lawsuit brought by its customers. The case stems from alleged misconduct by Electricity Maine that resulted in customers receiving higher bills than were previously represented. Plaintiffs Jennifer Chon and Katherine Veilleux sought to represent a class of approximately 200,000 customers seeking damages totaling approximately $35 million. Specifically, the complaint asserted claims for negligence, negligent misrepresentation, violations under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18. U.S.C. §§ 1962, 1964, and the Maine Unfair Trade Practices Act.
The Zurich policy defined “occurrence” to be “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. Zurich contended that because of the RICO claim, which required intentional conduct, there was no “accident” and thus no “occurrence”. Disagreeing with Zurich, the court held that the allegations against Electricity Maine, specifically the negligence and negligence misrepresentation claims, could be interpreted as alleging that Electricity Maine acted inadvertently, rather than intentionally.
Zurich also argued that the allegations in the class action did not allege “bodily injury” as defined by the policy. Specifically, Zurich noted that the policy expressly defined “bodily injury” to encompass “mental injury, shock [or] fright … resulting from bodily injury”. Thus, Zurich argued that the policy was best read, impliedly, to exclude from its scope “bodily injury” that was caused by emotional distress. In siding with Electricity Maine, the court concluded that the policy’s “bodily injury” definition could include emotional distress because although the policy states that it includes mental injury and shock resulting from bodily injury, it does not purport to exclude from coverage “bodily injury” by those markers of emotional distress. Zurich also argued that the asserted negligence claims could not give rise to emotional distress damages, contending that, under Maine law, emotional distress damages are only recoverable if there is also physical damage. The court rejected this argument, noting that Zurich did not provide any precedent that supports this assertion and that the precedent that does exist would appear to refute it. Thus, the court concluded that Zurich was obligated to defend Electricity Maine in the lawsuit.
The Electricity Maine case demonstrates that an insurer’s duty to defend is broad and that ambiguities or other lack of clarity in the allegations can result in coverage, at least for the duty to defend. Accordingly, policyholders facing a lawsuit will want to analyze how the plaintiff’s allegations line up with policy language and the applicable case law interpreting an insurer’s duty to defend.