Chapter 24 - § 24.6 • DUTIES OWED BY INSURERS


§ 24.6.1—The Duty to Defend

Judge Jackson recently discussed the scope of the duty to defend.38 While applying Massachusetts law, the opinion is instructive for its analysis and because Massachusetts law does not differ greatly from Colorado law on the issues discussed.

There, Judge Jackson denied the insurer's (AXA) motion to dismiss and granted the insured's motion for summary judgment. The court found at the outset that Massachusetts law governed. The court applied Colorado principles of choice of law where Colorado law provides that "an insurance contract is governed by the law of the state with the most significant relationship to the insurance contract."

The underlying liability action was a class action brought on behalf of au pairs alleging that au pair sponsors, including the defendant insured, conspired to set au pair rates of compensation below market rates in violation of federal and state minimum wage laws, and in violation of racketeering, tort, and consumer protection laws. The class accused the sponsor companies of fixing rates at the price floor that the Fair Labor Standards Act (FLSA) regulations authorized, and then paying a rate below the federal minimum wage and several states' required minimum wages. Further, the class also accused the defendants of misinforming the au pairs that they could not ask their host families to pay them more than this price floor.

AXA denied any duty to defend, declined to pay for or reimburse defense costs, and denied coverage.

The subject insurance policy provided coverage for the following indemnity and defense coverages:

• AXA agreed to "pay on behalf of the Insured those sums that the Insured becomes legally obligated to pay as Damages because of a negligent act or negligent omission committed by the Insured . . . in the conduct of Travel Agency Operations by the Named Insured" that occurred during the policy period and in the coverage territory.
• AXA also agreed that it had a "duty to defend any Suit against the Insured seeking Damages on account of such . . . 'negligent act' or 'negligent omission' . . . to which this insurance applies, even if any of the allegations of the Suite [sic] are groundless, false, or fraudulent."

In turn, AXA's defense relied on two exclusions in arguing that it had no obligation to defend and had no obligation to indemnify. Those exclusions stated there was no coverage for:

• "Any claim or Suit based upon or arising out of any violation of the Fair Labor Standards Act [('FLSA')] or any similar federal, state or local law pertaining to working conditions, hours, employee benefits or wages." [Exclusion J].
• "Any claim or Suit based upon or arising out of any Occurrence, act or omission, or offense by the Insured which is intentional, dishonest, fraudulent or malicious, or criminal, regardless of whether the resultant Damages were intended." [Exclusion K].

AXA contended that the suit as a whole, and the negligent...

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