June 25, 2019

June 25, 2019

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June 24, 2019

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Statutory Damages Constitute Covered Loss Under Professional Liability Policy

The court in Flagship Credit Corp. v. Indian Harbor Ins. Co., No. 11-20408, 2012 WL 2299484 (5th Cir. June 15, 2012), held that statutory minimum damages for violations of the Texas Business and Commerce Code were not “penalties” and, therefore, constituted covered “loss” under a professional liability policy issued to an automobile financing company.

The plaintiff debtors in the underlying consumer fraud class action in Flagship alleged that the insured had “substantively and procedurally” failed to provide statutorily-mandated notice regarding their collateral pursuant to the Texas Business and Commerce Code.  The applicable Texas statute specified that a debtor is entitled to recover actual damages (e.g. loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing) resulting from a proven statutory violation, but also specified that if actual damages do not exceed a minimum amount of damages based on a formula contained in the statute, the debtor is entitled to recover the statutory minimum amount of damages.

Indian Harbor denied coverage for the settlement of the claim, contending that statutory damages constituted a “penalty” and, therefore, were not “loss” under the policy, which specified that “loss” does not include “fines, penalties or taxes imposed by law.”  The trial court agreed with Indian Harbor and held that Indian Harbor was not obligated to provide coverage for the settlement.

The Fifth Circuit reversed, holding that the insured’s settlement payment was not a penalty because it was paid to the class rather than to the government.  In so ruling, the court applied the canon of policy construction known as noscitur a sociis, which applies where a word in a group of words has multiple meanings, and requires that the meaning of each word in the group is consistent with the meaning of its companion words.  Because the term “penalties” was grouped with the words “fines” and “taxes,” both of which are payments to the government, the court held that “penalties” similarly only includes payments made to the government. 

© 2019 Neal, Gerber & Eisenberg LLP.


About this Author

Seth D. Lamden, General & Commercial Litigation attorney, Neal Gerber law firm

Seth D. Lamden concentrates his legal practice on assisting policyholders in enforcing their rights to insurance coverage.  Seth has been instrumental in recovering hundreds of millions of dollars in insurance proceeds for policyholders from a broad array of industries - including electric utilities, construction, consumer and industrial manufacturing, natural gas distribution, real estate, health care, insurance (representation of managed care companies and life insurers against their E&O insurers), professional services, and financial services - in disputed coverage matters arising...

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