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Case Notes

September 10, 2014

Appellate Dissent Maps Potential Challenge to Bad Faith Punitive Damages

 

A potential roadmap for navigating around a bad faith punitive damages award may be lying in Justice H. Walter Croskey’s dissent in Nickerson v. Stonebridge Life Insurance Company, 161 Cal. Rptr. 3d 629 (2013), rev. granted, No. S213873 (Dec. 11, 2013). Justice Croskey currently presides in the Second Appellate District of the California Court of Appeal. He is one of the lead authors of The Rutter Group’s California Practice Guide on Insurance Coverage Litigation.


Nickerson involved a straightforward appeal of the trial court’s remittitur of a bad faith punitive damages award from $19 million to $350,000. The remittitur was based on a 10:1 ratio of punitive to compensatory damages. At trial, the jury found that the insurer breached the insurance contract as well as the implied covenant of good faith and fair dealing. The jury awarded the plaintiff $35,000 in compensatory damages for emotional distress plus $19 million in punitive damages. The trial court reduced the punitive damages award to $350,000. Both parties appealed. The court of appeal affirmed, 2-1, with Justice Croskey writing separately in dissent. The California Supreme Court has granted a petition for review regarding whether an award of attorneys’ fees under Brandt v. Superior Court, 37 Cal. 3d 813 (1985), should be considered compensatory damages for purposes of calculating the ratio between punitive and compensatory damages. The case has been fully briefed and is awaiting oral argument.


In the court of appeal decision, the majority affirmed the trial court’s remittitur because the reduced award fell within the maximum amount permitted by due process as delineated by the three guideposts set out in State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408, 418 (2003) (citing BMW of North America, Inc. v. Gore, 517 U.S. 559, 575 (1996)), which are the following: (1) the degree of reprehensibility, (2) the disparity between the harm suffered and punitive damages award, and (3) the difference between the punitive damages award and civil penalties authorized. The majority in Nickerson concluded, after weighing the factors within each guidepost and evaluating additional considerations, that the “trial court properly remitted the jury’s award to the outside constitutional limit of a 10:1 ratio of punitive to compensatory damages.” Nickerson, 161 Cal. Rptr. 3d at 649.


Justice Croskey’s dissent took a simpler path, avoiding the constitutional weigh station altogether, and instead driving through the facts as found by the jury to conclude that the evidence did not support any award of punitive damages in the first instance.


In Justice Croskey’s 20-page dissent, he argued that the special verdict findings on fraud and malice were internally inconsistent, and the evidence overall was insufficient to support a finding of fraud justifying any punitive damages. Id. at 650.


Justice Croskey considered the jury’s finding of fraud to be inconsistent with its finding of no malice under the special verdict responses. The special verdict instruction on punitive damages was based on California Civil Code § 3294(a), which provides as follows:


In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.


Particularly relevant to Justice Croskey’s analysis were the jury instructions for malice and fraud. The trial court had instructed the jury that “malice” means that the insurer “acted with intent to cause injury or . . . [the insurer’s] conduct was despicable and was done with willful and knowing disregard of the rights and safety of others.” The trial court had further instructed the jury that “fraud” means that the insurer’s intentional misrepresentation or concealment of a material fact was done “intending to harm” the plaintiff. Nickerson, 161 Cal. Rptr. 3d at 653.


The jury was then asked to answer separately whether the insurer’s conduct involved “malice,” “oppression,” or “fraud.” The jury answered “no” to malice, “no” to oppression, but “yes” to fraud. The jury then awarded punitive damages to the plaintiff based on the finding of fraud.


According Justice Croskey, these express findings by the jury were “patently irreconcilable.” Id. at 653.


He explained that a finding of fraud necessarily included a finding of an “intent to harm.” However, the jury’s finding of no malice compelled the conclusion that the jury did not find any “intent to cause injury”—i.e., no intent to harm—and therefore no despicable conduct. According to Justice Croskey, this contradiction, in addition to the lack of sufficient evidence to support a fraud finding in the first place, should have been enough to overturn the entire punitive damages award. Id. at 657.


Justice Croskey further noted that the majority opinion concurred with his conclusion that the special verdict responses were internally inconsistent. However, the majority overlooked this error because both parties in the case had specifically agreed that the special verdicts were not internally inconsistent. Id. at 639, 653 fn. 6. According to the majority, “The dissenting opinion is arguing for reversal on a basis expressly eschewed by the party it would benefit.” Id. at 639. Based on the majority’s comment, had the insurer in Nickerson not expressly denied the inconsistency and instead objected to it, it is possible that Justice Croskey’s dissenting opinion could have been the unanimous opinion of the court.


While the California Supreme Court has not been asked by Stronebridge Life Insurance Company to adopt Justice Croskey’s analysis, his dissent nevertheless provides a cogent framework on how to avoid a punitive damages award based on breach of the implied covenant of good faith and fair dealing when the special verdicts used are internally inconsistent. When a special verdict asks the jury to decide separately whether the insurer’s conduct was committed with malice, oppression, or fraud, and when significant overlap exists between the definitions of the three words, the jury’s verdict may be internally inconsistent if it does not include an affirmative finding for all three. In such a circumstance, the findings may be sufficient to overturn a punitive damages award.


Justice Croskey, in fact, predicts such outcomes:


This case vividly illustrates the risk of an inconsistent verdict if the jury is asked to answer ‘yes’ or ‘no’ separately as to each of the three statutory grounds, and serves as a reminder that instead a single question should be presented in the disjunctive so as to avoid such a risk.


Id. at 653-54. Accordingly, practitioners should pay careful attention in situations where special verdict forms, and the definitions used in them, have the potential to raise inconsistencies, as any such inconsistencies could undermine the validity of an award of punitive damages for breach of the implied covenant of good faith and fair dealing.


 

Keywords: insurance; coverage; litigation; California; bad faith; punitive damages; Brandt fees; jury instructions; verdict forms; remittitur; due process; malice; oppression; fraud.


Albert K. Alikin and Marc J. Shrake are with Anderson McPharlin & Conners, LLP, Los Angeles.


 

September 10, 2014

Broad Prior Knowledge Exclusions May Not Be Enforceable As Written

 

Disputes can arise between policyholders and insurers under liability insurance policies regarding whether a policyholder was aware at the time it purchased a policy of facts and circumstances that placed the policyholder on notice of a reasonable likelihood of a subsequent claim.  Insurance companies oftentimes will seek to protect themselves from liability arising out of these “known” facts or circumstances by including disclosure requirements in their insurance applications and parallel exclusionary language in their policy forms (often referred to as “prior knowledge exclusions”).


A recent Texas decision demonstrates that, while insurers are entitled to rely on exclusionary language designed to prevent indemnifying policyholders for known liability exposure at the time a policy is purchased, courts may elect not to enforce broadly drafted prior knowledge exclusions as written if such a result would interfere with the fundamental nature of the coverage provided.  In OneBeacon Insurance Co. v. T. Wade Welch & Associates, No. H-11-3061, 2014 U.S. Dist. LEXIS 85486 (S.D. Tex. June 24, 2014), at issue was a law firm’s claim under its professional liability policy seeking indemnification for potential liability stemming from malpractice allegations.  OneBeacon disclaimed its coverage obligations through invocation of the policy’s prior knowledge exclusion on the grounds that Welch was aware of some of the alleged wrongful acts that subsequently resulted in the malpractice claim prior to the policy’s December 2007 to December 2008 coverage period.


The policy’s prior knowledge exclusion broadly encompassed “any claim arising out of a wrongful act occurring prior to the policy period if, prior to the effective date of the [policy] . . . [the insured] had a reasonable basis to believe that [it] had committed a wrongful act, violated a disciplinary rule, or engaged in professional misconduct.”  Id., at *20.  The policy defined a “wrongful act” as “any actual or alleged act, error, omission or breach of duty arising out of the rendering or the failure to render professional legal services.”  Id.  As written, this exclusion broadly encompasses claims based on any wrongful act committed by a policyholder prior to the policy’s effective date so long as the policyholder believed (or reasonably should have believed) that it had acted wrongfully, regardless of whether it reasonably could have or should have believed that the act ultimately would result in a claim against it that would trigger the policy’s liability coverage.  Pursuant to this language, OneBeacon took the position that, because the discovery dispute in the underlying action that ultimately led to the malpractice claim was ongoing at the time the policy was issued, Welch had “a reasonable basis to believe that it had committed a wrongful act” at the time it purchased its malpractice coverage because he was aware, or reasonably should have been aware, that he had mishandled aspects of the discovery process in the underlying action (regardless of whether he reasonably could have or should have believed that this conduct would ultimately lead to his client bringing a malpractice claim against him).


Analyzing the plain meaning of the exclusionary language as written, the court concluded that the prior knowledge exclusion was sufficiently broad enough to encompass Welch’s current coverage claim because the malpractice action was based on Welch’s mishandling of a discovery dispute that occurred in whole or in part prior to the policy’s December 2007 inception date and because Welch was aware that some of his conduct had been substandard (regardless of whether he was aware at the time that the conduct would lead to a subsequent malpractice claim against him).  Id., at *29.  Notwithstanding the plain meaning of the exclusionary language, however, the court concluded that interpreting the prior knowledge exclusion strictly as written would be inconsistent with the policy’s January 1995 retroactive coverage date, which operated to provide coverage for liability “caused by a wrongful act which takes places before or during the [December 2007 to December 2008] policy period and after the [January 1995] retroactive date.”  Id., at *35.  As the court observed:


[I]f one were to interpret the prior knowledge provision in accordance with its plain language, the retroactive coverage would be illusory because no ‘wrongful act’ that the attorney was aware of, but did not think would result in a claim, would be covered.  These claims also would not be covered by a prior insurer, since the Welch Firm was only required under the application to report known claims, suits, or incidents, acts, or omissions ‘that may in the future give rise to a claim or suit’ to its former insurer.  Thus, the insurer’s construction creates an unintended gap in coverage.


Id., at *35-36.  The court ultimately held that, when properly interpreted in the context of the coverage provided and the circumstances present at the time the parties formed the contract, the prior knowledge exclusion “applies only to a claim arising out of a wrongful act if the insured could reasonably foresee it would result in a claim” rather than applying the more broadly written “reasonable basis to believe that [it] had committed a wrongful act” language.  Id., at *36.


OneBeacon stands for the proposition that, while insurers are entitled to protect themselves from indemnifying likely claims known by policyholders as of a policy’s effective date, a court may elect not to enforce as written a broad prior knowledge exclusion that, if applied literally, would effectively eviscerate a significant portion of the expected coverage for which policyholders pay significant premiums.  When faced with a claim denial based on broad prior knowledge exclusionary language similar to the provision at issue in OneBeacon, the parties accordingly should always be aware that even the most unambiguous exclusionary language may not be enforceable as written if it would operate to render illusory or otherwise frustrate the fundamental nature of the insurance coverage provided.


Gregory M. Jacobs is with Kilpatrick Townsend & Stockton LLP, Washington, DC


Keywords:  insurance, coverage, litigation, Texas, professional liability policy, prior knowledge exclusion, illusory coverage


 

 

June 27, 2014

Tenth Circuit Invokes Public Policy to Interpret Unambiguous Insurance Policy Language

 

The U.S. Court of Appeals for the Tenth Circuit, in recently deciding Glacier Construction Co. v. Travelers Property & Casualty Co. of America, Nos. 12-1503, 12-1514, 2014 U.S. App. LEXIS 11630 (10th Cir. June 20, 2014), relied on its own conception of public policy to reach what it perceived to be a desirable result in a case involving otherwise unambiguous policy language. In doing so, the court may have inadvertently created a broader holding than intended. The Glacier decision is an unpublished Order and Judgment, but it may still be cited as persuasive authority under Federal Rule of Appellate Procedure 32.1 and Tenth Circuit Rule 32.1.


The facts of Glacier are straightforward. Glacier Construction Company contracted with the city of Aurora, Colorado, to construct a new wastewater pumping facility. Before construction could begin, excess water had to be removed from the site through a process called “dewatering.” Glacier installed four wells and pumps to dewater the site, which operated normally until May and June 2009. During those months, above-average rainfall caused the wells and pumps to fail through soil erosion and sediment build up. Further investigation showed that the types of soil on the site were different from those found during the original evaluation of the site. The presence of different soil meant that the original dewatering plan apparently was inadequate. Thus, Glacier developed a second, more expansive dewatering plan.


Glacier made a claim for the total cost of the second dewatering plan, $473,884.31, to Travelers Property & Casualty Company of America (“Travelers”), under a builder’s risk policy Travelers had issued for the construction of the wastewater facility. The policy insured “covered property” from “direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.” The policy defined “Covered Causes of Loss” as “risks of direct physical loss or damage” (effectively making it an “all risk” policy) and defined “Covered Property” as:


a.  Buildings or structures including temporary structures while being constructed, erected, or fabricated at the “job site,”

b. Property that will become part of a permanent part of the buildings or structures at the “job site:”

            (1)  While in transit to the “job site” or at a temporary storage location;

            (2)  While at the “job site” or at a temporary storage location.


The policy further insured expenses incurred “to reexcavate the site, reprepare the site, regrade the land, or reperform similar work because of loss of or damage to Covered Property by a Covered Cause of Loss” (the “Site Preparation” clause).


Travelers denied Glacier’s claim in its entirety and Glacier filed suit. The district court granted Glacier summary judgment for the cost of repairing and reworking the original four wells and pumps, an amount to be determined at trial. At the trial, Travelers asserted that the cost of repairing and reworking the four wells and pumps was $9,142.25. Glacier asserted that the covered work included not only repairing and replacing the four wells and pumps, but also the development and implementation of the second dewatering plan under the Site Preparation clause. Glacier asked the jury to enter a verdict in the amount of $473,884.31. The jury sided with Travelers and rendered a verdict in favor of Glacier for $9,142.25 plus postjudgment interest and costs.


The Appeal
Travelers and Glacier appealed. Travelers argued that the district court erred in ruling that the cost of repairing and reworking the four wells and pumps was covered. Glacier argued that the district court erred in ruling that only the cost of repairing and reworking the wells and pumps was covered and issuing a jury instruction that essentially instructed the jury to award Glacier only this cost.


The Tenth Circuit, applying Colorado law, affirmed the district court’s rulings and jury instructions, leaving Glacier with a judgment of $9,142.25. The Tenth Circuit agreed that the wells and pumps were covered “temporary structures” that had been damaged by the heavy rains, which were a covered cause of loss. Thus, Travelers was obligated to reimburse Glacier for the cost of repairing and reworking the wells and pumps.


The Tenth Circuit rejected Glacier’s argument that the development and implementation of the second dewatering plan were covered under the policy’s Site Preparation clause. The court found that the policy’s plain language did not cover the expense of a new dewatering plan or the costs to implement it. The court did not explain its reasoning, but a close reading of the opinion indicates that the discovery of different soils at the site was the reason for the second dewatering plan, not the damage to the original wells and pumps. There was no evidence that the heavy rains damaged any part of the site other than the four wells and pumps. Because the heavy rains did not cause loss or damage to the rest of the site, and the damage to the four wells and pumps did not require repreparation of the site, the jury properly could have decided that the second dewatering plan’s expenses were not covered under the Site Preparation clause’s plain language.


Basis for the Decision
Had the court affirmed the jury’s decision on that basis the decision would not be noteworthy. Rather than just apply the policy as written, though, the court relied on public policy to support its interpretation. “Construing the Policy as Glacier advocates would encourage a builder to economize on an initial dewatering plan and later require the insurer to pay for a more elaborate plan,” the court wrote. “This would misallocate the construction expense between the construction company and the insurer.” In other words, the court believed its interpretation would promote better behavior by construction companies to submit accurate bids for projects.


There is, of course, nothing wrong with an insurer not wanting to insure expenses incurred to develop and implement new construction plans. In that case, the burden should have been on Travelers to write the policy so that such expenses were clearly excluded. See Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006) (applying Colorado law) (insurer has burden to establish that “clear and specific” exclusion applies). Indeed, Travelers’ policy limited coverage for the expense of re-engineering Glacier’s work by requiring site preparation expenses to be caused by “loss of or damage to Covered Property by a Covered Cause of Loss,” and the Tenth Circuit found that this language unambiguously excluded the costs and expenses associated with the second dewatering plan.


If, however, the policy did not clearly limit or exclude coverage for the second dewatering plan, Travelers would have been obligated to reimburse Glacier, regardless of whether the court believed such a result would encourage less than optimal behavior by insureds. It has long been the rule in Colorado, and elsewhere, that courts will not enforce an unambiguous insurance provision only if the interest in enforcing the provision is clearly outweighed by a contrary public policy as expressed by legislative action or long-standing precedent. See Fed. Deposit Ins. Corp. v. Am. Cas. Co. of Reading, Pa., 843 P.2d 1285, 1290 (Colo. 1992). An insurer and insured may enter into “any contract which is desired unless it clearly appears that the contract of insurance pertains to a subject matter which is condemned by legislative or other action as against public policy or public morals.” Crowley v. Hardman Bros., 223 P.2d 1045, 1049 (Colo. 1950). The Tenth Circuit’s reference to public policy unnecessarily broadens its holding to imply that expenses such as those incurred by Glacier can never be covered, regardless of whether they are incurred because of an otherwise covered loss.


The bottom line is that the Tenth Circuit’s reliance on its own conception of public policy in this case was unwarranted. In the future, both insurers and insureds may point to the Glacier Construction opinion as support for the notion that “public policy” trumps unambiguous policy language even where such a policy is not clearly expressed by statute or long-standing precedent. Such arguments would tend to undermine the ability of parties to insurance policies to conform their actions and expectations to otherwise clear policy provisions.


Keywords: insurance, coverage, litigation, Colorado, property, builder’s risk, public policy


Paul Walker-Bright is a partner with Reed Smith LLP, Chicago.


 

June 27, 2014

Alabama Holds Construction Defect Is An Occurrence

 

The Alabama Supreme Court, reversing its prior precedent, held that construction defects meet the definition of an “occurrence” within a commercial general liability (CGL) policy. The court also held that the “products-completed operations” exclusion does not apply when the policy declarations show that the insured has purchased products-completed operations coverage. Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44 (Ala. March 28, 2014).


Jim Carr Homebuilder designed and constructed a $1.2 million home for Thomas and Pat Johnson. The Johnsons discovered problems with the home, including water leakage that caused physical damage. An arbitrator found that flashing was defectively installed or not installed, and that there were defects in the installation of brick and mortar, improper window installation, defective caulking, and improper roof installation. The Johnsons were awarded $600,000 for damages and mental anguish, and the trial court affirmed the award.


In a separate declaratory judgment action initiated by Jim Carr's CGL insurer, Owners Insurance Company, the trial court held that Owners was required to indemnify Jim Carr for the entire arbitration award. Owners appealed, and on September 20, 2013, the Alabama Supreme Court reversed the decision of the trial court, and held that there was no occurrence within the meaning of a CGL policy unless there was damage to personal property or other parts of the structure outside the scope of that construction.


Jim Carr applied for rehearing, and the court withdrew its prior decision, holding that damage to the construction project can be an occurrence unless the damage was intended. See id. at *15. The court cited with approval the decisions of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007), and the Florida Supreme Court in United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007), among others, in holding that the definition of occurrence does not depend on the “nature or location of the property damaged.” 2014 Ala. LEXIS 44, at *15. The court further held that in a situation where the insured was engaged in constructing an entirely new building, coverage would be “illusory” if damage to the project itself were excluded. Id., at *16.


Significantly, the court also rejected Owners' alternate argument that coverage was precluded under the standard ISO “completed operations hazard” exclusion, which states: “This insurance does not apply to … ‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.” The court noted that there was no issue that the damages occurred after completion of the home, and stated: “'Simply put, the 'your work' exclusion applies if and only if the Policy’s declarations fail to shown any coverage for 'products-completed operations.’” Id., at *21 (quoting from the Johnsons’ brief). (Note that, although many of the defects in the Johnsons’ home resulted from work of Jim Carr’s subcontractors, the Owners policy at issue did not contain the subcontractor exception to the products-completed operations exclusion.) Because the Owners policy declarations showed that Jim Carr had purchased completed operations coverage, the exclusion did not apply.


In addition to joining the majority of states in holding that defective construction causing property damage is an occurrence under a CGL policy, the court’s decision limiting the applicability of the completed operations exclusion presents a new rationale for expanding policyholder rights.


Keywords: insurance; coverage; litigation; commercial general liability; CGL; Alabama law; construction defect; occurrence; completed operations exclusion; products completed operations


Edwin L. Doernberger is with Saxe Doernberger & Vita, PC, Hamden, CT.


 

June 13, 2014

The Bermuda Form: Actual or Alleged Liability?

 

In Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm) and Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660 the English Commercial Court and Appeal Court have for the first time considered the Bermuda Form insurance policy, the principal form of product liability cover for many large multinationals.


The case concerned two preliminary issues arising in the context of AstraZeneca Insurance Co Ltd's claim against its excess reinsurers, XL and ACE, to recover sums paid in its capacity as captive insurer in relation to the Seroquel litigation.


Key to the decisions was the fact that the standard Bermuda Form policy wording (XL004) had been amended to include English law as the governing law (instead of, as is usual in such policies, New York law). The parties agreed to waive the arbitration clause so that the issues could be determined in court.


The Commercial Court Decision
In his first instance decision, Flaux J. found in favour of the defendant reinsurers, as follows:


First, that the reinsured (captive insurer) was only entitled to an indemnity where it could demonstrate it had an actual legal liability.


Second, that the reinsured was only entitled to an indemnity for defence costs where it could establish that it was, or would have been, legally liable for the third-party claims in issue.


The Court of Appeal Decision
AstraZeneca appealed the decision and the Court of Appeal handed down its Judgment on 20 December 2013. The Court of Appeal's Judgment unanimously upholds the first instance decision of Flaux J. in relation to both preliminary issues. The appeal judgment includes an interesting analysis of the loss payable condition and the notice of occurrence provision, and how they operate under English law.


The Ramifications
Following the Court of Appeal's judgment, there is little doubt that, to secure coverage under Bermuda Form policies governed by English law, an insured's actual legal liability must be established; alleged liability will be insufficient.


In relation to the recoverability of defence costs, because the policy wording in issue only referenced defence costs within the definition of “damages,” the Court of Appeal confirmed that liability must be imposed by law for damages (i.e., there must be evidence of actual legal liability) before defence costs can be recovered.


The Court of Appeal acknowledged that the application of English law to the Bermuda Form policy wording is potentially very inconvenient for insureds. It went further, stating that the result was very unfavourable to the particular insured and stated, "The Policy is not, therefore, to be treated as one whose terms are intended to be particularly favourable to the insured."


In light of this recent judgment, it is important to reiterate that amendments to Bermuda Form policies, particularly in respect of the governing law clause, have potentially serious consequences for insured companies (often US companies) facing mass tort litigation, both from a practical and commercial perspective.


The precedent set by this ruling creates very real difficulties for insureds, many of whom may now question the value of such insurance cover. In practical terms, insurers may deny cover unless insureds can show that they have taken a case to trial and lost (i.e., to show that they are legally liable), and only after they have paid the third-party award will insureds be able to request indemnification and recovery of their defence costs.


The position in respect of defence costs is in our view wholly unsatisfactory. It means that, as things stand (based on the wording in the policy in issue), an insured who successfully defends a claim at trial will be unable to recover its defence costs because it will not be legally liable for the loss suffered by the third party claimant. So, even though the insured mitigates or extinguishes the insurer's exposure to pay damages, it will still be unable to recover its legal defence costs.


It seems that the time has come for insureds to take a much closer look at the Bermuda Form wording to make sure that they understand fully the way in which particular clauses will operate under English law, and to ensure that real care is taken in relation to any amendments which are made to the standard form, since, as in this case, such amendments could ultimately result in a lack of cover.


Keywords: insurance; coverage; litigation; English law; products liability insurance; Bermuda Form


Authors Richard Leedham, Sonia Campbell, and Richard Wise are with Addleshaw Goddard LLP, London, U.K.



 

May 30, 2014

Are Bad Faith Claims Assignable? Pennsylvania Decides to Weigh In

Can a policyholder assign a claim against an insurance carrier for violating Pennsylvania’s insurance bad faith statute? On April 24, 2014, the Pennsylvania Supreme Court decided to answer that question in Allstate Property & Casualty Insurance Co. v. Wolfe, 2014 Pa. LEXIS 1044 (Pa. Apr. 24. 2014). The Supreme Court accepted that certified question from the U.S. Court of Appeals for the Third Circuit.


The case began as an ordinary tort claim for personal injuries. Jared Wolfe was injured in a car accident. He sued Karl Zierle. Wolfe demanded $25,000 in settlement. The insurer, which controlled the defense, authorized an offer of $1,400. After a three-day trial, the jury awarded $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000, but refused to pay the $50,000 in punitive damages.


In exchange for Wolfe’s agreeing to not collect the $50,000 punitive award from him, Zierl assigned whatever rights he had against Allstate to Wolfe. Wolfe then sued the insurance carrier for violating Pennsylvania’s bad faith statute, 42 Pa.C.S.A. § 8371, and other claims. The jury found that the insurance carrier had violated the bad faith statute and awarded Wolfe $50,000 in punitive damages.


The insurance carrier filed a motion to dismiss the bad faith claim, arguing that Wolfe did not have standing to sue it because insurance bad faith claims cannot be assigned. The district court rejected that position and denied the insurance carrier’s motion.


The insurance carrier then appealed to the Third Circuit Court of Appeals. The Third Circuit discussed at length whether insurance bad faith claims could be assigned. The Third Circuit noted that the Pennsylvania Superior Court has allowed such assignments and also had noted that the majority of states allowed bad faith claims to be assigned. Indeed, the district court had found that such claims were assignable. Wolfe v. Allstate Prop. & Cas. Ins. Co., 877 F. Supp. 2d 228 (M.D. Pa. 2012).


However, the Third Circuit noted that in 2007, Pennsylvania’s Supreme Court held that claims against insurance carriers for acting in bad faith in violation of Section 8371 were statutorily created tort claims. Relying on that decision, federal courts have begun to rule that insurance bad faith claims are not assignable in Pennsylvania, notwithstanding that this conclusion conflicted with previous state court precedent allowing bad faith claims to be assigned.


Since the Pennsylvania Supreme Court has not spoken on the issue, the Third Circuit certified a question to the Pennsylvania Supreme Court whether an insured person can assign his or her bad faith claim to another. In its order certifying the question to the Pennsylvania Supreme Court, the Third Circuit noted that while “the sum of money at stake in this case may be viewed as small relative to the stakes in other matters, the legal issues have potentially far-reaching consequences.” In doing so, it invited the Pennsylvania Department of Insurance to file an amicus brief on the issue.


Keywords: Insurance, coverage, litigation, Pennsylvania, bad faith, assignment, certified question


Andrew J. Kennedy is with Colkitt Law Firm, P.C., Indiana, Pennsylvania. (The author has been engaged to prepare an amicus brief in connection with the proceedings before the Pennsylvania Supreme Court.)



 

April 22, 2014

Web-Publication Does Not Trigger "Knowledge" or "Business of Publishing" Exclusions in Defamation Suit

IThe U.S. District Court for the Eastern District of Virginia has ruled that an insurer must defend its insured in connection with allegedly defamatory articles posted on the insured’s website under the personal and advertising injury provisions of a business owners policy. In State Farm Fire and Casualty Company v. Franklin Center for Government and Public Integrity, et al., No. 1:13-cv-00957 (E.D. Va. Apr. 4, 2014), the court held that the underlying complaint did not trigger exclusions for acting with knowledge or actions by one in the business of publishing.  The insured, the Franklin Center for Government and Public Integrity (FCGPI), is the non-profit group responsible for the website Watchdog.org.  In April 2013, the group published two articles on its website concerning the then-Virginia gubernatorial candidate Terry McAuliffe and a start-up car care company, GreenTech Automotive, Inc. with which he was involved.  In response to the articles, GreenTech filed a civil action against FCGPI and one of its employees alleging defamation and intentional interference with business and prospective business relations.  State Farm denied coverage for the claims on the basis of several exclusions to the personal and advertising Injury coverage.


The court addressed two exclusions limiting coverage for the knowing conduct of the insured: one excluding coverage for personal and advertising injury “[c]aused by or at the direction of the insured with the knowledge that the act would violate the rights or another and would inflict ‘personal and advertising injury’”, and another excluding coverage for publication of material “if done by or at the direction of the insured with knowledge of its falsity.”  State Farm argued these exclusions were implicated because the allegations of the underlying complaint stated that FCGPI acted with intent in publishing the allegedly defamatory articles and in interfering with GreenTech’s business relationships.  The court held that with respect to the defamation count, GreenTech did not have to prove that FCGFI acted with knowledge in order to recover; thus, this count was not barred by either exclusion.  Similarly, the count alleging intentional interference with current and prospective business relations did not allege that FCGFI acted with knowledge that its articles were false or that the posting of the articles would violate GreenTech’s rights.  Accordingly, the court held that neither exclusion barred coverage.


The court also addressed a provision in the personal and advertising injury coverage which excluded coverage for such injuries “[c]omitted by an insured whose business is . . . publishing”.  As to this exclusion, the court held that the term “publishing” was ambiguous as FCGFI was not engaged in the traditional business of publishing due to the online nature of its activities.  Moreover, the court stated, the specific references in separate exclusions to website usages that would bar coverage would cause a reasonable insured to assume that excluded web-related activities would be set forth in those exclusions.  As a result, the court construed the provision against State Farm and held that the exclusion was not applicable to FCGFI’s activities.


Keywords:  Insurance, coverage, litigation, Virginia, personal and advertising injury, Coverage B, defamation, acting with knowledge, business of publishing


Lindsay R. Lankford is with, Hancock, Daniel, Johnson & Nagle, P.C., Richmond, VA.


 

April 9, 2014

New York Court of Appeals Limits Application of Suit Limitation Clause

In Executive Plaza, LLC v. Peerless Ins. Co., -- N.E.3d --, 22 N.Y.3d 511; 2014 N.Y. LEXIS 165 (Feb. 13, 2014), the New York Court of Appeals refused to enforce a two-year suit limitation provision against a policyholder, finding the provision to be unreasonable where its application would require that suit be filed before the loss was complete. The policyholder, Executive Plaza, LLC (Executive), owned an office building that was destroyed by fire.  Executive submitted a claim to its property insurer, Peerless Insurance Co. (Peerless), which paid Executive $750,000 for the “actual cash value” of the damaged building. Executive notified Peerless that it would also make a “replacement cost” claim for the remainder of the policy limit. Peerless advised that, under the policy, “replacement cost” coverage requires “documentation verifying the completion of repairs” as a condition to receiving payment.  Thus, until replacement was complete, Peerless would not pay the claim.


The policy also contained a suit limitation provision purporting to preclude any lawsuit from being brought against Peerless based on a claim under the policy more than two years after the date of fire. To protect its rights under the policy, Executive filed a declaratory judgment action against Peerless in New York state court on the two-year anniversary of the fire — the last day allowed by the suit limitation provision; but, granting Peerless’ motion, the court dismissed the case as premature.  After completing its repairs and rebuilding roughly three and a half years after the fire, Executive then sought the remainder of its policy limit from Peerless, which again denied the claim. Executive again filed suit in New York state court and Peerless removed the case to federal court. The district court dismissed the lawsuit, this time based on the two-year suit limitation provision.  Executive appealed the dismissal to the Second Circuit, which certified to the New York Court of Appeals the question, “is an insured covered for replacement costs if the insured property cannot reasonably be replaced within the time specified by the suit limitations provision?”


The New York Court of Appeals accepted the certified question and, under the facts of the case, answered in the affirmative. The court recognized the generally accepted principle that parties may shorten applicable statutes of limitation if they do so reasonably. The court further explained that two-year suit limitation provisions are not “inherently unreasonable” and, in fact, have been enforced by New York courts.  The court explained, however, that under the circumstances here, Peerless’ suit limitation was unreasonable, not because of its length, but because of its accrual date and the manner in which it was applied to a loss that continued to accrue after the limitation period had expired.  As the court noted, nowhere did the policy account for circumstances such as those faced by Executive, where the damaged property could not be repaired, replaced or rebuilt within the two-year limitation period.  Under those circumstances it would be unfair and unreasonable to apply the limitation period as a bar to a lawsuit on a claim that did not mature until after the limitation period had expired. As the court put it, the limitation provision as applied to Executive’s claim amounted to a “nullification of the claim [that] renders the coverage valueless when the repairs are time-consuming.”  Executive Plaza stands for the proposition, therefore, that even facially reasonable conditions to coverage are nevertheless subject to challenge and exception where their application produces an unreasonable outcome.


Keywords:  insurance, coverage, litigation, New York, suit limitation provision, suit limitation clause, statute of limitations, replacement cost


Michael Levine is an attorney with Hunton & Williams, McLean, Virginia.


 

March 26, 2014

NY Court Denies Coverage for Sony Data Breach

On February 21, 2014 a New York trial court ruled that two insurers had no duty to defend Sony in connection with numerous lawsuits arising from a 2011 cyber-attack on Sony’s PlayStation Network in Zurich American Insurance Co. v. Sony Corporation of America, et al., 651982-2011 (N.Y. Sup. Ct., N.Y. Cnty. Feb 21, 2014). In the context of personal and advertising injury coverage, the court held, there is no coverage for a “publication” perpetrated by third-party hackers.


Justice Jeffrey K. Oing, faced with cross motions for summary judgment, issued an immediate ruling from the bench, stating that the issue was “important enough that it needs to seek appellate review as quickly as possible.” The parties asked Justice Oing to interpret a provision in Coverage B (personal and advertising injury) of the CGL policy issued by Zurich, which provided coverage for damages resulting from oral or written publication in any manner that violates a person’s right to privacy.


Counsel for Sony focused his argument on the “in any manner” language of this provision, arguing that there was no language requiring that the publication be by the policyholder. “The policy grants coverage for publication in any manner that violates the right to privacy,” counsel for Sony stated. “If they had wanted it only to apply to the policyholder, they could have done that.”


Justice Oing, however, disagreed. While he held that there had been a publication within the meaning of the policy, the critical issue, he stated, was whether or not the publication had been perpetrated by Sony. “[T]he cases are clear about that,” Justice Oing held, “the policyholder has to act.” Thus, there could be no coverage under the relevant provision for a publication perpetrated by a third-party. “And in this case it is without doubt in my mind, my finding is that the hackers did [the publication].”


The decision in this case is one of the first to address coverage of data breaches, and although appealable, may still have broad-reaching implications for coverage litigation under traditional insurance policies.  


Kathryn E. Kasper, and Lindsay R. Lankford, Hancock, Daniel, Johnson & Nagle, P.C., Richmond, VA


Keywords: Insurance, coverage, litigation, New York, commercial general liability insurance, Coverage B, publication, data breach, cyberliability


 

March 26, 2014

Third Party Indemnification Payments Can Satisfy Self-Insured Retention

The Florida Supreme Court has held that an insured can use indemnification payments from a third party towards the satisfaction of its self-insured retention if the policy is silent on that issue; and in such cases, the “transfer of rights” provision in the policy does not abrogate the “made whole” doctrine.


The controversy in Intervest Construction of Jax, Inc. v. General Fidelity Insurance Company, No. SC11-2320 (Fla. Feb. 6, 2014), involved the terms of a general liability contract between a home builder, Intervest Construction of Jax, Inc. and ICI Homes, Inc. (“ICI”), and General Fidelity. In 2000, ICI entered into a contract with a third party subcontractor for miscellaneous carpentry work that would be provided for future construction projects. ICI was indemnified in that contract for any damages resulting from the third party’s negligence. Thereafter, in 2007, an owner of a home constructed by ICI was injured due to the negligent installation of attic stairs by the subcontractor. The homeowner sued ICI, who in turn sought indemnification from the subcontractor.


The parties engaged in mediation, and it was agreed that the homeowner would receive a $1.6 million settlement. The subcontractor’s insurer paid $1 million to ICI for payment to the injured homeowner. As for the remaining $600,000, since ICI’s policy had a $1 million self-insured retention (SIR) provision, it argued that by its paying the $1 million settlement from the third party to the homeowner, it had satisfied the SIR obligation. Conversely, General Fidelity asserted that because ICI did not use its own funds to make the payment, the SIR amount was not satisfied. The underlying litigation thus centered on who was responsible to pay the remaining $600,000.


In deciding in favor of General Fidelity, a Florida district court followed the reasoning in several similar California cases and granted General Fidelity’s motion for summary judgment. Specifically, the court held that the SIR provision was unambiguous because it required that the retained limit must be paid by the insured itself, and thus ICI could not use the $1 million indemnification payment to satisfy its SIR because the funds came from a third party. The court further opined that even if that was not true, ICI would still be liable for the full $600,000 payment because of the policy’s “transfer of rights” provision which states that “if the insured has rights to recover all or party of any payment that the insurer has made, those rights are transferred to the insurer.” ICI appealed to the Eleventh Circuit, which in turn certified two questions to the Florida Supreme Court.


The first question considered by the court was whether the General Fidelity policy allowed ICI to apply the indemnification payment from the third party towards its SIR. Although the court recognized that the cases relied upon by the district court dealt with the issue of satisfaction of SIR obligations, none of them had the same policy language as the contained in the General Fidelity policy. An examination revealed that although the General Fidelity policy did state that the SIR amount must be paid by the insured, it did not specify where the funds must come from. The court further rationalized that when ICI entered into its contract with the subcontractor six years prior to obtaining the General Fidelity policy; it had in effect already exhausted the SIR because the purchase price of the contract included the protection afforded in the indemnification clause. Thus, the court held the General Fidelity policy allowed ICI to apply the indemnification amount to its SIR even though the funds were supplied by the third party’s insurer.


The second question the court considered was whether the “transfer of rights’ provision in the contract granted superior rights to the insured or the insurer. The court agreed that although the transfer of rights provision of the policy granted subrogation rights to General Fidelity, the policy language provided no direction as to the priority of recovery when the indemnity amount is insufficient to make both parties whole. ICI’s primary argument was that the policy did not abrogate the “made whole doctrine,” and thus ICI had priority over General Fidelity. General Fidelity, however, took the position that the “made whole doctrine” was abrogated by the policy language, and as such, the Policy gave General Fidelity the priority to be made whole before ICI could use any of the indemnity payment towards the SIR.


The court first acknowledged that in Florida, the “made whole doctrine” provides that an insured has priority over the insurer to recover damages when there is a limited amount of indemnification available. Agreeing with the principles outlined in Bordeaux, Inc. v. Am. Safety Ins. Co., 186 P.3d 1188, 1192-93 (Wash. Ct. App. 2008), the court also recognized that although the “made whole doctrine” is based on equitable principles, it still applied to subrogation rights based on a contract, unless the contract does not specifically state otherwise. After examining the policy, the court found that the “transfer of rights” clause in the General Fidelity policy was silent on the issue of priority of reimbursement and it did not contain an abrogation of the “made whole doctrine.” Thus, ICI retained its rights of priority, and was thus able to apply to full $1 million it received from the third party to the SIR


Keywords: insurance, coverage, litigation, Florida, indemnification, self-insured retention, made whole doctrine, transfer of rights clause, priority.


Robert James is an attorney with Powers McNalis Torres Teebagy Luongo in West Palm Beach, Florida.


 

February 25, 2014

K2 Update: New York’s Highest Court Reverses Itself After Rehearing

On February 18, 2014, following a rehearing held on January 7, 2014, the New York Court of Appeals reversed its own ruling set out in the original case of K2 Investment Group v. Am. Guarantee & Liability Ins. Co., 21 N.Y.3d 384 (June 11, 2013) (“K2-1”). K2-1 held that a breach of the duty to defend resulted in a waiver of the insurers’ rights to rely on two policy exclusions in later coverage litigation. The New York Court of Appeals vacated the June ruling and stated that the 1985 precedent of Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 NY2d 419 (1985), controls. Servidone provides that insurers may litigate policy exclusions as to indemnity even where the duty to defend is breached.


In the February decision, K2 Investment Group v. Am. Guarantee & Liability Ins. Co., -- N.Y.3d --, 2014 N.Y. LEXIS 201 (Feb. 18, 2014) (“K2-2”), the court held that Servidone is the better approach for handling coverage disputes where an insurer’s defenses do not depend on re-litigating underlying liability. The court discussed the underlying dispute, which involved a legal malpractice policy where the insurer refused to defend the lawyer because he was sued in connection with his own real estate business transactions and in his capacity as a manager or owner of his real estate business. The American Guarantee policy at issue contained both an insured capacity/status exclusion and a business enterprise exclusion that appeared to apply to bar coverage for defense and indemnity. In the face of the denial of coverage, the undefended attorney reached an agreement with the plaintiffs to dismiss all of the allegations except for two counts of legal malpractice and allowed a default judgment to enter on the two legal malpractice counts only. The plaintiffs then sued the insurer directly for payment of the judgment.


In finding that the carrier may litigate the validity of the disclaimer where the applicability of the exclusions has not already been foreclosed on in the underlying litigation, the court suggested that American Guarantee was not barred from relying on the policy exclusions at issue in the coverage suit. The court went further to hold that on the record before them, both exclusions could potentially apply. The court decided that summary judgment to the plaintiffs could not be granted because an issue of fact exists as to whether the claim against the attorney did in fact arise from his own business enterprise or from his role as a manager of the entities involved in the underlying transactions.


In sum, the court was not prepared to change its long-standing rule as set out in Servidone that failure to defend does not eliminate an insurer’s defenses to indemnity. The court still suggests in dictathat declaratory actions remain a prudent course for insurers, but the court has confirmed that declaratory actions are not required to preserve policy exclusions.


Melinda B. Margolies is a partner with Kaufman Borgeest & Ryan, New York.


Keywords: insurance, coverage, litigation, New York, waiver, policy exclusion, duty to defend, breach of duty to defend

 

 

January 31, 2014

Grand Jury Investigation and Subpoena Are a Claim


In Syracuse University v. National Union Fire Insurance Co. of Pittsburgh, PA, No. 2012EF63, 2013 N.Y. Misc. LEXIS 2753 (N.Y. Sup. Ct. Mar. 7, 2013), aff’d, __ N.Y.S.2d __, 2013 N.Y. App. Div. LEXIS 8670 (N.Y. App. Div. Dec. 27, 2013), the Appellate Division of the New York Supreme Court recently affirmed the trial court’s ruling that grand jury investigations and grand jury subpoenas issued to the university constitute a “claim” within the meaning of a professional liability insurance policy. The grand jury investigations and subpoenas at issue related to sexual abuse allegations involving a former university associate basketball coach, Bernie Fine. The trial court also rejected the insurance company’s argument that the subpoenas did not contain facts or allegations of a wrongful act committed by the university, explaining that although the university was not a target of the grand jury investigation, it was “clear that the subpoenas sought ‘facts . . . of a wrongful act’ concerning plaintiff’s conduct” within the meaning of the policy. The Appellate Division unanimously affirmed the trial court’s judgment “for reasons stated in the decision at the Supreme Court.”


The policy at issue defined “claim,” in relevant part, as:


(1) A written demand for monetary, non-monetary or injunctive relief; or


(2) A civil, criminal, administrative, regulatory or arbitration proceeding for monetary or non-monetary relief which is commenced by: (i) service of a complaint or similar pleading; or (ii) return of an indictment, information or similar document (in the case of criminal proceeding); or (iii) receipt of filing of a notice of charges . . . . 


Finding the policy’s terms clear and unambiguous, the trial court concluded that grand jury investigations and subpoenas satisfied the former prong of the “claim” definition, and that grand jury investigations also satisfied the latter prong of that definition.


The trial court first explained that the subpoenas state: “'YOU ARE HEREBY COMMANDED’ to appear with and/or produce the enumerated documents,” and that failure to comply is punishable by fine or imprisonment under both New York and federal law. The court also analyzed and relied on broad dictionary definitions of the term “relief” and its synonym “remedy,” and explained that “[t]he relief sought by a subpoena is the production of documents or testimony.”


In so ruling, the court also relied on other cases that likewise had held that government-issued subpoenas and other document requests constituted a claim within the meaning of a professional liability policy. 2013 N.Y. Misc. LEXIS 2753 at *9-10. In Agilis Benefit Services, LLC v. Travelers Casualty and Surety Co., for example, the court had held that a grand jury subpoena constituted a “‘a written demand for monetary or non-monetary relief,” and thus constituted a “claim.” 2013 N.Y. Misc. LEXIS 2753 at *9-10 (citing Agilis Benefit Services, LLC v. Travelers Cas. and Sur. Co., No. 5:08-CV-213, 2010 U.S. Dist. LEXIS, 144499 at *30-31 (E.D. Tex. Feb. 24, 2010)). Additionally, in MBIA, Inc. v. Federal Insurance Co.,the Second Circuit, predicting New York law, had held that a governmental investigative subpoena constitutes a “claim” under a “substantially similar definition” of “claim” that encompassed a “‘formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, a formal or informal investigative order or similar document.’” 2013 N.Y. Misc. LEXIS 2753 at *9-10 (citing MBIA, 652 F.3d at 152). The MBIA court had rejected the insurer’s “crabbed” characterization of the subpoena as a “mere discovery device,” and instead found that “a business person would view a subpoena as a formal or informal investigative order based on a common understanding of these words.” The Syracuse University court thus held that “a grand jury’s investigations are criminal proceedings for monetary or non-monetary relief and that common sense dictates that a criminal investigation is an integral part of a criminal proceeding.” It further explained that the district attorney’s issuance of a grand jury subpoena commences a grand jury proceeding just as, by analogy, in the civil context, the service of a summons commences a civil action.


The court also rejected National Union’s argument that because the university was not a target of the investigation, the subpoenas did not allege a wrongful act by the university. In concluding that the university was not required to prove that it was a target, the court emphasized the breadth of the duty to defend, which “arises when there are any facts or allegations bringing the claim even potentially within the protection that was purchased.” Although many of the subpoenas’ document demands pertained to the former coach, the court explained that “any liability of the [university] was necessarily dependent on the predicate liability of Fine” because his status as a former employee “implicates issues regarding responsibility, including potential, vicarious, supervisory or derivative liability for Fine’s actions.” The court further concluded that “the broad nature” of the subpoenas’ demands sought information beyond the former coach’s “potential wrongful acts and extended to those of the organization as a whole.” The “only reasonable interpretation” of these requests was that the prosecutor was seeking to determine whether the university “was engaged in an institutional cover-up of Fine’s alleged misdeeds, similar to that of Penn State, and was thus engaged in a breach of duty.”


Although the grand jury investigations against the former coach ultimately concluded with no charges being filed against either him or the university, the university nevertheless was forced to incur substantial costs responding to the grand jury subpoenas. This case serves as a powerful reminder to policyholders of the importance of reviewing your professional liability policies’ “claim” definitions (as well as all other terms and conditions of the policies) to see if they have comparable (or even more explicit) language in their “claim” definitions. Additionally, while courts have split on the issue of whether grand jury subpoenas and investigations constitute a claim, this case also serves as a good reminder that an insurance company denial letter does not necessarily mean that you have no coverage for costs incurred responding to a government-issued subpoena. Policyholders facing such a loss should carefully review the terms of their policies, review the law in the relevant jurisdiction (and beyond), and take steps to preserve and pursue coverage for such costs.


Keywords: insurance, coverage, litigation, New York, professional liability policy, claim, wrongful act, subpoena, grand jury subpoena, government investigation


By Erica J. Dominitz, Kilpatrick Townsend & Stockton LLP, Washington, DC.


 

November 1, 2013

Insurers Have a Direct Claim for Contribution in New Jersey Against Co-Insurers for Allocation of Defense Costs


In a case of first impression in New Jersey, its Supreme Court has held that insurers who have a duty to indemnify and defend an insured based on a continuous trigger claim may seek contribution of defense costs from similarly positioned co-insurers, even when the co-insurers have settled with the insured.


The decision in Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturer’s Association Ins. Co., 73 A.3d 465 (N.J. 2013), arose from an earlier-litigated construction defect action brought against Roland Aristone, Inc. by the Township of Evesham). In 1991, the township hired Aristone to act as a general contractor for the construction of a new middle school for the sum of $14.5 million. In 2001, following repeated instances of the new school’s roof leaking, the Township commenced an action against Aristone for alleged construction defects. During the ten-year trigger period, Aristone was insured by five different general liability insurers: Pennsylvania Manufacturers’ Insurance Company (PMIC), two years; Newark Insurance Company one year; Royal Insurance Company, one year; OneBeacon Insurance Company, one year; and Selective Way Insurance Company, five years. Newark was previously a subsidiary of Royal, and Royal agreed to assume Newark’s obligations, which brought the total number of involved insurers to four.


Selective and OneBeacon agreed to provide Aristone with a defense against the Township, but PMIC and Royal initially denied coverage, which caused Aristone to file a separate action against them. PMIC later settled with Aristone for $150,000 to be used toward Aristone’s settlement of the township’s lawsuit, with Aristone providing PMIC a release from all claims. Three days later, Aristone settled with the township for $700,000. Aside from the $150,000 from PMIC, OneBeacon paid $150,000, Selective paid $260,000 and Royal paid $140,000.


Left undetermined by the settlement with the township, however, was the issue of defense costs for the underlying construction action. OneBeacon and Selective paid a combined $528,868 in legal fees and expenses. Using the continuous trigger theory set forth in Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437 (1994), and its progeny, OneBeacon demanded that PMIC and Royal contribute a share of defense costs based on the number of years during the 10-year trigger period that they insured Aristone. Using that model, OneBeacon argued that 50 percent of total defense costs should be allocated to Selective (which insured Aristone for five years), 10 percent should be allocated to OneBeacon (which insured Aristone for one year), 20 percent should be allocated to PMIC (which insured Aristone for two years) and the remaining 20 percent should be allocated to Royal/Newark (each of which insured Aristone for one year).


Royal/Newark ultimately settled with OneBeacon, but PMIC rejected OneBeacon’s demand, claiming that it had obtained a release from Aristone and was therefore immune from contribution demands. Following a three-day bench trial, the trial court ruled in favor of OneBeacon, finding that Aristone’s release of PMIC only prevented the other insurers from seeking contribution against it for indemnity payments. The release did not implicate the other insurers’ right of contribution for defense costs because they were not parties to the release and Aristone could not have waived their rights to seek contribution from PMIC.


PMIC appealed the trial court’s ruling to the New Jersey Superior Court’s Appellate Division, which conceded the dearth of relevant New Jersey case law on the topic. However, relying on the California case of Fireman’s Fund Insurance Co. v. Maryland Casualty Co., 65 Cal.App.4th 1279 (1998), the Appellate Division held that an insurer did have a direct right of action against another insurer for defense costs arising out of the same loss.


PMIC then appealed to the New Jersey Supreme Court, arguing that the Appellate Division had in effect created a novel cause of action through a misinterpretation of California law. OneBeacon countered that the Appellate Division merely applied the Owens-Illinois standard to achieve the equitable result of spreading costs among carriers that provide coverage to a common insured. The Supreme Court framed the issue as: “whether an insurer may assert, against a co-insurer, a claim for defense costs incurred in litigation that arises from property damage manifested over a period of several years, during which the policyholder is insured by successive carriers.” Potomac,73 A.3d at 472.


The Supreme Court affirmed the judgment of the Appellate Division, agreeing with OneBeacon that a claim for contribution of defense costs among co-insurers was a logical extension of the holding in Owens-Illinois. In that case, the court found that “when multiple insurance policies are implicated by the continuous-trigger analysis, all affected insurers ‘must respond to any claims presented to them, and if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs.’” Id. at 473 (quoting Owens-Illinois). To that end, the court “envisioned the litigation of direct claims between co-insurers to ensure that the policyholders’ losses would be equitably allocated among its carriers.” Therefore, the court concluded, an “inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy.” Id. at 475.


Daniel Ginzburg is an associate with Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, PC, Newark, NJ.


Keywords: insurance, coverage, litigation, New Jersey, contribution, co-insurers, defense costs, allocation, continuous damage


 

October 30, 2013

Texas Supreme Court Reaffirms All Sums Allocation Approach for Continuous Losses


Finally resolving 12 years of litigation, the Texas Supreme Court ruled on August 23, 2013, that the triggered insurer—not the insured—bears the responsibility for allocating costs among insurers when a continuing loss extends over several policy periods. The court also reaffirmed that an insured’s failure to comply with a policy’s consent-to-settle provision does not excuse the insurer’s liability unless the insurer was prejudiced by the settlement.


Lennar Corporation v. Markel American Insurance Company,— S.W.3d— No. 11–0394, 2013 Tex. LEXIS 597 (Tex. Aug. 23, 2013) involved an insurance coverage dispute stemming from damage to homes caused by a synthetic stucco commonly known as EIFS (exterior insulation and finish system). Prior to 2009, Lennar, the insured homebuilder, had used EIFS in its homes. After a televised exposé, Lennar investigated numerous complaints and decided to proactively remove the EIFS from hundreds of homes and replace it with traditional stucco.


Lennar notified its insurers that it would seek indemnification for the costs of replacing the EIFS, but its insurers declined to participate in Lennar's remediation. Instead, they decided to respond to homeowners’ claims as they were made. Each of Lennar’s insurers ultimately denied coverage. After years of litigation involving settlements with Lennar’s other insurers, only Markel—which had issued a $25 million umbrella policy effective from 1999 to 2000—remained.


Before the Texas Supreme Court were Markel’s three remaining coverage defenses: (1) that Lennar entered into settlements without Markel’s consent, thereby violating the policy’s requirement that Markel preapprove any settlement; (2) that Lennar’s cost to locate property damage by removing all EIFS—as opposed to the costs required to repair the damage itself—did qualify as amounts “because of property damage;” and (3) that Markel was only responsible for its pro rata share of the damages occurring during its own policy period.


The court rejected each of Markel’s arguments, overruling the court of appeals, and reinstating the jury’s $6 million verdict for Lennar.


Relying on Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994), the court first found that the policy’s “voluntary payments” condition and “loss establishment” provision did not bar coverage unless Markel established prejudice from a settlement, which it failed to do.


The court next determined that the policy covered amounts spent to locate—not just to repair—the damaged property. The policy language at issue provided coverage for the amount of Lennar's loss "because of" property damage. The court of appeals held that this language limited coverage to only the cost of repairing the damage—not the cost of locating it. The Texas Supreme Court disagreed, finding that "[u]nder no reasonable construction of the phrase [‘because of’] can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage."


Finally, Markel argued that Lennar could not recover sums for any damages occurring outside the policy period, and that it must instead look to the various insurers covering those other periods. Because Lennar had not segregated the damages occurring during Markel’s policy period as opposed to other insurers’ policy periods, Markel maintained that Lennar could not recover anything. The court disagreed. While noting that Markel's policy was limited to damage occurring during the policy period, it expressly included damage from “continuous…exposure to the same general harmful condition.” Thus, citing its prior decision in American Physician Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994), the court held that, where some damage occurs during the policy period, “coverage extends to the ‘total amount’ of loss suffered as a result, not just the loss incurred during the policy period.” In doing so, the court rejected Markel's argument that it was only responsible for its pro rata share of the total loss, instead adopting an all sums approach and reaffirming Garcia’srequirement that “insurers who share responsibility for a loss allocate amongst themselves according to their subrogation rights.”


Keywords: insurance, coverage, litigation, Texas, all sums, allocation, continuous loss, indemnification, “property damage,” construction defects, EIFS


Leslie C. Thorne is with Haynes and Boone, LLP, Austin, Texas.

 

September 12, 2013

Second Circuit Weighs in on D&O Excess Coverage


A recent hot topic in the world of directors and officers (D&O) liability insurance is the application and interpretation of excess coverage. With increased frequency, courts across the country have limited policyholders’ ability to tap into this coverage, despite the existence of covered liability that reaches excess layers. See, e.g., Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App. 4th 184 (2008) (holding that a settlement for less than a carrier’s policy limits has the effect of releasing any excess carrier from its coverage obligations); Forest Labs., Inc. v. Arch Ins. Co., 953 N.Y.S.2d 460 (2012) (same).


The U.S. Court of Appeals for the Second Circuit recently entered the fray with its decision in Ali v. Federal Insurance Co., 719 F.3d 83 (2d Cir. June 4, 2013). In Ali, the Second Circuit held that where the excess policies at issue applied only upon exhaustion of underlying coverage “as a result of payment of losses,” these policies were triggered solely through liability payments meeting their attachment points, not through the existence of liability exceeding the underlying limits. Consequently, the policyholders could not seek excess coverage in a case where both the underlying carriers were insolvent and unable to pay the limits of their policies, and the entity itself also could not pay the “gap.”


Not surprisingly, policyholder counsel have found much to disagree with in this opinion. First, it limits policyholders’ ability to recover for incurred liability through circumstances that are not within the policyholders’ control, and is contrary to a policyholder’s intent when purchasing excess coverage. Second, the holding does not serve any rational interest of insurance carriers. To the extent that insurers are concerned about policyholders agreeing to inflated settlements with third parties in order to more quickly exhaust insolvent coverage, this concern can be addressed by a court’s determination of the existence of fraud; a carte blanche prohibition on accessing excess coverage where the underlying liability has not been paid is vastly over-inclusive. Third, although the court did not address it, the decision violates the intent of the provision, common in D&O coverage, that the bankruptcy or insolvency of an insurer does not affect a policyholder’s ability to recover for its losses.


It is worth noting, however, that while it surely will further embolden insurers in negotiations and coverage litigation, the Second Circuit’s holding in Ali may not be as harmful to policyholders at it appears at first blush. The court specifically leaves open the door to a policyholder triggering excess solvent coverage by paying the insolvent carrier’s liability limits himself. In other words, Ali v. Federal is expressly not Qualcomm, and a circumstance where both the underlying carrier is insolvent and the policyholder cannot pay the liability will be somewhat infrequent. 


So, what should policyholders do to protect themselves? We suggest the following:


First, and most obviously, if you are seeking new D&O coverage, ensure that the policy does not include a trigger provision that requires payment of liabilities prior to attachment. Certain D&O policies specifically provide that an excess carrier’s obligations “drop down” to provide coverage when the underlying carrier is insolvent.


To the extent that you have an existing D&O coverage claim, and certainly in the case of a dispute, consider the extent of the risk you face on this issue at the outset.  Very small variations on policy language and choice of law make all the difference in these cases, and a close analysis is required. Sophisticated modeling of potential outcomes may, in certain cases, justify resolution of underlying coverage for less than limits, even where these risks exist. Where you face a greater risk, factor this risk into your settlement analysis.


Maintain underlying defense and settlement data comprehensively in an organized electronic medium to be able to value the risks and evaluate various settlement options in the context of these issues. This requires coordination of various parties in the earlier stages of defending the underlying case to insure all the data you may need is being tracked.


Where you have significant risk, consider creative settlement arrangements, such as a “top-down” structure where you settle with excess carriers first, or contingent arrangements that make settlement agreements with underlying insurers contingent on your ability to resolve excess coverage favorably.


Kami Quinn is a partner and Meredith R. Hiller is an associate at Gilbert LLP, Washington DC. Elizabeth Hanke is a consultant at KCIC LLC.


Keywords: insurance, coverage, litigation, Second Circuit, New York, Pennsylvania, directors and officers, D&O, excess, exhaustion, Qualcomm

 

 

August 27, 2013

Insurer Not Entitled to Discovery of Social Media Posts


Recognizing some measure of privacy protection for social media postings, a Montana federal district court has held that an automobile insurer is not entitled to discovery of its policyholders’ private social media postings without a preliminary showing that the postings would somehow relate to the coverage issues in the case.


In Keller v. National Farmers Union Property & Casualty Co., No. CV 12–72–M–DLC–JCL, 2013 U.S. Dist. LEXIS 452 (D. Mont. Jan. 2, 2013), a policyholder sued its insurer for coverage under an auto policy for injuries arising out of an automobile accident.  The insurer sought discovery that included “a full printout of all of [both policyholders’] social media website pages and all photographs posted thereon including, but not limited to, Facebook, Myspace, Twitter, LinkedIn, LiveJournal, Tagged, Meetup, myLife, Instagram and MeetMe . . . .”  Id., at *7-8.  The insurer argued that because the injured policyholder had alleged “‘a host of physical and emotional injuries,’ information found on her social networking websites ‘may very well undermine or contradict’ those allegations.”  Id. at *12.  With respect to the injured plaintiff’s mother, who was a policyholder under the relevant automobile policy but was not in the car at the time of the accident, the insurer argued that there was “‘no good reason for her to shield information that might shed light on her or her daughter’s injuries.’”  Id.; see also Keller v. Nat’l Farmers Union Prop. & Cas. Co., No. CV 12–72–M–DLC–JCL, 2013 U.S. Dist. LEXIS 33001, at *2 (D. Mont. Mar. 8, 2013).  The policyholders resisted the discovery on the grounds that it was “‘overly burdensome’” and “‘meant to harass’” them.  Keller, 2013 U.S. Dist. LEXIS 452, at *7 (citation omitted).


In Keller, the U.S. District Court for the District of Montanadenied the insurer’s motion to compel the discovery.  The court acknowledged that the “content of social networking sites is not protected from discovery merely because a party deems the content ‘private.’”  2013 U.S. Dist. LEXIS 452 at *10-11 (citing E.E.O.C. v. Simply Storage Mgmt., LLC, 270 F.R.D. 430, 434 (S.D. Ind. 2010); Glazer v. Fireman’s Fund. Ins. Co., No. 11 Civ. 4374, 2012 U.S. Dist. LEXIS 51658 (S.D.N.Y. Apr. 4, 2012)).  However, the court expressed concern that parties not be given “‘a generalized right to rummage at will through information that [opposing parties have] limited from public view.”  Keller, 2013 U.S. Dist. LEXIS 452, at *11-12 (quoting Tompkins v. Detroit Metro. Airport, 278 F.R.D. 387, 388 (E.D. Mich. 2012)).


The Keller court discussed several recent cases addressing discovery of private social media postings in similar circumstances, noting that other courts addressing this issue had awarded such discovery only “where the defendant makes a threshold showing that publicly available information on those sites undermines the plaintiff’s claims.”  2013 U.S. Dist. LEXIS 452, at *11 (citing Thompson v. Autoliv ASP, Inc., No. 2:09-cv-01375, 2012 U.S. Dist. LEXIS 85143 (D. Nev. June 20, 2012); Tompkins v. Detroit Metro. Airport, 278 F.R.D. 387 (E.D. Mich. 2012); Romano v. Steelcase, Inc., 30 Misc. 3d 426 (N.Y. Sup. Ct. 2010); McMillen v. Hummingbird Speedway, Inc., No. 113-2010 CD, 2010 Pa. Dist. & Cnty. Dec. LEXIS 270 (Pa. Com. Pl. Sept. 9, 2010); Zimmerman v. Weis Markets, Inc., NO. CV-09-1535, 2011 Pa. Dist. & Cnty. Dec. LEXIS 187 (Pa. Com. Pl. May 19, 2011)).  Otherwise, parties could simply request production of private social media postings in the hope that they might be relevant to an issue in the case—the proverbial “fishing expedition.”  Keller, 2013 U.S. Dist. LEXIS 452, at *11.


The Keller court held that the insurer had failed to make the required showing because it had “not come forward with any evidence that the content of either of the Plaintiff’s public postings in any way undermines their claims in this case.”  Id. at *12-13.  Without this showing, the insurer was “not entitled to delve carte blanche into the nonpublic sections of Plaintiffs’ social networking accounts.”  Id. at *13. 


Other courts have disagreed with the approach set out in Keller.  For example, a Florida federal district court previously compelled discovery of social media postings to another automobile insurer without such a showing.  See Davenport v. State Farm Mut. Auto. Ins. Co., No. 3:11-cv-632-J-JBT, 2012 U.S. Dist. LEXIS 20944, at *5 (M.D. Fla. Feb. 21, 2012).  The court in Davenport held that because the plaintiff’s physical condition was at issue in a case seeking coverage for injuries, she was required to produce “any photographs depicting her, taken since the date of the subject accident, and posted to a [social networking site] regardless of who posted them.”  Id.  Conducting a straightforward relevance analysis, the court held that “the potential relevancy of such photographs outweighs any burden of production or privacy interest therein.”  Id.  The court did not require any showing from the insurer to prove that the plaintiff’s private social media postings would be relevant.  In fact, at least one court has specifically rejected such a requirement.  Giacchetto v. Patchogue-Medford Union Free School Dist., No. CV 11-6323, 2013 U.S. Dist. LEXIS 83341, at *4-6 & n.1 (E.D.N.Y. May 6, 2013).


Even the line of cases, followed in Keller, that is more protective of privacy labels does not provide any absolute protection for social media postings that are designated “private” or “protected.”  Both policyholders and insurers should be aware that even postings thought to be private and personal can be subject to discovery, if they are found to be relevant to the claim at issue.


Erin L. Webb is an associate with Dickstein Shapiro LLP, Washington, DC, and is a cochair of the Social Media subcommittee of the ABA Section of Litigation’s Insurance Coverage Litigation Committee.


Keywords: insurance, coverage, litigation, Montana, automobile, social media, discovery, Facebook, Twitter


 

July 31, 2013

Defective Construction Claims May Be an Occurrence


Capstone Building Corporation v. American Motorists Insurance Company

In Capstone Building Corporation v. American Motorists Insurance Company, 308 Conn. 760, 67 A.3d 961 (2013), the Supreme Court of Connecticut held that defective construction or faulty workmanship by a subcontractor that causes damage to property other than the defective work itself or repairs of defective work constitutes an occurrence under a commercial general liability (CGL) policy. In so holding, the court sided with a majority of jurisdictions that have addressed the issue of whether defective construction or faulty workmanship claims constitute an occurrence under the insuring agreement of a CGL policy.


The Capstone case arose from a claim of defective construction work at a student housing complex at the University of Connecticut (UConn) that resulted in elevated levels of carbon monoxide in the housing complex. Capstone was hired by UConn as the general contractor and developer of the project and was an additional insured under a CGL policy issued by American Motorists Insurance Company (AMICO) to UConn, the owner of the construction project. After AMICO refused to cover Capstone for faulty workmanship claims alleged by UConn against Capstone, Capstone and UConn resolved the construction defect claims in mediation. Capstone then filed a lawsuit against AMICO for breach of contract and bad faith, to recover the amounts it paid UConn.


The Supreme Court of Connecticut ruled that a claim of faulty workmanship qualified as an occurrence, i.e., an accident, under a CGL policy. The policy at issue defined the term “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Like many insurance policies, however, the insurance contract did not define the term “accident.” The court ruled that the term “accident” means an unexpected or unintended event from the standpoint of the insured and that a claim of defective construction involves some volitional or deliberate act on the part of an insured in performing the work. The court ruled, however, that the term “accident” includes a voluntary deliberate act, performed negligently, if the end result is not intended or expected by the insured. Under Capstone, therefore, an intentional or volitional act by an insured may constitute an occurrence under a liability policy so long as the insured does not intend or expect the end result.


The Capstone court ruled that to be an insured occurrence, faulty workmanship or defective construction work must cause property damage to property other than the defective work itself. Defective work or repair of defective work does not by itself constitute property damage under a CGL policy. As a result, damages arising from building and fire-safety violations and repairs to damaged work in Capstone did not constitute property damage. Damage to nondefective property stemming from defective construction work would, however, fall within the definition of property damage. The Capstone Court also established Connecticut precedent in holding that the release of carbon monoxide does not by itself constitute property damage under a definition that includes “physical injury to tangible property.” The court left open the possibility that loss of use of a building due to the release of carbon monoxide would satisfy a second definition of property damage under a CGL policy for “loss of use of tangible property that is not physically injured.”


After concluding that defective construction work that causes damage to nondefective property was a covered occurrence under the insuring agreement of the CGL policy, the Court addressed the applicability of an exclusion found in most CGL policies, known as the "Your Work” exclusion. Such an exclusion typically excludes coverage for property damage to an insured’s work unless the damaged work or work out of which the damage arises is performed on the insured’s behalf by a subcontractor. The court ruled that such an exclusion eliminates coverage when the property damage is caused by an insured contractor’s work, but coverage is afforded for property damage that is caused by the work of a subcontractor.


Capstone also established precedent concerning an insurance company’s liability for bad faith arising from the failure to investigate a claim. The Supreme Court of Connecticut sided with a majority of jurisdictions and held that an insurer’s failure to investigate a claim does not by itself give rise to a private cause of action for bad faith. The court recognized that bad faith liability arises from the denial of insurance benefits expressly granted to an insured under an insurance policy. The policy at issue in Capstone, like most liability policies, provided that the insurer may, at its discretion, investigate any occurrence and settle any claim or suit that may result. The right to investigate a claim was a discretionary right retained by the insurance company and not an obligation owed to the insured under the insurance policy. The court therefore held that the insurer could not be held liable in bad faith for its failure to investigate the insured’s claim. The court emphasized, however, that failure to investigate a claim may be evidence of bad faith if an insurer denies a covered claim.


Finally, the Capstone court addressed an insurance company’s liability for damages arising from a breach of the duty to defend after the insured settles the claims for which the insurer does not provide a defense. An insurance company that has a duty to defend an insured must defend the insured against covered and noncovered claims, and an insurer that breaches its duty to defend may be liable to its insured for all costs caused by the breach, including the reasonable settlement of a claim up to the limits of the insurance policy. The Capstone court ruled that when an insured seeks to hold an insurer liable for costs and damages arising from the insurer’s breach of the duty to defend after the insured settles a case involving covered and noncovered claims, the insured has the burden of proving that the claims were within the policy’s coverage for defense and that the settlement was reasonable.


Under Capstone, an insurer that breaches its duty to defend may challenge the reasonableness the insured’s settlement on the basis of allocation of damages between covered and noncovered claims. An insurer’s liability for breach of the duty to defend is limited to the portion of the settlement corresponding to claims for which the insurer had an independent duty to defend. According to the Court, the insurer is not bound by how the settlement is allocated by the insured and claimant or by the terms of the settlement agreement. Instead, under Capstone, if an insurer challenges the reasonableness of an insured’s settlement of a claim after refusing to defend the insured, the insured bears the burden of proving the reasonable allocation of the settlement and costs incurred in relation to the claims for which, when considered independently, the insurer had a duty to defend.   

           

Michael McCormack is a partner with Hinckley Allen in Hartford, Connecticut.


Keywords: insurance, coverage, litigation, Connecticut, commercial general liability, CGL, occurrence, bad faith, construction defect

 

July 31, 2013

Insurers Breaching Duty to Defend Can’t Avoid Indemnity Obligations


K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co.


In a decision garnering significant attention from insurers and policyholders alike, the New York Court of Appeals recently ruled in K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., —N.E.2d —, No. 106, 2013 N.Y. LEXIS 1461 (N.Y. June 11, 2013), that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” Although the impact of the ruling has been the subject of some debate, virtually all commentators agree that the ruling provides a strong incentive for insurers to defend their policyholders, even when the insurer has doubts as to whether the duty to defend is triggered.


K2 involved a dispute over coverage for a malpractice claim against an attorney. The attorney was sued by two limited liability companies that made loans to a third company, Goldan LLC. The loans were to be secured by mortgages, but the mortgages had not been recorded. After Goldan defaulted on the loans, the lenders sued Goldan, as well as its two principals, one of whom was an attorney. The lenders claimed that the attorney had represented them with respect to their loans to Goldan and committed malpractice by failing to record the mortgages. Id. at *1-2.


The attorney notified its malpractice carrier of the claim, but the insurer denied coverage. The attorney then defaulted in the lenders’ action against him, and a default judgment was entered in excess of the malpractice policy’s limits. The attorney assigned his rights under the policy to the lenders, who then brought suit against the malpractice carrier. Id. at *2-3.


In the coverage action, the insurer argued that it had no duty to defend or indemnify the attorney, relying on two policy exclusions in the policy. The trial court granted summary judgment to the lenders, holding that the insurer breached its duty to defend and was liable up to the policy’s limits for the judgment entered against the attorney. The intermediate appellate court affirmed, with two justices dissenting in part on the basis that issues of fact existed as to whether the two exclusions at issue applied. Id. at *4.


The New York Court of Appeals affirmed. Refusing to address whether the exclusions applied, the court held that “by breaching the duty to defend [the attorney], [the insurer] lost its right to rely on these exclusions in litigation over its indemnity obligation.” The court relied on its prior ruling in Lang v. Hanover Insurance Co., 820 N.E.2d 855 (N.Y. 2004), where the court held that when an insurer “‘cho[oses] not to participate in the underlying lawsuit, the insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment.’” K2, 2013 N.Y. LEXIS 1461, at *7 (quoting Lang, 820 N.E.2d at 859) (emphasis in original). The court reiterated that this language in Lang “means what it says: an insurance company that has disclaimed its duty to defend ‘may litigate only the validity of its disclaimer.’ If the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify.” K2, 2013 N.Y. LEXIS 1461, at *8. The court specifically noted that the rule they adopted would “give insurers an incentive to defend the cases they are bound by law to defend.” Id.


Although the court’s holding in K2 relates specifically to an insurer’s ability to rely on policy exclusions, the basis for the court’s holding— that an insurer who denies a duty to defend “may litigate only the validity of its disclaimer”—is broad enough to apply to all defenses to indemnity coverage, not just defenses based on policy exclusions. Indeed, the court recognized the broad sweep of the rule it enunciated when it stated that “[p]erhaps there are exceptions” to the rule, such as for public policy grounds like the one raised in Hough v. USAA Casualty Insurance Co. Id. In Hough, 940 N.Y.S.2d 41 (N.Y. App. Div. 2012), the Supreme Court of New York, Appellate Division, held that a breach of an insurer’s duty to defend did not bar the insurer from asserting that the policyholder injured the underlying plaintiff intentionally, id. at 42, which the K2 Court said “could arguably be justified on the ground that insurance for one’s own intentional wrongdoing is contrary to public policy,” K2, 2013 N.Y. LEXIS 1461, at *8.


Notably, the Hough court was not addressing an exclusion in a policy. Thus, by stating that there may be exceptions to “the rule” the Court of Appeals was articulating, which could possibly include public policy exceptions such as the one at issue in Hough, the court was necessarily indicating that its rule was not limited to policy exclusions, but rather sweeps more broadly.


While courts will be left to wrestle with whether there are any such “exceptions” to the rule articulated in K2, one thing is clear: insurers must tread carefully when deciding whether to defend their policyholders, as a wrongful denial could leave them liable not only for defense costs, but also for any liability the policyholder incurs.


Marla H. Kanemitsu is a partner and Aimee P. Ghosh is an associate with Dickstein Shapiro LLP, Washington, DC.


Keywords: insurance, coverage, litigation, New York, professional malpractice, duty to defend, policy exclusions, duty to indemnify

 

 

June 12, 2013

Florida Court Finds Fact Issues as to Insurer's Liability for Excess Judgment


Goheagan v. American Vehicle Ins.


Goheagan v. American Vehicle Insurance Co., 107 So. 3d 433 (Fla. 4th DCA 2012), arises out of an auto accident on February 24, 2007, in which the insured, John Perkins, traveling at high speed and with a blood alcohol content of 0.19 percent, rear-ended the decedent, Molly Swaby. Her injuries from the accident were so severe that she was hospitalized in a coma until her death less than three months later. Two days after the accident, Perkins notified his insurer, American Vehicle Insurance Co. (AVIC), of the accident. The adjuster assigned to the claim notified Perkins that his policy limits for bodily injury claims were $10,000 per person and $20,000 per accident. A few days later, the adjuster contacted Swaby’s family and was informed by her stepfather that the family had retained an attorney and that the adjuster should speak to Swaby’s mother, Olive Goheagan, to obtain the attorney’s information. Over the next month and a half, the adjuster called Swaby’s family members on five occasions, but failed to obtain the attorney’s contact information, attempt settlement negotiation, or tender the policy limits. On April 19, 2007, the AVIC adjuster learned that suit had been filed against the insured, and thereafter attempted to tender the limits. Goheagan did not accept the tender. A final judgment of $2.8 million was entered against the insured in early 2009 for the wrongful death of Molly Swaby.


Following judgment, Goheagan, as personal representative of the estate of Molly Swaby, individually, and as assignee of John Perkins, filed a common law bad faith claim alleging AVIC failed to protect its insured from an excess judgment. AVIC filed a motion for summary judgment, arguing that  because Swaby was in a coma, there was no one to whom a settlement offer could be made; and that because the adjuster had been informed that Goheagan retained a lawyer, Florida Administrative Code 69 and 69b-220.201 prevented the adjuster from communicating or negotiating a settlement with Swaby or Goheagan. The trial court granted summary judgment on behalf of AVIC based on AVIC’s first argument, and the Fourth District Court of Appeals affirmed, stating, “[I]n this case, the undisputed facts demonstrate no basis from which a reasonable jury could conclude that AVIC acted solely in its own interest.” Goheagan v. Am. Vehicle Ins. Co., 37 Fla. L. Weekly D1388 (Fla. 4th DCA 2012), opinion withdrawn and superseded on reh'g, 107 So. 3d 433 (Fla. 4th DCA 2012), reh'g denied (Mar. 15, 2013).


Goheagan’s motion for a rehearing was accepted. On rehearing, the Fourth District reversed its position and withdrew the previous opinion. Recognizing that an appellate court must examine the record in the light most favorable to the nonmoving party, the Fourth District found that “[t]he financial exposure to Perkins was a ticking financial time bomb. Suit could be filed at any time. Any delay in making an offer under the circumstances of this case even where there was no assurance that the claim could be settled could be viewed by a fact finder as evidence of bad faith.” 107 So. 3d at 439 (citing Boston Old Colony Ins. Co. v. Guitierrez, 386 So. 2d 783, 785 (Fla. 1980)). The Fourth District thus held that summary judgment was inappropriate and remanded the case for determination of issues of fact and credibility regarding whether AVIC acted “reasonably and prudently in attempting to protect Perkins.”


Keywords: insurance, coverage, litigation, Florida, bad faith


Andrea DeField,, Ver Ploeg & Lumpkin, P.A., Miami.

 

May 31, 2013

Insurer's Communications with Coverage Counsel Found Presumptively Discoverable In Bad Faith Cases


Cedell v. Farmers Insurance Company of Washington


On February 22, 2013, the Washington Supreme Court issued a landmark decision barring insurance companies from relying on the attorney-client privilege to avoid disclosure of communications with outside counsel related to the investigation, evaluation, negotiation or processing of bad faith insurance claims. Cedell v. Farmers Insurance Company of Washington, 295 F.3d 239 (2013).


The policyholder, Cedell, suffered a loss in 2006. The insurance company, Farmers, delayed its coverage determination and eventually retained coverage counsel to assist with the handling of Cedell’s insurance claim. Eight months after the loss, Farmers’ coverage counsel sent Cedell a “one-time offer of $30,000” to settle Cedell’s insurance claim; an amount significantly less than the $105,000 exposure Farmers initially estimated. Cedell filed suit alleging, among other things, that Farmers acted in bad faith in handling his insurance claim.


After filing suit, Cedell issued discovery requests to Farmers. Farmers produced a heavily redacted claims file and refused to answer interrogatories on grounds that the information sought was privileged. Cedell moved to compel the disclosure of that information, and the superior court ordered that Farmers produce the documents it previously withheld or redacted.


After the court of appeals reversed the superior court ruling, the Washington Supreme Court granted review. In ruling in favor of with Cedell, the Washington Supreme Court established a four-step process for determining whether an insurer in a bad faith action may avoid disclose of communications that may otherwise protected by the attorney-client privilege.


First, the court established a “presumption that there is no attorney-client privilege relevant between the insured and the insurer in the claims adjusting process, and that the attorney-client and work product privileges are generally not relevant.”


Second, “the insurer may overcome the presumption of discoverability by showing its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead in providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.”


Third, if the insurance company makes such a showing, the insurance company is entitled to an in camera review of the questioned communications and “to the redaction of communications from counsel that reflected the mental impressions of the attorney to the insurance company, unless those mental impressions are directly at issue in the quasi-fiduciary responsibilities to its insured.”


Finally, if the court finds the attorney-client privilege applies, “then the court should next address any claims the insured may have to pierce the attorney-client privilege,” such as the fraud exception.


The Washington Supreme Court established this four-step process to protect two fundamental principles of public policy: that insurance companies have a good faith, quasi-fiduciary duty to their policyholders under Washington law; and that insurance policies, practices, and procedures are highly regulated in Washington and of substantial public interest. Those two principles apply to first-party insurance policies and third-party liability insurance policies alike. Indeed, the principles may have even greater import in the context of third-party liability insurance policies because third-party liability insurers have an enhanced duty of good faith under Washington law.


Following Cedell, insurance companies defending against bad faith claims in Washington can no longer rely on the attorney-client privilege to avoid disclosure of communications with outside counsel related to the investigation, evaluation, negotiation or processing of a policyholder’s insurance claim. As the Washington Supreme Court noted, “[t]o permit a blanket privilege in insurance bad faith cases because of the participation of lawyers hired or employed by insurers would unreasonably obstruct discovery of meritorious claims and conceal unwarranted practices.”


Keywords: Insurance, coverage, litigation, Washington, bad faith, attorney-client privilege

Jay Donovan is with Foster Pepper PLLC, Seattle.


 

May 31, 2013

Court Rules Insurer Must Issue Litigation Hold to Independent Agents


Haskins v. First Am. Title Ins. Co.


In Haskins v. First Am. Title Ins. Co., 2012 U.S. Dist. LEXIS 149947 (D.N.J. Oct. 18, 2012), the U.S. District Court for the District of New Jersey held that an insurance company had a duty to issue a litigation hold to its independent agents, even though the insurer did not have physical control over the documents in question.


The insurer, a title insurance company, issued policies through independent title agents. The plaintiffs in the case filed suit against the insurer alleging that it was involved in a scheme to overcharge customers. In the litigation, the plaintiffs sought copies of a sampling of the insurer’s agents’ closing files to determine if and why customers were overcharged. The insurer did not dispute that the plaintiffs could access the documents, but did dispute that it had a duty to produce the documents. The insurer argued that, because the documents in question were not in its custody or control, it should not have the burden of production. The insurer also disputed that it had a duty to issue a litigation hold to the agents to preserve the documents in question, again on the grounds that the insurer did not have control or custody of the documents.


The court held that “there is control if a party has the legal right or ability to obtain the documents from another source upon demand… It logically follows that a litigating party has control of documents if a contractual obligation requires a non-party to provide requested documents to the litigating party upon demand.” The court further held that “[a]dditionally, control exists if a party has “a right to access the [requested] documents or obtain copies of them.” The court then looked to the agency agreements between the insurer and the agents to determine if the insurer had control over the documents. The agency agreements required the agents to maintain and preserve “all records,” and required the agents to allow the insurer to examine, audit, and copy “all financial information and records.” The court held that this language evidenced that the documents were under the insurer’s control, and therefore that the insurer had the duty to produce the documents.


Having ruled that the insurer had control of the documents, the court focused next on whether the insurer must issue a litigation hold to the agents to ensure preservation of the documents. The court began with the general principle that “[a] duty to preserve documents arises when a party knows or reasonably should know that litigation is foreseeable.” The court, relying on its earlier determination that the insurer did not need to have physical possession of the documents in order to control them, held that the insurer had the duty to issue the litigation hold to its agents. According to the court, “[b]ecause First American's contractual language establishes that it has possession, custody, or control over relevant documents in the physical possession of its independent title agents, First American's litigation hold must include these documents.”


The court further pointed out that at least one of the insurer’s agreements with an agent anticipated the court’s ruling, because it specifically required the agent to comply with any litigation hold issued by the insurer.


Keywords: insurance, coverage, litigation, New Jersey, title insurance, litigation hold


Rahul Karnani is assistant general counsel with the ACE Group, and is a member of the Insurance Coverage Litigation Committee’s  In-House Subcommittee. He provides coverage advice and oversight of coverage litigation for the ACE Group’s North American Claims organization.


The opinions and positions expressed in this article are the author’s own and not those of any ACE company.

 


 

March 27, 2013

Negligence Claims Arising from Policyholder's Intentional Acts Do Not Constitute an Occurrence 


Chiquita Brands Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.


In Chiquita Brands Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., ___ N.E.2d ____, 2013 Ohio App. LEXIS 697 (Ohio Ct. App. Mar. 6, 2013), the Ohio Court of Appeals held that claims based on a policyholder’s intentional conduct do not constitute an occurrence under liability policies, even when they are styled as negligence claims. The appellate court also held that alleged injuries taking place in Colombia did not fall within the policies’ coverage territory.


Several underlying lawsuits were filed in the United States against Chiquita. The lawsuits alleged that Chiquita illegally financed terrorist groups in Colombia between 1989 and 2004, and those groups engaged in torture, kidnapping, murder, and other atrocities. 2013 LEXIS 697, at *2, 10-11.


Chiquita, the policyholder, brought a declaratory judgment and breach of contract action against three of its insurers, who in turn filed a third-party complaint against National Union Fire Insurance Company of Pittsburgh, PA, which had issued occurrence-based liability policies to Chiquita from July 1992 to July 2000. Id. at *2-3. The policies covered bodily injury if the “bodily injury . . . is caused by an occurrence that takes place in the coverage territory.” Id. at *6. Occurrence was defined in the policies as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. The policies defined “coverage territory” as “[t]he United States of America (including its territories and possessions), Puerto Rico and Canada.” Id. at *12.


National Union and Chiquita asserted direct claims against each other regarding National Union’s alleged obligations to defend and indemnify Chiquita. Id. at *3. After the other three insurers settled, Chiquita and National Union were the only remaining parties. The trial court granted partial summary judgment in Chiquita’s favor, holding that National Union had a duty to defend the underlying lawsuits. Id. Chiquita argued, and the trial court agreed, that although the underlying lawsuits made “serious allegations of intentional even malicious conduct . . . each complaint, to some extent makes allegations of negligence.” Id. at *7. Relying on Safeco Insurance Company of America v. White, 913 N.E.2d 426 (Ohio 2009), the trial court held that because the underlying complaints included allegations of negligence, National Union had a duty to defend. Id. The trial court further held that the alleged occurrence took place within the coverage territory because the decision to pay the terrorist groups was made at Chiquita’s corporate headquarters in Ohio, while Chiquita’s “employees in [Colombia] simply implemented that policy with the goal of protecting Chiquita’s employees and property.” Id. at *12. National Union appealed both rulings. Id. at *4.


The Ohio Court of Appeals reversed. The appellate court construed the definition of “occurrence” to mean that “the [National Union] policies cover only accidental occurrences, not intentional acts.” Id. at *6. The appellate court stated that “inherent in a policy’s definition of ‘occurrence’ is the concept of an incident of an accidental, as opposed to an intentional, nature.” Id. at 7. The court also noted that “Ohio public policy generally prohibits obtaining insurance to cover damages caused by intentional torts.” Id. at 6.


The appellate court distinguished Safeco on the ground that the underlying allegations in that case were based on negligent acts of the policyholders that arose from the intentional acts of another policyholder. The appellate court stated that the Ohio Supreme Court in Safeco recognized the difference between the claims arising from the intentional acts by one policyholder, which were excluded from coverage, and the negligent supervision and negligent entrustment claims against other policyholders, which were covered. Id. at *9. By contrast, “[t]he negligence claims against Chiquita [arose] from its own intentional acts, not the acts of another insured party.” Id. at 9-10 (emphasis added).


The appellate court also explained that the trial court failed to examine the nature of the underlying lawsuits, holding that “‘[t]he mere insinuation of negligence in a civil suit complaint cannot transform what are essentially intentional torts into something ‘accidental’ that might be covered by insurance.’” Id. at 10 (citations omitted). The appellate court reasoned that the underlying complaints “alleged that Chiquita was both directly and vicariously liable for the deaths and injuries of numerous people through murder, torture, kidnapping and other atrocities,” and that “Chiquita aided and abetted, conspired with, and participated in a joint criminal enterprise with the terrorists.” Id. at 10-11. The appellate court concluded that “[t]he complaints did not allege conduct that could be reasonably construed as negligent or accidental,” and thus did not allege an occurrence under the policies. Id. at 11.


The appellate court also reversed the trial court’s holding that the injuries giving rise to the claims against Chiquita took place in the National Union policies’ coverage territory. Id. at *11-12. The appellate court, finding no Ohio law on point, followed those jurisdictions that have adopted the “place of injury” test for determining where an occurrence took place. Id. at *12-13. The appellate court concluded that, while the decision to pay the terrorists took place in the United States, “the events that inflicted the harm alleged in the underlying complaints took place in [Colombia].” Id. at *16. The appellate court held that those events did not take place within the policies’ coverage territory. Id.


This case confirms that a policyholder’s intentional conduct is not an occurrence, even though the underlying claims are characterized as negligence claims. Therefore, in order to determine if a claim alleges an occurrence, it is necessary to look at the factual allegations in the underlying complaint, not the legal theories used. The case establishes that the location of an occurrence is where the injury took place, not where a decision eventually resulting in the occurrence took place.


Keywords: insurance, coverage, litigation, Ohio, commercial general liability, CGL, occurrence, intentional conduct, coverage territory


Ruth Kochenderfer and Christopher Dougherty are with Steptoe & Johnson LLP, Washington, DC.

 


 

 

March 22, 2013

Illinois Appellate Court Finds All Sums Allocation in Asbestos-Bodily Injury Claim

 

John Crane, Inc. v. Admiral Ins. Co., 2013 IL App. (1st) 093240 (2013)


On March 5, 2013, the Illinois Appellate Court reaffirmed a landmark, 25-year-old Illinois Supreme Court decision in Zurich v. Raymark, 118 Ill.2d 23 (Ill. 1987), an insurance coverage case centered on asbestos bodily-injury claims. The appellate case, John Crane, Inc. v. Admiral Ins. Co., 2013 IL App. (1st) 093240 (2013), addressed issues of exhaustion, allocation, and trigger.


In his appeal, Crane raised three key issues:


1. whether the parties could use the agreement concerning coverage (ACC) with Kemper to determine exhaustion of primary policies;


2. whether excess carriers’ pro rata allocation of payment applies, rather than “all sums” allocation; and


3. whether Zurich v. Raymark requires Crane to prove all three trigger dates to exhaust primary policies.


Several CNA insurance companies also filed a cross-appeal, which alleged that the trial court erred in determining that mere exposure to asbestos constitutes bodily injury under Zurich v. Raymark and failed to adopt an equitable continuous trigger.


As to the first issue raised by Crane, the appellate court affirmed the trial court in finding that Crane could make use of the ACC in demonstrating exhaustion, based upon horizontal exhaustion. It further found that Crane was responsible for proving exhaustion of the limits as provided in the original primary policies, not the amounts as were later amended by the ACC. Additionally, the appellate court rejected the insurers’ argument that the ACC was entered into in bad faith in an attempt to prematurely exhaust the primary policies to prejudice the excess or umbrella carriers.


However, the court did find that the excess carriers have standing to properly object to the ACC. The appellate court required Crane to show (upon remand) exhaustion of all triggered post-1986 primary policies before the excess and umbrella carriers would be required to contribute, citing Kajima Construction Services, Inc. v. St. Paul Fire & Marine Ins. Co., 227 Ill.2d 102 (Ill. 2007) (Kajima II). The court held: “We affirm the trial court’s holding that the horizontal doctrine requires Crane to prove that all of Kemper’s primary policy limits, as written before the parties entered into the ACC, were exhausted before the umbrella or excess carriers would be required to contribute to any settlement or judgment.” John Crane, ¶42.


For Crane’s second issue, the appellate court reversed the trial court’s use of a pro rata time-on-the-risk allocation method in determining the amount owed by the excess insurers to Crane as damages, upholding Zurich v. Raymark’s determination that all triggered policies are jointly and severally liable for all sums to the extent that the carrier provided policies for the period at issue.


For the third issue, the appellate court reversed the trial court’s requirement that Crane need prove all three triggers (exposure, sickness and disease) and found that Crane need only show one of these three triggers, also pursuant to Zurich v. Raymark.


On the cross-appeal, the court rejected both of CNA’s appealed issues and affirmed the trial court’s determinations that:


1. Under Zurich v. Raymark bodily injury occurs at the time of exposure to asbestos (and not with the first mutation that eventually results in cancer as argued by CNA) and that “an insurer that was on the risk during the time the claimant was exposed to asbestos must provide coverage.” Id. at ¶64 (quoting Zurich v. Raymark, 118 Ill.2d 23, 47 (Ill. 1987));and


2. Rejecting an equitable continuous trigger between exposure and diagnosis or death to prove exhaustion.


The appellate court’s opinion is still subject to potential further appeal.


Keywords:  insurance, coverage, litigation, Illinois, asbestos, bodily injury, exhaustion, horizontal exhaustion, allocation, trigger


Angela R. Elbert is with Neal Gerber Eisenberg, Chicago.

 


 

March 11, 2013

Proximate Cause Theory Applied to Determine Number of Occurrences

 

Mitsui Sumitomo Ins. Co. v. Duke Univ. Health System, Inc., 2013 U.S. App. LEXIS 3039 (4th Cir. Feb. 11, 2013) (unpublished)


Mitsui Sumitomo filed suit seeking a declaratory judgment that it owed no further obligation to its insured, Automatic Elevator Company, because the carrier had already paid the per occurrence limit under the applicable policy and there was only one occurrence at issue. Duke University Health System, Inc., which had sued Automatic Elevator, argued that the aggregate limit of Automatic Elevator’s policy applied because there was more than one occurrence at issue. The district court agreed with the carrier, and the Fourth Circuit Court of Appeals affirmed.


The coverage issue arose when Duke sued Automatic Elevator, which Duke had hired to renovate Duke’s elevators, for storing elevator hydraulic fluid in barrels that bore labels indicating that they stored surgical detergents. The barrels were mistakenly used to wash surgical instruments at two different hospitals in November and December 2004, such that 3,650 surgical patients may have come into contact with tainted surgical instruments. Approximately 150 patients asserted claims against Duke and Automatic Elevator, and after most of the claims were settled, Duke filed suit against Automatic Elevator.


The applicable policy issued by Mitsui Sumitomo to Automatic Elevator provided a $1 million per occurrence limit. Mitsui Sumitomo argued that it had already satisfied its obligation when it paid $1 million to settle the claims against Automatic Elevator. Further, Mitsui Sumitomo contended that Automatic Elevator’s negligence in storing the hydraulic fluid was a single occurrence under the policy. The policy defined “occurrence” as “an accident, including the continuous repeated exposure to substantially the same harmful condition,” but the policy did not define “accident.” Duke argued that the matter involved multiple occurrences, such as each surgery or each use of hydraulic fluid to wash surgical instruments.


The Fourth Circuit agreed with Mitsui Sumitomo, finding that North Carolina courts have adopted a cause test to determine how many occurrences an event encompassed—i.e., the number of occurrences “is determined by the cause or causes of the resulting injury.” Specifically, the court believed that North Carolina law would apply the proximate cause theory, under which “courts consider an event to constitute one occurrence when ‘there was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage’” (quoting Michael Murray, Note, The Law of Describing Accidents: A New Proposal for Determining the Number of Occurrences in Insurance, 118 Yale L.J. 1484, 1499 (2009) (quoting Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 61 (3d Cir. 1982)). In this case, the storage of the hydraulic fluids was the single proximate cause of injury. Thus, there was only one occurrence.


Duke argued that the court should instead apply the liability event theory, where courts “look to the immediate event or events that give rise to liability to determine the number of occurrences.” Among other reasons, the court rejected Duke’s position because determining the number of occurrences based on the number of surgeries or instances of using hydraulic fluid to wash surgical instruments would turn the focus away from the alleged negligent act of the insured to Duke’s actions.


Mitsui Sumitomo provides guidance on the position North Carolina courts likely will take when determining the number of occurrences under an insurance policy. Under the proximate cause theory, North Carolina law focuses on “the negligent act, or continuum of negligent acts, on the part of the insured [that] gave rise to liability.” If only one such negligent act of the insured is at issue, only one occurrence likely will be found, absent specific policy language to the contrary.


Keywords: insurance, coverage, litigation, North Carolina, occurrence, commercial general liability (CGL)


John Jo, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, Raleigh, North Carolina

 


 

February 27, 2013

The Case of the Vanishing Self-Insured Retention

 

Peloquin v. Haven Health Center, No. 2011-130 (R.I. January 14, 2013)


In recent years, policyholders have increasingly structured their insurance programs so that the “working layer” of coverage—the layer in which cases are defended and most claims are resolved—is self-insured. SIRs have obvious advantages for policyholders: greater control over risk management, reduced costs, and tax deductibility being the three most obvious. SIRs can be problematic for insurance companies, however, as where the insolvency of the insured prevents it from carrying out its duties under the policy.


The underwriting of excess policies subject to self-insured retentions also requires a detailed understanding of state laws and regulations as many states only allow self-insurance if the insured is of a certain size, has adequate financial assets or otherwise meets stated criteria.  If those criteria are not met, the excess carrier may still have valid claims and arguments relative to the policyholder but may be vulnerable to direct claims or “reach and apply” actions by third-party claimants.


In such circumstances, as Columbia Casualty Company recently learned to its dismay in Peloquin v. Haven Health Center, No. 2011-130, 2013 R.I. LEXIS 9 (R.I. January 14, 2013), promises on paper may also prove illusory where underwriting fails to take into account the vagaries of state insurance regulation.  


In June 2006, Pearl E. Archambault died while in the care of Haven Health Center of Greenville, LLC (Haven Health) after a nurse mistakenly administered a lethal overdose of morphine. At the time of her death, Haven Health was insured by Columbia Casualty under a professional liability policy with limits of $1 million per claim and $3 million in the aggregate. However, the policy also contained an SIR endorsement requiring Haven Health to pay the first $2 million of “all ‘damages’ and all ‘claim expenses’ resulting from each claim under the Professional Liability Coverage Form. The policy stated that Columbia Casualty’s obligations were excess of this SIR regardless of the insured’s “financial ability or inability to pay the Self-Insured Retention and in no event are we required to make any payments within the Self-Insured Retention.”


In 2007-2008, Haven Health and its operators filed for bankruptcy and were dismissed from the tort action. Thereafter, the estate amended its complaint to add Columbia Casualty pursuant to G.L. 1956 § 27-7-2.4, which permits an injured party to proceed against an insurer when the insured has filed for bankruptcy.  While it is unclear from the record why Haven Health and its affiliates remained subject to the court’s jurisdiction after their respective bankruptcies, a default judgment was entered against them for $364,422, which the plaintiff sought to enforce against Columbia Casualty.  The trial judge ruled, however, that Columbia Casualty owed nothing, as the sum in question was far less than the policy’s $2 million SIR.


G.L. 1956 § 42-14.1-2(a) requires nursing facilities to maintain professional liability insurance at a minimum level of $100,000 per claim, $300,000 in the aggregate.  Plaintiff argued on appeal that the SIR was void and unenforceable as being against public policy and that Columbia Casualty must therefore pay $100,000 in damages plus prejudgment interest amounting to $105,060.21, and post-judgment interest amounting to $32,947.75.


The plaintiff’s argument hinged on the interplay of the statutory coverage requirements imposed by § 42-14.1-2(a) and a separate provision of the statute that authorizes the State Department of Business Regulation (DBR) to “establish rules and regulations allowing persons or entities with sufficient financial resources to be self-insurers.” As the DBR had not, to date, promulgated any such regulations, the plaintiff argued that Haven Health’s self-insurance did not meet the minimum coverage levels required by § 42-14.1-2(a).


In reversing the trial court and finding coverage for the plaintiff, the Rhode Island Supreme Court focused on the language of the statute. Rather than declaring that self-insurance is void as against the public policy of Rhode Island, the Supreme Court instead interpreted §42-14.1-2(a) as only allowing self-insurance to the extent that it is permitted by regulations issued by the Department of Business Regulation. As the DBR has not promulgated any such regulations to date, the court declined to give effect to the SIR provisions in the Columbia Casualty policy. 

The court also noted that self-insurance must reflect some of the actuarial and risk transfer hallmarks of actual insurance. It found that “the record is devoid of any indication that any effort was undertaken to ascertain Haven Health’s risk of loss and financial ability to meet that potential loss.”  In particular, the court was troubled by the fact that Haven Health filed for bankruptcy protection less than a year and a half after the policy was issued. In the court’s mind, this called into question “whether at the time the Columbia policy became effective, Haven Health was in a financial position to adequately self-insure against the first $2 million of loss pursuant to the SIR Endorsement.”


The Peloquin decision is clearly unique in some respects. It would not have occurred but for a statutory “direct action” remedy that isn’t allowed in most states. Nor would it have occurred had there not been a statutory requirement of coverage. 


The outcome of the case was also clearly influenced by the fact that claim involved the death of an elderly, vulnerable individual through the gross negligence of the employee of a nursing home operator of dubious financial means.  While it was unfair of the court to pin the blame for this result on Columbia Casualty, the court may well have perceived the company as an enabler in a scheme that failed to protect vulnerable members of the public.


The result is also puzzling in some respects. Why is it that a stay had not entered to protect the bankrupt insureds? Why did Columbia Casualty not recognize its peril and appoint counsel to avoid a default? 


A final unanswered question is what remedies Columbia Casualty had (or may have now) to recover these payments from its insured based on a breach of its promised obligations?  Courts around the country are divided with respect to whether policy language that is unenforceable because it conflicts with statutory and regulatory dictates may nonetheless be binding as between the insurer and the insured.


Keywords: insurance, coverage, litigation, Rhode Island, self-insured retention, SIR, professional liability insurance, public policy


Michael F. Aylward is with Morrison Mahoney LLP, Boston.


 

February 27, 2013

Voluntary Payment Clause in a Legal Malpractice Policy Unenforceable

 

Illinois State Bar Ass'n Mut. Ins. Co. v. Frank M. Greenfield & Assoc., P.C., 980 N.E.2d 1120 (Ill. 2012)


In Illinois State Bar Ass’n Mut. Ins. Co. v. Frank M. Greenfield & Assoc., P.C., 980 N.E.2d 1120 (Ill. 2012), The appellate court evaluated whether an admission of error by a policyholder without his insurance company’s approval gave the company the right to deny the duty to defend an attorney and his law firm in a legal malpractice litigation. The appellate court affirmed, on public policy grounds, that the voluntary payment clause did not allow the insurer to deny its duty to defend.


Greenfield had a professional liability policy through the Illinois State Bar Association Mutual Insurance Company (ISBA Mutual). Greenfield admitted to omitting a provision in his client’s will that affected the distribution of funds from a trust, resulting in several beneficiaries receiving less than they would have otherwise received.


Without consulting with his carrier, Greenfield sent a letter to all of the beneficiaries of the trust, stating, in pertinent part: “The 2008 Will contains what is referred to as a ‘scrivener’s error’. … I drafted the 2008 Will and inadvertently omitted a provision that had been contained in the 2007 Will....” The letter then set out several possible courses of action to carry out the intent of his client, including arbitration or a judicial determination to resolve the scrivener’s error.


Thereafter, those beneficiaries filed suit against Greenfield and his firm for legal malpractice. Greenfield tendered the defense of the suit to ISBA Mutual. The tender was accepted, subject to a reservation of rights.


In 2010, ISBA Mutual filed a declaratory judgment action, asserting that, under the voluntary payments provision of its policy, it had no duty to defend Greenfield. The “Voluntary Payments” provision of the policy provided that the Insured “would not admit any liability . . . without the Company’s prior written consent.” ISBA Mutual asserted that the 2008 letter admitted liability and was sent without its knowledge and/or consent.


On summary judgment, Greenfield argued that he had an ethical duty to inform the beneficiaries of the error, and that he did not admit liability, but only informed the beneficiaries of what happened, and that the letter did not prejudice ISBA Mutual because the trustee would have informed the beneficiaries, if Greenfield had not done so.


ISBA Mutual, in its cross-motion for summary judgment, asserted that Greenfield admitted liability for malpractice, in violation of the insurance contract; that the policy did not foreclose Greenfield from complying with his ethical obligations; and, that Greenfield’s letter went further than merely relating facts. The insurer argued that it was prejudiced because Greenfield interfered with ISBA Mutual’s contractual right of exclusive control over the claim and noted that Greenfield waited almost a year before providing notice of the claim.  


The trial court found that Greenfield did not admit to liability in the letter and that, even if the letter did violate the policy, ISBA Mutual was not prejudiced. The appellate court affirmed on different grounds, relying instead on public policy grounds.


On appeal, the court considered the enforceability of the voluntary payment provision of the policy. Neither party disputed that an attorney has an ethical duty to disclose a mistake. The court noted that there are no modern Illinois cases addressing provisions that prevent an attorney from admitting liability without the written consent of the insurance carrier. Referencing older Illinois law as well as cases in other jurisdictions, the court noted that admitting the truth of facts from which liability could flow was distinguishable from assuming liability.


However, this matter was complicated by the attorney’s ethical obligations to his client. The court was troubled by the proposition that an insurance company was asserting a right to advise an attorney regarding his ethical obligations to his clients, especially where the insurance company might advise the client to disclose less information than the attorney would otherwise choose to disclose. The court held that it is the attorney’s responsibility to comply with the ethical rules “as he understands them.” Provisions in an insurance policy such as the one at issue were, therefore, against public policy because they may operate to limit an attorney’s disclosures to his clients. 


This case highlights that, in cases where coverage determinations involve the interpretation of policy provisions that may affect the ethical obligations of attorneys arising from the attorney-client relationship, courts may interpret those policy provisions differently and in favor of the attorney’s discharge of his or her ethical obligations.


Keywords: insurance, coverage, litigation, Illinois, malpractice, voluntary payment, admit liability, ethics, public policy


Elizabeth Treubert Simon is with Vorys, Sater Seymour and Pease LLP, Washington, D.C.


 

January 9, 2013

Broker Owed No Duty to Explain Policy Terms to Insured

 

Rayfield Props., LLC v. Bus. Insurers of the Carolinas, Inc., 2012 N.C. App. LEXIS 1429 (N.C. App. Dec. 18, 2012)


Rayfield sued its insurance broker, Business Insurers, after Rayfield’s commercial property insurer denied Rayfield’s claim of loss under an exclusion. Rayfield asserted claims of negligence and breach of contract against Business Insurers for its alleged failure to advise Rayfield of the terms of the policy or to procure insurance coverage that applied. The North Carolina Court of Appeals affirmed summary judgment against Rayfield because, among other things, Rayfield did not sufficiently plead a duty owed by Business Insurers.


The real property owned by Rayfield was vacant at all relevant times. Rayfield discovered that its building had been vandalized and property had been stolen and damaged. Although the insurance policy provided coverage regardless of vacancy for certain events, the insurer denied Rayfield’s claim because the policy expressly excluded loss resulting from theft or vandalism if the insured property had been vacant for more than 60 consecutive days prior to the loss. Rayfield was unaware of the exclusion as it had not read the policy. Rayfield thereafter filed suit against Business Insurers for professional negligence and breach of contract, but summary judgment was awarded to Business Insurers.


As an initial matter, the court noted that Rayfield had alleged a claim for professional negligence but failed to present any evidence of a standard of care by expert testimony. Construing Rayfield’s claim as one of common negligence, the court noted that under established law, “if an insurance agent or broker undertakes to procure for another insurance against a designated risk, the law imposes upon him the duty to use reasonable skill, care and diligence to procure such insurance and holds him liable to the proposed insured for loss proximately caused by his negligent failure to do so.” On the other hand, a broker did not have a duty to explain the meaning and effect of all the provisions in the policy, though such a duty may arise if specific coverage is requested. Moreover, absent special circumstances that create a duty to inform, an insured’s failure to read the policy may bar recovery.


The court held that Rayfield had not sufficiently pled a duty owed by Business Insurers. Rayfield presented no evidence that it requested vacancy coverage specifically for theft or vandalism such that Business Insurers was under a duty to inform Rayfield of the exact provisions of the policy. Rayfield’s failure to read the policy also constituted contributory negligence, a complete bar to a negligence claim under North Carolina law, and Rayfield did not show a fiduciary relationship with Business Insurers to negate its failure to read the policy. A broker has “a limited fiduciary duty to the insured…to correctly name the insured in the policy and correctly advise the insured of the nature and extent of his coverage under the policy.” An implied duty to advise may only be shown, however, if the broker received consideration beyond the payment of premium, the insured made a clear request for advice, or the course of dealings over an extended period of time put the broker on reasonable notice that the insured was seeking and relying on the broker’s advice. Given that the first two criteria did not apply, Rayfield argued that its relationship with the broker since the 1990s established a fiduciary relationship. The court held that the length of the relationship was a factor but was not sufficient by itself to create a fiduciary duty.


The court also rejected the breach of contract claim. Rayfield had not shown evidence of any contractual duty owed by the broker to procure coverage for theft and vandalism even if the property were vacant or to explain all of the policy provisions.


Rayfield Properties highlights the challenges an insured faces in asserting claims against its insurance broker when its policy does not provide coverage for certain losses. Absent a request for a specific type of coverage, a court may find that a broker owes no duty to explain policy terms to the insured. Additionally, an insured’s failure to read the policy may provide a defense to a negligence claim for the broker’s alleged failure to advise the insured regarding policy terms unless the insured can show that an implied duty to advise was created.


Keywords: insurance, coverage, litigation, North Carolina, insurance broker, agents and brokers, fiduciary duty


John Jo, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, Raleigh, North Carolina

 

January 9, 2013

Broker Owed No Duty to Explain Policy Terms to Insured

 

Rayfield Props., LLC v. Bus. Insurers of the Carolinas, Inc., 2012 N.C. App. LEXIS 1429 (N.C. App. Dec. 18, 2012)


Rayfield sued its insurance broker, Business Insurers, after Rayfield’s commercial property insurer denied Rayfield’s claim of loss under an exclusion. Rayfield asserted claims of negligence and breach of contract against Business Insurers for its alleged failure to advise Rayfield of the terms of the policy or to procure insurance coverage that applied. The North Carolina Court of Appeals affirmed summary judgment against Rayfield because, among other things, Rayfield did not sufficiently plead a duty owed by Business Insurers.


The real property owned by Rayfield was vacant at all relevant times. Rayfield discovered that its building had been vandalized and property had been stolen and damaged. Although the insurance policy provided coverage regardless of vacancy for certain events, the insurer denied Rayfield’s claim because the policy expressly excluded loss resulting from theft or vandalism if the insured property had been vacant for more than 60 consecutive days prior to the loss. Rayfield was unaware of the exclusion as it had not read the policy. Rayfield thereafter filed suit against Business Insurers for professional negligence and breach of contract, but summary judgment was awarded to Business Insurers.


As an initial matter, the court noted that Rayfield had alleged a claim for professional negligence but failed to present any evidence of a standard of care by expert testimony. Construing Rayfield’s claim as one of common negligence, the court noted that under established law, “if an insurance agent or broker undertakes to procure for another insurance against a designated risk, the law imposes upon him the duty to use reasonable skill, care and diligence to procure such insurance and holds him liable to the proposed insured for loss proximately caused by his negligent failure to do so.” On the other hand, a broker did not have a duty to explain the meaning and effect of all the provisions in the policy, though such a duty may arise if specific coverage is requested. Moreover, absent special circumstances that create a duty to inform, an insured’s failure to read the policy may bar recovery.


The court held that Rayfield had not sufficiently pled a duty owed by Business Insurers. Rayfield presented no evidence that it requested vacancy coverage specifically for theft or vandalism such that Business Insurers was under a duty to inform Rayfield of the exact provisions of the policy. Rayfield’s failure to read the policy also constituted contributory negligence, a complete bar to a negligence claim under North Carolina law, and Rayfield did not show a fiduciary relationship with Business Insurers to negate its failure to read the policy. A broker has “a limited fiduciary duty to the insured…to correctly name the insured in the policy and correctly advise the insured of the nature and extent of his coverage under the policy.” An implied duty to advise may only be shown, however, if the broker received consideration beyond the payment of premium, the insured made a clear request for advice, or the course of dealings over an extended period of time put the broker on reasonable notice that the insured was seeking and relying on the broker’s advice. Given that the first two criteria did not apply, Rayfield argued that its relationship with the broker since the 1990s established a fiduciary relationship. The court held that the length of the relationship was a factor but was not sufficient by itself to create a fiduciary duty.


The court also rejected the breach of contract claim. Rayfield had not shown evidence of any contractual duty owed by the broker to procure coverage for theft and vandalism even if the property were vacant or to explain all of the policy provisions.


Rayfield Properties highlights the challenges an insured faces in asserting claims against its insurance broker when its policy does not provide coverage for certain losses. Absent a request for a specific type of coverage, a court may find that a broker owes no duty to explain policy terms to the insured. Additionally, an insured’s failure to read the policy may provide a defense to a negligence claim for the broker’s alleged failure to advise the insured regarding policy terms unless the insured can show that an implied duty to advise was created.


Keywords: insurance, coverage, litigation, North Carolina, insurance broker, agents and brokers, fiduciary duty


John Jo, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, Raleigh, North Carolina

 

December 3, 2012

EEOC Lawsuit Is a Claim Under an Employment Practices Liability Policy

 

Cracker Barrel Old Country Store, Inc. v. Cincinnati Insurance Co. No. 11-6306, 2012 U.S. App. LEXIS 19161 (6th Cir. Sept. 10, 2012)


The Sixth Circuit recently held that a lawsuit filed by the Equal Employment Opportunity Commission (EEOC) constitutes a claim within the meaning of the Employment Practices Liability policy at issue (the EPLI Policy) in Cracker Barrel Old Country Store, Inc. v. Cincinnati Insurance Co., No. 11-6306, 2012 U.S. App. LEXIS 19161 (6th Cir. Sept. 10, 2012) (applying Tennessee law). Although the court concluded that the district court had erred in finding that the EPLI policy’s “claim” definition unambiguously excluded actions brought by the EEOC, it nevertheless affirmed the district court’s grant of summary judgment in favor of the carrier on other grounds.


In Cracker Barrel, 10 Cracker Barrel employees had filed charges of discrimination with the EEOC, and the EEOC thus subsequently filed a class action lawsuit against Cracker Barrel alleging gender and race discrimination (the EEOC Lawsuit). Cracker Barrel sought coverage for the costs related to the EEOC Lawsuit. The carrier denied coverage, and, in the ensuing coverage action, moved for summary judgment, contending that the EEOC lawsuit was not a claim under the EPLI Policy. The EPLI Policy defined “claim” as:


[A] civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective “employee(s)” of the “insured entity” against any “insured” for . . . [v]iolation of any federal, state or local law that concerns employment discrimination including sexual harassment . . . .


The Sixth Circuit rejected the carrier’s assertion and the district court’s conclusion that EPLI policy’s claim definition unambiguously excluded actions brought by the EEOC. The district court had held that the EEOC Lawsuit was not a claim on the ground that it had been brought by the EEOC, as opposed to by an employee. The district court had reasoned that “only a ‘complaint’ can commence a civil action while a ‘charge’ begins an administrative proceeding.”


Rejecting the district court’s conclusion that the definition of “claim” was unambiguous, the Sixth Circuit also deemed reasonable Cracker Barrel’s position that the EEOC Lawsuit is a claim because that definition “indicates only that a proceeding must be ‘commenced’ by a ‘charge’ brought by an ‘employee,’ which is what happened.” It further explained that because Title VII’s statutory scheme requires exhaustion of administrative remedies as a precondition to filing a lawsuit, “exactly when a proceeding has ‘commenced’ is ambiguous.” On the one hand, a proceeding may be deemed to have commenced when an employee first files a charge with the EEOC, which ultimately culminates in a civil complaint filed by the EEOC. On the other hand, a proceeding may be deemed to have commenced when the EEOC filed suit. In other words, under Title VII’s statutory scheme, a civil proceeding “can in fact be ‘commenced’ by a charge rather than a complaint, depending on one’s interpretation of the word ‘commence.’” Finding that both Cracker Barrel and the carrier had advanced reasonable arguments, the Sixth Circuit held that the “claim” definition is ambiguous.


The Sixth Circuit further reasoned that Cracker Barrel’s interpretation of “claim” was reasonable in light of its review of the EPLI policy as a whole. For example, the policy’s limits of insurance provision stated the maximum amount the carrier would pay “regardless of the number of . . . Persons or organizations making ‘claims’ or bringing suits,” which demonstrated that the policy “contemplated claims made by organizations” such as the EEOC. The EPLI policy also “contemplates that multiple ‘claims’ arising from the same ‘wrongful act’ will be considered a single ‘claim,’ which effectively treated as a single “claim” a charge that an employee files with the EEOC that ultimately “turns into a civil suit filed by the EEOC based on the same ‘wrongful act.’” The court thus held that the “claim” definition is “susceptible to more than one reasonable interpretation,” and accordingly construed it in Cracker Barrel’s favor.


Despite finding that the EEOC Lawsuit is a claim, the Sixth Circuit affirmed the district court’s grant of summary judgment in favor of the carrier on the ground that the “claim” was not first made during the policy period, as the EPLI policy required. The court held that that “the EEOC suit ‘commenced’ when the first charge of class-wide discrimination that subsequently led to the EEOC suit was filed by an employee,” which predated the inception of the EPLI policy. It reasoned that this was the “natural result of construing the definition of ‘claim’ in favor of Cracker Barrel” and finding that a “claim” is a “proceeding commenced by the service of a complaint or charge by an employee.” The court thus held that Cracker Barrel’s claim was not covered. The court noted that the carrier “may well be liable for” one of the underlying EEOC charges that in fact was made during the policy period because that charge “would constitute a claim under the Policy.”


This opinion underscores the importance of not only carefully reviewing policy terms to assess what types of events and proceedings arguably qualify as a claim, but also understanding other effects of such a finding. While a broad definition or interpretation of the term “claim” generally is favorable from a scope of coverage standpoint, consideration is also warranted of how that definition or interpretation of “claim” affects the potential applicability of other terms and conditions typically found in EPLI policies, such as “claims made and reported” clauses, which typically serve as conditions to coverage. In other words, the determination of what constitutes a claim necessarily effects the determination of whether the claim was made during the policy period and whether the policyholder’s notice of the claim was timely. As was the case in Cracker Barrel, the interpretation of what constitutes a claim may lead a court to both giveth and also taketh away coverage.


Keywords: insurance, coverage, litigation, Sixth Circuit, Tennessee, employment practices liability insurance, EPLI, discrimination, Equal Employment Opportunity Commission, EEOC


Erica J. Dominitz, Kilpatrick Townsend & Stockton LLP, Washington, DC.

 

November 21, 2012

Claims of Defective Construction or Workmanship Do Not Constitute an Occurrence Under a CGL Policy

 

Westfield Insurance Company v. Custom Agri Systems, Inc., 2012-Ohio-4712


The issue of whether claims for property damage arising out of defective construction or workmanship constitute an occurrence under a CGL policy under Ohio law was recently settled by the Ohio Supreme Court in Westfield Insurance Company v. Custom Agri Systems, Inc., 2012-Ohio-4712, 2012 Ohio LEXIS 2485 (Oct. 16, 2012). The court, answering a certified question from the United States Court of Appeals for the Sixth Circuit, held that such claims do not constitute an occurrence under a CGL policy.


Westfield arose out of the construction of a steel grain bin in a feed-manufacturing plant. A contractor sued one of its subcontractors, claiming the subcontractor defectively constructed the bin. The subcontractor turned to its CGL insurer to defend and indemnify it in the litigation. The insurer subsequently intervened, claiming it had no duty to defend or indemnify the subcontractor because defective construction or workmanship does not constitute an occurrence under the policy at issue. The Sixth Circuit determined there was no controlling Ohio precedent and certified the question to the Ohio Supreme Court.


On certification, the Ohio Supreme Court concluded that defective construction or workmanship does not constitute an “occurrence” under a CGL policy. The court noted that CGL policies are not intended to insure business risks. In particular, the term “occurrence” is defined by the policy as an “accident,” which in turn has been construed by Ohio courts as meaning “unexpected, as well as unintended.” Inherent in the definition of accident is the concept of fortuity. Claims for faulty workmanship, however, “are not fortuitous in the context of a CGL policy.”


The court approvingly cited an Ohio appellate decision noting that the coverage analysis turns on the damages sought. If the plaintiff seeks consequential damages arising from the insured’s work that are unanticipated by the insured, there is generally coverage. If, however, the damages are for the insured’s work itself, there is no coverage. Here, the subcontractor was seeking coverage for damage to the subcontractor’s work. Accordingly, no coverage was provided under the policy. The court noted that contractors are not without a remedy from defective construction or workmanship; they can require the subcontractors to provide a performance bond.


In light of the Ohio Supreme Court’s decision, it is clear that it cannot be assumed that a contractor or a subcontractor will have CGL coverage in the event of a defective construction or workmanship claim. Thus, individuals and companies will want to take steps to protect themselves by researching the performance histories and financial condition of prospective contractors or subcontractors, and, if appropriate, consider requiring a personal guaranty or performance bond.


Keywords: insurance, coverage, litigation, Ohio, commercial general liability, CGL, occurrence, defective construction, defective workmanship


Peter J. Georgiton, Dinsmore & Shohl LLP, Cincinnati



 

 

November 9, 2012

Coverage for Computer Hacking Under Commercial Crime Policies

 

Retail Ventures, Inc. v. National Union Fire Ins. Co.,(6th Cir. Aug. 23, 2012)


The Sixth Circuit’s recent decision in Retail Ventures, Inc. v. National Union Fire Ins. Co., 691 F.3d 821, 2012 U.S. App. LEXIS 17850 (6th Cir. Aug. 23, 2012), underscores the need to review policy language in light of existing case law. While the type of losses at issue in that case are relatively new, the principles upon which the Sixth Circuit relied have long been established. Sometime in early February 2005, hackers used the local wireless network at one DSW Shoe store to access the DSW’s “main computer system and download credit card and checking account information pertaining to more than 1.4 million customers of 108 stores.” Id. at *2-3. The policyholder faced losses from the resultant FTC inquiry, charge backs, reissuance of credit cards, precautionary customer credit monitoring, and VISA/MasterCard fines. Id. at *4.


The appeal itself raised two issues of policy interpretation. The first was the meaning of the term “directly.” DSW’s commercial crime policy covered, among other things, “Loss which the Insured shall sustain resulting directly from … theft of any Insured property by Computer Fraud.” The insurer argued that the term “directly” limited coverage to those losses resulting directly from the incident, i.e., the insured’s losses, not its “vicarious liability” to others for their losses. Id. at *15. The second issue raised by the appeal was the effect of an exclusion for “loss of proprietary information, Trade Secrets, Confidential Processing Methods, or other confidential information of any kind.” The insurer argued that because credit card information was “confidential information of any kind,” the loss did not fall within the scope of the policy. The Sixth Circuit rejected both arguments.


Interpreting the term “directly,” the Sixth Circuit reasoned that both state supreme courts and federal circuit courts sitting in diversity have repeatedly held that “direct losses” are those losses proximately caused by the relevant malfeasance. Id. at *21-22 (citing Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378, 385-86 (N.J. 2004) (N.J. law); Frontline Processing Corp. v. Am. Econ. Ins. Co., 2006 MT 344, 335 Mont. 192, 149 P.3d 906, 909-11 (Mont. 2006); Scirex Corp. v. Fed. Ins. Co., 313 F.3d 841, 850 (3d Cir. 2002) (Pa. law); FDIC v. Nat’l Union Fire Ins. Co. of Pittsburgh, 205 F.3d 66, 76 (2d Cir. 2000) (N.J. law); Resolution Trust Corp. v. Fid. & Deposit Co. of Md., 205 F.3d 615, 655 (3d Cir. 2000) (N.J. law); Jefferson Bank v. Progressive Cas. Ins. Co., 965 F.2d 1274, 1281-82 (3d Cir. 1992) (Pa. law)).


The court went on to note that Ohio courts had likewise “applied a proximate cause standard to determine whether there was a ‘direct loss’ under other kinds of first party coverage.” Id. at *25 (citing Amstutz Hatcheries of Celina, Inc. v. Grain Dealers Mut. Ins. Co., No. 4-77-4, 1978 Ohio App. LEXIS 9593, 1978 WL 215799, at *1-2 (Ohio App. Mar. 15, 1978); Yunker v. Republic-Franklin Ins. Co., 2 Ohio App. 3d 339, 2 Ohio B. 384, 442 N.E.2d 108, 113-14 (Ohio App. 1982)). The Sixth Circuit concluded that “the Ohio Supreme Court would apply a proximate cause standard to determine whether plaintiffs sustained loss ‘resulting directly from’ the ‘theft of Insured property by Computer Fraud.’” Id. at *25. Such losses could (and did) include the insured’s liability to others proximately caused by the computerized theft of the credit card information.


The Sixth Circuit also rejected the insurer’s attempt to invoke an exclusion precluding coverage for loss of confidential information. The court relied on the doctrine of ejusdem generis, that “the general term must take its meaning from the specific terms with which it appears.” Id. at *30. (The Latin expression means “of the same genera” or “of the same kind.”) When a contract lists a series of terms, any general catchall phrase included in the list should be interpreted as limited to only members of the same category as the specific items listed. For example, in the phrase “the Orioles, the Red Sox, the Cubs, the Nationals, and any others,” the term “any others” should be interpreted as limited to any other baseball teams rather than any other sports teams, or any other individuals. In Retail Ventures, the court noted that the phrase “confidential information of any kind” was part of a list of specific, narrower terms, namely “loss of proprietary information, Trade Secrets, [and] Confidential Processing Methods.” Id. at *31. The Sixth Circuit found no error in the District Court’s reasoning that “‘proprietary information,’ ‘Trade Secrets,’ and ‘Confidential Processing Methods,’ are specific terms that all pertain to secret information of [the policyholder] involving the manner in which [its] business is operated.” Id. at *32. The last item in the list, thus “should be interpreted as part of the sequence to refer to ‘other secret information of [the policyholder] which involves the manner in which [its] business is operated.” Id. at *32. The stolen credit card information was not confidential information belonging to the policyholder but rather confidential information belonging to its customers. Id. at *32. Nor did that information deal with the manner in which the policyholder operated its business. Id. at *32. The exclusion did not apply. Id. at *32.


Retail Ventures highlights the importance of reading policies through the lens of existing case law. In rejecting the insurer’s arguments regarding the interpretation of the word “directly,” the Sixth Circuit relied on a substantial body of law interpreting that term in courts around the nation. Likewise, the argument that the phrase “confidential information of any kind” encompasses customer credit card information, while facially plausible, ignores basic principles of insurance law that requiring such phrase to be read in, and limited by, their context.


Keywords: insurance, coverage, litigation, Sixth Circuit, Ohio, commercial crime policy, computer, hacking, hackers, confidential information, credit card, exclusion


-- Rukesh A. Korde, Covington & Burling LLP, Washington, D.C.


 


 

October 28, 2012

Dispute Over Valuation of Property Stayed Pending Completion of Appraisal Process

 

Westfield Insurance Company v. Custom Agri Systems, Inc., 2012-Ohio-4712

The issue of whether claims for property damage arising out of defective construction or workmanship constitute an occurrence under a CGL policy under Ohio law was recently settled by the Ohio Supreme Court in Westfield Insurance Company v. Custom Agri Systems, Inc., 2012-Ohio-4712, 2012 Ohio LEXIS 2485 (Oct. 16, 2012). The court, answering a certified question from the United States Court of Appeals for the Sixth Circuit, held that such claims do not constitute an occurrence under a CGL policy.

Westfield arose out of the construction of a steel grain bin in a feed-manufacturing plant. A contractor sued one of its subcontractors, claiming the subcontractor defectively constructed the bin. The subcontractor turned to its CGL insurer to defend and indemnify it in the litigation. The insurer subsequently intervened, claiming it had no duty to defend or indemnify the subcontractor because defective construction or workmanship does not constitute an occurrence under the policy at issue. The Sixth Circuit determined there was no controlling Ohio precedent and certified the question to the Ohio Supreme Court.

On certification, the Ohio Supreme Court concluded that defective construction or workmanship does not constitute an “occurrence” under a CGL policy. The court noted that CGL policies are not intended to insure business risks. In particular, the term “occurrence” is defined by the policy as an “accident,” which in turn has been construed by Ohio courts as meaning “unexpected, as well as unintended.” Inherent in the definition of accident is the concept of fortuity. Claims for faulty workmanship, however, “are not fortuitous in the context of a CGL policy.”

The court approvingly cited an Ohio appellate decision noting that the coverage analysis turns on the damages sought. If the plaintiff seeks consequential damages arising from the insured’s work that are unanticipated by the insured, there is generally coverage. If, however, the damages are for the insured’s work itself, there is no coverage. Here, the subcontractor was seeking coverage for damage to the subcontractor’s work. Accordingly, no coverage was provided under the policy. The court noted that contractors are not without a remedy from defective construction or workmanship; they can require the subcontractors to provide a performance bond.

In light of the Ohio Supreme Court’s decision, it is clear that it cannot be assumed that a contractor or a subcontractor will have CGL coverage in the event of a defective construction or workmanship claim. Thus, individuals and companies will want to take steps to protect themselves by researching the performance histories and financial condition of prospective contractors or subcontractors, and, if appropriate, consider requiring a personal guaranty or performance bond.

Keywords: insurance, coverage, litigation, Ohio, commercial general liability, CGL, occurrence, defective construction, defective workmanship

Peter J. Georgiton, Dinsmore & Shohl LLP, Cincinnati


 


 

September 28, 2012

Indemnification Policies: Coverage Applies When Damage Actually Occurs

 

Memorial Properties, LLC v. Zurich American Ins. Co., 210 NJ 512 (2012).


The Supreme Court of New Jersey recently held that when a delay exists between a wrongful act and the resulting damages, the time of the relevant occurrence, for indemnification insurance purposes, is when the actual harm is suffered. The court also held that when an insurance policy excludes coverage for damages caused by certain specific events, claims arising out of such events, regardless of how they are particularly worded, will trigger the exclusion and relieve the insurer from defending or indemnifying such a claim.


In Memorial Properties, LLC v. Zurich American Ins. Co., 210 N.J. 512 (2012), the manager and the owner of Liberty Grove Memorial Gardens, a crematory, filed an action against their insurers, Assurance Company of America and Maryland Casualty Company. The policyholders sought a declaratory judgment that the insurers were obligated to defend and indemnify them with regard to actions brought against them by survivors of decedents whose remains had been cremated at Liberty Grove.


The underlying lawsuits stemmed from an illegal scheme to harvest and sell human bone, tissue and organs. A dentist and an embalmer developed this unlawful scheme and colluded with funeral homes and crematories to gain access to decedents’ bodies. The dentist and embalmer would extract bone, tissue and organs from the bodies, then conceal their actions by making the remains appear intact, and by falsifying medical and funeral records associated with the bodies. Between 2003 and 2005, a number of survivors had placed their deceased family members’ remains in the care of funeral directors, who allowed the bodies to be interfered with in this fashion before sending the remains to Liberty Grove for cremation. The policyholders asserted that they were unaware of the harvesting scheme until law enforcement authorities contacted them in 2005. Likewise, the survivors stated they had no knowledge that their loved ones’ remains had been tampered with until law enforcement officials notified them in 2006.


The survivors filed complaints against Liberty Grove, relating to decedents whose remains were interfered with in 2003, 2004 and 2005. The claims against Liberty Grove included civil conspiracy, negligence, infliction of emotional distress, breach of fiduciary duty, misrepresentation, fraud, and violations of consumer protection statutes. Facing these numerous complaints, the policyholders sought defense and indemnification from Assurance and Maryland Casualty.


Assurance had provided liability insurance to the policyholders in 2003, and its policy covered claims, including those for mental anguish, caused by damage to human remains. Maryland provided similar insurance to the policyholders in 2006, but its policy excluded coverage for claims arising from the failure to “properly dispose of a deceased body.” Assurance denied the policyholders’ claim on the basis that the relevant occurrences took place after the conclusion of its policy term because the survivors did not discover that their loved ones’ bodies had been tampered with until 2006. Maryland Casualty also denied the policyholders’ claim, on grounds that the survivors’ lawsuits arose out of improper disposal of human remains, and therefore came within its policy’s exclusions. In response to these denials, the policyholders brought a declaratory judgment action against the insurers, demanding defense and indemnification with regard to the survivors’ claims.


The Supreme Court of New Jersey first addressed the issue of the relevant event triggering insurance coverage. The court stated that “the time of an ‘occurrence’ within the meaning of an indemnity policy is not the time the wrongful act was committed but the time when the complaining party was actually damaged.” Examining the complaints against Liberty Grove relating to decedents whose remains were harvested in 2003, the court observed that the survivors sought damages resulting from the emotional distress they experienced in 2006 upon learning that their loved ones’ bodies had been interfered with. Although the tampering had taken place earlier, the survivors were not actually damaged until 2006, when the news of the wrongful acts caused them mental anguish. The court therefore concluded that the occurrences triggering coverage were in 2006, when the survivors actually suffered distress, and their claims therefore fell outside of the 2003 Assurance policy period.


The court then turned to the applicability of the exclusionary clause in the Maryland Casualty policy. The court observed that all actions attributed to Liberty Grove in the complaint related to its participation in the illegal harvesting scheme. The survivors’ unspecified claims of negligence could therefore not be read independently of the tampering allegations. Accordingly, the court found that, regardless of the particular wording of the claims, they alleged conduct constituting a failure to properly dispose of a deceased body, and therefore fell within the exclusionary clause of the Maryland Casualty policy. Because, as the court observed, “[t]he duty to defend comes into being when the complaint states a claim constituting a risk insured against,” the court held that Maryland Casualty had no duty to indemnify, and no duty to defend the policyholders with regard to the survivors’ claims.


Memorial Properties is therefore instructive as it specifies when an insurance policy’s provisions are triggered in the event of a delay between an event and the resulting harm. Memorial Properties also clarifies that although a complaint may not be phrased to specifically match a policy’s exclusions, if the conduct alleged in the complaint amounts to behavior implicating the exclusion, courts will not require the insurer to defend or indemnify the insured in the action.


Keywords: occurrence, delay, indemnification, exclusion, insurance, coverage, litigation, New Jersey


— Sarah C. Mitchell, Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, PC, Newark, NJ.


 

August 29, 2012


California Adopts "All Sums with Stacking" for Long-Tail Claims

State of California v. Continental Insurance Co., 2012 Cal. LEXIS 7324 (Aug. 9, 2012)


In a significant and long-awaited decision, the California Supreme Court has added its voice to the ongoing controversy over allocation of coverage for continuous loss spanning multiple policy periods. The court’s ruling in State of California v. Continental Insurance Co., 2012 Cal. LEXIS 7324 (Aug. 9, 2012) (“Stringfellow”), rejects the pro rata allocation methodology adopted by other states, including Boston Gas Co. v. Century Indemnity Co., 910 N.E.2d 290 (Mass. 2009). Instead, the California Supreme Court adopted an “all sums with stacking” methodology, which maximizes coverage for policyholders by permitting them to obtain coverage across all years when injury or damage occurred, up to the full limits of all policies in effect.


The coverage dispute in Stringfellow arose out of the Stringfellow Acid Pits, an industrial waste facility operated by the State of California from the mid-1950s to the mid-1970s. The facility was unsuitably designed and sited, and the state has since been held liable for cleanup costs, which could be as much as $700 million.


In 1993, the state sued its insurers, seeking coverage up to the combined limits of all liability policies in effect in each year when contamination occurred. By stipulation, the insurers agreed that property damage at the Site had taken place continuously throughout multiple consecutive policy periods from 1964 to 1976; the trial court held that this property damage resulted from a single occurrence.


In 2004, the trial court ruled that the state’s coverage could not be stacked, i.e., the insurance available in one policy period could not be added to the insurance available in a second policy period, to create a combined coverage limit equal to the sum of all purchased insurance policies. Rather, citing FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (6th Dist. 1998), the trial court ordered the state to choose a single policy period, within the period of exposure; the state could then recover from its various triggered insurers only up to the amount of the limits of the policies in effect during that period.


Appeals were taken, and in 2009 the California Court of Appeal, Fourth District, reversed in part. Applying California’s continuous trigger (see Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995)), the court of appeal agreed that the state was entitled to seek coverage for long-tail claims across the coverage block, i.e., in any year that coverage was in effect. State of California v. Continental Ins. Co., 88 Cal.Rptr.3d 288, 297-303 (Cal. App. 2009). However, the court of appeal did not limit the state to the amount of insurance purchased in a single policy year. Instead, the court of appeal construed California’s “all-sums” jurisprudence, Aerojet-General v. Transport Indem. Co., 17 Cal.4th 38 (1997), to mean that the state could stack coverage and seek indemnity up to the full policy limits of every insurance policy in effect during the period of property damage. State v. Continental, 88 Cal. Rptr.3d at 303-306. Reaching this conclusion, the court of appeal explicitly rejected FMC’s anti-stacking rationale as “flawed and unconvincing.” Id. at 306-311.


Now, in the latest Stringfellow ruling, the California Supreme Court has affirmed “all sums with stacking,” on essentially the same reasoning applied by the court of appeal. As to all sums, the Supreme Court reaffirmed Montrose, and noted CGL policy language obligating insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property . . . .” The insurers argued, without success, that this “all sums” language was modified by the policies’ definition of “occurrence,” which limited coverage to property damage taking place “during the policy period.” They argued that a pro rata approach was consistent with this language; was fairer and more reasonable; and was consistent with other leading cases, such as Boston Gas. The California Supreme Court disagreed. It found that the relevant definitional language—“during the policy period”— did not appear in the insuring agreement of the policy, and was “neither logically nor grammatically” related to the insuring agreement’s “all sums” language. Moreover, the court found an “all sums” approach better reflected “the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.”


As to stacking of limits: the California Supreme Court concurred with the court of appeal that “standard policy language permitsstacking” across multiple triggered policy periods. The court noted the policy language in question—requiring each insurer to pay “all sums”—did not limit insurers to paying “all sums” at issue during a particular policy period. Rather, “[t]he fact that all policies were covering the risk at some point during the property loss [was] enough to trigger the insurers’ indemnity obligation” in full, up to the entire amount of the loss, so long as the policies in question did not contain non-cumulation or anti-stacking provisions.


For the most part, the California Supreme Court’s ruling will be viewed as a setback for insurers, and a victory for policyholders, who—as the California Supreme Court itself noted—will now be permitted to “effectively stack the insurance coverage from different policy periods to form one giant ‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.” As with most allocation issues, however, the effects of the ruling may be felt differently by different carriers. While primary carriers may be most affected by the ruling, excess carriers may be less affected. Such carriers generally sit above primary policies and often argue for “horizontal exhaustion” of primary coverage (or self-insured retentions) across a coverage block before their policies are triggered. As the court of appeal noted, a rule permitting “stacking” is consistent with horizontal exhaustion; thus, it could benefit excess carriers in at least some circumstances.


Keywords: Insurance, coverage, litigation, California, allocation, long-tail, continuous, primary, excess, Stringfellow, stacking


Eric B. Hermanson is of counsel with Edwards Wildman Palmer LLP, Boston.

 

 

July 26, 2012


An Insurer Cannot Deny a Claim and Reserve Its Rights

Hoover v. Maxum Indemnity Co., 2012 Ga. LEXIS 570 (Ga. June 18, 2012)


An insurer cannot both deny a claim and reserve its rights, according to the Supreme Court of Georgia in Hoover v. Maxum Indemnity Co., 2012 Ga. LEXIS 570 (Ga. June 18, 2012). In that case, an employee was injured while working for his employer, which held a commercial-liability policy with Maxum. When the employee brought a personal-injury action, Maxum denied coverage for the claim and refused to provide a defense to the employer based on the policy’s employer-liability exclusion. In its letter disclaiming coverage, Maxum also reserved the right to assert other coverage defenses, including late notice, and specifically stated that it was not waiving any other potential defenses.


Nevertheless, the court determined that Maxum had waived its right to assert a defense based on untimely notice because it did not properly alert its insured that the lack of timely notice would potentially bar coverage for the claim. In doing so, the court stated that an insurer cannot both deny a claim and reserve the right to assert a different defense in the future. Rather, a reservation of rights is only available to an insurer who undertakes a defense of the insured pending resolution of any coverage issues. Because Maxum denied the employer’s claim and refused to provide a defense on the basis of the employer-liability exclusion, it could not reserve the right to assert other defenses, including lack of timely notice.


The court also found that Maxum’s reservation of rights was defective because it did not unambiguously inform the employer of its intent to pursue a late-notice defense. Finally, the court held that the employer-liability exclusion did not apply, as the employee was not performing duties related to the conduct of the insured’s business at the time of the accident. Accordingly, Maxum had breached its duty to defend its insured.


Justice Melton, in a concurring and dissenting opinion, pointed out that the majority had created new Georgia law in deciding that an insurer could not both deny coverage and reserve its rights—which had been a common practice. Based on the majority’s holding, an insurer must now specifically assert all of its coverage defenses if it intends to disclaim coverage, or it must defend under a reservation of rights and seek a declaratory judgment as to coverage.


Keywords: litigation, insurance, coverage, Georgia, commercial liability, employer-liability exclusion, waiver, reservation of rights, coverage denial, disclaimer


Heather Smith Michael, Arnall Golden Gregory LLP, Atlanta, Georgia


 

July 26, 2012


CGL Insurer Must Try to Settle Even Without Demand

Yang Fang Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012)


Predicting California law, the U.S. Court of Appeals for the Ninth Circuit recently held that the implied covenant of good faith and fair dealing requires a commercial general liability (CGL) insurer to attempt to effectuate a settlement within policy limits when its insured’s liability is reasonably clear—even in the absence of a settlement demand.


In Yang Fang Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012), an insured driver was involved in an accident when his car collided with another vehicle, which was carrying four passengers. At the time of the accident, the driver was insured under a CGL insurance policy issued by Deerbrook Insurance Co., a subsidiary of Allstate Insurance Company. The policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident.


One of the passengers in the second vehicle, Yan Fang Du, was badly injured in the accident. In the months following the accident, Du’s lawyers corresponded with Deerbrook regarding the extent of Du’s injuries. After a yearlong investigation into Du’s claim, Deerbrook made a $100,000 settlement offer, which Du rejected. Du then filed a lawsuit against Deerbrook’s insured and obtained a jury verdict of $4,126,714.46. Deerbrook paid the $100,000 per claim limit in partial satisfaction of the judgment. The insured then assigned his bad-faith claim to Du in exchange for a covenant not to execute.


Du filed a lawsuit against Allstate and Deerbrook alleging that Deerbrook had breached the covenant of good faith and fair dealing owed to its insured. At trial, Du proposed the following jury instruction:


In determining whether Deerbrook Insurance Company breached the obligation of good faith and fair dealing owed to [its insured], you may consider whether the defendant did not attempt in good faith to reach a prompt, fair, and equitable settlement of Yan Fang Du’s claim after liability [of its insured] had become reasonably clear.


The presence or absence of this factor alone is not enough to determine whether Deerbrook Insurance Company’s conduct breached the obligation of good faith and fair dealing. You must consider Deerbrook Insurance Company’s conduct as a whole in making this determination.


Id. at 1121. The district court rejected Du’s proposed jury instruction and concluded that an insurer has no duty to initiate settlement discussions in the absence of a demand from a third-party claimant. The district court also rejected the proposed instruction from a factual standpoint, ruling that “‘the issue of settlement was broached at a sufficiently early time in the litigation that it vitiates any claim or effective claim insofar as a failure to initiate a settlement discussion.’” Id. The jury found in favor of the insurer, and Du appealed to the Ninth Circuit.


Although the Ninth Circuit agreed that there was, in this case, no evidentiary foundation for Du’s proposed jury instruction, the court held that the district court “erred in holding as a matter of law that an insurer’s duty of good faith and fair dealing cannot be premised on the insurer’s failure to effectuate settlement in the absence of a reasonable demand.” Id. at 1127. The Ninth Circuit emphasized that, under California law, the duty of good faith and fair dealing obligates a liability insurer to settle claims within policy limits “‘when there is substantial likelihood of recovery in excess of those limits.’” Id. at 1122–23 (quoting Kransco v. Am. Empire Surplus Lines Ins. Co., 23 Cal. 4th 390, 401 (2000)). The court acknowledged that the duty to settle is most commonly mentioned in those instances in which an insurer unreasonably rejects a settlement offer within policy limits, but it nevertheless dismissed the argument that the insurer’s duty to settle was only triggered by a demand by a third-party claimant.


Looking to prior California state and federal decisions, the Ninth Circuit noted that a liability insurer must conduct itself “‘as though it alone were liable for the entire amount of the judgment.’” Id. at 1123 (citation omitted). Relying on this guiding principle, the court held that a liability insurer has an affirmative duty to effectuate settlement within policy limits where its insured’s liability has become reasonably clear—even if the third-party claimant has not yet made a formal settlement demand.


The Ninth Circuit’s ruling in Du makes clear that, under California law, a liability insurer’s duty to settle within policy limits is triggered whenever a substantial likelihood exists of recovery in excess of policy limits and the insured’s liability has become reasonably clear. In such circumstances, the insurer must proactively attempt to settle the claim within policy limits, and its failure to do so can give rise to bad-faith liability.


Keywords: litigation, insurance, coverage, bad faith, California, Ninth Circuit, duty to settle


Shaun H. Crosner, Dickstein Shapiro LLP, Los Angeles, California


 

July 25, 2012


No Duty to Defend Appeal of Non-Covered Claims

City of Medford v. Argonaut Ins. Group, Nos. 1:06–cv–3098–PA, 1:11–cv–3037–PA, 2012 U.S. Dist. LEXIS 86114 (D. Or. June 21, 2012).


The U.S. District Court for the District of Oregon recently held that an insurer has no duty to defend the policyholder’s appeal of an underlying action, where the appeal related only to non-covered claims.


Medford involved two underlying actions by city employees against the insured city, alleging various causes of action based on the city’s failure to provide health insurance to employees after retirement. 


In the first underlying action, retired employees alleged claims for age discrimination, statutory violations, and breach of contract.  The court entered judgment for the employees for breach of contract, and dismissed the other claims as untimely.  The dismissed discrimination claims had been covered.  In the coverage action, the court held that the breach of contract claims, on which judgment was entered, were not covered, because they did not constitutee “wrongful employment practices,” defined by the policy to mean “any conduct that violates any federal, state or local law prohibiting employment discrimination,” because the statute giving rise to the breach of contract claims, Or. Rev. Stat. § 243.303, does not address employment discrimination. 


In the second underlying action, current employees alleged similar claims, as well as a claim for injunctive relief.  The court entered judgment for the employees, ordering the city to obtain health insurance for them with an option to continue coverage after retirement.  The court also awarded attorneys’ fees and costs related to obtaining injunctive relief, but the court did not award damages.  In the coverage action, the court held that a policy exclusion for “nonmonetary damages, fines or penalties,” including “[a]ny costs, fees or expenses which the insured may become obligated to pay as a result of an adverse judgment for injunctive or declaratory relief,” barred coverage for the award of attorneys’ fees and costs. 


The city appealed both underlying judgments, but the claimants did not appeal the dismissal of the covered claims.  In Oregon, an insurer might have a duty to defend an appeal “in an appropriate case.”  Id. (quoting dicta from Goddard ex rel. Estate of Goddard v. Farmers Ins. Co., 173 Or. App. 633, 641, 22 P.3d 1224, 1229 (2004)).  However, an insurer has no duty to defend an underlying action when the complaint is amended to delete the allegations that created a duty to defend.  Id. (citing National Union Fire Ins. Co. v. Starplex Corp., 220 Or. App. 560, 565 n. 1, 188 P.3d 332, 336 n. 1 (2008)).  The Medford court ruled that a similar principle should apply where an underlying judgment eliminates all covered claims, and held that the insurer has no duty to defend. 


The court further held that the insurer had no duty to indemnify, because the breach of contract claims in the first underlying action and the award of attorneys’ fees in the second underlying action were not covered.


Keywords:  insurance, coverage, litigation, Oregon, breach of contract, wrongful employment practices, injunctive relief, duty to defend, duty to defend appeal, duty to indemnify


Rina Carmel, Musick, Peeler & Garrett LLP, Los Angeles.


 

June 27, 2012


Court Determines When Malicious Prosecution “Occurs”

In Genesis Insurance Co. v. City of Council Bluffs, Nos. 11–1277, 11–1741, 2012 U.S. App. LEXIS 9577 (8th Cir. May 11, 2012)


In Genesis Insurance Co. v. City of Council Bluffs, Nos. 11–1277, 11–1741, 2012 U.S. App. LEXIS 9577 (8th Cir. May 11, 2012) (applying Iowa law), the U.S. Court of Appeals for the Eighth Circuit held that, for purposes of a liability insurance policy, a malicious prosecution “occurred” upon the commencement of the underlying litigation.


In 1978, two men were convicted of murdering a retired police officer. In 2003, however, the Iowa Supreme Court held that the state had failed to produce certain important documents during the criminal action against one of the men. Both men were released from prison later that year.


In 2005, the men filed a lawsuit against the City of Council Bluffs and several of its police officers alleging malicious prosecution of the criminal actions. The City tendered the lawsuit to its liability insurer, Genesis Insurance Company, which had issued policies to the City for the policy periods 2002–2003 and 2003–2004. Genesis declined the tender and filed a complaint for declaratory judgment in the U.S. District Court for the Southern District of Iowa. Genesis sought a declaration that it had no duty to indemnify the City in connection with the malicious prosecution action. The trial court granted Genesis’s motion for summary judgment, holding that the injuries incurred by the two men “did not occur, for insurance purposes, during the Genesis policy periods.”


The Eighth Circuit Court of Appeals affirmed. The court observed that the Iowa Supreme Court has not determined when an “occurrence” takes place for purposes of an underlying malicious prosecution action. However, the court stated that the majority of other courts have held that such an “occurrence” takes place upon the initiation of criminal proceedings, and noted that the Eighth Circuit itself, in a decision applying Missouri law, had followed this majority rule. In addition, the court explained that, under general principles of existing Iowa insurance coverage law, an “occurrence” takes place as soon as a claimant sustains damages. As such, the court reasoned that, because a criminal defendant suffers injury as soon as proceedings are initiated against him or her, it follows that this must also be the moment upon which an “occurrence” takes place. In the case at bar, the court held that, because the underlying criminal charges were filed in 1977 and the first Genesis policy did not become effective until 2002, the “occurrence” did not take place during the Genesis policy periods.


Keywords: insurance, coverage, litigation, Iowa, occurrence, malicious prosecution


Benjamin E. Shiftan, Sedgwick LLP, San Francisco.

 

 

May 24, 2012


Tender of Policy Limits Not a Defense to Action to Enforce Hospital Lien

Southern General Insurance Co. v. Wellstar Health Systems, Inc., No. A11A2065, 2012 Ga. App. LEXIS 306 (Ga. Ct. App. Mar. 20, 2012)


Southern General Insurance Co. v. Wellstar Health Systems, Inc., No. A11A2065, 2012 Ga. App. LEXIS 306 (Ga. Ct. App. Mar. 20, 2012), involved an insurer’s obligations under an automobile liability policy when faced with both a claim by an injured party and a hospital lien. After a bicyclist was injured in a collision with the insured’s car, Southern offered to settle the injured party’s claim for the applicable policy limits. In return, Southern requested that the injured party provide it with either assurances that Wellstar’s lien, which resulted from his medical expenses, would be satisfied or indemnification with respect to Wellstar’s lien. The injured party refused and demanded that Southern tender its policy limits within five days. After Southern did so, Wellstar filed suit against Southern, seeking the satisfaction of its lien, as well as attorney fees.


Southern claimed that Georgia’s bad-faith law was inconsistent with its statutes regarding hospital liens because an insurer could be forced to make payments in excess of its policy limits. The trial court disagreed, finding that Southern’s tender of its policy limits to the injured party was not a defense to Wellstar’s action to enforce its lien. The court of appeals affirmed.


As an initial matter, the court found that an insurance company does not act in bad faith simply because it fails to accept a settlement offer by the deadline imposed by the plaintiff’s attorney. Moreover, an insurer can create a “safe harbor” from bad-faith liability when it promptly acts to settle a case involving clear liability and damages in excess of the policy limits, and the sole reason for the parties’ inability to reach a settlement is the plaintiff’s unreasonable refusal to assure the satisfaction of any outstanding hospital liens. In such a case, there can be no bad-faith liability as a matter of law, and the insurer is free to verify the validity of any liens, make payment directly to the hospital, and then disburse any remaining funds to the plaintiff.


Keywords: insurance, coverage, litigation, Georgia, automobile insurance policy, hospital lien, policy limits, bad faith, safe harbor from bad-faith liability


Heather Smith Michael, Arnall Golden Gregory LLP, Atlanta, GA

 

 

 

May 24, 2012


Claims for Breach of Contract and Bad Faith are Properly Bifurcated

Saye v. Provident Life & Accident Insurance Company, 714 S.E.2d 614 (Ga. Ct. App. 2011)


So held the Court of Appeals of Georgia in Saye v. Provident Life & Accident Insurance Company, 714 S.E.2d 614 (Ga. Ct. App. 2011). In that case, the insured sued Provident for breach of contract and bad faith based on its failure to pay continuing benefits under a disability insurance policy. The insured’s entitlement to lifetime benefits depended on whether his condition was the result of sickness or an injury. Provident determined that the insured’s condition resulted from sickness, thus allowing it to terminate the insured’s benefits. Not surprisingly, the insured disagreed. The trial court bifurcated the insured’s two claims, with the expectation that trial would proceed on the bad-faith claim only if the insured prevailed with respect to his claim for breach of contract. The insured argued that this bifurcation was error.


Under Georgia law, a court has the power to order the separate trial of any claim for the purpose of convenience or to avoid prejudice. The court’s discretion in this respect is quite broad. In Saye, the court determined that bifurcation was proper because “all the bad faith in the world” would not have mattered if the insured was not entitled to continuing benefits under the policy. That, coupled with the difficulties of managing a complex bad-faith case and the prejudice Provident could suffer if bad-faith evidence tainted the coverage question, justified trying the coverage claim first. The court of appeals rejected the insured’s contention that a Georgia statute arguably requiring that breach of contract and bad-faith claims be brought in a single action precluded the bifurcation of such claims.


Keywords: insurance, coverage, litigation, Georgia, breach of contract, bad faith, disability insurance, bifurcate, bifurcation


Heather Smith Michael, Arnall Golden Gregory LLP, Atlanta, GA


 

May 4, 2012


Court Rules Coverage Exists for Mitigation Costs

Standard Life Assurance Limited v. Ace European Group and Others


The England and Wales High Court (Commercial Court) has handed down the long-awaited judgment in Standard Life Assurance Limited v. Ace European Group and Others. The widely publicized dispute concerned a claim for £100 million by Standard Life against its professional indemnity insurers. In ordering that Standard Life was entitled to recover the full amount of its claim, Justice Eder set out a number of important points of application to policyholders generally.


Standard Life’s claim related to a £2.2 billion pension fund—the Pension Sterling Fund. Following the collapse of Lehman Brothers and the onset of the credit crunch, certain assets in which the fund had been invested—asset-backed securities and floating rate notes—experienced losses with the result that the fund lost approximately five percent of its value, or a little more than £100 million. Standard Life chose to reverse the effect of the fall by injecting £100 million into it. Standard Life subsequently made a claim for £100 million less than its professional indemnity insurance policy on the basis that its actions averted potentially larger losses and therefore fell within the definition of “mitigation costs” under the policy. Insurers denied coverage and challenged Standard Life’s interpretation of the policy on a number of grounds.


The policy provided Standard Life with coverage for “any payment of loss, costs or expenses reasonably and necessarily incurred . . . in taking action to avoid a third party claim or to reduce a third party claim.”


The insurers denied that the payments were mitigation costs on two main grounds.


First, they argued that the requirement that the payments were “reasonably and necessarily incurred” meant that they were not covered if it could be shown that there was an alternative course of action open to the insured that would have also been considered reasonable or that the payments did not directly satisfy third-party liabilities.


Second, the phrase “in taking action to” meant that the payments must have been made with the dominant motive of mitigating against third-party claims and not for any other reason such as protecting the brand or reputation of the company.


Eder, finding for Standard Life, found that the correct approach was to look at the intended effect of the payment, not the company’s motive for making it or to whom it was directed. Eder stressed the important practical point that it would be very hard, if not impossible, to ever prove the motive of a large organization when involved in a complex decision-making process and that it would be irrational or absurd to deny coverage for a payment that was intended to mitigate liabilities simply because the action of making the payment was also expected to prevent damage to the company’s brand or reputation with its customers.


The insurers argued that the amount of any indemnity that Standard Life was entitled under the policy should be reduced in accordance with the principles of apportionment found typically within policies of marine insurance or in the context of under-insurance. In such cases, there is an established principle that, where a payment is made for competing purposes, one insured and one uninsured, the cost should be apportioned between the insured and insurer according to the proportion that can be attributed to the insured and uninsured purposes.


Eder, again accepting Standard Life’s submissions, stated that it was “at the very least, very doubtful whether it can be said that there is any general principle of apportionment in a liability policy.” Eder referred to the fact that liability policies are different in nature from other types of insurance in that the insurer agrees to provide indemnity up to the limit of cover and not by reference to the value of any particular asset.


Policyholders will be reassured by the practical approach adopted by the Court. It did not penalize Standard Life because its actions were not driven by insurance recovery but rather, in common with most large organizations, it sought to protect its customers and its reputation as well as mitigating its losses. Insurers will no doubt review the scope of cover afforded by similar policy wordings following the judgment. Certainly, the decision will be highly relevant to other cases involving customer claims, not just in the financial sector where payment protection insurance and credit crunch related losses have been highly publicized, but across the market generally.


Keywords: insurance, coverage, litigation, United Kingdom, England, Wales, professional indemnity policy, payment protection insurance, mitigation costs, financial crisis


Richard Leedham, Addleshaw Goddard, London, England


 

May 4, 2012


CGL Policies Triggered by Allegations of Physical Damage to Adjacent Property

Mid-Continent Cas. Co. v. Academy Dev., Inc., No. 11-20219, 2012 U.S. App. LEXIS 8056, --F.3d -- (5th Cir. Apr. 20, 2012)


A standard commercial general liability (CGL) policy covers “damages because of . . . property damage.” Recently, in Mid-Continent Casualty Co. v. Academy Development, Inc., No. 11-20219, 2012 U.S. App. LEXIS 8056, --F.3d -- (5th Cir. Apr. 20, 2012), the Fifth Circuit Court of Appeals held that such policies are triggered by allegations of diminished value due to adjacent property damage, even where the underlying claimant has no ownership interest in the physically damaged property. The court also rejected the carrier’s contention that defense costs should be allocated over all triggered policies.


In Academy, several related entities built and developed a residential subdivision near several lakes. Purchasers of homes in the subdivision later sued the entities in Texas state court, alleging that, at the time the home sites were sold, the defendants knew the lake walls were failing. As a result of these failures, water was leaking from the lakes onto adjacent home sites, thus diminishing the value of the homeowners’ property. Each of the defendant entities was insured under five consecutive CGL policies issued by Mid-Continent. The policies varied in deductible amount and in whether the deductibles applied to defense costs. Specifically, the last three policies contained a higher deductible and also applied to defense costs.


Earlier iterations had included specific allegations of property damage to the plaintiffs’ homes. While Mid-Continent initially defended the action, it denied coverage, and informed the insureds that it would no longer fund the defense, after the underlying plaintiffs amended the petition to seek damages only for diminution of their homes’ value. The Fifth Circuit disagreed with Mid-Continent and held that it had a duty to defend the developers for two reasons. First, the court found that, while an allegation that the water “may have caused structural damage to Plaintiffs’ homes” was insufficient to allege “property damage,” allegations that water had leaked onto the “properties upon which Plaintiffs’ homes were located” were sufficient, even though they did not specifically allege damage to the home itself. Second, the court found that the alleged diminution in value attributable to the defective lakes was itself sufficient to trigger the policies’ duty to defend. Specifically, the allegations of property damage to the lakes triggered coverage even though the underlying plaintiffs did not possess an ownership interest in the lakes. Rather, the policies’ plain language did not require the underlying plaintiffs to have such an ownership interest in the allegedly damaged property as long as the diminution in value was attributable to the damaged property.


In addition to its holdings regarding “property damage,” the court also rejected the pro rata allocation method and held that policyholders could select which triggered policies to target for their defense. Given that the implicated policies involved different deductible amounts and terms, Mid-Continent had asserted that the defense costs should be apportioned across the policies, thus requiring the insureds to contribute. Rejecting this position, the court held that, under Texas law, an insured may select any triggered policy to provide a complete defense.


Keywords: insurance, coverage, litigation, commercial general liability, CGL, Texas, “property damage,” diminution of value, allocation


Leslie C. Thorne, Haynes Boone, LLP, Austin, Texas


 

April 30, 2012


Computer Data Is Not "Tangible Property" Under Federal Act

United States v. Aleynikov, No. 11-1126, -- F.3d --, (2d Cir. April 11, 2012)


Policyholders and insurers have long debated whether computer data is “tangible property” within the meaning of standard form insurance policies. See generally B. Wells, et al., 4-29 New Appleman on Insurance Law § 29.02 (Library Ed. 2011). The Second Circuit’s decision on April 11, 2012 overturning the conviction of Sergey Aleynikov for theft of his employer’s “proprietary source code” will likely provide grist for that debate. Aleynikov holds that computer source code is not “tangible property” within the meaning of the federal, 18 U.S.C. § 2314 (NSPA).


A jury convicted Aleynikov of stealing a significant portion of the source code used by his employer, Goldman Sachs & Co., to operate its high frequency computerized trading system. Aleynikov, who was at the time employed by Goldman Sachs as a programmer, had accepted a job offer from a competing company to develop a similar high frequency trading system. On his last day at Goldman Sachs, Aleynikov encrypted and uploaded 500,000 lines of source code for the trading system to a server in Germany. That night, he downloaded the source code from the server to his home computer. Shortly thereafter, he was arrested and charged with violating the NSPA, “which makes it a crime to transport, transmit, or transfer in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.” Slip op. at 6 (quotations and citations omitted). He was convicted after a jury trial, and he appealed his conviction.


On appeal, Aleynikov argued that the source code was not “stolen goods, wares or merchandise within the meaning of the NSPA.” Slip op. at 11 (quotations and citations omitted). The Second Circuit agreed. The court relied on its prior decision in United States v. Bottone: “where no tangible objects were taken or transported, a court would hard pressed to conclude that ‘goods’ had been stolen . . . within the meaning” of the NSPA. United States v. Bottone, 365 F.2d 389, 393 (2d Cir. 1966). Bottone, the court reasoned, stands for the proposition that “[s]ome tangible property must be taken from the owner for there to be deemed a ‘good’ that is ‘stolen’ for the purposes of the NSPA.” Aleynikov, slip op. at 13. The court further reasoned that prosecution under the NSPA requires the theft of “physical” goods, “even if the stolen thing does not remain in entirely unaltered form and owes a major portion of its value to an intangible component.” (Id. at 13.) Reviewing cases from other circuits, the court held that “we join other circuits in relying on [Dowling v. United States, 474 U.S. 207 (1985)] for the proposition that the theft . . . of purely intangible property is beyond the scope of the NSPA.” Slip op. at 14.


With little analysis, the court concluded that the stolen source code was intangible property. The court noted that Aleynikov’s theft of the source code resembled copyright infringement, in that, Aleynikov did not assume physical control over the code, nor did he deprive the owner of its use. Absent assumption of physical control and deprivation, there was no theft within the meaning of the NSPA. The court acknowledges that its analysis was problematic because it seems to immunize the theft of purely intellectual property from prosecution under the NSPA. Under Aleynikov, the statute would not apply when “a carefully guarded secret formula was memorized, carried away in the recesses of a thievish mind” but would seemingly apply if a flash drive containing the same information was stolen. Slip op. at 13. However, because “federal crimes are solely creatures of statute,” the court declined to “stretch or update the statutory words of plain and ordinary meaning to better accommodate the digital age.” Slip op. at 18.


Aleynikov will certainly provide fodder to insurers seeking to argue that computer data does not constitute “tangible property” within the meaning of standard form insurance policies. Such insurers will likely emphasize the court’s suggestion that the “ordinary meaning” of the terms of the NSPA does not include tangible property. They may also argue that American Guarantee & Liability Ins. Co. v. Ingram Micro, Inc., No. CIV 99-185 TUC ACM, 200 U.S. Dist. LEXIS 7299 (D. Ariz. Apr. 19, 2000), a leading case holding that computer data is tangible property, is undermined by Aleynikov because Ingram Micro relied upon, among other things, criminal law definitions of “property” to conclude that computer data is tangible property. Policyholders will likely argue that Aleynikov is distinguishable: the terms of criminal statutes are interpreted narrowly to limit the reach of such laws, particularly where federal crimes “solely creatures of statute” are concerned. Likewise, where computer data is lost or destroyed, the policyholder can argue that it has been “deprived” of the use of that data. At a minimum, however, Aleynikov is certain to provide grist for future arguments about this topic.


Keywords: insurance, coverage, litigation, National Stolen Property Act, federal law, source code, computer data, cyber, e-commerce, data loss, tangible property, intangible property


Rukesh A. Korde, Covington & Burling, LLP, Washington, DC


 

April 9, 2012


Court Holds Pollution Exclusion Ambiguous, Unenforceable

State Auto Mutual Ins. Co. v. Flexdar, Inc.
No. 49S02-1104-PL-199, ___ N.E.2d ___ (Ind. Mar. 22, 2012)


In State Auto Mutual Ins. Co. v. Flexdar, Inc., the Indiana Supreme Court held that the standard “pollution exclusion” typically appearing in commercial general liability (CGL) policies issued from approximately 1985 to 2005 is ambiguous and unenforceable as to most, if not all, types of environmental liabilities.


In Flexdar, the Indiana Department of Environmental Management (IDEM) demanded that Flexdar, an Indianapolis-based rubber-stamp and printing-plate manufacturer, clean up trichloroethylene (a chemical solvent commonly known as TCE) that was found in soil and groundwater at Flexdar’s manufacturing site. Flexdar sought insurance coverage from its liability insurer, State Auto, for the legal, investigative, and remediation costs of complying with IDEM’s demand. State Auto then sued Flexdar, seeking a court determination that the “pollution exclusions” in its policies from 1997 to 2002 absolved it of any obligation to provide coverage to Flexdar for IDEM’s demand. The State Auto policies contained not only the standard CGL “pollution exclusion,” but also an Indiana-specific endorsement stating that the exclusion “applies whether or not such irritant or contaminant has any function in your business, operations, premises, site or location.”


The Indiana Supreme Court summarized its holding in the opinion’s first two sentences: In this case we examine whether the language of a pollution exclusion in a commercial general liability policy is ambiguous. We hold that it is.


Specifically, the court held that the definition of “pollutant” in the State Auto policies was ambiguous, rendering the “pollution exclusion” unenforceable. The State Auto policies defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.” The court observed that if this definition were read literally, “practically every substance would qualify as a ‘pollutant’ . . . , rendering the exclusion meaningless.” Because the definition of “pollutant” in the State Auto policies did not specifically identify TCE as a “pollutant,” the court held that the “pollution exclusion” was ambiguous and unenforceable, and did not preclude coverage for Flexdar’s environmental liabilities to IDEM.


In reaching this result, the court affirmed longstanding Indiana precedent, and confirmed the approach it had taken on the previous occasions when it addressed this exclusion. See, e.g., American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996) (gasoline not specifically identified as a “pollutant”; “pollution exclusion” unenforceable); Seymour Mfg. Co. v. Commercial Union Ins. Co., 665 N.E.2d 891 (Ind. 1996) (following Kiger); Freidline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002) (carpet glue fumes not specifically identified as a “pollutant”; “pollution exclusion” unenforceable). The court noted that numerous Indiana Court of Appeals decisions also have reached similar results through the years.


Finally, the court observed that insurers have a simple remedy available if they wish to unambiguously exclude pollution coverage in their CGL policies: “By more careful drafting State Auto has the ability to resolve any question of ambiguity.” The court noted that State Auto had in fact done so in 2005, after the State Auto policies at issue in Flexdar. State Auto’s 2005 “pollution exclusion” endorsement specifically identifies TCE and a laundry list of other specific substances in the definition of “pollutant.” Like State Auto, many insurers have begun to adopt this type of specific definition in Indiana, and after the Indiana Supreme Court’s opinion in Flexdar, it is anticipated that many more insurers will do so.


Flexdar was decided on a 3–2 vote, with Justice Dickson concurring in Justice Rucker’s opinion for the court; Justice David concurring in the result; and Chief Justice Shepard (who recently retired) joining in Justice Sullivan’s dissent.


Keywords: insurance, coverage, litigation, Indiana, commercial general liability, CGL, pollution exclusion, pollutant


John P. Fischer, Barnes & Thornburg LLP, Indianapolis, IN, and Charles M. Denton, Barnes & Thornburg LLP, Grand Rapids, MI.


 

March 28, 2012


Virginia Issues Two Decisions Addressing Pollution Exclusions

Nationwide Mutual Insurance Co. v. Overlook, LLC, 785 F.Supp. 2d 502 (E.D. Va. 2011)

Builders Mutual Insurance Co. v. Parallel Design & Development, LLC, 785 F.Supp. 2d 535 (E.D. Va. 2011)


The U.S. District Court for the Eastern District of Virginia, Newport News Division (Judge Mark S. Davis presiding) issued two opinions––Nationwide Mutual Insurance Co. v. Overlook, LLC, 785 F.Supp. 2d 502 (E.D. Va. 2011), and Builders Mutual Insurance Co. v. Parallel Design & Development, LLC, 785 F.Supp. 2d 535 (E.D. Va. 2011)––on the same day, May 13, 2011, which both addressed whether the commercial general liability (CGL) total pollution exclusion barred coverage for damage/injury caused by Chinese drywall. Interestingly, the conclusions reached in each case differed.


The pollution exclusion at issue in the CGL policies considered by the Overlook court provided that coverage “does not apply to: 1) ‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants:’ . . .” at for from described locations.


The pollution exclusion at issue in Parallel Design provided that the “insurance does not apply to (1) ‘Bodily injury’ or ‘property damage’ which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.”


The Overlook CGL policy defined the term “pollutant” as “any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” There was no definition of “pollutant” in the CGL policy at issue in Parallel Design.


The court in Overlook ruled that the pollution exclusion barred coverage for the property damage allegedly caused by Chinese drywall. The court explicitly rejected the argument that this pollution exclusion was only intended to apply to traditional environmental pollution (e.g., Love Canal), as opposed to a release of sulfur gases from Chinese drywall inside a building, finding that such a limitation was not apparent from the actual words of the exclusion. The court noted that this result was supported by the “gases, fumes, or vapors” exception to the total-pollution exclusion, which indicated that the exclusion is applicable to the release of pollutants inside a building (otherwise, this exception would be meaningless).


However, the court reached the opposite result in Parallel Design on the sole ground that the CGL policy at issue in that case did not define the term “pollutant.” According to the court, without the definition, “the language and context of the policy suggest that the term ‘pollutants,’ as it is used in the Total Pollution exclusion, could be understood in more than one way, i.e., to mean only traditional environmental pollution, or to mean traditional and non-traditional environmental pollution.” As a result of this perceived ambiguity, the court held that the pollution exclusion did not bar coverage for the Chinese drywall suits and damage.


While a good argument could be made that the undefined word “pollutant” unquestionably included sulfur-based gases that corrode metal surfaces on contact––the court in Parallel Design essentially held that the word “pollutant” was ambiguous without further definition given the possible applications of this word. The fact that the term “pollutant” was defined in other policies before the court also did not help the insurer’s cause on this issue.


Keywords: insurance, coverage, litigation, Virginia, commercial general liability, CGL, total pollution exclusion, pollutant, gases fumes or vapors exception, Chinese drywall


John B. Mumford. Jr., Hancock, Daniel, Johnson & Nagle, P.C., Richmond, VA


 

March 27, 2012


Connecticut Changes Course on Late Notice

Arrowood Indemnity Co. v. King, No. SC 18658 (Conn. Mar. 27, 2012)


The Connecticut Supreme Court recently had an opportunity to revisit Connecticut’s long-standing law regarding late notice in Arrowood Indemnity Co. v. King. The case arose when 14-year-old Pendleton King, Jr. used his parents’ all-terrain vehicle to tow Conor McEntee on a skateboard on a dead-end street near King’s home. McEntee fell and suffered a severe head injury that resulted in hospitalization and a temporary coma. Following the incident, the Kings and the McEntees continued to meet in social settings, but the McEntees never indicated that they intended to bring an action related to the incident. More than a year after the incident, a letter from the McEntees’ attorney alerted the Kings that an action may be filed. The Kings promptly notified their homeowners carrier and the ultimate insurer filed a declaratory judgment action in the U.S. District Court for the District of Connecticut, claiming they did not have a duty to defend. The district court granted summary judgment to the insurer without reaching the issue of notice. The Kings appealed to the U.S. Court of Appeals for the Second Circuit, which certified three questions to the Connecticut Supreme Court, including the following:


Under Connecticut law, where a liability insurance policy requires an insured to give notice of a covered claim ‘as soon as practicable,’ do social interactions between the insured and the claimant making no reference to an accident claim justify a delay in giving notice of a potential claim to the insurer?

To establish that an insurer’s duties are discharged pursuant to the “notice” provision in a policy, Connecticut requires, “an unexcused, unreasonable delay in notification by the insured”, and “resulting material prejudice to the insurer.” Late notice is deemed unreasonable where “the situation would have suggested to a person of ordinary and reasonable prudence that liability may have been incurred.” The Connecticut Supreme Court quickly found that, given the severe head injuries suffered, liability was obvious to a person of ordinary and reasonable prudence. Therefore, regardless of the Kings’ subjective belief that an action may not be pursued due to their subsequent social interactions with the McEntees, the Kings’ late notice was objectively unreasonable.


Turning to the second requirement, the court stated that Connecticut law places the burden on the insured to demonstrate that the insurer did not suffer any prejudice as a result of the late notice, citing Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409 (1988). As the court explained, that law was based upon the “legally tenable” reasoning that the burden application was appropriate because “[i]t is the insured who is seeking to be excused from the consequences on a contract with which he has concededly failed to comply. . . . The determination of what is fair, as a factual matter must . . . depend upon a proper showing by the [party] who seeks this extraordinary relief.”


However, the court took this opportunity to reverse the Murphy decision, placing the burden to show prejudice on the insurer. The court explained that “the task of proving a negative is an inherently difficult one, and it may be further complicated by the opposing party’s interest in concealment.” The court further reasoned that the insured was “the party least well equipped to know, let alone demonstrate, the effect of delayed disclosure on the investigatory and legal defense capabilities of the insurer. As such, Connecticut late notice law is now aligned with that of the majority of states, “incentivizing insurers to bring evidence of prejudice, should it exist, to the court’s attention.”


Keywords: insurance, coverage, litigation, Connecticut, late notice, “as soon as practicable,” burden of proof, prejudice, social interaction between insured and claimant


Christopher R. Perry, Robinson & Cole LLP, Hartford, Connecticut


 

February 23, 2012


Ninth Circuit Holds Insurers Can Challenge Bankruptcy Plan

In the Matter of Thorpe Insulation Co., 2012 U.S. App. LEXIS 1272 (9th Cir. Jan. 24, 2012)


The Ninth Circuit in In the Matter of Thorpe Insulation Co., 2012 U.S. App. LEXIS 1272 (9th Cir. Jan. 24, 2012), held that insurers have standing to challenge a debtor’s Chapter 11 plan because, although the plan claimed to be insurance-neutral, it could have a financial impact on the insurers. The court also rejected the debtor’s argument that the insurers’ challenge was moot because the plan had already been implemented. The court further held that the Bankruptcy Code expressly preempted anti-assignment provisions in the insurers’ policies.


Thorpe Insulation Co. distributed, installed, and repaired asbestos-containing products resulting in thousands of asbestos suits against the company. The Bankruptcy Court approved Thorpe’s section 524(g) Joint Plan of Reorganization. Non-settling insurers challenged the plan and opposed it on grounds it violated the anti-assignment clauses in their policies. The district court held the appellants lacked standing to challenge the plan because it was “insurance neutral” and the bankruptcy law preempted the appellants’ state-law contract rights.


The plan, which was funded with $600 million from settling insurers, created a trust that was to oversee how claims were paid as well as establishing claim value. The plan also assigned Thorpe’s insurance rights to the trust, allowing claimants to bring a claim against the trust directly. The plan further purported to be “insurance neutral” and preserved all “Asbestos Insurance Defenses” despite the fact it included several exceptions that prohibited the raising of certain defenses.


Non-Settling Insurers Had Standing
The Ninth Circuit held that the plan was not “insurance neutral” and that appellants were a “party in interest” under the Bankruptcy Code with standing to challenge the plan because it could have a “substantial economic impact” on the appellants in several respects. Specifically, the court noted the plan:


  • could have a preclusive effect on asbestos claims against appellants because the district court had found that the appellants could potentially be bound by the trust’s resolution of asbestos claims;
  • permitted the trust to pay claims without participation from appellants and then seek indemnity from the appellants without providing the appellants a method to challenge the reasonableness of the settlements;
  • permitted the trust to allow asbestos claimants to file direct suits against the appellants; and
  • prohibited contribution claims against settling insurers including reinsurance claims.

 

The court distinguished In Re Combustion Engineering, 391 F.3d 190 (3d Cir. 2004), on the grounds that the plan in that case contained a super-preemptory clause, which specifically provided that nothing in the plan would impair “the insurers’ legal equitable or contract rights . . . in any respect.”


Mootness Did Not Bar Appeal
The court also rejected Thorpe’s argument that the doctrine of equitable mootness barred the appeal on several bases. Specifically, the court noted as follows:


  • Appellants had not sat on their rights;
  • the plan had not been substantially confirmed;
  • appellants transferred $135 million to the trust of which only $44.7 million had actually been distributed to claimants;
  • a remedy would not unduly burden asbestos claimants because the Bankruptcy Court could ensure any changes were equitable and could fashion remedies to prevent any negative impact; and
  • the Bankruptcy Court could devise an equitable remedy that would address the appellants’ objections without disrupting the plan.

 

Bankruptcy Law Preempted Anti-assignment Provisions
The Ninth Circuit upheld the district court’s finding that bankruptcy law preempted the non-settling insurers policies’ anti-assignment clauses, holding that section 541(c) of the Bankruptcy Code “effectively preempts any contractual provision that purports to limit or restrict the rights of a debtor to transfer or assigns [sic] its interest in bankruptcy.”


Keywords: insurance, coverage, litigation, Ninth Circuit, bankruptcy, 524(g), reorganization, anti-assignment, asbestos


Aaron M. Muranaka and Peter D. Volz, Carroll, Burdick & McDonough LLP, San Francisco, CA


 

January 23, 2012


Court Interprets "Separation of Insureds," "Other Insurance"

Universal Ins. Co. v. Burton Farm Dev. Co., LLC, 2011 N.C. App. LEXIS 2281 (N.C. App. Nov. 1, 2011)


Universal Insurance Company denied a defense to Burton, which was listed as an additional insured under a policy issued by Universal to a contractor that provided services to Burton. Though there was no dispute that the underlying claims would trigger coverage under the policy’s personal and advertising injury section, Universal claimed that a number of exclusions, including the “knowledge of falsity” exclusion, precluded coverage for Burton. In addition, Universal claimed that Burton’s own commercial general liability (CGL) policy, issued by First Specialty Insurance Company, provided primary coverage. The North Carolina Court of Appeals rejected both arguments and ordered Universal to defend Burton in the underlying action.


Burton contracted with W.O. White, LLC, to perform a variety of construction work on a subdivision owned by Burton. Burton hired Bernard Mancuso and his company, Mancuso Development, to serve as the project manager. The relationship between White and Mancuso deteriorated, with Mancuso claiming that White’s work was unsatisfactory. White eventually filed suit against Mancuso, Mancuso Development, and Burton, asserting claims for breach of contract, unfair and deceptive trade practices, defamation, and quantum meruit. In pertinent part, White claimed that Mancuso “made false, derogatory and defamatory remarks about White” that were “made maliciously and with a willful and wanton intent” to damage White’s reputation.


Burton sought a defense as an additional insured under a commercial lines policy issued by Universal to Mancuso Development. Universal responded by filing an action seeking a declaration that it had no duty to defend. Burton then obtained a defense from its own CGL carrier, First Specialty, which intervened in the action. On cross motions for summary judgment, the trial court denied Universal’s motion, granted First Specialty’s motion, and declared that Universal had a duty to defend Burton in the White action.


On appeal, Universal first argued that coverage was barred by the exclusion in its policy for injury “done by or at the direction of the insured with knowledge of its falsity.” The court rejected this argument, finding that White’s allegations of malicious slander by Mancuso did not trigger the “knowledge of falsity” exclusion with respect to Burton. The Universal policy contained a “separation of insureds” provision, which stated that the insurance applied “[s]eparately to each insured against whom claim is made or ‘suit’ is brought.” The North Carolina court thus followed the majority of other jurisdictions in holding that this provision prevented the carrier from denying a defense to one insured based on alleged conduct by a different insured.


The court also rejected Universal’s argument that its policy provided only excess coverage to Burton. The two policies contained identically worded “other insurance” provisions, each stating that the policy was excess over “[a]ny other primary insurance available to you.” While the wording of the two clauses was identical, however, the court found that they were not repugnant, because they did not have identical meanings as applied to these facts. In both policies, the term “you” was defined with reference to the named insured, and the named insured was different in each policy––Mancuso under the Universal policy and Burton under the First Specialty policy. Therefore, the provisions could be consistently interpreted and applied, because the reference to “you” in the “other insurance” provision of the Universal policy referred only to Mancuso Development, not to Burton (and vice versa in the First Specialty policy). As a result, the court found that the Universal policy provided primary coverage.


Keywords: litigation, insurance, coverage, North Carolina, duty to defend, separation of insureds, other insurance, additional insured


Alan Parry, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, North Carolina


 

January 11, 2012


Economic or Physical Loss Not Required for Emotional Distress Damages

Miller v. Hartford Life Ins. Co., 2011 Haw. LEXIS 284 (Haw. Dec. 28, 2011).


Revisiting its bad-faith jurisprudence, the Hawaii Supreme Court recently determined that an insured need not prove economic or physical loss caused by the insurer’s bad faith to recover emotional distress damages. See Miller v. Hartford Life Ins. Co., 2011 Haw. LEXIS 284 (Haw. Dec. 28, 2011).


Hartford issued a long-term care policy to the insured, Penelope Spiller. After Spiller suffered a seizure in 2007 and was diagnosed with lung cancer that metastasized to her brain, Hartford determined she was eligible for long-term care benefits. A year later, however, Hartford terminated her benefits. Spiller was determined to no longer be “cognitively impaired” nor incapable of performing two activities of daily living, as required by the policy’s eligibility requirements.


Thereafter, Spiller repeatedly sought reinstatement of her benefits. Phone conversations between Spiller and a Hartford employee became increasingly contentious. After an internal appeal, Hartford affirmed the termination of benefits.


On January 23, 2009, benefits were restored. Nevertheless, in July 2009, Spiller sued in state court for bad faith, negligence, and intentional infliction of emotional distress. She sought damages for the emotional distress incurred during the period that her benefits were denied, together with punitive damages.


 The case was removed on diversity grounds to federal court. The federal district court issued certified questions to the Hawaii Supreme Court. The court addressed one of the questions, which it modified to read, “If a first-party insurer commits bad faith, must an insured prove the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith?”


The court first surveyed its prior holdings on bad faith. Under the leading case, Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996), and subsequent cases, the court intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss.


Hartford, however, urged the court to rely on California case law, under which economic or financial loss was required before an insured could recover emotional-distress damages for bad faith. In contrast, Spiller urged the court to follow Colorado’s lead in rejecting California’s economic-loss requirement for the recovery of emotional-distress damages in insurer bad-faith actions. In Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409 (Colo. 2004), the Colorado court held that in a tort claim against an insurer for bad faith, the insured could recover damages for emotional distress without proving substantial property or economic loss. Otherwise, the insurers would be encouraged to unreasonably refuse to pay, or delay payment of, a valid claim and then avoid liability for bad-faith emotional-distress damages by making payment at the last minute.


The Hawaii Supreme Court determined the Colorado view was more compatible with Best Place. In Best Place, the court made clear its intent to make available to the insured a broader range of compensatory damages, including damages for emotional distress, that were generally not available in actions based solely on breach of contract.


Therefore, the court answered the certified question as follows: “If a first-party insurer commits bad faith, an insured need not prove that the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith.”


Keywords:

insurance, coverage, litigation, Hawaii, long-term care policy, health insurance, bad faith, emotional distress


Tred R. Eyerly, Damon Key Leong Kupchak Hastert, Honolulu, Hawaii

 

 

 

December 21, 2011


Insurer's Right to Fee Arbitration Further Limited under California Law

Janopaul + Block Companies, LLC v. Superior Court, 200 Cal. App. 4th 1239 (2011)


The California Court of Appeal has further limited an insurer’s right to take advantage of the limitations of California Civil Code Section 2860(c) regarding arbitration of fee disputes. Janopaul + Block Companies, LLC v. Superior Court, 200 Cal. App. 4th 1239 (2011). Janopaul clarifies and expands the ruling in Intergulf Development LLC v. Superior Court, 183 Cal. App. 4th 16 (2010) and significantly limits the application of Compulink Mgmt. Ctr., Inc. v. St. Paul Fire and Marine Ins. Co., 169 Cal. App. 4th 289, 292 (2008), insofar as under what circumstances a fee dispute raised in a bad-faith action must be arbitrated under the California statute dealing with a policyholder’s right to select independent counsel where there is a conflict of interest resulting from the insurer’s reservation of rights.


In Janopaul, the policyholder retained independent counsel for defense of a claim. The claim was tendered to the insurer. More than two years thereafter, the insurer finally agreed to defend the policyholder under a reservation of rights and to provide independent counsel. The insurer stated in its reservation of rights letter that it was not obligated to reimburse the policyholder for any fees and costs that the policyholder incurred pursuing any affirmative claims in the underlying action, and that the insurer would pay for only costs and fees reasonable and necessary to the policyholder’s defense in the underlying action. The insurer further expressed its concern regarding the billing practices of the policyholder’s attorneys, including tasks that purportedly did not appear reasonable and/or necessary to the defense of the policyholder in the underlying action. The insurer petitioned to compel arbitration of the fees disputed under California Civil Code Section 2860(c). The policyholder moved to dismiss that petition arguing that, because the insurer waited more than two years to respond to the tender of defense and reserved its rights, the insurer had breached the insurance contract and engaged in bad faith. The policyholder contended that, as such, the insurer forfeited and/or was estopped to assert its alleged right to compel arbitration and set rates for independent counsel.


The Janopaul court concluded that the issues of the insurer’s duty to defend, breach, and bad faith must be resolved first in the trial court before any section 2860(c) arbitration. The Janopaul court reasoned that a determination of one or more of those issues in favor of the policyholder might eliminate altogether the need for arbitration under section 2860(c). Meanwhile, the Janopaul court stressed that its decision by no means insulates the issue of the amount of fees charged by the policyholder’s counsel and that its decision merely requires postponing the determination of that issue until the threshold questions of duty to defend, breach, and bad faith are resolved in the trial court.


While Intergulf reached a similar result in 2010, Janopaul expands that decision by holding that, even where the insurer does acknowledge the policyholder’s right to independent counsel under section 2860(c), the insurer cannot take advantage of the limitations of that statute until the threshold questions of bad faith are first resolved.


Further, in distinguishing the holding in Compulink, the Janopaul court explained that Compulink did not involve the preliminary question of duty to defend or disputes over if and when the insurer recognized the policyholder’s right to select independent counsel. The Janopaul court added that the issue in Compulink was whether section 2860(c) applied only in cases where thesoleissue was independent counsel’s billing rate or hours, and that Compulink did not address the issue in Janopaul that involved the timing of arbitration under section 2860(c) in the context of a bad-faith action.


As a result of Janopaul, bad-faith exposure on the part of insurers in disputing fees of independent counsel is now likely to increase. It remains to be seen if Janopaul will actually push insurers to pay defense fees for claims arising out of California earlier than they normally would, prior to this decision.


It also appears that policyholders may be able to avoid, or at least delay significantly, being subject to arbitration of fee disputes under section 2860(c) by arguing bad faith by the insurer.


Keywords: insurance, coverage, litigation, California, independent counsel, Cumis, section 2860, fee arbitration


Karen E. Jung, Gilbert, Kelly, Crowley & Jennett LLP, Los Angeles, CA

 

 

 

November 2, 2011


Earth Movement Exclusion Held Ambiguous By Nevada Supreme Court

Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668 (Nev. 2011)


The Supreme Court of Nevada held that the earth movement exclusion in a homeowner’s insurance policy was ambiguous and was to be construed against the insurer. Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668 (Nev. 2011).


In July 2005, a water pipe in the insured’s house exploded, flooding the dirt sub-basement. An expert concluded that “after many years of relative foundation stability, [the house] is currently being affected by the expansion of supporting clay soils. [T]he expansion . . . has been severely aggravated by the intrusion of a significant amount of water a short time ago. . . .” 252 P.3d at 671.


The insured submitted a claim under her all risk homeowner’s policy that was issued by Liberty Mutual. The claim was denied on the grounds that the earth movement exclusion applied. The exclusion states in pertinent part:


We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. . . . Earth movement, meaning earthquake including land shock waves or tremors before, during or after a volcanic eruption; landslide, mine subsidence; mudflow; earth sinking, rising or shifting.

252 P.3d at 670 (bold in original). The policy also contains a settling clause, which further excludes losses caused by “settling, shrinking, bulging or expansion, including resultant cracking, of payments, patios, foundations, walls, floors, roofs or ceilings.” 252 P.3d at 671.


The district court, in upholding the exclusion and denying relief, relied upon Schroeder v. State Farm Fire & Cas. Co., 770 F.Supp. 558 (D. Nev. 1991). The Nevada Supreme Court, however, disagreed that Schroeder was applicable, and instead found that the earth movement exclusion in the policy issued by Liberty Mutual was ambiguous as applied.


Citing other jurisdictions, the Nevada Supreme Court held that an ambiguity can arise if the language is unclear as to whether the earth movement exclusion applies only to naturally occurring events, or to man-made events as well. In the absence of clear language excluding coverage for earth movement from any cause whatsoever, courts have found the exclusion ambiguous and/or limited its application to naturally occurring events. In the present context, the court found that Liberty Mutual’s recitation of specific causes of earth movement, rather than excluding coverage for earth movement from “any cause whatsoever,” rendered the exclusion ambiguous.


The Nevada Supreme Court further found that the settling clause did not clarify the man-made versus natural event ambiguity in the exclusion itself. The court rejected the argument that the language of the settling clause in the insured’s policy clarified that it applied to both naturally occurring and man-made events. The court also concluded that the exclusion must be interpreted against the insurer, and distinguished the language from Schroeder because there, the policy excluded earth movement generally, by clarifying that “earth movement includes, but is not limited to,” the listed types of earth movement. Powell, 252 P.3d at 675. Lastly, the court found that the earth movement exclusion in Schroeder clearly applies to events other than those listed as examples, whereas Liberty Mutual’s policy does not.


In Nevada, courts champion the plain language of the contract as the guiding principle for interpretation. Some may argue the supreme court took an overly restrictive view of the exclusion, while others may argue the intent of the drafters was clear that the policy did not cover earth movement under the circumstances presented. If Powell and Reyburn Lawn & Landscape Designers, Inc. Plaster Dev. Co., Inc., 255 P.3d 268 (Nev. 2011) holding an indemnity clause only covered a subcontractor’s negligence because the clause was not specific––are to be reconciled, it is that an exclusion in an insurance policy, like an indemnity agreement in a construction contract, will be interpreted narrowly. Although a court will enforce a clearly drafted provision that operates to the clear detriment of one of the parties, it will not help the party in the superior bargaining position, either the general contractor, seeking indemnity, or the insurer seeking to exclude coverage.


Keywords:

insurance, litigation, Nevada, first-party property, earth movement exclusion, settling clause, ambiguous


John H. Podesta, Murchison & Cumming, LLP, San Francisco, CA

 

 

 

November 2, 2011


Eleventh Circuit Denies Coverage for FACTA Liability

Creative Hospitality Ventures, Inc. v. U.S. Liab. Ins. Co., No. 11-11781, 2011 U.S. App. LEXIS 19990 (11th Cir. Sept. 30, 2011)


The Eleventh Circuit Court of Appeals recently held that under Florida law, printing credit card receipts without truncating the account information in violation of the Fair and Accurate Credit Card Transaction Act (FACTA), 15 U.S.C. § 1681, does not constitute a publication of private information for purposes of commercial general liability (CGL) policies. In Creative Hospitality Ventures, Inc. v. U. S. Liab. Ins. Co., No. 11-11781, 2011 U.S. App. LEXIS 19990 (11th Cir. Sept. 30, 2011), a restaurant had given to its customers credit card receipts that had reproduced their full account information in violation of FACTA, a federal law that prohibits the printing of more than the last five digits of the credit card account number. When a class of consumers brought suit against the restaurant, the business sought legal representation from its insurer under its CGL policy. That policy provided coverage for amounts that the restaurant was legally obligated to pay because of “personal and advertising injury,” which was defined in relevant part as any publication that invaded the right to privacy. When the insurance company denied the application, the restaurant joined a prospective class of businesses that had already filed suit in federal court seeking coverage under similar CGL policies for FACTA violations. A federal magistrate judge found that FACTA created a right to privacy in one’s credit card information and that the printing of a receipt was a covered publication. The federal district court reversed and held that a receipt is not a publication; the Eleventh Circuit affirmed.


In reaching its conclusion, the court applied Florida state contract law and looked to the Florida Supreme Court’s 2010 decision in Penzer v. Transp. Ins. Co., F.3d 1303 (11th Cir. 2010). In that case, the Florida Supreme Court defined publication for purposes of CGL policies as a “communication (as of news or information) to the public: public announcement.” Using this definition, the Eleventh Circuit Court of Appeals held that the CGL policy issued to the restaurant was not ambiguous, and that the provision of a receipt to a customer was not a publication. In so holding, the court reasoned that the receipts were given solely to the customers, who already knew their own account information.

 


Keywords: insurance, litigation, Florida, CGL, personal and advertising injury, publication, Fair and Accurate Credit Card Transaction Act, FACTA


Robert D. Chesler and Peter Slocum, Lowenstein Sandler, Roseland, NJ

 

 

 

November 2, 2011


Mutual Mistake as Basis for Reformation of Insurance Contract

Ill. Nat’l Ins. Co. v. Wyndham Worldwide Operations, Inc., 653 F.3d 225 (3d Cir. 2011).


The U. S. Court of Appeals for the Third Circuit recently concluded that an insurer was permitted to seek reformation of an aircraft fleet insurance policy on the ground of mutual mistake against its insured’s client, which was not a contracting party but was a named insured under the policy seeking coverage. Ill. Nat’l Ins. Co. v. Wyndham Worldwide Operations, Inc., 653 F.3d 225 (3d Cir. 2011) (New Jersey law).


The insurer brought this action against a third-party client of its insured, which was a named insured under the policy in question, seeking a declaratory judgment that coverage under an aircraft fleet insurance policy was not triggered by a crash involving a plane rented and flown by the client’s employee. The insurer and the insured negotiated the relevant policy and previous policies, directly and through their brokers. The policies all contained endorsements that provided coverage for the insured’s clients under limited circumstances.


However, during negotiation of the policy at issue, the insurer and insured agreed to a drafting change in the policy. The change was designed to make it clearer that entities affiliated with the insured were covered when using non-owned aircraft. Both contracting parties stated that they believed that the change did not expand coverage to entities that were unaffiliated with the insured, such as the client seeking coverage. However, the modification, as written in the reformed policy, appears to provide third-party clients with coverage when using non-owned aircraft without the insured’s involvement.


The district court found that the client was entitled to coverage under the reformed policy and that the insurer was not entitled to reformation based upon the alleged mistake between the insurer and insured. The district court held that the policy was clear on its face and that the client was entitled to coverage as a matter of law. The district court further held that the defense of mutual mistake as to the client was unavailable because the client did not participate in the negotiation and drafting of the policy at issue.


The Third Circuit reversed, relying on the basic rule in New Jersey that a court must discern and implement the common intention of the parties to an insurance contract and that the court’s role is to consider what is written in the context of the circumstances at the time of drafting. Pacifico v. Pacifico, 190 N.J. 258, 266 (2007). In furtherance of the goal of binding parties to their mutual intent at the time of contracting, a party may seek reformation of an insurance contract for mutual mistake when it can show that both parties to the contract labored under the same misapprehension as to a particular and essential fact. The court could find no case law in New Jersey prohibiting the applicability of the doctrine when it is to the detriment of a third party. Therefore, the court held that the insurer was permitted to seek reformation of the policy based on the alleged mistake between it and its insured.


On remand, the Third Circuit required the district court to evaluate the insurer’s and insured’s intent as well as the client’s arguments that reformation may be inequitable due to negligence of the parties involved with the negotiation and because the remedy was sought after the accident in question.


The holding expands the ability of an insurer to allege mutual mistake when seeking reformation of an insurance policy that does not comply with the intent of the negotiating parties. However, the case also serves as an important caveat to insurers to use caution when selecting policy language during the reformation of an existing policy.


Keywords: insurance, litigation, New Jersey, reformation, mutual mistake


Aaron Gould, Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C., Newark, NJ

 

 

 

October 26, 2011


EEOC Lawsuit Not a Claim under Employment Practices Liability Policy

Cracker Barrel Old Country Store, Inc. v. Cincinnati Ins. Co., No. 3:07-cv-00303 (M.D. Tenn. Sept. 21, 2011).


The Middle District of Tennessee recently held that a lawsuit brought by the Equal Employment Opportunity Commission (EEOC) did not constitute a claim under the terms of the employment practices liability (EPL) policy before the court and, accordingly, the insurer had no duty to defend or indemnify its policyholder.


In Cracker Barrel Old Country Store, Inc. v. Cincinnati Ins. Co., No. 3:07-cv-00303 (M.D. Tenn. Sept. 21, 2011), 10 employees of the plaintiff policyholder filed charges of discrimination against it with the EEOC and the corresponding state agency. The policyholder notified its insurer, Cincinnati Insurance Company (Cincinnati) of the charges. Ultimately, based upon the charges filed, the EEOC brought suit against the policyholder for multiple alleged violations of Title VII of the Civil Rights Act of 1964 and Title I of the Civil Rights Act of 1991 (EEOC lawsuit). The parties eventually settled the case when the policyholder agreed to pay $2,000,000 into a settlement fund that would be allocated among the charging parties. The policyholder also incurred defense costs exceeding $700,000 before settlement was reached. The policyholder then brought suit against Cincinnati ,seeking a declaration that Cincinnati had a duty to defend and indemnify it in connection with the EEOC lawsuit and seeking damages for breach of contract and bad faith. Both parties moved for summary judgment.


In its motion, Cincinnati argued that the EEOC lawsuit did not constitute a claim under the policy. The policy defined claim as


a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge, which is brought by any past, present or prospective ‘employee(s)’ of the ‘insured entity’ against any ‘insured’ for any of the following twelve listed causes  . . . [w]rongful termination of employment; or . . . [v]iolation of any federal, state or local law that concerns employment discrimination, including sexual harassment . . . (emphasis added).

Notably, Cincinnati did not dispute that the EEOC lawsuit fell within the enumerated causes of action in the policy and raised claims for “[v]iolation of any federal, state or local law that concerns employment discrimination.” Cincinnati argued, however, that because the lawsuit was brought solely by the EEOC, it was not brought by an employee of the insured and was therefore not even arguably covered under the policy.


The policyholder countered that, under basic grammar rules, when one uses a comma followed by the word “which,” the phrase following the word “which” modifies solely the subject immediately preceding the comma. The court identified this rule as the “last antecedent rule.” Under the policyholder’s interpretation, then, the phrase “which is brought by any past, present or prospective ‘employee’” modified only the phrase “complaint or charge.” Thus, only the complaint or charge had to be brought by an employee, here the 10 charging parties. Under the policyholder’s construction, the “civil, administrative or arbitration proceeding” did not have to be brought by an employee to constitute a claim under the policy.


Despite first noting that Tennessee construes any ambiguities in insurance policies against the insurer and in favor of coverage, the district court nevertheless refused to apply that rule of policy construction to its interpretation of the term claim, finding that the term was not ambiguous. The court then found that it need not apply the last antecedent rule articulated by plaintiff because it found that the policy was not ambiguous. The court held that the phrase “a civil, administrative or arbitration proceeding commenced by the service of a complaint or charge” was the subject of the sentence, and was modified in its entirety by the limiting phrase “which is brought by any past, present or prospective ‘employee(s).’”


The court further held that, even under the policyholder’s interpretation, the EEOC lawsuit still would not constitute a claim because it was not commenced by the service of a charge but rather by the service of a complaint. The court thus found irrelevant the fact that the lawsuit was based upon the EEOC charges because the complaint that commenced the action was not brought by an employee.


Finally, the court found persuasive the fact that other insurers’ EPL policies did not contain the limiting employee language, discounting the fact that the policyholder understood that it had purchased coverage for precisely these types of lawsuits by purchasing the Cincinnati policy. The Cracker Barrel decision is therefore instructive to policyholders, reminding them that they should be careful to confirm that their EPL policies provide coverage for claims brought by the EEOC.


Keywords:  insurance, litigation, Tennessee, EPLI, employment practices liability insurance, claim, EEOC, last antecedent rule


Amanda M. Leffler, Brouse McDowell, Akron, OH

 

 

 

October 24, 2011


Tenth Circuit Holds Patent Infringement May Be Covered By CGL Insurance

DISH Network Corporation v. Arch Specialty Ins. Co., No. 10-1445, 2011 U.S. App. LEXIS 20955 (10th Cir. Oct. 17, 2011) (Colorado law)


In a victory for policyholders, the U. S. Court of Appeals for the Tenth Circuit held that under Colorado law, patent infringement claims may be covered under the Advertising Injury part of a Commercial General Liability insurance policy.  See DISH Network Corporation v. Arch Specialty Ins. Co., No. 10-1445, 2011 U.S. App. LEXIS 20955 (10th Cir. Oct. 17, 2011).  In DISH Network, the satellite television provider, DISH Network, sought a defense and indemnity from its insurers after being sued for patent infringement.  The infringement claim arose in connection with DISH Network’s alleged use of patented technology in automated telephone systems that allow its customers to perform pay-per-view ordering and customer service functions over the telephone.


The Tenth Circuit held that the underlying allegations of patent infringement fell potentially within the Advertising Injury offense of “misappropriation of advertising ideas.”  In reaching its holding, the court rejected the insurers’ contention that the phrase was unambiguous and could not encompass patent infringement claims.  Following the holdings in cases such as Hyundai Motor Am. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 600 F.3d 1092, 1102 (9th Cir. 2010), and Amazon.com Int’l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 85 P.3d 974, 977 (Wash. Ct. App. 2004), the DISH Network court held that, “where an advertising technique itself is patented, its infringement may constitute advertising injury.”  DISH Network, 2011 U.S. App. LEXIS 20955, at *20.


Having determined that patent infringement claims could, as a general matter, fall potentially within the coverage afforded for Advertising Injuries, the Tenth Circuit proceeded to hold that the specific claims asserted against DISH Network fell within the covered offense of “misappropriation of advertising ideas” and the alleged underlying injury arose in the course of DISH Network’s advertising.  With regard to the “advertising ideas” prong, the Tenth Circuit rejected the district court’s reasoning that DISH Network could not have misappropriated “advertising ideas” because it did not incorporate patented technologies as a substantive element of its communications with customers.  To the contrary, the Tenth Circuit considered it sufficient that DISH Network allegedly misappropriated “a means of conveying content to and tailoring its interactions with its customers.”  Id. at *37 (quotation omitted).


Finally, in concluding that the causation prong was satisfied, the Tenth Circuit held as follows:


[The alleged injury] derived, at least in part, “from [the patented technology’s] use as the means to market goods for sale.  In other words, the infringement occurred in the advertising itself.”


Id. at *47 (second alteration in original) (quotation and citation omitted).


Thus, despite the near-uniform contention by insurers that patent infringement claims are never covered, the DISH Network case represents another in a growing trend of cases finding the potential for coverage when the infringement involves the alleged wrongful taking of a patented advertising idea.


Keywords:  insurance coverage, litigation, Colorado, patent infringement, CGL, advertising injury


Lee Epstein , Fried & Epstein LLP, Philadelphia, Pennsylvania. 
The author represented the policyholder in this case.

 

 

 

October 17, 2011


Coverage May Only be Triggered Upon Payment of All Underlying Limits of Insurance

Fed. Ins. Co. v. Estate of Irving Gould, et al., No. 1:10-CV-1160 (S.D.N.Y. Sept. 28, 2011)


On September 28, 2011, Federal Insurance Company (Federal), a division of Chubb & Son, prevailed against the former officers and directors of long-defunct Commodore International Limited in a declaratory judgment action pending before Judge Richard J. Sullivan in the Southern District of New York. Judge Sullivan agreed with Federal that it had no obligation under two excess directors and officers liability insurance policies to drop down in place of unavailable underlying insurance and advance defense costs to the former executives of Commodore, producer of the classic Commodore 64 personal computer. Most notably, however, Judge Sullivan also agreed that Federal’s excess policies, which sit at the second and fifth excess layers of Commodore’s insurance tower, cannot be triggered unless and until the limits of all insurance underlying its layers is in fact paid, even if the loss otherwise reaches the excess insurance layers.


In the wake of Commodore’s demise, various third-party claimants commenced litigation against Commodore and its directors and officers. The directors and officers successfully defended or settled each claim with the exception of one action still pending in the Bahamas. Reliance Insurance Company and The Home Insurance of Indiana––both insolvent––underwrote the first, third, fourth, and sixth layers of Commodore’s excess insurance tower, and as a consequence, these layers of insurance have not been, and in all likelihood will never be exhausted. Nevertheless, despite clear language in the policies that coverage “shall attach only after all such ‘Underlying Insurance’ has been exhausted by payment of claim(s),” the directors and officers demanded that Federal advance defense costs incurred in their defense of the Bahamian action and asked Judge Sullivan to declare that Federal’s excess policies would be triggered in the event they faced losses that reached the Federal layers even if the underlying insurance was never paid.


Judge Sullivan––who was general counsel at Marsh, Inc. prior to becoming a federal judge and, thus, no stranger to insurance law––held that, consistent with the unambiguous language of the Federal excess policies, coverage could only be triggered upon payment of all underlying limits of insurance. This is a critical new precedent in New York law. Prior to this ruling, policyholders relied on a long line of New York cases, dating back to the Second Circuit’s 1928 decision in Zeig v. Mass. Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) (Augustus Hand), which held that, depending upon the language of the policy in issue, coverage could be triggered in the event a claim—but not payment—reached the level of an excess insurance layer. The Fed. v. Estate of Gould decision, for the first time, clarifies that coverage under excess insurance policies that require exhaustion can attach only upon actual payment. In so holding, Judge Sullivan recognized that the excess insurers demonstrated “impressive foresight” by including the exhaustion by payment requirement, noting that if the directors and officers “were able to trigger the Excess Policies simply by virtue of their aggregated losses, they might be tempted to structure inflated settlements with their adversaries . . . that would have the same effect as requiring the Excess Insurers to drop down and assume coverage in place of the insolvent insurers.” Slip. op. at 9.


Keywords:  insurance coverage, litigation, directors and officers, excess insurance, attachment point, exhaustion, drop down


Joseph G. Finnerty III and Rachel V. Stevens, DLA Piper LLP, New York, NY

The authors represented Federal Insurance Company in this case.

 

 

 

September 29, 2011


Subcontractor Is Not Obligated to Provide Indemnity Unless Clearly Required by the Agreement

Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev. Co., Inc., 255 P.3d 268 (Nev. 2011).


The Supreme Court of Nevada held that the indemnity clause at issue only covered the subcontractor’s negligence and not the negligence of the general contractor because the clause was not explicit as to whether the subcontractor was required to indemnify the general contractor, even if the subcontractor was not negligent, and the scope of the agreement included indemnity for the general contractor’s negligence.


In this construction defect case, the subcontractor was responsible for the rough and final grading of building lots. The subcontractor did not design or construct any of the allegedly defective retaining walls or side walls. The contract between the general contractor and subcontractor included an indemnity clause that provided


Subcontractor agrees to save, indemnify and keep harmless Contractor against any and all liability, claims, judgments or demands, including demands arising from injuries or death of persons (Subcontractor’s employees included) and damage to property arising directly or indirectly out of the obligation herein undertaken or out of the obligations conducted by Subcontractor, save and except claims or litigation arising through the sole negligence or sole willful misconduct of the Contractor, and will make good to and reimburse Contractor of any expenditures, including reasonable attorney’s fees. If requested by Contractor, Subcontractor will defend any such suits at the sole cost and expense of Subcontractor.

In reversing the trial court, the Supreme Court of Nevada relied on its recent decision in George L. Brown Ins. v. Star Ins. Co., 237 P.3d 92 (Nev. 2010), which held that “contracts purporting to indemnify a party against its own negligence will only be enforced if they clearly express such an intent and a general provision indemnifying the indeminitees ‘against any and all claims,’ standing alone, is not sufficient.” 237 P.3d at 97 (citation omitted). Based on the language of the clause, the Nevada Supreme Court concluded that the subcontractor was required to indemnify the general contractor only for liability or damages that were attributable to the subcontractor’s negligence, because the indemnity clause did not expressly or explicitly state that the subcontractor would indemnify general contractor for general contractor’s negligence.


The trial court had concluded that the subcontractor was partially negligent based on its finding that the subcontractor’s owner had made a judicial admission of liability. Specifically, the trial court held that the owner had conceded in his trial testimony that, as a general rule, a contractor should not cover a wall’s drainage system and that, if his employees had covered the drainage openings with sand, it would have been a mistake. In reversing the trial court, the Nevada Supreme Court held that the statement by the owner was not a judicial admission because it was not a clear, unequivocal statement of liability, and that it was not an evidentiary admission because it did not admit a fact adverse to the owner’s claims.


Because the indemnity agreement only applied to the separate negligence of the subcontractor, the general contractor was only entitled to that portion of the fees and costs actually incurred by the general contractor in defending against those claims directly attributable to the subcontractor’s scope of work. The decision is silent as to which party has the burden of apportioning the fees and costs incurred. Specifically, it is unclear whether the general contractor has the burden of proving allocation in its case against the subcontractor, or whether the subcontractor has the burden of allocation in seeking to pay less than the full amount of fees and costs allegedly incurred.


As the decision demonstrates, subcontractors have been exposed to substantial awards of attorney fees pursuant to indemnity contracts. This decision provides some relief to subcontractors and their insurers at the expense of general contractors and developers.


Keywords:  insurance coverage, litigation, Nevada, subcontractor, indemnity, judicial admission, negligence


John H. Podesta, Branson, Brinkop, Griffith & Strong, LLP, Redwood City, CA

 

 

 

September 28, 2011


Subcontractor Exception to Your-Work Exclusion Is Ambiguous

Mosser Constr., Inc. v. The Travelers Indemnity Co., No. 09-4449, 2011 U.S. App. LEXIS 14455 (6th Cir., July 14, 2011).


In Mosser Constr., Inc. v. The Travelers Indemnity Co., No. 09-4449, 2011 U.S. App. LEXIS 14455 (6th Cir. July 14, 2011), the insured general contractor brought an action against Travelers for failing to defend and indemnify it in connection with an underlying action involving improvements to a wastewater treatment facility. In the underlying action, the owner alleged that a new odor-control building being constructed by Mosser sustained property damage as a result of defective backfill used in the construction of the building. The contract between the insured and the supplier of the backfill was a standard two-page purchase order that constituted 0.5 percent of the total master contract price. Furthermore, the supplier never stepped foot on the project site and did not deliver the backfill.


The insured argued that the U.S. District Court for the Northern District of Ohio erred in finding that the exception in the “your-work” exclusion of a commercial general liability policy regarding work performed by a subcontractor did not apply because the supplier was a mere material man, not a subcontractor. The U.S. Court of Appeals for the Sixth Circuit agreed with the insured, finding that because the undefined term subcontractor in the exception is subject to multiple reasonable interpretations, it is ambiguous and must be construed against the insurer. Therefore, under the facts in the underlying action, the Sixth Circuit found that the supplier was a subcontractor and, accordingly, that the exception to the your-work exclusion applied, affording coverage for Mosser.


Keywords:  insurance coverage, litigation, subcontractor, your-work exclusion


Jeffrey J. Vita and Ryan M. Suerth, Saxe, Doernberger & Vita, P.C., Hamden, Connecticut

The authors represented the policyholder in this case.

 

 

September 28, 2011


Right of Privacy Construed Broadly to Expand Coverage

Owners Ins. Co. v. European Auto Works, Inc.

2011 U.S. Dist. LEXIS 80379 (D. Minn., Aug. 30, 2011)


The U. S. District Court for the District of Minnesota recently held that a violation of the Telephone Consumer Protection Act (TCPA) infringed on privacy interests so that it constituted “advertising injury” under a CGL policy. In Owners Ins. Co. v. European Auto Works, Inc., 2011 U.S. Dist. LEXIS 80379 (D. Minn., Aug. 30, 2011) the plaintiffs, Owners Insurance Co. and Auto-Owners Insurance Co., moved for summary judgment seeking a declaration that they had no duty to defend or indemnify their insured, European Auto Works, Inc.––dba Autopia––pursuant to the terms of primary CGL policy and follow-form umbrella CGL policy. Autopia filed a cross-motion for summary judgment.


In the underlying claim that gave rise to the coverage dispute, Percic Enterprises, Inc., brought a class-action suit against Autopia for violating the TCPA, which prohibits the sending of unsolicited advertisements. Specifically, Percic claimed that Autopia sent it and other class members nearly 4,000 unsolicited faxed advertisements. Autopia tendered defense of the action to the insurers, which acknowledged its obligation to defend Autopia “until such time as the facts establish that there is no arguable basis for coverage.” Id. at *6. Autopia eventually settled with Percic for $1.95 million and sought indemnification from the insurers for the same.


The CGL policy at issue provided that it would pay “those sums that the insured becomes legally obligated to pay as damages because of . . . ‘advertising injury.’” Advertising injury was defined as an “injury arising out of . . . Oral or written publication of material that violates a person’s right of privacy.” Neither publication nor right of privacy were defined in the policy. Accordingly, the parties disagreed as to whether the advertising injury provision extended coverage to a TCPA claim. Autopia also argued that coverage was provided under the property-damage provision of the policies, but the court declined to address that assertion.


The insurers argued that the underlying TCPA claim was not a privacy tort and, therefore, it was not covered by the CGL policies. They pointed out that the legal concept of privacy encompassed interests in secrecy and seclusion. In their view, secrecy was not violated because the faxes did not disclose information to a third party. Furthermore, seclusion was not infringed within the meaning of the CGL policies because infringement required a privacy violation that is the result of a publication that the insurers contended meant “making information known to third parties.”


The court disagreed with the insurer’s argument and accepted Autopia’s broad construction of privacy and publication. It held that the plain meaning of privacy applied and that the TCPA claims involved violations of the underlying plaintiff’s right to privacy because the plaintiffs alleged that the unsolicited faxes interfered with their right to be left alone. With regard to the meaning of publication, the court relied heavily upon a decision by the Tenth Circuit Court of Appeals, which found the term to be ambiguous because it could either mean “communication of material to a third party” (implicating secrecy) or “the simple transmittal of material to a recipient” (implicating seclusion). It noted that the insurers:


could have included more restrictive definitions in their policies to narrow the scope of coverage to only certain types of privacy-rights violations, yet they did not do so, and the court must interpret the policy language as written and construe ambiguities in favor of Autopia.


Id. at *16.


As a result, the court granted summary judgment in favor of Autopia.


This decision illustrates the current split on the interpretation of the advertising injury clause of CGL policies, as the Third, Fourth, and Seventh Circuits have reached opposite conclusions.It will be interesting to see how this issue plays out as it continues to be litigated and whether insurers might consider amending the definitions of publication or privacy in their CGL policies.


Keywords: insurance coverage, litigation, Minnesota, TCPA, privacy, advertising injury


Darren Dwyer, Cozen O’Connor, Philadelphia, Pennsylvania

 

 

 

Sole Negligence Provision Does Not Bar Defense for Additional Insured

A-1 Roofing Co. v. Navigators Ins. Co., 2011 Ill. App. LEXIS 656 (Ill. Ct. App. June 24, 2011).


The Illinois Court of Appeals recently held that a general contractor was entitled to a defense as an additional insured despite a sole negligence provision in the additional insured endorsement when the underlying complaint did not allege the general contractor was solely negligent. A-1 Roofing Co. v. Navigators Ins. Co., 2011 Ill. App. LEXIS 656 (Ill. Ct. App. June 24, 2011).


A-1 was the general contractor for a roof resurfacing job at a high school. Jack Frost Iron Works Inc. was one of A-1’s subcontractors. Frost had a commercial general liability policy with Navigators Insurance Co. under which A-1 was an additional insured.


An employee of Frost’s subcontractor Midwest Sheet Metal Inc. was killed at the job site when a boom lift he was operating flipped over. The boom lift had been leased by another Frost subcontractor, Bakes Steel Erectors, Inc. (BSE). The deceased’s estate filed suit against A-1, BSE, and two other defendants.


A-1 then filed a declaratory judgment action against Navigators, seeking a judgment that the insurer had a duty to defend and indemnify A-1. The trial court found Navigators had no duty to defend or indemnify A-1 because the underlying complaint did not state a cause of action against the insured, Frost.


On appeal, the court noted that the policy stated that an additional insured was covered “with respect to liability arising out of ‘your work’ for that insured by or for you.” Your work was defined as “work or operations performed by you or on your behalf.” The underlying complaint alleged the decedent’s death occurred while BSE was performing its work on Frost’s behalf, in furtherance of work Frost was contractually obligated to perform for A-1. A-1’s liability in the underlying suit arose out of work performed for A-1 on behalf of Frost by BSE. Therefore, the claim against A-1 was within the scope of the additional insured endorsement.


Next, the court considered whether the policy’s sole negligence clause negated Navigator’s obligation to provide coverage to A-1. The sole negligence provision stated coverage did not apply “to any claim arising out of the sole negligence of any additional insured or any of their agents/employees.” The underlying complaint did not allege that the decedent’s injuries arose solely from A-1’s negligence. Instead, the complaint alleged negligence on the part of BSE and two other parties. Because the negligence allegations were not exclusively directed at A-1, the sole negligence exclusion was not triggered to negate coverage as to A-1.


Therefore the trial court’s decision was reversed


Keywords: insurance, litigation, Illinois, Additional insured, Duty to defend, sole negligence clause


––Tred R. Eyerly, Damon Key Leong Kupchak Hastert, Honolulu, Hawaii

 

 

Breach of Contract Needed for Bad-Faith Discovery

Brethorst v. Allstate Prop. & Cas. Ins. Co., 798 N.W.2d 467 (Wis. 2011)


In Brethorst v. Allstate Prop. & Cas. Ins. Co., 798 N.W.2d 467 (Wis. 2011), the insured asserted a bad-faith claim against Allstate but did not assert a claim for breach of the insurance contract. Allstate requested that the trial court bifurcate the issues of coverage and bad faith and asked for discovery on the bad-faith claim to be stayed until the contract issues were resolved. The trial court denied Allstate’s request. The Supreme Court of Wisconsin then granted certification on two issues: whether a finding of wrongful denial of benefits is a condition precedent to proceeding with discovery in a first-party, bad-faith claim based on such a denial and, if so, whether a trial court errs if it refuses to grant an insurer’s motion to bifurcate the issues for discovery.


The court held that breach of contract and first-party bad faith are separate claims, so a bad-faith claim may be asserted without a claim for breach of contract. In doing so, the court classified insurance bad faith as an intentional tort, as opposed to a mere breach of contract. However, some breach of the insurance contract is a fundamental prerequisite for a first-party, bad-faith claim against an insurer. Therefore, an insured may not proceed with discovery on a first-party, bad-faith claim unless the insured has pleaded a breach of contract by the insurer as part of the bad-faith claim and satisfied the court that he or she has established such a breach or will be able to prove such a breach in the future. In the case at hand, the insured had put forth sufficient evidence of a breach of contract by the insurer that discovery on the bad-faith claim could proceed.


Keywords: insurance, litigation, bad faith, discovery, bifurcate, breach, Wisconsin


––Heather Smith Michael, Arnall Golden Gregory, LLP, Atlanta, Georgia

 

 

Jury Trials Allowed for Bad Faith

Wood v. New Jersey Mfr. Ins. Co., ___A.3d___, 2011 N.J. LEXIS 679 (N.J. June 14, 2011)


In a case of first impression, the Supreme Court of New Jersey held that bad-faith claimants have a right to a trial by jury in Wood v. New Jersey Mfr. Ins. Co., ___A.3d___, 2011 N.J. LEXIS 679 (N.J. June 14, 2011). In that case, the insured, who maintained a $500,000 liability policy, had been sued in a personal injury action resulting from a dog attack. The insurer rejected offers to settle the case within policy limits, despite recommendations to do so by defense counsel and its own claims adjuster. Thereafter, a verdict was entered against the insured for more than $1.4 million.


The insured assigned his bad-faith claim to the personal injury plaintiff, who then commenced a declaratory judgment action against the insurer based on its bad-faith failure to settle. After the trial court granted summary judgment in the plaintiff’s favor, the appellate division reversed, and the supreme court accepted the certified question of whether insurance bad-faith claims are to be decided by the judge or a jury.


Under New Jersey law, there is no right to a trial by jury on equitable claims. The plaintiff argued that bad-faith claims were equitable in nature, involved complex issues relating to fiduciary relationships, and should be decided by the judge. The court determined, however, that insurance bad-faith claims are, at their core, simple breach-of-contract claims seeking monetary damages. Accordingly, they are legal actions to which the right to a trial by jury attaches.


Keywords: insurance, litigation, bad faith, trial, jury, judge, New Jersey


––Heather Smith Michael, Arnall Golden Gregory, LLP, Atlanta, Georgia

 


 

“Other Premises” Exclusion May Not Bar Coverage for Insured’s Negligence

Westfield Insurance Co. v. Hunter, 2011-Ohio-5642 (April 20, 2011)


Settling a conflict among appellate courts in a 4–3 decision, the Supreme Court of Ohio held that an exclusion in a homeowner’s policy for claims “arising out of” premises owned by the insured other than the insured location does not exclude coverage for claims occurring on another property owned by the insured, so long as the claims are based on the insured’s negligence and that negligence is unrelated to the quality or condition of the premises. The exclusion only bars coverage if the claims are based on the quality or condition of the other property or on the insured’s ownership of the other property.

The insureds in this case owned a primary residence in Ohio and a farm in Indiana. Westfield Insurance Company provided homeowner’s insurance coverage for the Ohio residence and Grinnell Mutual Reinsurance Company provided homeowner’s coverage for the Indiana property. After the insureds’ grandson was injured while riding an ATV with other young relatives at the Indiana farm, his parents filed a lawsuit against the insureds, claiming negligence. Westfield filed a declaratory judgment action, seeking a declaration that it had no duty to defend or indemnify the insureds. Grinnell filed a counterclaim, asserting that it and Westfield were both obligated to defend and indemnify the insureds. The trial court granted summary judgment in favor of Westfield, holding that Westfield had no obligation to defend or indemnify the insured because the claims “arose out of” a premise that was not insured by Westfield. The court of appeals affirmed, reasoning that the farm at which the claims occurred was not an “insured location” under the Westfield policy. Grinnell appealed to the Supreme Court of Ohio.


The court defined the issue as “to what degree a negligent claim must be connected to the premises in order for the exclusion to be triggered.” The Eighth District Ohio Court of Appeals had interpreted “arising out of” to mean “flowing from” or “having its origin in.” Nationwide Mut. Fire Ins. Co. v. Turner (1986), 29 Ohio App. 3d 73, 77. The Second District Ohio Court of Appeals interpreted the phrase “arising out of” more narrowly. Am. States Ins. Co. v. Guillermin (1996), 108 Ohio App. 3d 547. Under the Guillermin interpretation, coverage would be excluded only if a dangerous condition on the premises caused or contributed to the injury for which coverage is sought. Id.at 565. The court rejected the causal connotation from Turner and adopted the rationale in Guillermin, thereby narrowly interpreting “arising out of” so that the claims would be excluded by the Westfield policy only if they involved the quality or condition of the other location or were made solely because the insureds owned the property where the injury occurred.


The complaint did not allege that the quality or condition of the premises caused or contributed to the injury, so the case was remanded to the trial court to determine whether the claims against the insureds are based on the alleged breach of a duty of care, in which case the Westfield policy would be obligated to defend, or on the fact that the insureds owned the property upon which the injury occurred, in which case the exclusion would apply and Westfield would not have a duty to defend.


Keywords: litigation, insurance, “arising out of,” exclusion, premises, homeowner’s policy


––Brandi Doniere, Thacker Martinsek LPA, Perrysburg, OH

 


 

Bad Faith—Jury Trial

Wood v. New Jersey Mfrs. Ins. Co., 2011 N.J. LEXIS 679 (N.J. June 14, 2011)


The New Jersey Supreme Court unanimously ruled that a policyholder has the right to a jury trial when bringing a claim of bad faith against its insurer for failure to settle within policy limits pursuant to Rova Farms Resort, Inc. v. Investors Ins. of Am., 65 N.J. 474, 323 A.2d 495 (N.J. 1974). Writing for the court, Justice Rivera-Soto stated that “a Rova Farms bad faith claim is and always has been a breach of contract claim, and it is beyond question that a breach of contract claim was at common law and remains today an action triable to a jury.”


However, the court noted that a claim of bad faith under Rova Farms will not automatically be tried by a jury; rather, a party’s failure to demand a jury trial will constitute a waiver of that right. Furthermore, the court acknowledged that despite a demand for a jury trial, the parties are not bound by the demand and are free to “consent to a trial by the court without a jury.”


Neil V. Mody and Michael J. Creegan, Connell Foley LLP, Roseland, NJ


 

South Carolina Passes New Statute on “Occurrence”


On May 17, 2011, South Carolina became the third state to pass pro-policyholder legislation regarding what constitutes an “occurrence” under standard CGL policies. The other two states are Arkansas and Colorado. Ark. Code § 23-79-155; Colo. Rev. Stat. § 13-20-808. The South Carolina bill, which will be codified as S.C. Code Ann. § 38-61-70, was introduced earlier this year, only two weeks after the state supreme court issued its decision in Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909, 2011 S.C. LEXIS 15 (S.C. Jan. 7, 2011).


The Crossmann decision represented a change in course for the court, which the year before had ruled that defective construction was an occurrence under standard CGL policies. In Crossmann, the court ruled that damages resulting from faulty workmanship were the “natural and probable cause” of the faulty work and, as such, did not qualify as an occurrence.


In response to this judicial pronouncement, the state senate introduced a bill, which the governor signed on May 17, 2011, providing as follows:


Commercial general liability insurance policies shall contain or be deemed to contain a definition of occurrence that includes:


(1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and

(2) property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.


(Emphasis added.) Although the statute has yet to be construed by the courts, policyholders can argue that the statute makes clear that any damages flowing from faulty workmanship constitutes a covered occurrence under standard CGL policies. The statute took effect immediately upon the governor’s signing, and insurers and policyholders alike should take it into account in evaluating coverage issues and disputes.


South Carolina isn’t the only state making moves on the issue of whether faulty workmanship constitutes an occurrence. On May 18, 2011, the Hawaii legislature approved House bill 924, which explicitly overturns Group Builders Inc. v. Admiral Insurance Co., 231 P.3d 67 (Haw. Ct. App. 2010) and mandates that insurance policies be interpreted so as to provide coverage for claims relating to defective construction. The bill will become final upon signing by the governor.


For full text of the statutes and bills discussed herein, click here [PDF].


Tracy Alan Saxe, Saxe Doernberger & Vita, P.C., Hamden, Connecticut.


 

CGL Has Primary Obligation to Pay Defense Costs


Fieldston Prop. Owners Assn., Inc. v. Hermitage Ins. Co., Inc., 2011 N.Y. Lexis 254 (N.Y. Feb. 24, 2011).


In Fieldston Prop. Owners Assn., Inc. v. Hermitage Ins. Co., Inc., 2011 NY slip op. 1361, 2011 N.Y. Lexis 254 (N.Y. Feb. 24, 2011)[PDF], a policyholder sought coverage under separately issued commercial general liability (CGL) and directors and officers (D&O) policies with respect to two underlying actions. Each of the underlying lawsuits primarily involved D&O claims, but included a single “injurious falsehood” count that potentially implicated the CGL coverage. Thus, a dispute arose between the insurers as to which policy, CGL or D&O, imposed the primary obligation to pay defense costs for the underlying matters.


In particular, the CGL insurer argued that the D&O insurer had the primary defense obligation because most of the claims implicated the D&O policy, while the D&O insurer refused to pay any defense costs based on the “other insurance” provisions in the policies. Accordingly, the court examined the competing other insurance provisions to determine which insurer had the primary defense obligation. The CGL policy contained the following provision, sometimes referred to as a co-primary other insurance clause:


If other valid and collectible insurance is available to the insured for a loss we cover . . . our obligations are limited as following:

(a) Primary Insurance. This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described [herein].
(b) Excess Insurance. This insurance is excess over [certain types of insurance not at issue here].

By contrast, the D&O policy contained this fundamentally different other insurance provision, sometimes referred to as an excess other insurance clause:

If any Loss arising from any claim made against the Insured(s) is insured under any valid policy(ies) . . . , then this policy shall cover such Loss . . . only to the extent that the amount of such Loss is in excess of the amount of such other insurance . . . unless such other insurance is written only as specific excess insurance over the limits provided in th[is] policy.


Thus, the GCL policy provided that it would share in any coverage obligation with other available insurance on a co-primary basis, while the D&O policy was written to apply as excess where the insured’s loss is otherwise covered. Based on these provisions and the possibility that the CGL policy covered at least one claim in each of the underlying suits, the court of appeals ruled that the CGL insurer was obligated to pay all defense costs for the underlying matters. Moreover, the court held that the CGL insurer had no right to recover equitable contribution from the D&O insurer because the D&O policy expressly provided that it applied on an excess basis where valid insurance is available to cover an underlying loss. Finally, the court recognized that while its holding may appear to be inequitable and that it may have held differently if the policies contained different other insurance language, it was obligated to interpret the policies as written and could “not judicially rewrite the language of the policies at issue here to reach a more equitable result.”

 

Keywords: New York, other insurance, CGL, D&O, primary, excess, fieldston, hermitage


––Neil V. Mody, Connell Foley LLP, Roseland, New Jersey

 


 

Illinois Emphasizes Prejudice Factor in Late-Notice Case


West American Insurance Co. v. Yorkville National Bank, 2010 WL 3704985 (Ill. Sept. 23, 2010)


Bit by bit, Illinois is becoming a more favorable state for policyholders on the issue of late notice. Although Illinois is one of four states that do not require an insurer to show that it was prejudiced by the timing of an insured’s notice, a recent decision by the Illinois Supreme Court places considerable weight on a showing of prejudice and generally establishes a higher bar for insurers to prevail on a late-notice defense. In West American Insurance Co. v. Yorkville National Bank, the Illinois Supreme Court held that a policyholder that gave notice to its primary general liability insurer 27 months after suit was filed against it and 37 months after learning about the underlying occurrence had given timely notice. 2010 WL 3704985, at *6.


In Yorkville, an employee of Yorkville National Bank filed suit against the bank in September 2001 alleging defamation. Id. at 1. The bank’s president testified that he met with the insurance broker who placed the policy shortly thereafter, discussed the suit, and asked if the general liability policy would provide coverage. Id. The broker replied, “Probably not.” Id. The bank proceeded to defend itself in the litigation. Id. at 2. In January 2004, however, another insurer advised that the policy should cover the suit. Id. The bank sent a notice in writing on January 19, 2004. Id. West American denied coverage based on late notice on March 5, 2004—only 10 days before trial. Id. Having been denied a defense, the bank settled the case and later brought a declaratory judgment action against West American. Id.


On appeal, the Illinois Supreme Court held that Yorkville had not violated the general liability policy’s late-notice provision. Id. at 6. The Court looked at the following factors:


  • the specific language of the policy’s notice provision;
  • the insured’s sophistication in commerce and insurance matters;
  • the insured’s awareness of an event that may trigger insurance coverage;
  • the insured’s diligence in ascertaining whether policy coverage is available; and
  • prejudice to the insurer. Id. at 3.

The first factor favored neither party, according to the Court, because the policy’s requirement that the insured provide written notice “as soon as practicable” and “immediately” forward suit papers did not identify “a specific time frame for giving notice.” Id. at 4. The Court held that the second and third factors weighed against Yorkville, because, as a bank, it was presumed sophisticated, and because the bank’s president learned about the employee’s allegations 10 months before the employee filed suit. Id.


With respect to Yorkville’s diligence in ascertaining coverage, the Court stated that “an insured’s reasonable belief of noncoverage under a policy may be an acceptable excuse for the failure to give timely notice. . . .” Id. Yorkville’s excuse was reasonable, the Court held, because a reasonably prudent insured in Yorkville’s position would not have continued to pursue coverage after the broker informed it that coverage did not apply. Id. at 5.


The Court also held that the fifth factor, prejudice, weighed in Yorkville’s favor. Id. at 5–6. The Court considered the fact that West American never investigated the suit or made any efforts to delay trial after it was given notice. Id. at 5. Moreover, because West American had actual notice of the lawsuit in its early stages, it could have reached out to Yorkville and obtained a copy of the suit. Id. at 5–6. After considering all of the factors, the Court determined that the timing of Yorkville’s written notice was reasonable and did not violate the policy’s late-notice provision. Id. at 6.


The Court’s decision is significant for several reasons. Among them are:


  • the significant amount of time that passed from notice of the occurrence—37 months—and notice of the suit—27 months—to Yorkville’s tender of coverage;
  • the Court’s analysis that policy language requiring notice “as soon as practicable” was not sufficiently specific to weigh in the insurer’s favor;
  • the Court’s application of the “reasonable excuse” standard to a sophisticated insured; and
  • the considerable weight the Court applies to the prejudice factor.

 

Moreover, according to the dissent, the Yorkville decision significantly expands Illinois’ actual notice doctrine. Dicta in the dissent that notice provisions may increasingly be treated in Illinois as mere technical requirements could be prescient.


––Noel Paul, Reed Smith, LLP, Chicago, Illinois

 


 

Insurer Denied the Right to Binding Arbitration


Intergulf Development LLC v. Superior Court , 183 Cal. App. 4th 16 (2010)


In a bad-faith action, Intergulf Development LLC v. Superior Court, 183 Cal. App. 4th 16 (2010), the court held that, where there has been no determination that the insurer breached the duty to defend, an insurer is not entitled to binding arbitration under a California statute requiring binding arbitration for attorney fees disputes.


The insured sued for bad faith based on the insurer’s failure to acknowledge the insured’s right to independent counsel and delay in paying policy benefits. The insurer took the position that the independent counsel chosen by the insured charged legal fees far in excess of the amounts required to be paid by the insurer under California Civil Code section 2860(c). The insurer petitioned to compel arbitration under that statute, which requires binding arbitration for attorney fees disputes. In response, the insured contended that the gravamen of the insured’s complaint was bad faith and breach of contract, not a dispute over the amount the insurer should pay the insured under the statute.


The court concluded that, where the insured seeks compensatory as well as punitive damages in a bad-faith action, a premature decision that the insurer is entitled to binding arbitration under section 2860(c) may prejudice the insured’s claim that the insurer failed to accept the insured’s selection of independent counsel and pay its share of defense costs in a timely manner—a factual question at the heart of the insured’s breach of contract and bad-faith claims.


It remains to be seen if this ruling will push insurers to pay defense fees for claims arising out of California earlier than they did, prior to this decision.


It also appears that insureds may be able to avoid being subject to binding arbitration under section 2860(c) by arguing bad faith by the insurer.


Karen E. Jung, Gilbert, Kelly, Crowley & Jennett LLP, Los Angeles, CA


 

Third Circuit: Construction Defects Do Not Constitute "Occurrences" under New Jersey Law


Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., 2010 U.S. App. LEXIS 25334 (3d Cir. Dec. 10, 2010)


In Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., the Third Circuit applied established New Jersey law to conclude that general liability insurance does not cover faulty workmanship resulting in damage to the insured’s work itself. In Parkshore, after a developer/general contractor built a condominium complex in Linwood, New Jersey, the condominium association complained that the windows were improperly caulked, resulting in water infiltration. Accordingly, the association filed a complaint against the developer, alleging breach of contract, breach of implied warranties, and negligence.


The developer tendered the complaint to its general liability insurer, Penn National, which disclaimed coverage on the basis that the underlying claims did not give rise to an “occurrence” under the policies. In a resulting coverage action, the New Jersey District Court agreed that there was no “occurrence,” because all of the water damage was to the developer’s project (i.e., the condominium complex itself).


On appeal, the developer argued that the underlying complaint involved an “occurrence” under the New Jersey Supreme Court decision in Weedo v. Stone-E-Brook, 81 N.J. 233 (N.J. 1979), because part of the claim sought “consequential damage” to the non-defective parts of the complex affected by water seeping through the poorly caulked windows. The developer asserted that it was therefore entitled to coverage for the property damaged as a result of the water infiltration.


In rejecting the developer’s argument, the Third Circuit observed that the developer was responsible for all of the work at the condominium complex. As a result, even though the developer had retained various subcontractors to perform its work, the court found that there was no “occurrence” because all of the damage stemming from the developer’s faulty work was “to the completed project itself.” Accordingly, Circuit Judge Chagares dismissed the policyholder’s interpretation of Weedo, holding that “New Jersey courts foreclose” coverage where an insured’s faulty construction damages its own work. 


Finally, it is also important to note that the court rejected the developer’s argument that damage to the work of a subcontractor constitutes an “occurrence,” reasoning that, with respect to a general contractor, the entire project is that contractor’s “own work.” Thus, the Third Circuit in Parkshore reiterated that construction defects resulting in damage to the work of an insured are not covered by general liability insurance under New Jersey law.


Neil V. Mody, Connell Foley LLP, Roseland, NJ


 

Court Ends Defense Costs Coverage for Allen Stanford


Pendergest-Holt v. Certain Underwriters at Lloyd's of London, No. H-09-3712, 2010 U.S. Dist. LEXIS 108920 (S.D. Tex. Oct. 13, 2010)


Upon remand after a decision by the U. S. Court of Appeals for the Fifth Circuit, the U.S. District Court for the Southern District of Texas recently issued a decision ending directors and officers (D&O)  liability insurance coverage for R. Allen Stanford and other Stanford Financial executives prior to a final adjudication of such executives’ criminal and civil liability.


In Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, No. H–09–3712, 2010 U.S. Dist. LEXIS 108920 (S.D. Tex. Oct. 13, 2010), the court ruled on the application of a money laundering exclusion in D&O insurance policies. Prior to the court’s decision, Mr. Stanford and other Stanford Financial executives had sought advancement of defense costs from such D&O insurers for defense of criminal and SEC actions regarding alleged misconduct at Stanford Financial, including participation in a massive Ponzi scheme. The insurers initially advanced defense costs but––after a Stanford Financial chief financial officer entered a guilty plea––retroactively denied coverage and sought reimbursement for all advanced amounts. The insurers based their denial on the money laundering exclusion, which required the insurers to pay defense costs until such time that it was determined that the alleged act or acts did “in fact” occur. Mr. Stanford and other executives then sued for coverage, and, in an earlier decision, the court entered a preliminary injunction prohibiting the insurers from withholding defense costs and from unilaterally making the “in fact” determination under the money laundering exclusion. The Fifth Circuit affirmed the preliminary injunction in part but remanded for the district court to determine whether the “in fact” requirement of the money laundering exclusion had been met.


On remand, the court held an evidentiary hearing, after which it issued the above decision and made the “in fact” determination required by the money laundering exclusion. The court held that the insurers had proven––by a preponderance of the evidence––a substantial likelihood of success in demonstrating that Mr. Stanford and the other executives seeking coverage had “in fact” committed money laundering as defined in the money laundering exclusion. In making a determination that the “in fact” standard had been met, the court examined the policy language, the underlying complaints, and outside evidence presented at the evidentiary hearing, including the testimony of witnesses. Notably, Mr. Stanford and the other executives seeking coverage neither testified nor were deposed, and the court stated that its findings and conclusions were narrow and not intended to be used in the criminal and SEC actions against those individuals.


The court also denied a stay pending appeal, meaning the insurers––as of the court’s judgment–– no longer had an obligation to pay or advance defense costs. The court justified this by the fact that there was a “dwindling insurance pot” for the use of some 30 other Stanford Financial executives. The court did leave open the possibility that should Mr. Stanford and the other executives prevail in the criminal and SEC actions, they could seek a final determination on the merits from the court as to the applicability of the money laundering exclusion. In the interim, the court’s ruling left the policyholders on their own in funding their defense.


This decision demonstrates the importance to policyholders of negotiating for narrow exclusionary wording in D&O insurance policies. While the specific money laundering exclusion at issue in this decision does not frequently appear in D&O policies, the language permitting application if the excluded act(s) “in fact” occurred frequently does appear in so-called “conduct” exclusions in D&O policies––exclusions precluding coverage for personal profit or criminal or fraudulent acts. Importantly, as the court noted in its decision, the fraud exclusion in the D&O policies was not at issue as to Mr. Stanford and other executives because, unlike the money laundering exclusion, it applied only after a final judgment had been entered against a policyholder. Here, a simple change of language of the money laundering exclusion during placement of the policy to a “final adjudication in an underlying action” standard would have preserved coverage for Mr. Stanford’s and other executives’ millions of dollars of ongoing defense costs.


Brian S. Scarbrough, Jenner & Block, Washington, D.C.


 

Supreme Court of Oregon Rules on the Burden of Proving Damage


ZRZ Realty Co. v. Beneficial Fire & Casualty Insurance Co., 241 P.3d 710 (Or. 2010)


In ZRZ Realty Co. v. Beneficial Fire & Casualty Insurance Co., 241 P.3d 710 (Or. 2010), a case decided by the Supreme Court of Oregon on October 14, 2010, the court affirmed the Oregon Court of Appeals’ ruling that the policyholder has the burden to show that damage was not “expected or intended” when that language appears in the definition of “occurrence” in a liability policy, but where an “expected or intended” exclusion is read into the policy by the courts, the burden of proof falls on the insurance company.

ZRZ Realty involved two groups of comprehensive general liability (CGL) policies sold to the policyholder by Certain Underwriters at Lloyd’s of London and Certain London Market Insurance Companies (collectively, London) with policy periods from 1956 to1983. The policyholder sought coverage for environmental liabilities arising out of its ship dismantling business, which began after World War II.


The parties referred to the first group of London CGL policies (1956–1965) as the “implied fortuity policies.” In those policies, the words “expected or intended” did not appear. The trial court, however, read that limitation into the policies, stating that it was necessary to ensure that only “fortuitous” losses would be covered. In the 1966–1983 policies, referred to by the parties as the “express fortuity policies,” the grant of coverage stated that the policies would cover “‘[p]roperty damage . . . caused by or arising out of [an] occurrence.’” In those policies, an “occurrence” must “‘unexpectedly and unintentionally result[] in . . . property damage . . . during the policy period.’” Both parties agreed that it is a policyholder’s burden to prove coverage and an insurance company’s burden to prove an exclusion from coverage.


The Supreme Court of Oregon affirmed the Court of Appeals, holding that the trial court incorrectly required London to carry the burden of proving “expected or intended” damage with respect to the “express fortuity policies.” The court rejected the policyholder’s argument that, because the “expected or intended” phrase operated to exclude coverage, the burden should be placed on the insurer. The court responded to the policyholder’s “form over substance” arguments by stating that the parties had the freedom to contract how they chose, that “respecting the parties’ choice is the more appropriate method,” and that the rule it set forth would save courts from having to determine the “essence” of insurance contract provisions and whether they operated to grant or to exclude coverage.


With respect to the “implied fortuity” policies, the court affirmed the decisions below, holding that the trial court correctly placed the burden of proof on London, because the “fortuity” concept the trial court read into those policies was a “public policy” limitation that “functions as an exclusion.” The Supreme Court rejected London’s two arguments in this regard, finding that the definition of “insurance” in a repealed Oregon statute regulating insurance companies did not add any language to the policies and that the policyholder did not assume the burden of proof by bringing a declaratory action against its insurers. The court affirmed the Court of Appeals’ rulings on the burden of proof but reversed and remanded regarding coverage for damage to the riverbed.


This decision from Oregon’s high court establishes that the burden of proving that damage was not “expected or intended” will be dependent on whether that language is included in the grant of coverage or is instead specifically listed as an exclusion in the policy. The court evidenced a reluctance to look past the structure of the policy and placement of policy language to try to “divin[e] the ‘essence’ of contractual provisions that logically may serve either as a grant of limited coverage or an exclusion from a broad grant of coverage.” Left undecided by the court was the question of how to interpret the phrase “expected or intended” when that phrase––or similar phrases, such as “accident”––appears both within the coverage grant and the exclusions section of a policy. In addition, ZRZ Realty reinforces other Oregon decisions that read an “implied fortuity” exclusion into all CGL policies, even where such language does not appear anywhere in the policy. See also A-1 Sandblasting & Steamcleaning Co. v. Baiden, 643 P.2d 1260 (Or. 1982). Thus, policyholders seeking coverage under Oregon law may face additional burdens of proof beyond the explicit terms of their insurance policies.


Erin L. Webb, Dickstein Shapiro LLP, Washington, D.C.


 

Energy Drink Trademark Infringement Case Is Settled


Platypus Wear, Inc. v. United States Fidelity and Guaranty Company, CV 07–21827 (S.D. Ca.)


An action brought in California federal court seeking coverage for claims alleging copyright and trademark infringement has recently settled. Platypus Wear, Inc. (Platypus) sued United States Fidelity and Guaranty Company (Travelers), CV 07-21827 (S.D. Ca), seeking a defense and indemnity for claims brought against it by Horizonte. Horizonte sold an energy drink named “BAD BOY POWER DRINK.” It alleged that Platypus appropriated its well-known “BAD BOY” mark and can design, infringing on copyright and trademark registrations.


Platypus sought a defense from Travelers, claiming that it was entitled to coverage under the relevant policy’s “advertising injury” coverage provision. The provision provided coverage for the unauthorized use of an organization’s “advertising idea,” or the infringement of an organization’s copyright, trade dress, or slogan in advertising. The policy defined an “advertising idea” as “attracting the attention of other persons or organization by any means for the purpose of seeking customers or supporters or increasing sales or businesses” as well as “a manner or style of ‘advertising’ that other persons or organizations use and intend to attract attention in their ‘advertising.’”


Travelers denied coverage on several grounds, including the applicability of the policy’s IP exclusion. In its denial letter, Travelers asserted that “[t]he infringement that is alleged is not as a result of an ‘advertising injury’ per se, but rather as a result of a knowing usage of material that is claimed to be the property of the plaintiff and to which you did not have license or authority to use.”


On July 15, 2010, the parties agreed to settle the case. On August 10, 2010, the court granted the parties’ joint motion to dismiss. Shortly thereafter, Travelers filed a motion to seal or, alternatively, redact the settlement conference transcript. Platypus did not oppose Travelers’ motion. Notwithstanding Platypus’s non-opposition to Travelers’ motion, the court denied Travelers’ motion on October 15, 2010. In its denial order, the court presumed that the public should enjoy a right of access to court documents, even if such a right was, admittedly, not absolute. The court noted that a settlement agreement announced on the record is binding even if a party has a change of heart after agreeing to the terms, but before those terms are reduced to writing. Further, the court noted that a qualification to the terms of the settlement not stated when the terms were placed on the record is unenforceable. It concluded that Travelers’ motion was an impermissible attempt to insert an “after-the-fact” confidentiality provision into the terms of the settlement recited on the record in open court. The settlement transcript was set to be released on October 25, 2010, but Travelers has filed objections to the court’s ruling.


If and when the settlement transcript is released, it will hopefully clarify the reasons for the settlement and shed light onto the ongoing evolution of the applicability of the IP exclusion to advertising injury claims.


Matthew N. Klebanoff and Bryan W. Petrilla, Cozen O’Connor, Philadelphia and West Conshohocken, PA


 

Applying IP Policy Exclusions to Claims of Advertising Injury


S.B.C.C., Inc. v. St. Paul Fire & Marine Ins.,No. Civ. A. H034211, 2010 Cal. App. LEXIS 1030 (Cal. Ct. App. June 11, 2010)


The California Court of Appeals has held that an insurer did not commit bad faith when it relied upon an IP exclusion to deny coverage for an advertising injury claim. See S.B.C.C., Inc. v. St. Paul Fire & Marine Ins., No. Civ. A. H034211, 2010 Cal. App. LEXIS 1030 (Cal. Ct. App. June 11, 2010). The policyholder was sued for allegedly obtaining confidential information from the former employee of a rival company, San Jose Construction, Inc., and using that information to solicit its customers. The policyholder tendered the claim to its insurer, St. Paul Fire & Marine Insurance Company (St. Paul), which denied that it had a duty to defend. The policyholder sued St. Paul, alleging a wrongful refusal to defend and bad faith. The trial court granted St. Paul’s motion for summary judgment, holding that the policy’s IP exclusion precluded coverage for the claim and that St. Paul’s duty to defend was never triggered.


Affirming the trial court’s grant of summary judgment, the California Court of Appeals held that the policy’s IP exclusion precluded coverage. The IP exclusion at issue stated that coverage did not extend to claims resulting from violations of copyright, patent, trade dress, trade name, trade secret, trademark, or other intellectual property rights or laws. The policyholder argued that the exclusion was inapplicable because only one of the claims against it alleged a trade secret violation, and, therefore, St. Paul was obligated to defend against the remaining potentially covered claims.


The court rejected the policyholder’s assertion. It noted that the policy specifically did not “cover any other injury or damage that’s alleged in any claim or suit which also alleges any such [intellectual property] infringement or violation.” The court held that the policy’s plain language relieved St. Paul of any potential coverage obligation since all of the claims against the policyholder were bundled together with an alleged intellectual property violation. This case adds to the continuing body of case law addressing the application of an IP policy exclusion to claims of advertising injury.


Abby Sher and Bryan W. Petrilla, Cozen O'Connor, Philadelphia and West Consohohocken, PA


 

Hyundai Appeals Patent Infringement Case


Hyundai Motor America v. National Union Fire. Ins. Co. of Pittsburgh, No. 08–56257 (9th Cir. Apr. 5, 2010)


In Hyundai Motor America v. National Union Fire. Ins. Co. of Pittsburgh, No. 08–56257 (9th Cir. Apr. 5, 2010), Orion IP, LLC (Orion) sued Hyundai for patent infringement. Orion alleged that Hyundai was liable for infringement by, inter alia, introducing a feature on its website that allowed users to build and preview a car. Hyundai sought a defense from its insurer, National Union, asserting that it was entitled to a defense because the allegations constituted a misappropriation of advertising ideas, which fell within the relevant National Union policy’s advertising injury coverage grant. When National Union refused to defend, Hyundai sought a declaration that it was entitled to a defense. It did not seek indemnity. The district court held that a claim for patent infringement did not constitute advertising injury under the terms of the National Union policy. Hyundai appealed.


The Ninth Circuit reversed, holding that Hyundai’s use of the website feature satisfied the National Union policy’s definition of advertising injury under California law. It noted that three elements are required to trigger an insurer’s duty to defend a claim for advertising injury:


  • The policyholder must be engaged in advertising (i.e., widespread promotional activities directed to the public at large) when the alleged advertising injury occurred.
  • The allegations must create a potential for liability under a covered offense, such as the misappropriation of advertising ideas.
  • A causal connection must exist between the alleged injury and the advertising.

The court first observed that Hyundai’s website was aimed toward the public at large and that Orion had specifically alleged that Hyundai’s infringing website feature constituted marketing methods and systems akin to advertising. The court rejected National Union’s attempt to characterize the website as solicitation, noting that it was not limited to a discrete number of known potential customers.


The court next examined whether Orion’s patent infringement claim amounted to a misappropriation of advertising ideas. It noted that under California law, patent infringement can qualify as advertising injury if it involves a process or invention that could be considered an “advertising idea.” It held that Orion’s claim involved an advertising idea because the purpose of the patented website feature was to enable it to advertise its products directly to the public. The court rejected National Union’s argument that the claim against Hyundai did not constitute advertising injury because the claim must allege misappropriation of a competitor’s advertising ideas. Orion was a patent-holding company that did not directly compete with Hyundai. The court found no support for such a limitation in the National Union policy. Moreover, the court acknowledged that, in the past, it had rejected claims that a patent infringement claim constituted advertising injury but held that a “contextual analysis” was warranted in each case.


Finally, the court held that there was a sufficient causal connection between the alleged injury and the advertising because the patent concerned the method of advertising. “When the advertisement itself infringes on the patent, the causal connection requirement is met.” On this basis, the Ninth Circuit reversed the district court’s decision and remanded with instructions to grant summary judgment in favor of Hyundai.


Bryan W. Petrilla, Cozen O’Connor, West Conshohocken, PA


 

Claims Barred by IP Exclusion


Ventana Medical Systems, Inc. v. St. Paul Fire & Marine Ins. Co., 2010 U.S. Dist. LEXIS 41975 (D. Ariz. Jan. 13, 2010)


In Ventana Medical Systems, Inc. v. St. Paul Fire & Marine Insurance Company, No. Civ. A. 09–102–CKJ–CRP, 2010 U.S. Dist. LEXIS 41975 (D. Ariz. Apr. 29, 2010), the U.S. District Court for the District of Arizona, applying Arizona law, held that an IP exclusion barred coverage for a patent infringement claim. In Ventana, St. Paul Fire & Marine Insurance Company (St. Paul), insured Ventana Medical Systems, Inc. (Ventana) under a medical and biotechnology commercial general liability policy. The policy covered claims for personal injury and advertising injury. Ventana sought a defense and indemnity under the policy for claims brought against it by Digene Corporation. Digene alleged that Ventana infringed upon two patents it held with regard to human papillomavirum probes.


Ventana asserted that the claims against it constituted advertising injuries that were covered under two consecutively issued policies. It argued that the claims amounted to advertising injuries because Digene had implicitly alleged disparagement in addition to an allegation that Ventana had used an unauthorized slogan. St. Paul argued that Digene never asserted any claim that fell within the parameters of its policy, and that even if it did, the policy’s IP exclusion barred coverage for Ventana’s claims. The IP exclusion precluded coverage for injury or damage resulting from the alleged infringement or violation of copyright, patent, trade dress, trade name, trade secrets, trademarks, or other intellectual property rights or laws.


The magistrate judge issued a report and recommendation, concluding that Ventana’s claims were barred by the IP exclusion because the claims arose out of the alleged misuse of a patent. The court found the IP exclusion to be clear and unambiguous, noting that “St. Paul intends to exclude from its general liability policy any damages that arise from intellectual property violations and any damages that arise from any other claims when a claim of intellectual property violation is asserted.” The court further noted that “[w]hile this is a potentially harsh exclusion, insurance policies are contracts entered into by parties who have the choice to agree or not agree to the terms of the contract.” On this basis, the district court overruled the policyholder’s objections and adopted the magistrate judge’s report and recommendation.


Stephanie P. Gantman, Cozen O’Connor, Philadelphia, PA


 

Occurrence Held at Time of Property Damage Determines Trigger of Coverage under CGL Policy


Pennsylvania General Insurance Co. v. American Safety Indemnity Co., 185 Cal. App. 4th 1515 (2010)


In Pennsylvania General Ins. Co. v. American Safety Indemnity Co., 185 Cal. App. 4th 1515 (2010), Pennsylvania General insured framing subcontractor D.A. Whitacre Construction, Inc. (Whitacre) under a commercial general liability (GGL) insurance policy from October 1998 to December 2001. American Safety Indemnity Company (ASIC) insured Whitacre under a CGL policy for the period of December 2001–December 2002. Cross-Defendant, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National) issued a CGL policy to Whitacre in effect from December 31, 2002 to October 1, 2005.


Whitacre contracted to perform work on a project, which was substantially completed by June 2001, during the Pennsylvania General policy period, although it performed some punch list work after June 2001, and the final inspection notice for the entire project was issued in March 2002. A subsequent construction defect litigation alleged that Whitacre’s work on the project was deficient and had caused damage to the project. Whitacre tendered its defense to both Pennsylvania General and ASIC. Pennsylvania General agreed to defend under a reservation of rights, while ASIC denied coverage.


Pennsylvania General paid Whitacre’s defense and settlement costs, then filed suit for equitable contribution and declaratory relief against ASIC. ASIC filed a cross-claim against National. All parties filed motions for summary judgment. ASIC argued it was entitled to summary judgment because its policy only covered damages caused by an occurrence during the policy term and expressly excluded coverage for any loss that first manifested before the policy incepted. ASIC argued that its policy definition of “occurrence” expressly and unambiguously referred to the underlying conduct that caused the resulting damage, rather than the damage resulting from that conduct, and it was undisputed that Whitacre’s conduct (i.e., work on the project) was completed before the effective dates of its policy. Pennsylvania General argued that there was at least the potential for coverage under ASIC’s policy such that it was obligated to contribute to defense and settlement.


The trial court granted ASIC’s motion for summary judgment, ruling that ASIC had no obligation to pay defense or indemnity costs because there was no potential for coverage under the ASIC policy. Specifically, the trial court identified “occurrence” and “property damage” as two separate triggers, and the ASIC policy required both to take place during the policy period. The trial court concluded that the “occurrence,” in the form of the defective framing work on the project, was completed before the inception of the ASIC policy. Pennsylvania General Appealed. The court of appeals reversed.


The pivotal issue before the court of appeals was whether the terms of ASIC’s CGL policy clearly and unambiguously provided two separate triggers of coverage––the causal acts and resulting damage––that must both happen during the policy effective dates for there to be a potential for coverage. Because the trial court ruling was premised on its determination that ASIC’s CGL policy required causal acts to happen during the policy period, the court of appeals focused on that determination.


The ASIC Policy modified the standard definition of “occurrence” by adding the italicized language below:


“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. “Property damage” . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance.


The ASIC Policy also included a “Pre-Existing Injury or Damage Exclusion,” which provided:

This insurance does not apply to: [¶] 1. Any ‘occurrence’, incident or ‘suit’ . . . [¶] [(a)] which first occurred prior to the inception date of this policy . . .; or [¶] [(b)] which is, or is alleged to be, in the process of occurring as of the inception date of this policy . . . even if the ‘occurrence’ continues during this policy period.


The court of appeals concluded that the ASIC policy was ambiguous in that, read as a whole, it could still be reasonably interpreted as meaning that the resulting damage, not the causal conduct, is a defining characteristic of the occurrence that must take place during the policy period.


The Pennsylvania General court construed the new language in the “occurrence” definition, “that happens during the term of this insurance. ‘Property damage’ . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance,” as an exclusion, which it strictly construed against the insurer to the policy failed to clearly state the causal conduct must also occur during the policy period. The Court also appears to rely on the heading for the “Pre-Existing Injury or Damage Exclusion,” which it notes is not the “Pre-Existing Causal Conduct Exclusion,” to find that exclusion refers to the “injury or damage” resulting, not the causal conduct itself.


The court also refused to adopt ASIC’s argument that its policy clearly differentiates between the concept of “occurrence” and the resulting property damage. Reading the policy as a whole, the court construed policy language stating that the insurance applies only if “‘property damage’ is caused by an ‘occurrence’” as a territorial limitation, not designed to redefine the term “occurrence” as limited to the causal conduct leading to the covered damage. The insurance applies only if “‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’”


The court distinguished cases cited by ASIC, including EOTT Energy Corp. v. Storebrand International Insurance Co., 45 Cal. App. 4th 565 (1996) and Chemstar, Inc. v. Liberty Mutual Insurance Co., 797 F.Supp. 1541 (C.D. Cal. 1992), in support of the proposition that an insurance policy’s use of the term “‘[o]ccurrence’ refers to the underlying cause of injury, rather than the injury or claim itself,” as pertaining to the application of a policy’s per occurrence deductibles, as opposed to the trigger of coverage.


ASIC also relied on USF Insurance Co. v. Clarendon America Insurance Co., 452 F.Supp.2d 972 (C.D. Cal. 2006) (USF) for the proposition that the term “occurrence” as used in the insurer’s policy should be construed to require the insured’s causal conduct, not the resulting damage to the project, to happen during the term of the policy to trigger coverage. After noting that the Clarendon policies at issue in USF contained occurrence language analogous to that in ASIC’s policy, and acknowledging that the USF court did court did state that the language of the Clarendon policies “make[s] a clear distinction between the ‘occurrence,’ which is the accident or exposure that causes damage to the claimant, and the resulting ‘physical damage,’” the Pennsylvania General court found the statement in the USF opinion was non-controlling dicta because the USF court’s holding that Clarendon had no indemnity obligation was based on when the damages first manifested.


The court of appeals agreed that ASIC’s policy language was meant to circumvent the continuous injury trigger rule set forth in Montrose Chemical Corp. v. Admiral Insurance Co., 10 Cal. 4th 645 (1995) (Montrose) and that a reasonable insured could also reach this conclusion. However, the court found that the intent to obviate the continuous trigger approach does not mean the policy language was meant to exclude coverage if the injury producing conduct preceded the policy period.


As further support for its ruling, the court of appeals looked at the products completed operations hazard and noted the policy’s “occurrence” definition was modified, but not the definition of “your work” to require that work also “happen during the term of this insurance.”


The court of appeals concluded ASIC’s policy language could be reasonably interpreted to mean that the trigger of coverage was damage to property, not the causal conduct, and that the 1999 ASIC policy endorsements were simply meant to circumvent the Montrose trigger of coverage. Because there was a question of fact as to when the damages sought in the underlying construction litigation first commenced, the court of appeals held that the trial court erred in granting summary judgment to ASIC with respect to its obligation to contribute to Whitacre’s defense and indemnity costs.


—Katherine E. Mast, Sedgwick, Detert, Moran & Arnold LLP


 

Pollution Exclusion Did Not Bar Coverage for Natural Gas Accident


Barrett v. National Union Fire Insurance Co. of Pittsburgh, No. A10A1125, 2010 Ga. App. LEXIS 448 (Ga. Ct. App. May 11, 2010), reconsideration denied, June 7, 2010.


The Georgia Court of Appeals reversed the trial court’s dismissal of an insurance coverage case based on a standard-form of “pollution exclusion.” See Barrett v. National Union Fire Insurance Co. of Pittsburgh, 2010 Ga. App. LEXIS 448 (Ga. Ct. App. May 11, 2010). The court held that natural gas did not constitute a “pollutant,” defined in part as “any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The court also ruled that it would violate public policy to sell a liability policy to a natural gas company that excluded coverage under the pollution exclusion for damages arising from the release of natural gas. The court further construed the phrase “arising out of” in the pollution exclusion narrowly and applied a “but for” causation test in determining that the discharge or release of natural gas, standing alone, was not alleged to be the cause of the injuries.


Plaintiff-Appellant Brey Barrett was an employee of a company that installs natural gas lines that, in turn, had contracted with a gas company to install, or to assist with the installation of, gas lines and meters. In July 2001, Barrett assisted two gas company employees with the installation of three taps on a main gas line. Construing the facts most favorably to the plaintiffs, the completion plug was lost during the installation of the third and final tap. Ultimately, Barrett went into the excavation ditch where the gas line was located and, after a period of approximately two hours, extracted the plug. While Barrett was working, he was covered by a rain poncho to prevent glare on the “looking glass” device used to retrieve the plug. During Barrett’s retrieval effort, natural gas accumulated under his rain poncho, creating an oxygen deficient atmosphere that allegedly resulted in a permanent and disabling brain injury.


Barrett and his spouse sued the gas company, alleging that Barrett’s injury resulted from the negligent and reckless conduct of the company’s employees. Prior to trial, the Barretts made a $2 million settlement demand. National Union, the first layer excess carrier, refused to settle and disclaimed coverage. Following the settlement, the primary carrier paid its $1 million limit toward the $2 million judgment, and the gas company assigned to the Barretts all of its rights against National Union. The Barretts then filed suit against National Union.


National Union moved to dismiss, contending that the Barretts’ claim was excluded by the “pollution exclusion.” The trial court granted this motion and dismissed the case, relying upon the Georgia Supreme Court’s decision in Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008). In Reed, a tenant sued her landlord for injuries she sustained when the heating system in her rental house released carbon monoxide into the home. The insurer in that case moved for summary judgment, asserting that coverage was barred by a pollution exclusion identical to the exclusion in the National Union policy. The Georgia Supreme Court held that carbon monoxide was a “pollutant” that is an “irritant or contaminant,” and that, based upon the tenant’s claim that the release of carbon monoxide in her home had “poisoned” her, the pollution exclusion barred all coverage.


The Barretts appealed the dismissal of their case. The Georgia Court of Appeals reversed the trial court’s dismissal, declining to apply the “limited, fact-specific holding” in Reed to this case. First, the court observed that, unlike the plaintiff in Reed, the Barretts had not claimed that Barrett was “poisoned” by natural gas or that he was “harmed merely by the release of natural gas from the tap.” Rather, the Barretts asserted that, because of the negligence of the gas company employees, “natural gas released from the tap was allowed to accumulate, thereby creating an oxygen deprived atmosphere, and it was the lack of oxygen that injured Barrett.” The court further concluded that the trial court’s application of Reed was based on the erroneous assumption that Reed held that the phrase “irritant or contaminant” was unambiguous. Rather, the court interpreted Reed as simply finding that, based on the plaintiff’s allegation that carbon monoxide had “poisoned” her, carbon monoxide gas was obviously an irritant or contaminant. To the contrary, the Barretts’ allegations indicate that “exposure to natural gas is not necessarily dangerous and does not automatically result in injury so long as the supply of oxygen is not impeded.”


The court also concluded that it would violate public policy to allow National Union to “sell a liability policy to cover [a company] whose main product is natural gas, which policy contains an exclusion for damages arising from natural gas.” “Georgia public policy disfavors insurance provisions that ‘permit the insurer, at the expense of the insured, to avoid the risk for which the insurer has been paid’ and for which the insured reasonably expects it is covered.”


Finally, with respect to the question of whether Barrett’s injuries “arose out of” the “discharge, dispersal, seepage, migration, release, or escape of” natural gas, the court recognized that the phrase “arising out of,” when found in a coverage provision of an insurance policy, is construed broadly and encompasses almost any causal connection or relationship. When found in an exclusionary clause, however, the phrase “arising out of” should be interpreted more narrowly, requiring a “but for” causal connection. The court found that the “limited record” did not demonstrate that the mere presence of natural gas, standing alone, caused the injury to Barrett.


This is one of the few cases nationwide to address the application of the pollution exclusion to natural gas accidents, and the court clearly rejected the insurer’s attempt to eviscerate the coverage based on this exclusion.


Caroline Spangenberg, Julie Lierly, and Antoinette Ellison, Kilpatrick Stockton LLP


 

Insurer's Motion to Void Policy for Misrepresentation Fails


Grenoble House Hotel v. Hanover Ins. Co., No. 06-8840, 2010 U.S. Dist. LEXIS 75355 (E.D. La. July 26, 2010)


If the insured misrepresents that it owns the insured property, can the insurer void the policy? In Grenoble House Hotel v. Hanover Ins. Co., No. 06-8840, 2010 U.S. Dist. LEXIS 75355 (E.D. La. July 26, 2010), the court denied the insurer's motion for summary judgment seeking to void the policy on misrepresentation grounds.


Hanover issued to the insured a commercial policy covering damage to the hotel building and its contents, as well as business interruption. After the property was damaged by Hurricane Katrina, the insured claimed for damage and business interruption. Hanover eventually tendered policy limits for the contents and business interruption.


When the policy limits were not paid for damage to the building, the insured sued. Hanover moved for summary judgment, seeking to dismiss all of the claims because the insured represented itself to be the owner of the property, when in fact it was merely the lessor, constituting a material misrepresentation.


The policy stated that it was void if any insured intentionally concealed or misrepresented a material fact concerning its interest in the covered property. Under Louisiana law, a misrepresentation made in the negotiation of an insurance contract by the insured was not deemed material unless the misrepresentation was made with intent to deceive.


Here, Hanover offered no evidence establishing that the insured represented that it was the owner of the property. Although the "owner" box was checked on the policy application, there was no indication that a representative of the insured signed the application or provided information indicating that it was the owner of the property. Absent such evidence, Hanover failed to establish that the insured made a statement that was false.


Further, Hanover failed to provide any evidence establishing that a misstatement regarding ownership of the property would be material. There was no evidence to establish that, had Hanover known the insured was the lessor as opposed to the owner of the building, it would have either declined to write the policy or issued the policy only upon the payment of a higher premium. Accordingly, the motion for summary judgment was denied.


 

Liberty Surplus Insurance Corporation, Inc. v. First Indemnity Insurance Services, Inc., 2010 Fla. App. LEXIS 2540 (Fla. Dist. Ct. App. 2010)


In 2003 the law firm of Brinkley, McNerney, Morgan, Solomon & Tatum, LLP, submitted an application for professional liability insurance to its agent Kurt Stephany who forwarded the application to First Indemnity Insurance Services, Inc., an insurance broker. Brinkley accurately reported to First Indemnity fourteen claims. After the application was rejected by several insurance companies, First Indemnity either negligently or intentionally altered the application deleting 11 of the claims and sent the sanitized application to Liberty. The alteration of the application was done without either Brinkley's or Stephany's knowledge. Based on the incomplete information provided, Liberty agreed to insure Brinkley.


In January 2005, claimant Scheck filed an amended class action lawsuit against Brinkley and one of its lawyers seeking damages in excess of $500 million. Shortly thereafter, the policy came up for renewal, and First Indemnity for the first time disclosed to Liberty seven claims or suits prior to the original insurance contract. Subsequently, Liberty learned of the 7 additional claims that were never disclosed by First Indemnity. Because of this disclosure, Liberty demanded that First Indemnity participate in settlement discussions of the class action suit, but First Indemnity refused. In May 2005, pursuant to a policy limit demand from Brinkley and to mitigate its damages, Liberty settled the class action for $3 million.


Liberty initiated a lawsuit against First Indemnity to recover the money paid in settlement of the lawsuit under theories of negligent misrepresentation, common law indemnity, intentional misrepresentation, nondisclosure, fraudulent concealment, fraud, and negligence.  First Indemnity moved to dismiss asserting that Florida does not recognize a cause of action in tort by an insurance carrier against an agent of the insured seeking to recover settlement monies paid by the carrier under a liability policy when the carrier had knowledge of the alleged misrepresentations on the application and where the carrier abandoned its right to seek rescission of the policy issued to the insured. According to First Indemnity, any misrepresentations or altering of the application by First Indemnity were imputed to the insured and no legal relationship existed between Liberty and First Indemnity. The trial court agreed holding that the insurer bears the risk of a broker's error because of the general rule that an insurance broker is the agent of the insured rather than of the insurer.  The 4th District Court of Appeals reversed.


In its complaint for negligence, Liberty sought to state a cause of action based upon section 552 of the Restatement (Second) of Torts which establishes a principle for information negligently supplied for the guidance of others.  First Indemnity maintained that section 552 only applies to professionals and not insurance brokers.  The court rejected this argument holding that the “law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.” The Court only observed that its decision was consistent with the decisions of other courts.  Burlington Ins. Co. v. Okie Dokie, Inc., 329 F.Supp.2d 45 (D.D.C. 2004); St. Paul Surplus Lines Ins. Co. v. Feingold & Feingold Ins. Agency, Inc., 693 N.E.2d 669 (Mass. 1998); Midland Ins. Co. v. Markel Serv., 548 F.2d 603 (5th Cir. 1977).  The Court then adapted the reasoning of  the court in Century Surety Co. v. Crosby Insurance, Inc., 124 Cal. App. 4th 116 (2004). That court also rejected the broker's assertion that it owed no duty of care to the insurer and, therefore, as a matter of law could not be liable to an insurer for negligent misrepresentation.


Next the Court rejected First Indemnity's contention that sections 551 and 552 of the restatement did not apply because Liberty only alleged a nondisclosure of information.  The Court observed that “[a]lthough Liberty alleges that First Indemnity failed to disclose the additional claim supplements, that failure is tantamount to supplying false information, because the submission of only three claims when there were actually fourteen is a misrepresentation of Brinkley's claim history.”  The Court then held, “that an insurance broker is liable for its own negligence in supplying false information on which an insurer justifiably relies in issuing a policy and suffers pecuniary loss.”  With respect to the fraud allegations the Court also concluded that an agent is liable for its own intentional fraudulent acts.


— Ronald L. Kammer, Hinshaw & Culbertson, LLP


 

Fortner v. Grange Mutual Insurance Company, 286 Ga. 189, 686 S.E.2d 93 (Ga. 2009)


Agreeing to settle for policy limits may not be enough to avoid bad faith in Georgia. So said the Supreme Court of Georgia in Fortner v. Grange Mutual Insurance Company. In that case, the plaintiff had been injured in a car accident caused by the insured. The insured had two policies, issued by Grange Mutual Casualty Company and Auto Owners Insurance Company, with liability limits of $50,000 and $1 million, respectively. The plaintiff offered to settle his claims for $50,000 from Grange, contingent upon the agreement of Auto Owners to pay $750,000. Grange responded by agreeing to settle for $50,000—its policy limits—but conditioned such settlement on the plaintiff signing a full release and indemnification agreement and dismissing his claims against the insured with prejudice. The plaintiff instead went to trial and was awarded $7 million.


In the subsequent bad faith action against Grange, the jury was instructed that in responding to a settlement demand that is conditioned upon the response of another insurance company, an insurer need only offer its policy limits. The jury then entered a verdict in favor of Grange. Although the Court of Appeals found no error in the instruction, the Georgia Supreme Court reversed. The Court stated that whether an insurer acts in bad faith in refusing to settle depends on whether it acted reasonably. When a settlement offer contains a condition beyond the insurer’s control, the insurer can create a “safe harbor” against bad faith liability, and satisfy the reasonableness standard, by meeting the portion of the demand over which it has control. Here, the insurer did not so do. Instead of simply offering its policy limits in response to the plaintiff’s offer, Grange imposed additional conditions on settlement. Such conditions were within the insurer’s control, and the jury should have considered them in determining whether Grange acted reasonably, or in bad faith, in responding to the plaintiff’s settlement demand.


— Heather Michael, Arnall Golden Gregory, LLP


 

Architex Ass’n, Inc. v. Scottsdale Ins. Co., No. 2008-CA-1353-SCT, 2010 WL 457236 (Miss. Feb. 11, 2010)


This case arose out of underlying construction litigation in which a hotel owner brought suit against Architex, a general contractor, for breach of contract and negligence, alleging, inter alia, “property damage” from an Architex’s subcontractor that failed to put rebar in the foundation. Architex then brought a third party complaint against its Commercial General Liability (CGL) Insurer, Scottsdale Insurance Company, for failing to provide Architex with defense and indemnity.


The circuit court granted summary judgment for Scottsdale, finding that Architex’s hiring of subcontractors was not an “‘accident, including continuous or repeated exposure to substantially the same general harmful conditions’ as the definition of ‘occurrence’ sets out plainly in the insurance policy,” and that “the hiring of the subs was a ‘course consciously devised and controlled by [the insured]’ which “set into motion the ‘chain of events leading to the injuries complained of.’”


Architex appealed, maintaining that the Owner’s allegations, if true, were “unexpected,” and therefore, constituted an “occurrence” under its CGL policy. Scottsdale argued that there was no “occurrence” triggering coverage because failing to install rebar and defective construction were not “accidents.”


The Mississippi Supreme Court reversed and remanded the case, finding that: (1) “[t]he subject policy unambiguously extend[ed] coverage to Architex for unexpected or unintended ‘property damage’ resulting from negligent acts or conduct of a subcontractor;” and (2) the circuit court erred because it only considered Architex’s hiring of subcontractors and did not holistically consider “whether the underlying acts or conduct of the insured or its subcontractors proximately causing the ‘property damage’ were negligent or intentional or otherwise excluded by the policy language.”


— Stephen E. Schemenauer, Leonard, Street and Deinard


 

Baker v. National Interstate Insurance Company, 180 Cal.App.4th 1319 (2009)


In Baker v. National Interstate Insurance Company, the California Court of Appeals was called upon to interpret the products-completed operations hazard exclusion in a CGL policy. The insured was sued for negligently inspecting a seat in a bus that later came loose and killed the driver in an accident away from the insured’s premises. The exclusion at issue denied coverage for “‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work.’”


More than 40 years earlier, the California Supreme Court had interpreted a similar exclusion to only apply to completed operations that also involved the insured’s product (i.e., not services). According to the supreme court, because the definitions of “operations” and “products” were indented and appeared under the same heading “Products Hazard,” the terms has to be construed together.


But the policy at issue in Baker was structured differently. According to the Baker court, “unlike the compression of the terms ‘products’ and ‘operations’ into a single definition” as in the prior case, the policy at issue here “contained separate definitions of ‘your product’ and ‘your work,’ [thereby] clarifying the separate nature of the insured’s ‘products’ and its ‘work.’” Accordingly, (and notwithstanding the title of the exclusion – “products-completed operations hazard”) the policy excluded coverage for injuries and property damage arising either out of the insured’s products or services, and occurring away from the insured’s premises.


— Jeffrey A. Ehrich, Leonard, Street and Deinard


 

American Home Assurance Co. v. Pope, 591 F.3d 992 (8th Cir. 2010)


The Eighth Circuit, in American Home Assurance Co. v. Pope, was asked to interpret a knowingly wrongful act exclusion in a case involving a psychologist’s failure to report ongoing sexual abuse of a minor. The professional liability policy at issue provided coverage for any “wrongful act,” but then excluded coverage for “any wrongful act committed with knowledge that it was a wrongful act.” The insurer argued that the insured’s professional license and the existence of a criminal statute prohibiting this very conduct meant the insured committed a knowingly wrongful act.


The Court pointed out that the irony of an insurance policy that purports to provide coverage for conduct that is negligent, but not conduct the actor knew to be negligent, because negligence “necessarily requires a duty to act, that is, a duty known or presumptively known by the defendant.” The Court also acknowledged that the clause was ambiguous, and thus had to be construed in favor of coverage. Accordingly, the Court held that “the insurance policy exclusion for knowingly wrongful acts reasonably could be described as an exclusion for intentional misconduct,” which requires proof that “the insured intend, not only the act itself, but also its consequence.” Because the arbitration panel in the underlying action found that the insured had acted negligently but made no finding regarding intent, the Court held there was coverage as a matter of law.


— Jeffrey A. Ehrich, Leonard, Street and Deinard


 

Bausch & Lomb Inc. v. Lexington Ins. Co., No. 08-CV-6260, 2009 WL 5214953 (D. Minn. Dec. 28, 2009)


In Bausch & Lomb Inc. v. Lexington Ins. Co., No. 08-CV-6260, 2009 WL 5214953 (D. Minn. Dec. 28, 2009), Bausch & Lomb sued its insurer, Lexington Insurance Company, seeking a declaration that Lexington was required to provide coverage for alleged injuries that arose out of the use of Bausch & Lomb’s contact lens solution. Bausch & Lomb asserted that it had purchased umbrella liability insurance policies from Lexington each year from January 1, 2004 through January 1, 2007. During this time period, thousands of claims were made against Bausch & Lomb for injuries allegedly arising from use of the contact lens solution.


Bausch & Lomb sought liability coverage for defense costs associated with these claims, and Lexington denied coverage on nearly all of them. Lexington denied the claims because it was treating each claim as a separate occurrence under the terms of the Lexington insurance policy, and thus Lexington agreed to provide coverage only when certain liability thresholds had been met in each individual case. Because the thresholds had not been met, and because it was unlikely they would be met at all, Lexington argued it was not obligated to provide a defense for each claim. Bausch & Lomb argued that the claims should instead be grouped together under the provisions of the Lexington policies. By treating the different claims as arising from a single occurrence, the thresholds triggering coverage would be met much more easily.


The district court found in favor of Lexington, holding that under New York law, the contract term “occurrence” was not ambiguous. The court stated that under the policies, the different claims constituted separate occurrences that could not be aggregated for purposes of insurance coverage under the Lexington policies. As a result, Lexington was not obligated to insure Bausch & Lomb for the damages or defense costs related to those claims, unless the individual claim met the liability threshold.


— Thomas R. Cuthbert, Leonard, Street and Deinard


 

Graff v. Swendra, 776 N.W.2d 744 (Minn. Ct. App. 2009)


In Graff v. Swendra, 776 N.W.2d 744 (Minn. Ct. App. 2009), an insured sued an insurance agent for negligently failing to procure $1,000,000 in additional underinsured motorist (UIM) coverage in umbrella policy.


Graff, the insured, was seriously injured in a work-related accident. After initially refusing to pay the UIM benefits because no policy had been secured, Graff settled with American Family Insurance Group for $100,000. Graff and American Family entered into a Pierringer release and represented that the settlement constituted payment of the policy limits of Graff’s UIM coverage on his basic automobile policy. The release expressly provided that it had no effect on Graff’s claims against the insurance agent, Swendra. In addition to the settlement with American Family, Graff also settled his disability and workers’ compensation claims.


A district court jury found that Swendra was 90% negligent in not obtaining additional UIM coverage for Graff. The jury awarded Graff damages of $753,000 for pain, disability and loss of future earning capacity. The district court also issued a collateral-source order, which adjusted the recovery amount by subtracting the amounts of the other settlements. However, before subtracting the collateral source amounts, the court reduced them by the amount of attorney fees incurred by Graff. Swendra appealed the jury’s findings, and Graff appealed the collateral-source deductions.


On appeal, the Minnesota Court of Appeals addressed two primary issues and affirmed the trial court on each of them. First, the appeals court held that the settlement and release between Graff and American Family did not affect Graff’s claims against Swendra for negligence. The court cited established precedent which held that an agent can be held individually liable for their torts. Thus, the settlement and release between Graff and American Family did not extinguish Graff’s negligence claims against Swendra. Additionally, the court stated that negligence actions by insured against insurance agents are separate actions based on tort law, and they are not actions seeking coverage under the insurance policy.


The court also addressed the issue of how the collateral-source offsets should be applied. The court stated that under Minnesota Law, a jury award for compensation can be reduced for compensation that the plaintiff has already received from other sources. Graff argued that the district court improperly calculated and deducted the worker’s compensation settlements from the negligence award. The appeals court disagreed, stating that both worker’s compensation settlements should be deducted from the award total. The court also held that attorneys fees, which were related to the cost of securing the other settlements, should be used to lower the collateral-source amount. Thus, the collateral-source total was lowered equal to the amount of attorneys fees, then the collateral-source amount was deducted from the $753,000 negligence award.


— Thomas R. Cuthbert, Leonard, Street and Deinard

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