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Case Notes

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:

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

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:

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

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:

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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