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Practice Points

May 5, 2016

Hail No: Insurer Prejudiced by Insured’s Delay in Reporting Storm Damage Claim

The Fifth Circuit Court of Appeals, applying Texas law, recently affirmed summary judgment for an insurer in a case where the insured provided no explanation for its 19-month delay in reporting a hail damage claim, and the insurer disclaimed coverage for an inability to determine what damage occurred during its policy period (Hamilton Properties et al. v. American Insurance Company et al., Case No. 15-10382, -- Fed. Appx. -- (5th Cir. Apr. 14, 2016)). The court held, as a matter of law, the insured failed to satisfy the “prompt notice” provision of the policy, and that the delay prejudiced the insurer’s ability to investigate the claim to determine what damages might have occurred during its policy period. The court further stated that even if the delay did not prejudice the insurer, the insured’s claim that the insurer breached the policy by disclaiming coverage must fail because the insured provided no evidence segregating covered damages occurring within the policy period from non-covered damages occurring outside the policy period.  The court further held that because there was no breach of the policy, the insured’s extra-contractual claims also failed.

From February 16, 2009 until September 24, 2009, a hotel owned by Hamilton Properties was insured under an American Insurance Company (AIC) policy providing coverage for hail damage. On July 8, 2009, a hailstorm allegedly damaged the hotel. The hotel’s caretaker testified that on multiple occasions within two months of the storm he reported to Hamilton that the building was damaged. Hamilton took no action to address the storm damage until hiring an inspector in November 2010. Even later, in February 2011, Hamilton attempted to contact its AIC agent about the storm damage. The agent told Hamilton he could not accept or report the claim as he was no longer its broker of record. Ultimately Hamilton properly filed its claim for the alleged damage from the July 2009 storm in October 2011. After investigating the claim, AIC disclaimed coverage, indicating that several storms occurred before and after July 2009, and AIC could not determine the cause of the damage or whether it occurred during the AIC policy period.

Hamilton sued AIC for breach of contract, violation of the Texas Deceptive Trade Practices Act, violation of Texas Insurance Code §541 and § 542, and bad faith. The Northern District of Texas granted summary judgment in favor of AIC on the grounds that (1) Hamilton failed to give prompt notice of the alleged damage; (2) Hamilton did not state a claim for breach of contract because there was no evidence that Hamilton’s claimed damages were covered by the AIC policy; and (3) because AIC did not breach the policy, Hamilton’s extra-contractual claims also failed. Hamilton appealed, and the Fifth Circuit affirmed the district court.

The Fifth Circuit noted that under Texas law the “prompt notice” requirement in an insurance policy is a condition precedent to coverage.  Thus, if there is no prompt notice, coverage under the policy is void. However, the Court also noted that under Texas law an insured’s failure to provide prompt notice will not void coverage under the policy unless the insurer is prejudiced by the lack of notice.

The parties disputed the date AIC received notice of the claim, but the court indicated that even if it accepted February 2011—the earliest date urged—as the notice date for Hamilton’s claim, Hamilton provided no explanation as to why it took 19 months to give AIC notice of the July 2009 storm damage. Because Texas courts construe prompt notice to be notice given within a reasonable time after the occurrence, and Hamilton’s delay was without explanation, the Fifth Circuit affirmed that Hamilton’s notice to AIC was not prompt as a matter of law.

Evaluating whether Hamilton’s late notice prejudiced AIC, the Fifth Circuit noted that under Texas law, prejudice may arise if the insurer is unable to investigate the occurrence, or to prepare adequately to adjust or defend any claims. The Court was not swayed by Hamilton’s argument that AIC could not be prejudiced because it was able to investigate the claim sufficiently to determine there was no coverage under the policy. Rather, the Court indicated that the nineteen month delay caused AIC to lose important information about the condition of the hotel before the July 2009 storm, after the July 2009 storm, and through the end of the policy’s coverage period on September 24, 2009. The Fifth Circuit affirmed that AIC was prejudiced by the nineteen month delay as a matter of law.

As an additional reason that Hamilton’s breach of contract claim against AIC must fail, the Fifth Circuit indicated that Hamilton’s failure to segregate covered and non-covered damages was fatal to its claim. The court recognized that under Texas law, when covered and non-covered perils combine to create a loss, the insured can recover only for the covered peril. Further, Texas law places the burden of segregating the covered damages from the non-covered damages on the insured, and failure to present evidence which allows allocation between covered and non-covered damages is fatal to the insured’s claim.

Here, the court stated, Hamilton put on no evidence describing the extent of the damage attributable to the July 2009 hailstorm which occurred during the AIC policy period. In fact, Hamilton’s own hailstorm expert did not inspect the hotel until August 2013, and testified only that the damage he observed at that time could be linked to the July 2009 hailstorm. He further testified that the damage he observed could not have occurred between the July 2009 storm and the end of the AIC policy period in July 2009 because that kind of damage “takes time to develop.” The court stated that this was not sufficient evidence to support the allocation between damages which occurred during the AIC policy period and damages which occurred outside the AIC policy period. Therefore, Hamilton’s claim for breach of contract must fail even if there were no prejudice to AIC.

The Fifth Circuit also held that Hamilton could not prevail on its extra-contractual claims. The Fifth Circuit noted that under Texas Law, the alleged violations of the DTPA and the Insurance Code could be examined under the same framework as the common law bad faith claim. The court indicated that under Texas law, an insured does not have a bad faith claim if there is no breach of the policy by the insurer. The court noted two exceptions to this general rule: (1) when the insurer commits an act so extreme it causes an injury independent of the policy claim, or (2) when the insurer failed to timely investigate the insured’s claims. The court reasoned that because AIC did not breach the policy, and Hamilton presented no evidence of an independent injury or that AIC failed to timely investigate, Hamilton’s extra-contractual claims against AIC must fail.

Keywords: hail, late notice, prejudice, allocation, extra-contractual claims, burden of proof, Texas, property insurance

Pierce T. Cox is with Thompson, Coe, Cousins & Irons, Houston.


April 4, 2016

ERISA Insurers Must Disclose the Policy’s Contractual Limitations Period

Congress did not provide a statute of limitations for Employment Retirement Income Security Act (ERISA) claims, so federal courts typically adopt the forum state’s analogous limitations period. In 2013, the U.S. Supreme Court held that an ERISA plan’s contractual limitations period will be enforced, if reasonable, and may even begin before the claimant’s cause of action accrues. Heimeshoff v. Hartford Life & Accident Insurance Co, 134 S.Ct. 604 (2013).

Last month, the First Circuit Court of Appeals helped balance the playing field for plan participants, holding that an ERISA insurer must advise a claimant of the policy’s limitations period before it will be enforced. Santana-Diaz v. Metropolitan Life Ins. Co., --- F. 3d ---, 2016 WL 963830 (1st Cir. Mar. 14, 2016).

Santana-Diaz appealed from the district court’s ruling that his suit was time barred by the three-year limitations period in MetLife’s policy. The First Circuit reversed because MetLife’s benefit denial letter did not advise Santana-Diaz of the contractual limitations period. The court, interpreting 29 C.F.R. §2560.503-1(g)(1)(iv), held that “a denial of benefits letter must include notice of the plan-imposed time limit for filing a civil action.” The failure to comply is alwaysprejudicial to the claimant, and therefore renders the contractual limitations period inapplicable.

The Third and Sixth Circuits also require ERISA insurers to advise claimants of a contractual limitations period when communicating an adverse benefit decision. Mirza v. Ins. Administrator of America, Inc., 800 F.3d 129 (3d Cir. 2015); Moyer v. Metropolitan Life Ins. Co., 762 F.3d 503 (6th Cir. 2014). These rulings are well reasoned and likely to be followed across the country. ERISA insurers that wish to enforce contractual limitations periods are well-advised to comply, and should be aware that this notice requirement applies “even when the information is also contained elsewhere in the plan documents, and regardless of when the claimant last received a copy of the plan documents.”

For claimants, Santana-Diaz is a positive development but provides no assurances in ERISA’s often unforgiving landscape. Sophisticated insurers will quickly adapt, while their experienced counsel challenge the reach of this authority. Claimants should adhere to an ERISA plan’s limitations period whenever possible, recognizing expired deadlines may be overcome when absent from the insurer’s decision letter.

Keywords: insurance, coverage, litigation, ERISA, disability

Benjamin C. Hassebrock is with Ver Ploeg and Lumpkin PA, Miami.


January 19, 2016

Excess Insurer Not Required to Drop Down Following Insolvency of Primary Insurer

The Tenth Circuit Court of Appeals recently held that an excess liability insurer is not required to drop down and provide indemnity or defense coverage to an insured when the primary insurer becomes insolvent and is not able to honor its obligations under the primary insurance policy. Canal Ins. Co. v. Montello, Inc. , 2015 WL 7597429, 2015 U.S. App. LEXIS 20625 (10th Cir. Nov. 27, 2015).

The issue addressed by the Montello court may arise in toxic tort lawsuits involving alleged exposure to asbestos or other toxins spanning many years and multiple liability insurance policies. Montello, a distributor of products used in the oil-drilling industries, distributed a product which contained asbestos during the years 1966 to 1985. After it was sued by a number of individuals claiming injuries caused by exposure to asbestos, Montello sought coverage under various business liability policies it purchased from various insurers over a period of time. During a portion of the period of time in which the exposure to asbestos occurred, Montello had purchased liability insurance from The Home Insurance Company. Home Insurance was declared insolvent in 2003 and had not paid out any claims for bodily injury on behalf of Montello at the time it was declared insolvent.

During the exposure period, Montello had also purchased excess insurance from Canal Insurance Company. In response to the asbestos claims filed against Montello, Canal filed suit against Montello contending that it had no duty to defend or indemnify Montello in the asbestos lawsuits because it was an excess carrier that was only obligated to pay after any insurance coverage available under the primary insurance policies issued to Montello was exhausted. Canal claimed its obligations under the excess policy were not triggered because the underlying insurance policy issued by the insolvent insurer had not been exhausted.

The excess liability policy required the insurer to indemnify Montello for all sums which Montello “shall become legally obligated to pay as damages and expenses . . . within the term ‘ultimate net loss’ . . .” because of personal injury, property damage or advertising liability arising from an occurrence. The term “ultimate net loss” under the policy included any amounts for which the insured was liable above the applicable limits of any underlying insurance. If there was no applicable underlying insurance, then the excess insurer was required to pay amounts above a retained limit stated in the excess liability policy.

The court determined that the claim for coverage under the excess policy did not involve an occurrence. In the court’s view, the liability for which Montello sought coverage under the excess policy was caused by the primary insurer’s insolvency rather than an occurrence or accident as required by the policy. The court therefore concluded that the insolvency of the primary insurer was not an occurrence. It is not clear from the decision whether there was any argument by the insured that the lawsuits which gave rise to the claims for insurance coverage alleged occurrences that triggered the insuring clause. Arguably, the occurrence to which the excess insurance clause applied was the same occurrence to which the primary insurance applied— a lawsuit alleging exposure to asbestos that resulted in personal injury. The insured’s liability for damages arose from the claimed exposure to asbestos, not the primary insurer’s insolvency, and the primary policy was merely a source of payment for any damages for which the insured was liable.

Even if the Montello court had found that the claim for coverage under the excess policy arose from an occurrence, the court still concluded that coverage was not triggered because Montello did not incur liability above the applicable limits of the underlying insurance policy. The court rejected the insured’s argument that because the primary insurer was insolvent there were no applicable limits of underlying insurance for Montello to exhaust in order to trigger coverage under the excess policy.

The excess insurer’s indemnity obligation could also be triggered if the underlying insurance was inapplicable to the occurrence. The court concluded, however, that the primary liability policy provided coverage for asbestos related claims and therefore was applicable, although no payments were made because of the insurer’s insolvency. This portion of the court’s decision is inconsistent with the court’s previous determination that the primary insurer’s insolvency was the event for which coverage was claimed when it determined there was no occurrence to which the excess policy was required to respond. When analyzing the issue of whether the underlying insurance was “inapplicable to the occurrence”, however, the court focused on the asbestos exposure as the event which constituted an occurrence.

The excess liability policies in Montello were excess “over any other valid and collectible insurance available to the insured.” The court rejected the insured’s argument that the excess policy was not excess to any other insurance and should provide primary coverage because the insolvency of the primary insurer rendered the primary insurance uncollectable and unavailable. Since excess insurers generally have no obligation to the insured until the primary insurance limits are exhausted, the court was not willing to impose an obligation on the insurer which did not exist in the policy.

The court also determined that the excess insurer was not obligated to defend the insured under a defense coverage endorsement that required the insurer to defend any suit seeking damages for personal injuries, property damage, or advertising liability “if there is no underlying insurer obligated to do so.” The court rejected the insured’s argument that when the primary insurer was declared insolvent, the court effectively cancelled the primary contract of insurance and any obligations under the contract.

The Montello case is an example of how courts will not rewrite excess liability insurance policies to provide coverage that the parties to the contract did not intend would be provided and for which a premium was not paid. It is also an example of how a corporate insured may sustain financial obligations it did not intend to incur if the insurer from whom primary coverage was purchased is not able to pay claims.

Keywords: excess liability insurance, primary insurance, insolvency, bankruptcy, other insurance clause, occurrence, asbestos coverage

Michael McCormack, http://www.omjblaw.com/Attorneys/Michael-T-Mccormack.shtml, is with O’Sullivan McCormack Jensen & Bliss PC, Wethersfield, Connecticut.

December 7, 2015

Almost No Coverage for Replacing Defective Component That Has Not Failed

In U.S. Metals, Inc. v. Liberty Mutual Group, Inc., No. 14-0753, 2015 Tex. LEXIS 1081 (Tex. Dec. 4, 2015), the Texas Supreme Court rejected the argument that incorporation of defective flanges into diesel units should be considered “property damage.” The insured sought coverage for removal and replacement of those flanges and for the loss of use resulting from the need to replace them.

But “property damage” was defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.” The court reasoned that “[a] thing whose use or function is diminished by the incorporation of a faulty component can fairly be said to be injured, even if the injury is intangible, latent, or inchoate. Here, the installation of the leaky flanges—or at least potentially leaky, and in any event below-standard—can certainly be said to have injured—harmed or damaged—the diesel units by increasing the risk of danger from their operation and thus reducing their value. But if that increased risk amounted to physical injury within the meaning of the CGL policy, then it is difficult to imagine a non-physical injury. Any lessening of property by adding a component would be not only injury but physical injury. The policy’s limitation of coverage to damages from physical injury necessarily implies that there can be non-physical, non-covered injuries. Otherwise, the requirement that injury be “physical” would be superfluous. To give ‘physical’ its plain meaning, a covered injury must be one that is tangible.” Id. at *9-10.

Of course, a physical injury did occur when the defective flanges were cut out, destroying welds, insulation and gaskets. Id. at *19. But most coverage for that was barred by the impaired-property exclusion. The diesel units containing the defective flanges were tangible property that incorporated the insured’s defective product (the flanges) and could be “restored to use by the repair, replacement, adjustment, or removal” of the flanges. Id. at *20.

U.S. Metals argued that restoring the diesel units to use involved much more than replacing its product, because doing so required destruction and replacement of other things (e.g., welds, insulation and gaskets). The court disagreed. “The policy definition of ‘impaired property’ does not restrict how the defective product is to be replaced.” Id. at *20. Because the diesel units had been restored to use by the replacement, there was no coverage for their loss of use. “But the insulation and gaskets destroyed in the process were not restored to use; they were replaced. They were therefore not impaired property to which Exclusion M applied, and the cost of replacing them was therefore covered by the policy.” Id. at 20-21.

William T. Barker is with Dentons, U.S., LLP, Chicago.


January 19, 2016

The Demise of Mediation?

This past September, I sent the following letter to Barbara Gaal, of the California Law Revision Commission, arguing against the commissions’ attempt to make broad changes to the confidentiality protection currently afforded statements made in mediation. The commission continued its public hearing in Los Angeles this past week as it seeks further comment on this important issue.

Regardless of your perspective, its critical to remember that commercial mediation has evolved over the past 25 years, founded on the principle that it is an interest-based process and one that requires the participation of those involved in the dispute. Broad removal of the protections of confidentiality will muzzle the very people we are trying to assist. The legislation contemplated by the commission threatens to return us to a day when litigants were treated as outsiders looking in on a dispute resolution process that often failed miserably to meet their needs.

Dear Barbara,
I am the immediate past Chairman of the Board of JAMS, the largest provider of commercial mediation services in the United States, and a full time mediator with over thirty years of daily mediation experience. While I am not writing in any official capacity on behalf of JAMS, I am urging your Commission to reconsider its August 7th recommendation to draft legislation impacting confidentiality in the mediation process.

Some background: when I started the first commercial mediation company in California using attorney mediators, our business plan was to someday get the court system to see the value of the mediation process. A centerpiece of this process was, and remains, the opportunity for each participant to be heard in a confidential environment, free from the potential repercussions of traditional litigation. The goal is for parties, free to discuss a full range of issues, to work out their conflicts, with the assistance of the mediator, thus saving everyone involved, including the court system, tremendous amounts of time and money. To say the mediation process has been successful these past twenty-five years would be a huge understatement. As I'm sure you are aware, all law schools now teach mediation, every court has a mandatory mediation program and thousands of conflicts are resolved each year that would otherwise require increasingly scarce judicial resources. Our company alone resolved over 14,000 disputes last year nationwide. Just this past month I helped mediate a large construction case in Yolo County that would have occupied one of four civil departments for almost a full year. In that one instance it's fair to say that mediation freed up approximately 25% of the judicial resources in that county's civil court system for the next year. These results could not be achieved except for the confidentiality protection afforded to participants.

I've never written a letter or email to a legislator on any matter involving proposed legislation. I am compelled to act now because I'm very afraid that your pending actions will emasculate a process that has provided tremendous benefit to individuals, organizations and the court system, all for no persuasive reason. In over six thousand mediations I have been involved with I have never seen the possible benefit to someone looking to breach the confidentiality protection currently afforded. I can see obvious reasons why one might use these arguments as pretext for all sorts of strategic advantage but this shouldn't justify revising current confidentiality protections.

In life we often have to trust others with more experience to help us get things right. As a pioneer in this industry with more mediation and teaching experience than I need to recount, let me simply say, you are in grave danger of getting it wrong. I would counsel more reflection and an industry led dialogue on how to manage whatever legitimate interests need to be addressed without throwing the baby out with the bathwater.

Let's focus on the bigger picture for a moment. We can all agree that we live in a world with increasing stressors and conflict, many of which already escalate all too readily to violence. Even those that find their way into our legal system are further delayed in an environment of diminishing judicial resources. We desperately need any and all processes that encourage dialogue, find compromise and ultimately resolve conflict. To undermine one of the most successful processes developed in recent times ostensibly to deal with a narrow and otherwise manageable issue makes no sense.

If you or others on the Commission would like to understand more about the potential consequences of your pending legislative efforts, I would gladly volunteer my time to help you get it right. In the meantime please do no legislative harm to the confidentiality protections currently afforded those in desperate need of dispute resolution processes.


Bruce Edwards 


Bruce A. Edwards is a past chairman of the board of directors of JAMS, and recently cofounded Edwards Mediation Academy.


November 30, 2015

An Open Letter About California’s Absolute Mediation Confidentiality Statute

The California Legislature has asked that state’s Law Revision Commission to consider whether California’s Absolute Mediation Confidentiality statute should be amended to make mediation evidence admissible in cases of legal malpractice. ADR Subcommittee Cochair Jeff Kichaven is one of the leading advocates of this change. Below is a letter he recently submitted to the Law Revision Commission in connection with its work. We think you will find this letter provocative, and we welcome dialogue on this important subject.

* * *

Thank you for your continued interest in and openness to comments on the commission’s proposed changes to California’s mediation confidentiality rules. I appreciate the opportunity to contribute my views, and the respectful consideration received from you and the commission.

The Commission’s actions on August 7 are important steps toward restoring consumer protection and the Rule of Law in California mediations. I am pleased to see that there will be further discussion of these issues at the commission’s October 8 meeting in Davis.

While I am not able to attend the October 8 meeting, I did want to share some thoughts, which I hope will help the commission as it moves forward in its work. These thoughts are in three areas. The first regards the proper ways to consider assertions that changes to the mediation confidentiality rules will unleash a parade of horribles. The second regards whether in camera review serves any purpose. The third regards the need to allow mediators to testify in their own defense, if ever they are sued for malpractice.

Will Changes to Mediation Confidentiality Unleash a Parade of Horribles?
We have all heard assertions that changes to California’s mediation confidentiality rules will unleash a parade of horribles. The purpose of this letter is not to rebut the assertions one by one, but rather to suggest a method of analysis to the commission which will get to the truth, based on evidence.

For any asserted horrible which concerns the commission, we should ask, is there any actual evidence that lesser mediation confidentiality would actually cause that horrible to happen? Fortunately, there are ways to put these asserted horribles to empirical tests. Mediation confidentiality (or privilege) rules around the country vary. And, even in California, different standards of confidentiality have existed at different times. So, we should ask:

1.In California, confidentiality was at one time protected only by Evidence Code sections 1152 and 1154. Those sections provide, generally, that settlement offers and demands, and statements made in the negotiations which surround those offers and demands, are inadmissible to prove the validity or invalidity of the claims and defenses being negotiated. For any asserted horrible, is there any actual evidence that that horrible existed when only Evidence Code sections 1152 and 1154 governed?

2. Ten states and the District of Columbia have adopted the Uniform Mediation Act. Section (6)(a), subsections (5) and (6), generally provide that the privilege of that Act does not apply in malpractice claims against mediators or lawyers representing parties in mediation—in substance, what the commission decided to recommend on August 7. Some UMA States—Washington, Illinois, Ohio, New Jersey—and the District of Columbia—have dynamic commercial centers with busy courts as we have in California. For any asserted horrible, is there any actual evidence that that horrible exists in any UMA State?

3. Some Federal Courts may not apply state confidentiality rules to mediations, but rather may apply only Rule 408 of the Federal Rules of Evidence. Rule 408 is in substance the same as Evidence Code sections 1152 and 1154. Rule 408 has been in effect since 1975. For any asserted horrible, is there any actual evidence that that horrible exists in any situation governed by Rule 408?

Confidentially and privilege rules prevent courts from considering relevant evidence as they try to fulfill their duty to adjudicate fairly the claims and defenses which are before them. The fair adjudication of those claims and defenses id the essence of the Rule of Law —bedrock of our society. We adopt confidentially and privilege rules to limit courts’ consideration of relevant evidence, and thereby limit their ability to adjudicate fairly, only if there are actual, compelling reasons to do so. This is why I repeatedly and firmly emphasize the need for the propents of Absolute Mediation Confidentiality to produce actual evidence to prove that their asserted horribles are real. The burden should and must be on them. There are plenty of places they could get that actual evidence, if it existed, as described above. Absent such evidence, there is no reason to think that the asserted horribles are real, and therefore the commission should ignore those assertions.

Will In Camera Review Serve Any Purpose?
On August 7, the commission voted for some form of in camera review of evidence from the mediation in which the alleged malpractice is claimed to have taken place. Further consideration, though, of the traditional purposes of in camera review will show that such review really serve no purpose in the current context. And, the need to conduct in camera reviews would produce just the sort of burden on courts which the proponents of Absolute Mediation Confidentiality profess to disapprove. I would respectively request the commission to reconsider imposing the burdens of in camera review in this context.

Traditionally, the purpose of in camera review is to test an asserted claim of privilege or confidentiality. So, if a party responding to discovery objects to the production of documents on the grounds that those documents contain trade secrets or attorney-client privileged information, that responding party may be able to obtain in camera review before the requested documents must be produced. Compare, for example, Evidence Code section 915(b).

Here, though, in camera review would not be necessary. There is no need for a court to test whether the mediation communications come within the ambit of mediation confidentiality; by definition, they do, but the new statue will provide that the confidentiality rules may not be used to exclude this evidence in the subsequent malpractice case.

Moreover, saddling courts with the need to conduct these in camera reviews would create just the sort of unnecessary burden on courts which the proponents of Absolute Mediation Confidentiality sat they seek to avoid. We all agree that the workload of our buy courts should not be unnecessarily burdened; it seems that, upon further scrutiny, the idea of in camera review should not be part of the proposed legislation.

(There is one other type of case where in camera review is used, and which is easily distinguished from our situation. I mention it only to prevent confusion. Sometimes, parties seek to discover evidence of events or transactions distinct from the events directly at issue in a lawsuit, but which may be relevant. For example, in police excessive force cases, parties sometimes seek to discover evidence from the office’s personnel records which document other incidents where a particular officer used force. In such cases, the party seeking discovery must make what is commonly called a “Pitchess Motion” pursuant to Evidence Code section 1043, and the court will make an in camera review of the personnel records before production is required. In camera reviews of this type are unrelated to our situation, where we are talking about the use of evidence of what happened in the very mediation which is the subject of the malpractice action, not other cases or mediations in which the parties were involved.)

Should Mediators Be Allowed to Testify in Their Own Defense?
It would be curious indeed if a mediator, sued for malpractice, were found statutorily incompetent to testify in his own defense. Yet that would be the result if Evidence Code section 115 et seq. is amended to allow malpractice actions against mediators, but Evidence Code section 703.5 is not amended at the same time.

Evidence Code section 703.5 generally makes a mediator incompetent to testify, in any subsequent civil proceeding, to anything said or done in a mediation which that mediator conducted.

Clearly, if a mediator is sued, he should be allowed to testify in his own defense. Section 7033.5 should be amended, at least to that extent.

More broadly, though, a mediator’s testimony may also be important in a malpractice action against an attorney, where the alleged malpractice took place at a mediation.

In a paradigm case, a plaintiff might sue her former lawyer for malpractice, claiming that, at a mediation, the lawyer advised the client to settle too cheaply. The layer’s defense might be that the mediator told him of new evidence against his client, in light of which the settlement was reasonable. The lawyer would likely want to call the mediator as a witness, to testify that this new evidence was in fact disclosed and discussed. Due process would seem to require no less. Therefore, I would respectfully request that, once the commission recommends changes to Section 1115 et seq., the commission also recommend elimination of those portions of Section 703.5 which make a mediator’s testimony incompetent.

The proponents of Absolute Mediation Confidentiality may respond by adding to their Parade od Horribles, and arguing that this would result in mediators being endlessly drawn away from their work and into depositions and trials to testify as to long-ago mediations of which they remember little. The response, again, is to ask whether this horrible has become a reality in the Uniform Mediation Act states, where mediator testimony is permitted. Is there any actual evidence of this being a problem in any UMA state? If not, what is the reason to believe that it would be a problem in California?


Jeff Kichaven

Jeff Kichaven Mediations, Los Angeles.

October 28, 2015

DOJ Policy Shift Will Have Significant Effect on D&O Claims

The recent shift by the Department of Justice in its policy toward holding individual corporate executives accountable for corporate misconduct will almost certainly have significant implications for coverage under directors and officers liability policies.

On September 9, 2015, Deputy Attorney General Sally Quillian Yates released a memorandum entitled “Individual Accountability for Corporate Wrongdoing” (or the “Yates Memo”) that outlines a new direction in the DOJ’s approach to corporate wrongdoing. Noting that in large corporations “responsibility can be diffuse and decisions are made at various levels” making it “difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt,” the Yates Memo emphasizes that the DOJ must “fully leverage its resources to identify culpable individuals at all levels in corporate cases.” To this end, the Yates Memo outlines six steps the DOJ will now take when investigating corporate misconduct in both civil and criminal cases:

  1. To be eligible for any cooperation credit, corporations must provide to the department all relevant facts about the individuals involved in corporate misconduct.

  2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.

  3. Criminal and civil attorneys handling corporate investigations should be in routine communications with one another.

  4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.

  5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.

  6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

The Yates Memo’s focus on redressing individual wrongdoing likely represents a significant shift in the DOJ’s enforcement priorities. Whereas in the past corporations have often been able to resolve allegations of wrongdoing by paying fines, changing challenged business practices or submitting to ongoing monitoring— with individual executives often escaping any personal liability— the Yates Memo puts such executives squarely in the DOJ’s targets, even in situations where they may lack the ability to pay a judgment.

Indeed, by requiring companies to provide “all relevant facts” about individual involvement in corporate wrongdoing before they are eligible for cooperation credit, the new approach incentives companies to identify responsible individuals within the company. In prepared remarks at New York University following the release of the memo, Yates made clear, “[W]e’re not going to let corporations plead ignorance. If they don’t know who is responsible, they will need to find out. If they want any cooperation credit, they will need to investigate and identify the responsible parties then provide all non-privilege evidence implicating those individuals.”

The DOJ’s new policy that corporations under investigation must identify all individual wrongdoers as a precondition of any settlement is certain to have significant ramifications for the D&O coverage available to companies and individuals facing DOJ scrutiny. For one thing, the new focus on ferreting out individual wrongdoing shifts the dynamic between companies and their individual directors and officers, and is certain to multiply the number of individuals seeking separate defense counsel under a company’s D&O policy. In the past, companies under investigation and their executives have often shared counsel where their interests were obviously aligned. Under the new policy, with companies under pressure to identify individual wrongdoers and DOJ attorneys under orders not to let individuals off the hook, many cases that in the past may have been defended by a single firm will now require separate defense counsel for the company and each affected executive. Because defense costs under D&O policies are almost always paid within limits, this in turn will lead to much quicker erosion of a company’s D&O coverage, with multiple sets of lawyers each involved in managing the investigation, responding to discovery demands, and trial. 

Moreover, the DOJ’s new focus on individuals is certain to increase the length and complexity of litigation for reasons beyond the sheer number of attorneys involved. It is often more difficult for the DOJ to prove an individual’s misconduct than a corporation’s. As the Yates Memo notes, corporate decisionmaking is often spread across multiple parts of the organization and it is not always clear that one or more specific individuals had the knowledge necessary to impose liability. For this reason, holding individuals accountable in the ways contemplated by the Yates memo is certain to require more work on the part of both DOJ and defense attorneys in such cases. Settlements are also likely to become more challenging – and more expensive – as multiple individuals will need to negotiate their own resolutions with the DOJ, often with the potential for criminal charges looming large.

Each of these considerations should give companies – not to mention their officers and directors – reason to reexamine whether their D&O limits are sufficient. Individual executives may also want to consider personal coverage in the event that the coverage offered by the company may not be adequate.

The Yates Memo’s focus on individual accountability also highlights the importance of considering whether a policy provides coverage for defense costs incurred in government investigations, even if litigation or other formal proceedings have not yet begun. Often, whether such coverage is available is a function of how the policy at issue defines the term “Claim.” Corporate and individual insureds will want to seek the broadest definition possible when obtaining coverage to ensure that their policy will respond at the earliest possible stage of an investigation.

Insureds will also want to consider the application of D&O exclusions for fraud, violation of statutes, or unlawful profit or advantage.  Some policies require a final adjudication before these exclusions will apply, while others do not. Absent a final adjudication requirement, policyholders run the risk that they will not have coverage for defense costs incurred in defending against allegations of wrongdoing. In addition, insureds should consider their policy’s severability and imputation provisions, which can work to preserve coverage for the company and individual executives even if one bad actor’s conduct triggers an exclusion.

Keywords: insurance, coverage, litigation, D&O Policies, DOJ, Yates Memo

Joshua D. Davey, McGuireWoods LLP, Charlotte, North Carolina


October 20, 2015

Nevada Supreme Court Adopts Cumis Rule

The Nevada Supreme Court recently answered a certified question from the U.S. District Court on the application of the Cumis rule under Nevada law. In State Farm Mut. Auto. Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74, 2015 WL 5656978 (Nev. 2015), the court held that Nevada law, which recognizes that defense counsel hired by an insurance company serves “dual clients,” requires the insurer to pay for independent counsel of the insured’s choosing when a conflict of interest arises in the defense of a case. Following the California Court of Appeal’s holding in San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 208 Cal. Rptr. 494, 506 (Ct. App. 1984), and adopting the same dual client analysis relied on by the Cumis Court, the Nevada Supreme Court held: “When the insured and the insurer have opposing legal interests, Nevada law requires insurers to fulfill their contractual duty to defend their insureds by allowing insureds to select their own independent counsel and paying for such representation.” Citing RPC 1.7(a), and recognizing the insurer-appointed attorney owes obligations to both the carrier and the insured, the Court explained that a “conflict of interest may arise because the outcome of litigation may also decide the outcome of a coverage determination—a determination that may pit the insured’s interests against the insurer’s.” Under such circumstances, “an insurer must satisfy its contractual duty to provide counsel by paying for counsel of the insured’s choosing.”

The court also addressed the ancillary question of when a true conflict of interest arises, which triggers the need to retain independent counsel. Adopting a similar approach as the Cumis court, the Hansen court held: “[A]n insurer is only obligated to provide independent counsel when the insured’s and the insurer’s legal interests actually conflict. A reservation of rights letter does not create a per se conflict of interest.” Rather it is only where “(1) a reservation of rights and (2) that the outcome of the coverage determination can be controlled by [the insurer provided] counsel in the underlying defense of the claim” that the requirement to retain independent counsel for the insured arises. Further, the court emphasized that even if a reservation of rights has been issued by the carrier and the outcome of the case can be controlled by counsel first retained by the insurer, a conflict does not necessarily exist. “[C]ourts must still determine whether there is an actual conflict of interest. This means that there is no conflict if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”

The Hansen case presented such a situation. There, the insured faced potential liability for a vehicular accident in which the underlying plaintiff alleged that the insured either negligently or intentionally struck the plaintiff’s vehicle. The policy excluded, and State Farm issued a reservation of rights to disclaim coverage on the exclusion for, intentional acts and punitive damages. The insured admitted to negligently striking the plaintiff’s vehicle. Since the carrier would benefit from a finding of an intentional tort, and the insured would benefit and obtain coverage if he was only found negligent, defense counsel hired by the carrier, due to its dual obligations of loyalty to both the insured and the carrier, faced a conflict of interest. Under these circumstances, the Hansen court found that independent counsel, chosen by the insured and paid for by the carrier, was required.

Howard J. Russell is with Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC, Atlanta.


Keywords: insurance, Nevada, Cumis court, Cumis representative, conflict of interest


June 18, 2015

CT First Supreme Court to Address CGL Cyber Coverage Debate

The Connecticut Supreme Court recently published its eagerly anticipated decision in Recall Total Info. Mgmt., Inc. v. Fed. Ins. Co. (Recall III), No. 19291, 2015 WL 2371957, at *1 (Conn. May 26, 2015), one of the first decisions of its kind addressing commercial general liability (CGL) coverage for certain types of cyber exposures. The case received attention for its interpretation of “publication” in the personal and advertising injury coverage of a standard CGL insurance policy. The court held the insurers were not required to defend or indemnify the insureds for damages stemming from the loss of computer tapes containing the personal information of approximately half a million IBM employees because even though there was evidence the computer tapes fell into the hands of an unknown third party, there was no publication.

The facts surrounding the Recall case are not what most envision in a groundbreaking cybersecurity case. When one hears of a data breach, the first thought is usually of covert computer hackers or sly social engineers obtaining encryption keys from unsuspecting employees. In this case, the data breach was decidedly more low-tech; it occurred when a cart containing old computer tapes fell out of the back of a transportation vendor’s van. An unknown individual retrieved 130 of these tapes, which contained the names, birth dates, addresses, and social security numbers of about 500,000 present and former IBM employees. 

In response, “IBM immediately took steps to prevent the dissemination of the information. On March 30, 2007 and on April 23, 2007, IBM wrote to Recall claiming a total of $6,192,468.30 in expenses—$2,467,245.10 for notifying current and/or former employees, $595,122.00 for maintaining call centers and $3,130,101.20 for credit monitoring services—as a result of the loss of the tapes. Recall entered into a settlement agreement with IBM for the full amount of the loss.” Recall III at *1. 

Recall reimbursed IBM and pursued its transportation vendor, Executive Logistics Inc. The two resolved their dispute and pursued Executive’s CGL insurers, which denied the claim, arguing that the “publication of material, in any manner, that violates a person’s right of privacy” coverage under a CGL policy requires a showing of “access,” and because there was no evidence anyone accessed the information on the tapes, there was no “publication.”

Recall sought coverage under the section of its CGL policy that covered “a ‘personal injury,’ which was defined by the policies in relevant part as an ‘injury ... caused by an offense of ... electronic, oral, written or other publication of material that ... violates a person's right of privacy....’” Recall III, at *1.

The insurers denied any duty to defend or indemnify and declined to participate in settlement negotiations for several reasons, most notably that “the claims arise from the preventative measures taken by IBM because of the theft, or loss of use, of the data on the tapes—not the tapes themselves.” Recall Total Info. Mgmt., Inc. v. Fed. Ins. Co. (Recall I), No. X07CV095031734S, 2012 WL 469988, at *5 (Conn. Super. Ct. Jan. 17, 2012). The most important issue to arise out of the case was whether the data being in the hands of a thief was publication or whether the information needed to be disseminated further. The court in Recall I, held that because there was no evidence that the information was accessed, there was no injury to persons and no one’s right to privacy was violated. Id. at *6.

In Recall II, the Connecticut Appellate Court agreed with the insurers, concluding that access is a prerequisite to publication because one must have access to information in order to publish it. The court also reasoned that the facts of Recall did not demonstrate the requisite level of access to the information (as opposed to accessing the information by taking the tapes) and thus there was no publication. The Connecticut Supreme Court went on to adopt the appellate court’s decision.

While this decision limits policyholder access to CGL insurance in Connecticut in similar scenarios (i.e., where the evidence of access to information is lacking), it leaves open the argument that more traditional data breaches, such as those with Target, Home Depot, Anthem, and Sony (another CGL publication dispute that recently settled while arguments were pending before a New York appellate court) would still qualify. These issues will continue to be closely watched as other jurisdictions weigh in. See, e.g.,Travelers Indem. Co. of Am. v. Portal Healthcare Solutions, LLC., No. 1:13-cv-917 (GBL), 2014 WL 3887797 (E.D. Va. Aug. 7, 2014), where the mere availability of information on the internet–even without evidence of third party viewing–constituted a publication).

Gregory D. Podolak is with Saxe Doernberger & Vita, P.C., Hamden, CT.


Keywords: insurance, cyber coverage, Connecticut, Recall Total Information Management, IBM


March 11, 2015

Penn State Teaches a Lesson in Asserting Bad Faith Claims

In Pennsylvania State University v. Pennsylvania Manufacturers’ Association Insurance Company, Case No. 131103195 (Pa. Com. Pl., Phila. Cnty. Jan. 14, 2015), the court held that the policyholder’s allegations of specific, albeit disputed, facts regarding insurer misconduct allowed its bad faith claim to survive the carrier’s summary judgment motion.

Penn State asserted a bad faith claim against its insurer, Pennsylvania Manufacturers’ Association Insurance Company (PMA), for its alleged mishandling of the underlying claims against Penn State arising from the Gerald Sandusky sexual assault allegations. PMA moved for summary judgment, seeking dismissal of Penn State’s bad faith claim. Penn State opposed the motion, arguing both that the motion was premature and that disputed facts precluded summary judgment. On January 14, 2015, the Philadelphia County Court of Common Pleas denied PMA’s motion. In so ruling, the court explained that that while PMA’s motion “may be untimely,” the court’s denial was based on the “merits,” as the evidence reflected that “multiple issues of material facts” surrounded Penn State’s bad faith claim.

In November 2011, former assistant Penn State football coach Gerald Sandusky was indicted, and subsequently convicted, on numerous counts relating to the sexual assault of underage boys on or near Penn State property. An independent investigation commissioned by Penn State revealed that high-level University personnel concealed Sandusky’s activities and empowered Sandusky to attract his victims by allowing him access to University events and facilities.

According to Penn State’s opposition to PMA’s summary judgment motion, as the news broke of the allegations against Sandusky, Penn State turned to its insurer of more than 50 years, seeking the benefit of its experience in defending universities, including requesting guidance in selecting defense counsel and in developing a defense strategy. PMA, however, ignored the requests for assistance. Penn State subsequently submitted a formal notice of circumstances regarding potential claims against Penn State arising out of Sandusky’s indictment, and again sought recommendations regarding defense counsel. PMA continued to ignore Penn State’s requests.

On November 30, 2011, a complaint was filed against Penn State (and other parties) by Doe A, alleging he had been sexually molested by Sandusky between 1992 and 1996, while he was a minor and while Sandusky was employed by Penn State. Penn State proffered evidence reflecting that PMA had received a copy of the Doe A complaint before Penn State even was served with a copy of it, and that it prioritized its coverage analysis regarding a potential claim, but nevertheless continued to severely limit its communications with Penn State and refused Penn State’s request that PMA participate and cooperate in Penn State’s defense of the claims.

On January 31, 2012, PMA sent Penn State a reservation of rights letter setting forth its initial coverage position andfiled a declaratory judgment action that same day. According to evidence proffered by Penn State, this letter was PMA’s first communication to Penn State regarding its coverage position, even though PMA previously had received a copy of the Doe A Complaint and taken the time to prepare a declaratory judgment action against Penn State. As a result, Penn State filed a lawsuit against PMA in the Court of Common Pleas of Philadelphia County, asserting, inter alia, a claim for bad faith. The bad faith claim encompasses PMA’s alleged failure to timely communicate its coverage position regarding these claims, alleged failure to timely cooperate and participate in Penn State’s defense of the claims, its alleged unreasonable refusal to cover the claims, and other alleged misconduct throughout the course of the coverage litigation.

Before the completion of discovery, PMA moved for summary judgment regarding Penn State’s bad faith. Penn State opposed PMA’s motion on two grounds, arguing that: (1) PMA’s motion was premature because discovery (including bad faith-related discovery) was not complete; and (2) genuine issues of material fact existed regarding PMA’s investigation of Penn State’s insurance claim and its coverage denial.

In its opposition to PMA’s summary judgment motion, Penn State asserted numerous facts, supported by deposition testimony, emails produced in discovery, and other evidence, that formed the basis of its bad faith claims. For example, with regard to PMA’s investigation of Penn State’s claim, Penn State alleged that PMA:

  • Failed to timely communicate with Penn State after the claim was submitted despite Penn State’s ongoing efforts to engage PMA in discussions and decisions regarding the defense of the underlying claims and the fact that PMA had been conducting a prioritized coverage analysis.

  • Refused to help select defense counsel and strategize regarding the defense of the underlying claims.

  • Misrepresented and obscured the status of its investigation of Penn State’s claim.

Moreover, Penn State alleged that PMA’s coverage denial lacked any factual or legal basis and thus also constituted bad faith.

In its January 14, 2015 order, the court agreed with Penn State. The court noted that Pennsylvania’s bad faith statute, 42 Pa.C.S.A §8371, does not define “bad faith,” and briefly discussed the factors that Pennsylvania courts have examined in determining whether an insurer “breached its duty of good-faith through some motive of self-interest or ill-will.” Specifically, Pennsylvania courts have established the following factors to determine whether an insurer’s coverage denial constitutes bad faith: (1) whether the insurer had a reasonable basis for denying benefits under the policy, and (2) whether the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim. Brown v. Progressive Ins. Co., 860 A.2d 493, 500-501 (Pa. Super. Ct. 2004); Pennsylvania Nat. Mut. Cas. Ins. Co. v. Johnson, Nos. 05-2045, 05-3358, 2007 Pa. Dist. & Cnty. Dec. LEXIS 123, *47-49 (Pa. Com. Pl. Jan. 16, 2007). Pennsylvania courts also have recognized that a bad faith claim can encompass more than denial of a claim, and thus can include lack of good faith in its investigation of facts and its failure to communicate with the policyholder. See Grossi v. Travelers Personal Ins. Co., 79 A.3d 1141, 1153 (Pa. Super. Ct. 2013); see also Brown, 860 A.2d at 501. The Penn State court held: “it is clear that there are multiple issues of material facts that surrounds plaintiff’s claim of bad faith.” The court thus kept Penn State’s bad faith claim alive for the jury to consider.

The Penn State court’s ruling is consistent with other opinions in which Pennsylvania courts have denied an insurer’s motion for summary judgment regarding a bad faith claim because the policyholder alleged specific facts supporting its bad faith claim. See Mee v. Safeco Ins. Co. of Am., 908 A.2d 344, 351 (Pa. Super. Ct. 2006) (finding genuine issue of material fact exists regarding whether insurer acted in bad faith in not paying overhead and profit on claim); Schifino v. GEICO Gen. Ins. Co., No. 2:11-cv-1094, 2012 WL 6552839, at *4 (W.D. Pa. Dec. 14, 2012) (finding genuine issue of material fact where policyholder proffered evidence regarding insurer’s investigation of claim from which jury could find bad faith).

By contrast, courts have granted summary judgment to insurers with respect to bad faith claims where the policyholder asserted only conclusory assertions of bad faith without proffering evidence or alleging specific facts in support of such claims. See, e.g., Hanna v. State Farm Fire & Cas. Co., No. 06-3242, 2007 U.S. Dist. LEXIS 59650, *13-16 (E.D. Pa. Aug. 13, 2007) (granting insurer’s motion for summary judgment where policyholder alleged bad faith but provided “no additional evidence to support the allegations of bad faith”); United States Fire Ins. Co. v. Kelman Bottles, 538 F. App’x 175, at *182-83 (3d Cir. 2013) (affirming grant of summary judgment to insurer where policyholder’s assertions, without more evidence or facts, were insufficient to allow jury to conclude that insurer acted in bad faith).

Penn State’s recent defeat of PMA’s summary judgment motion, as well as the other cases discussed above, serves as a reminder of the importance of asserting specific facts and evidence in support of a bad faith claim, as opposed to barebones and unsupported allegations. Supporting bad faith allegations with detailed facts and evidence should allow a policyholder to demonstrate, at a minimum, questions of fact that will allow it to withstand summary judgment and get to the jury.

Erica J. Dominitz is with  Kilpatrick Townsend & Stockton LLP, Washington, D.C.


Virginia R. Duke is with Kilpatrick Townsend & Stockton LLP, Atlanta, GA


Keywords: Insurance, coverage, litigation, Pennsylvania, commercial general liability, CGL, bad faith, summary judgment


March 4, 2015

Innocent Insured Doctrine Inapplicable Where Application Falsified

On February 20, 2015, the Illinois Supreme Court held that the common law innocent insured doctrine did not preserve coverage for an innocent insured where the insurer rescinded a lawyer’s professional liability (LPL) policy based on misrepresentations by another insured in the renewal application. Illinois State Bar Association Mutual Insurance Company v. Law Office of Tuzzolino and Terpinas, 2015 IL 117096. The court stated “that doctrine is relevant to issues of policy exclusions and insurance coverage, but it is unsuited to the case at bar, which deals with rescission and contract formation.”

In the underlying matter, the insured law firm, Law Office of Tuzzolino & Terpinas, represented client Anthony Coletta. Tuzzolino allegedly committed malpractice while representing Coletta and offered to pay $670,000 to settle any potential claim for legal malpractice. Coletta never received the $670,000.

Three months after the purported offer, Tuzzolino completed a renewal application for the firm’s LPL policy. Question No. 4 on the application asked: “Has any member of the firm become aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise to a claim that has not been reported?” Tuzzolino answered “no.”

The insurer issued the LPL policy, after which Terpinas first learned of Tuzzolino’s alleged malfeasance when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to the insurer, which brought suit to rescind the policy. The circuit court granted rescission, and the appellate court reversed the judgment as to Terpinas. The insurer appealed to the Illinois Supreme Court.

The Illinois Supreme Court reversed, noting that Illinois cases applying the innocent insured doctrine “usually involve the enforcement of policy exclusions, typically exclusions for intentional acts allegedly committed by an insured other than the one challenging the exclusion.” According to the court, the innocent insured doctrine “makes sense in that context because the insured’s innocence is relevant to whether an intentional act invokes an exclusion to coverage. But the innocent insured doctrine appears irrelevant to rescission, a recognized remedy for even innocent misrepresentations.” In other words:

In the case of a misrepresentation that materially affects the acceptance of the risk, the issue is the effect of that misrepresentation on the validity of the policy as a whole. A misrepresentation on the policy application goes to the formation of the contract. The innocent insured doctrine, on the other hand, has a narrower focus, typically dealing with situations where an insured’s wrongdoing triggers a policy exclusion, and the question is whether the insurer has a duty to defend the innocent insured under a policy that is still in effect.

The court also stated that the appellate court “erred in partially severing the policy to facilitate the application of the innocent insured doctrine” based on the policy provision that the “particulars and statements contained in the APPLICATION will be construed as a separate agreement with and binding on each INSURED.”

Moreover, “while the severability clause creates a separate agreement with each insured, it states that each separate agreement is made up of” the “statements contained in the APPLICATION,” including the false statement that no member of the firm was aware of the potential for a then-unreported claim.

Keywords: Insurance, coverage, litigation, Illinois, lawyers professional liability policy, LPL policy, application, innocent insured doctrine, rescission

Paul T. Curley is with Kaufman Borgeest & Ryan LLP, Westchester County, NY.


March 4, 2015

Notice-Prejudice Rule Inapplicable If Date-Certain Notice Required

On February 17, 2015, the Supreme Court of Colorado held that the notice-prejudice rule does not apply to a date-certain notice requirement in a claims-made insurance policy. In Craft v. Philadelphia Indemnity Insurance Company, 2015 CO 11, 2015 WL 658785, the court reasoned, in this case of first impression, that "[i]n a claims-made policy, the date-certain notice requirement defines the scope of coverage. Thus, to excuse late notice in violation of such a requirement would rewrite a fundamental term of the insurance contract."

The D&O policy at issue in Craft required the insureds to give notice of a claim "as soon as practicable" but "not later than 60 days" after the expiration of the policy. Near the end of the policy period, a company officer was sued for alleged misrepresentations he made during a merger. Unaware of the insurance policy, the officer defended himself against the suit. When he learned of the policy, approximately 16 months after the policy period had expired, he gave notice to the insurer, which declined coverage for the suit.

The officer settled the suit and sued the insurer. In response, the insurer removed the case to federal court and moved to dismiss based on untimely notice. The district court granted the motion, rejecting the officer's argument that the notice-prejudice rule applied to the claims-made policy. The officer appealed, and the Tenth Circuit certified two questions to the Colorado Supreme Court, which the Colorado Supreme Court reframed as follows: whether the notice-prejudice rule applies to the date-certain notice requirement of claims-made liability policies.

The Colorado Supreme Court held that the notice-prejudice rule does not apply to the date-certain notice requirement in claims-made policies. The court explained that doing so "would alter the parties' agreed allocation of risk" and "to excuse late notice in violation of such a requirement would alter a basic term of the insurance contract." In addition, "it would prevent parties from defining coverage with certainty, no matter how definitive or express the notice requirement."

The Colorado Supreme Court also stated that public policy concerns that militate in favor of extending the notice-prejudice rule to liability policies that require notice "as soon as practicable" do not support applying the rule to date-certain notice requirements.  These public policy concerns include (1) the adhesive nature of insurance contracts, (2) the public's interest in compensating tort victims, and (3) the inequity of an insurer's receiving a windfall from a technicality. The court held that "strict enforcement of a date-certain notice requirement does not result in a windfall for the insurer based on a technicality" because "the date-certain notice requirement of a claims-made policy is a fundamental term of the insurance contract, and notice under such a provision is a material condition precedent to coverage. Thus, to apply the notice-prejudice rule to excuse an insured's noncompliance with a date-certain notice requirement essentially rewrites the insurance contract and effectively creates coverage where none previously existed."

Keywords: Insurance, coverage, litigation, Colorado, claims-made policy, notice-prejudice rule, date-certain notice requirement

Paul T. Curley is with Kaufman Borgeest & Ryan LLP, Westchester County, NY.


February 25, 2015

Deepwater Horizon: Scope of Additional Insured Coverage Depends on Contract with Named Insured

The Texas Supreme Court recently issued a ruling relating to how the scope of additional insured coverage under an insurance policy may be driven by the additional insured’s separate contract with a named insured.  See In Re Deepwater Horizon, No. 13-0670 (Tex. Feb. 13, 2015).  The Texas court’s ruling was issued in connection with a federal suit involving insurance for losses arising from the April 2010 Deepwater Horizon explosion and oil spill.  Developer BP American Production Company and its affiliated companies (collectively BP) sought $750 million in coverage for their losses as additional insureds under the liability policies purchased by rig owner Transocean Offshore Deepwater Drilling, Inc. and its affiliates (collectively Transocean).  In response to questions certified to it by a federal court, a majority of the Texas Supreme Court held that BP’s coverage was linked to and limited by its drilling contract with Transocean because Transocean’s insurance policies incorporated the drilling contract and therefore required examination of it.

BP had argued to the federal court that the Texas Supreme Court's 2008 decision in Evanston Insurance Co. v. ATOFINA Petrochemicals Inc., 256 S.W.3d 660 (Tex. 2008), required it to look solely at the four corners of the Transocean policies, not BP’s contract with Transocean, when determining the existence and extent of BP’s additional insured coverage.  Transocean’s insurers disagreed, arguing that BP’s additional insured coverage was limited to Transocean's liabilities because the insured parties’ contractual undertakings so required.  They urged the court that under the drilling contract, BP had assumed liability for claims arising from subsurface pollution and therefore BP’s additional insured status extended only to its above-surface pollution liability losses.

A federal trial court agreed with the insurers, ruling that Transocean’s policies incorporated the drilling contract’s limitations with respect to BP's additional insured status.  BP appealed and the U.S. Court of Appeals for the Fifth Circuit initially reversed the trial court’s order, holding that the insurance policies did not, by their own terms, limit coverage for additional insureds.  On rehearing, however, the Fifth Circuit vacated its order, observing that it was unclear whether Texas law compelled it to rely exclusively on the Transocean policies or to read the policies and the drilling contract together when determining BP's coverage.  The Fifth Circuit therefore certified the following questions to the Texas Supreme Court:

1. Whether Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), compels a finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of    the Drilling Contract are “separate and independent”?

2. Whether the doctrine of contra proferentem applies to the interpretation of the insurance coverage provision of the Drilling Contract under the ATOFINA case, 256 S.W.3d at 668, given the facts of this case? 

See In re Deepwater Horizon, 728 F.3d 491, 500 (5th Cir. 2013).

The Texas Supreme Court ultimately held that BP’s status as an additional insured was inextricably intertwined with drilling contract limitations on the extent of coverage to be afforded under Transocean’s insurance policies.  As Transocean was obligated under the drilling contract to insure and indemnify BP only for above-surface pollution, BP’s additional insured coverage was so limited. 

In analyzing the issues, the court did not abandon the “separate and independent” test articulated in prior Texas authorities, including Evanston.  The court, instead, explained that it was required to “determine the scope of coverage from the language employed in the insurance policy, and if the policy direct[ed it] elsewhere, [it] will refer to an incorporate document to the extent required by the policy.”  The court also noted that unless obligated to do so by the terms of an insurance policy, it would not consider coverage limitations in underlying transactional documents. 

The Texas Supreme Court observed that Transocean’s policies insured those whom Transocean “is obliged” by an “Insured Contract” to provide insurance.  This language it held pointed to the “additional insured” provision in the underlying drilling contract, which limited BP’s coverage to liabilities assumed by Transocean under the terms of the contract (i.e., above-surface pollution risk).  The court therefore ruled that BP’s additional insured status was linked, at least in some respect, to the extent of Transocean’s indemnity obligations.  That being the case, the court looked to the drilling contract and, on finding it unambiguous, limited BP’s insured status, and held BP was not entitled to coverage under the insurance policies for subsurface pollution liabilities.

Given its ruling on the first certified question, the court did not reach the second issue certified by the Court of Appeals.

Keywords:  insurance; coverage; litigation; Texas; Fifth Circuit; Deepwater Horizon; named insured; additional insured; insured contract; contractual indemnity; pollution; pollution liability

Sherilyn Pastor is with McCarter & English, Newark, NJ



February 25, 2015

Pennsylvania Holds that Policyholders Can Assign Insurance Bad Faith Claims to Third Parties

The Pennsylvania Supreme Court has decided that policyholders can assign their statutory bad faith claims to third parties. Allstate Prop. & Cas. Co. v. Wolfe, 2014 PA. LEXIS 3309 (Pa. December 15, 2014). The Third Circuit Court of Appeals had certified that question to the Pennsylvania high court. The decision settles conflicts that had arisen between the state’s intermediate appellate courts, which had held that allowed assignments of bad faith claims, and some recent decisions from federal courts, that had barred such assignments.

The decision clears the way for injured plaintiffs to settle claims from insured defendants by taking assignment of bad faith claims. Now they can settle cases by assigning both claims that arise under common law and those that arise under Pennsylvania’s bad faith statute, 42 Pa.C.S. Section 8371.

 The case generated significant attention. Ten organizations participated in filing amicus briefs before the Supreme Court. The insurance industry argued that Pennsylvania’s bad faith statute, which allows an award of punitive damages against insurance carriers, was akin to a personal tort. Pennsylvania has long barred parties from assigning unliquidated personal tort claims on the grounds that allowing those would be contrary to public policy. Given that similarity, the insurance industry argued, statutory bad faith claims should be barred as well. Further, it suggested that allowing such assignments would encourage litigation, which is also against public policy.

The plaintiff and amici on his behalf argued that Pennsylvania has long allowed assignments of bad faith claims that arise under the common law. Further, they argued the state legislature was aware of this when it passed the bad faith statute in 1990. They argued that the statute was intended to deter bad faith, which would be accomplished by allowing policyholders to assign statutory bad faith claims. They also argued that the legislature, which knew that Pennsylvania had allowed common law bad faith claims to be assigned for many years, did not intend to split the cause of action. They also pointed out that Pennsylvania’s lower courts had been allowing assignments of statutory bad faith claims for many years without generating the mischief that the insurance industry feared.

 In a decision that freely quoted the briefs on both sides, the Pennsylvania Supreme Court sided with policyholders. The court focused on the intent of the legislature and the policy to be obtained by broadly interpreting the remedial purpose of the statute. The court reasoned that “consideration of the occasion and necessity of Section 8371, the object to be attained, and the previous legal landscape, as well as the consequences of our interpretation, favor Wolfe’s position.”

 This case, in which public policy was vigorously argued, stemmed from an ordinary car accident. In 2007, Jared Wolfe was injured when Karl Zierle rear-ended him. Wolfe demanded $25,000 from Zierle, which was half of his policy limit. Allstate offered him $1,200 to settle the case. Wolfe then sued Zierle and discovered that Zierle had been intoxicated at the time of the collision. Wolfe then obtained a jury verdict of $15,000 for compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 but refused to pay the $50,000 in punitive damages.

Wolfe then agreed to not execute against Zierle in exchange for an assignment of all of Zierle’s claims against Allstate. Wolfe sued Allstate for bad faith and a jury entered a verdict in his favor for $50,000. Allstate argued that Wolfe lacked standing on the grounds that claims arising under Section 8371 could not be assigned. The district court disagreed. When the case was appealed to the Third Circuit, the appeals court certified the question to the Pennsylvania Supreme Court.

The Pennsylvania Supreme Court’s decision reinforces the strong public policy that is the foundation for the statute: to deter and punish bad faith by insurers. That policy is rooted in Pennsylvania’s common law. Pennsylvania first recognized a claim for bad faith against an insurer in Cowden v. Aetna Cas. & Sur. Co., 39 Pa. 459, 134 A.2d 223 (Pa. 1957). In 1966, the Pennsylvania Supreme Court allowed policyholders to assign their bad faith claims. Gray v. Nationwide Mut. Ins. Co., 42 Pa. 500, 223 A.2d 8 (1966). But plaintiff insureds cannot obtain punitive damages or attorney’s fees under the common law. In 1990, the Pennsylvania legislature added Section 8371 to its code. Under Section 8371 courts may award punitive damages, interest, and attorney’s fees.

At the Pennsylvania Supreme Court, the insurance industry argued that while an insured defendant could assign her common law bad faith claim to settle a suit with an injured plaintiff, that public policy did not allow her to assign the statutory claim to settle the suit. The insured defendant would have to pursue the claim independently.

The Supreme Court disagreed. It reasoned that “we simply do not believe the General Assembly contemplated that the supplementation of the redress available for bad faith on the part of insurance carriers in relation to their insureds would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions.”

Keywords: insurance; coverage; litigation; Pennsylvania; bad faith; statutory bad faith; assignment; tort; Section 8371

Andrew J. Kennedy, Colkitt Law Firm, P.C., Pittsburgh. The author represented amicus United Policyholders in the case discussed.


February 18, 2015

Split of Authority in Texas on Extracontractual Damages

In United National Insurance Co. v. AMJ Investments, LLC, 447 S.W.3d 1 (2014), a Texas court of appeals rejected any requirement of independent damages and affirmed a judgment based on Chapter 541. Because other courts of appeals have held independent damages necessary, and the federal courts agree, there is now a split of authority.

Texas has long recognized a common-law cause of action when an insured suffers an excess judgment due to the insurer’s negligent rejection of a within-limits settlement opportunity. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547–48 (Tex. Comm’n App. 1929, holding approved). More recently, it recognized a common-law cause of action for failure, without a reasonable basis, to provide first-party benefits. Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). These common-law remedies have now been supplemented by (largely parallel) statutory causes of action that provide more extensive remedies and, so, may effectively supplant the common-law causes of action.

Chapter 541, Subchapter B, of the Texas Insurance Code (formerly codified as article 21.21 of that code) defines various actionable unfair methods of competition and unfair or deceptive acts or practices in the business of insurance.

There is an issue concerning whether the "actual damages" required to maintain an action under  can simply be wrongfully withheld policy benefits, or whether some "independent damages" must be shown.  In Parkans International LLL v. Zurich Insurance Co., 299 F.3d 514, 519 (5th Cir. 2002), the Fifth Circuit has stated that, under Texas law, "[t]here can be no recovery for extra-contractual damages for mishandling claims unless the complained of actions or omissions caused injury independent of those that would have resulted from a wrongful denial of policy benefits."  But that was a case where the court had found no coverage and was disposing of a statutory claim for alleged misrepresentations.  Because there were no benefits due, any damages would have had to be "independent damages."  While the ruling was correct, the language swept more broadly than the facts before the court.  Nonetheless, federal courts have treated that language as fully authoritative, even in cases where policy benefits had been wrongfully withheld. Great Am. Ins. Co. v. AFS/IBEX Fin. Servs. Inc., 612 F.3d 800, 808 n.1 (5th Cir. 2010) (treating Parkans as authoritative on the point, but remanding based on the possibility that independent damages might be shown); Powell Elec. Sys., Inc. v. Nat'l Union Fire Ins. Co., 2011 U.S. Dist. LEXIS 96848, at *24-25 (S.D. Tex. Aug. 29, 2011) (finding for insured on coverage but dismissing Chapter 541 claim based on lack of independent damages).

Some Texas courts of appeals have held that independent damages are required. E.g., Laird v. CMI Lloyds, 261 S.W.3d 322, 327-28 (Tex. Ct. App. 2008) (affirming summary judgment on extracontractual claims based on lack of independent damages, while remanding for further proceedings on policy benefits that might remain due); DaimlerChrysler Ins. Co. v. Apple, 265 S.W.3d 52, 69-70 (Tex. Ct. App. 2008) (affirming judgment for insurer on extracontractual claims, while finding coverage under one policy), aff’d in part and rev’d in part, Chrysler Ins. Co. v. Greenspoint Dodge of Houston, Inc., 297 S.W.3d 248 (Tex. 2009) (NO. 08-0780), rehrg. denied (2009).

These cases, like Parkans,rely on Provident American Insurance Co. v. Castenada,988 S.W.2d 189, 198-99 (Tex. 1998). Provident denied coverage under some exclusions whose interpretation was disputed.  Castenada obtained a verdict for violations of Chapter 541 and the Deceptive Trade Practices Act.  There must have been no claim of contract breach, for the court said nothing about whether benefits were due, yet directed a take-nothing judgment. The jury found failure to attempt settlement when liability had become reasonably clear, but the court found that Provident had had a reasonable basis to deny the claim.

Castenada contended that she was nonetheless entitled to a judgment equivalent to policy benefits, because Provident failed to acknowledge communications about the claim and failed to adopt reasonable standards for investigating claims. The court responded by pointing to Republic Insurance Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), in which it had held that there ordinarily can be bad faith liability if no policy benefits were wrongfully delayed or denied.  But a concurrence in Stoker did recognize "the possibility that in denying the claim, the insurer may . . . cause injury independent of the policy claim." 903 S.W.3d at 342, 345 (concurring op.). But that possibility could not save Castenada'a claims for failure to acknowledge communications or establish proper investigation standards, because Castenada had proven no damages independent of the contract. Castenada, 988 S.W.2d at 199.

Thus, like Parkans, Castenada was a case where no improper denial or delay of policy benefits had been established.  In the absence of such a denial or delay, there could be no damages at all unless there were damages independent of the contract. Accordingly, Castenada neither says nor implies that independent damages are necessary if contractual damages are present.

Curiously, the Texas Supreme Court specifically rejected an independent damage requirement in Vail v. Texas Farm Bureau Mutual Insurance Co., 754 S.W.2d 129, 136 (Tex. 1988).This does not appear ever to have been overruled.

In AMJ Investments,a Texas court of appeals rejected any requirement of independent damages and affirmed a judgment based on Chapter 541.  It relied on Vail and distinguished Castenada on the ground that no contract damages had been found. Thus, there is now a split of authority.

(This N&D is adapted from material that will appear in the next release of William T. Barker & Ronald D. Kent, Insurance Bad Faith Litigation, Second Edition.)

Keywords:  insurance, coverage, litigation, Texas, bad faith, damages

William T. Barker is with Dentons, Chicago.


February 18, 2015

Policyholders Should be Aware of the Effect of "Presumptive Intent"

Under Section 2745.01 of the Ohio Revised Code, an employer’s intentional tort liability is limited to the rare situation where it acts with “deliberate intent” to injure the employee. Proving deliberate intent, however, is extremely difficult. Consequently, employees increasingly rely upon R.C. 2745.01(C), sometimes called the “equipment safety guard” provision, which provides that an employer’s deliberate removal of an equipment safety guard creates a rebuttable presumption that the employer intended to cause injury. It essentially allows a court to assume the employer intended to injure the employee even if no direct proof of deliberate intent exists —requiring the employerto then disprove intent.

Recently, in Liberty Mutual Fire Insurance Co v. Ivex Protective Packaging, 2014 U.S. Dist. LEXIS 165670 (S.D. Ohio Nov. 26, 2014), the court addressed whether a claim under R.C. 2745.01(C) was covered by an employer’s insurance policy that specifically excluded bodily injuries “intentionally caused or aggravated” by an employer-insured. The coverage dispute stemmed from an underlying lawsuit involving an Ohio manufacturing plant employee who was seriously injured when a machine malfunctioned due to the lack of proper safety guards. The employee sued Ivex, his employer, alleging that Ivex intentionally caused his injuries by removing the safety guards. The parties eventually settled and agreed that Ivex’s liability was limited to a disputed violation of R.C. 2745.01(C).

Ivex requested defense and indemnity from the insurer under the terms of its Workers Compensation and Employer Liability Insurance Policy. The insurer denied coverage and filed for a declaratory judgment that it had no duty to defend or indemnify Ivex because the policy specifically excluded bodily injury “intentionally caused or aggravated” by Ivex.  Ivex disputed this conclusion relying on the Ohio Court of Appeals’ decision in Hoyle v. DTJ Enterprises, 994 N.E.2d 492 (Ohio Ct. App. 9th Dist. 2013), that presumptive intent under R.C. 2745.01(C) does not constitute an “intentional act” and was therefore covered under the employer’s insurance policy.

The Southern District of Ohio agreed with Liberty Mutual on the coverage issue and granted partial summary judgment in its favor. The Southern District distinguished the case before it from Hoyle on the purported basis that Hoyle involved policy language and provisions that were not included in Ivex’s policy. The court then determined that a violation of R.C. 2745.01(C) constituted a “tortious act with the intent to injure another” and, therefore, was excluded from coverage under that specific policy. The court did, however, determine that the insurer had a duty to defend Ivex in the underlying tort action because of the legal uncertainty regarding the interpretation of presumptive intent under R.C. 2745.01(C).

Policyholders can argue that the Ivex court, like other federal courts before it, misunderstood or misapplied Ohio law, resulting in inconsistency and unpredictability for policyholders facing potential claims of injury under R.C. 2745.01(C), at least before Ohio federal courts.  They can further argue that the decision improperly distinguished Hoyle,which considered an analogous policy provision and, in so doing, rendered Ivex’s coverage for employment-related torts completely illusory, a result disfavored under Ohio law. Until the Ohio Supreme Court has an opportunity to conclusively settle this issue, employers should be aware of this uncertainty and mindful that employee claims brought under R.C. 2745.01(C) may result in denial of coverage under certain policy wording. Employers should work with their insurance broker to ensure that their policies contain the most advantageous policy language.

Keywords:  insurance, coverage, litigation, Ohio, EPLI, Employment Practices Liability Insurance, intentional acts exclusion, safety guards

Charlie D. Price and Kyle A. Shelton are with Brouse McDowell, Cleveland.


February 18, 2015

Manifestation Trigger for Property Damage to Dairy Cows

In Pennsylvania National Mutual Casualty Insurance Co. v. St. John, No. 86 MAP 2012, 2014 Pa. Lexis 3313 (Dec. 15, 2014), the Pennsylvania Supreme Court recently applied a manifestation trigger to damage sustained by a herd of dairy cows over a three-year period. Whether this 3-2 decision will be extended to overturn longstanding precedent in coverage cases involving asbestos and other similar long-tail liabilities, or whether it will be confined to its own idiosyncratic facts, remains to be seen.

In St. John, a contractor installed a plumbing system that allowed “gray water” to poison a dairy herd’s drinking water, resulting in decreased milk production and diseases in the cows. Health problems were noticed within the first year, but the cause was not determined until two years later. The dairy sued the plumbing contractor, which sought coverage from its liability insurer, Penn National, under three years of general liability insurance issued between installation of the plumbing system and discovery of the cause of the damage, plus an umbrella policy issued in the third year. The dairy and the contractor settled for an amount equal to the full limits of the contractor’s first liability policy; the dairy then proceeded directly against the insurer to recover more under the remaining policies. On appeal, the dairy argued that a continuous trigger applied (which would have provided coverage under all three policy periods), or, alternatively, if a manifestation trigger applied, that manifestation occurred when the cause of the damage was discovered (i.e., during the third policy period when higher insurance limits were available), not when the damage first appeared.

A narrow majority of the court rejected both arguments, holding that only the first policy —the policy in effect “when either bodily injury or property damage becomes reasonably apparent”—was required to cover the contractor’s liability. Id.,  at *42 (citing D’Auria v. Zurich Ins. Co., 507 A.2d 857, 861 (Pa. Super. 1986)). The majority declined to apply a “multiple trigger” like that adopted in J.H. France Refractories Co. v. Allstate Insurance Co., 534 Pa. 29, 37-39, 626 A.2d 502, 507 (1993), on two principal grounds.

First, St. John involved observable, short-term property damage—a herd of dairy cows sickened within a year after first drinking contaminated water—rather than latent, long-term damage or injury. The majority thus distinguished multiple-trigger cases like J.H. France and the seminal Keene decision (Keene Corp. v. Ins. Co. of N. Am., 667 F.2d 1034 (D.C. Cir. 1981), because, unlike the asbestos cases, the dairy’s “damage was not concealed and undiscoverable for decades,” and “did not lay dormant for an extended period.” St. John, 2014 Pa. Lexis 3313, at *51, *61. The majority also emphasized a key justification for the multiple trigger theory in long-term damage cases:

The “multiple trigger” theory is applied in latent disease cases, like asbestosis or mesothelioma, because such injuries may not manifest themselves until a considerable time after the initial exposure causing injury occurs. The overriding concern in latent disease cases is that application of the D’Auria “first manifestation” rule would allow insurance companies to terminate coverage during the long latency period (of asbestosis); effectively shifting the burden of future claims away from the insurer to the insured (manufacturers of asbestos), even though the exposure causing injury occurred during periods of insurance coverage.

Id. at *60 (citations omitted).

Second, the contractor’s policies in St. John contained language limiting coverage for any known “continuation, change or resumption of that ‘bodily injury’ or ‘property damage’ after the end of the policy period,” id., at *55-56, whereas the older CGL policies in J.H. France contained no such limitation. The St. John court observed that this provision “lends support to the interpretation that only the policy in effect when an occurrence first arises is answerable for the ensuing bodily injury or property damage.” Id.,at *56.

The majority in St. John stated that the Pennsylvania Supreme Court’s earlier, multiple-trigger decision in J.H. France “remains an exception to the general rule under Pennsylvania jurisprudence,” whose application was not warranted under “the circumstances of the damage to Appellants’ dairy herd, coupled with the language of the Penn National policies.” Id.,at *61-62.

The dissent criticized the majority’s reasoning on several grounds.

First, it “does not hew to the policy language.” Id.,at *64 (Saylor, J., dissenting). For example, all parties agreed that the damage to the herd occurred continuously during three years of exposure to contaminated drinking water. The policies covered property damage during the policy period. Therefore, under the policies’ plain language, each policy should have provided coverage, even with the newer restrictive language the majority cited to distinguish JH France.

Both the dissent and the majority expressly acknowledged the conceptual difference between an “occurrence” and a “trigger of coverage.” But, the dissent noted, “the majority cites affirmatively to cases which conflate these insurance-law concepts.” Id.,at *67-68.

The dissent also observed that the majority acknowledged at least two reasonable interpretations of the policy language, thus “discern[ing] a critical ambiguity in the policy language,” id.,at *69, but failed to apply contra proferentem, the rule of construction—long-standing in Pennsylvania—that requires the policy to be construed in the policyholder’s favor and against the insurer. Id., at *54-55 (“Fairly read, this language can be given one of two meanings.”). Similarly, the majority relied on “the parties’ reasonable expectations” to defeat the policyholder’s interpretation rather than to uphold it. The dissent pointed out that the doctrine of reasonable expectations would dictate the opposite result. Id.,at 69-70.

Finally, the dissent observed that the court in St. John has done little to “fashion an opinion which would offer meaningful guidance beyond the idiosyncratic parameters set by the arguments.” Id., at *65. If that view of the case prevails, coverage litigators should not expect a widespread revival of the manifestation trigger.

Keywords:  insurance, coverage, litigation, Pennsylvania, coverage, commercial general liability, CGL, long-tail, trigger, manifestation, continuous trigger, multiple trigger

John Buchanan and Suzan Charlton  are with Covington & Burling LLP, Washington, DC.
The authors’ views are their own and not that of their firms or their clients.


Expiration of the Terrorism Risk Insurance Act: Practical Effects on Policyholders

When Congress adjourned for 2014, it did so without passing the Terrorism Risk Insurance Program Reauthorization Act of 2014 (TRIPRA), and the programs developed under the initial Terrorism Risk Insurance Act (TRIA) (primarily, government reinsurance for a “certified act of terrorism” that exceeds $100 million in losses) expired on December 31, 2014. Congress reconvened on January 6, 2014, and Congressman Jeb Hensarling, chair of the Financial Services Committee, stated that the House will vote again on the bill so that it can be referred to the Senate for approval. (In December 2014, the Senate elected not to vote on the TRIPRA bill when Sen. Tom Coburn (R) objected to bringing the bill to the floor. Democrats subsequently chose to adjourn and leave the issue for the new Congress.)  In the interim and in the event that TRIA is not reauthorized, the effect of the TRIA expiration on policyholders is varied. 

Effect on Policyholders Who Renewed Their 2015 Coverage
Policyholders who have already renewed their coverage for the 2015-2016 policy year should review the policies to understand how the expiration of TRIA will affect their coverage. Generally, policyholders will fall into three situations.

Policyholders who paid the TRIA premium should review their policies for a conditional exclusion triggered with the expiration of TRIA or the reauthorization of TRIA under a form substantially different from TRIPRA (i.e., a “sunset clause”). If the policy does not contain a conditional exclusion, then the expiration of TRIA should not affect coverage. (The expiration of TRIA does not affect coverage because to participate in the TRIA program, insurers agree to not exclude terrorism coverage for those policyholders who pay the TRIA premium. Thus, unless an insurer prepared for the possibility of TRIA expiring by including a conditional exclusion, the policy should not have a terrorism exclusion.)  These policyholders should have coverage for any liability arising from the event, since terrorism risk is not specifically excluded. The policy likely contains an endorsement regarding the cap on losses from certified acts of terrorism; however, since the cap applies only to “certified acts of terrorism” as defined under TRIA, the cap would not apply once TRIA expires. Note that other exclusions, such as a nuclear liability exclusion, may apply to preclude coverage.

If the policy does contain a conditional exclusion, which may be on manuscript form or an ISO form, such as CG 21 87 01 07 for general liability policies or IL 09 95 01 07 for property policies, the conditional exclusion should be reviewed to determine the extent coverage will change once TRIA expires. For instance, upon TRIA expiration, CG 21 87 01 07 excludes terrorism coverage only if the terrorist event involves one or more of six specific types of circumstances described in the endorsement. Most of these circumstances are repeated in IL 09 95 01 07, which also includes an exception for direct loss or property damage caused by fire resulting from the terrorist event. In addition, several insurers have issued notices that they will not apply the conditional exclusion immediately on December 31, 2014. Rather, these insurers anticipate that TRIA will be reauthorized and have agreed to extend application of the conditional exclusion at a later date and/or to reevaluate the terrorism coverage/exclusion until a later date.

Policyholders who did not pay the TRIA premium likely have policies that contain a terrorism exclusion. Most terrorism exclusions exclude coverage not only for “certified acts of terrorism” as defined under TRIA, but also for any other acts of terrorism. Accordingly, the expiration of TRIA would not affect the application of the exclusion— coverage for terrorist events continues to be excluded.

Effect on Policyholders Who Will Be Renewing Their 2015 Coverage
Policyholders who will be renewing their coverage in 2015 should be aware that insurers may attempt to include terrorism exclusions or limitations in the renewal policies. Since policyholders may have contractual obligations to procure terrorism coverage, they should review their contracts for the required coverage. It may be possible to negotiate a narrower terrorism exclusion, or limitation such that terrorism coverage is provided under certain circumstances, so that a policyholder can comply with contractual obligations without having to purchase standalone terrorism insurance. Standalone terrorism insurance is available but generally cost-prohibitive. If policyholders need to purchase standalone terrorism insurance, a better understanding of their risk profile may assist the underwriter in maximizing coverage while managing the insurance premium.

The imminent expiration of TRIA, even temporarily, has created uncertainty for both policyholders and insurers. For policyholders who did not pay the TRIA premium, the exclusion of terrorism coverage remains in effect. Policyholders who paid the TRIA premium and/or will be renewing coverage in 2015 should carefully review their current and/or renewal policies and any notices from their insurers to determine whether and the extent coverage has changed or will change with the expiration of TRIA.


Update: On January 12, 2014, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015, which reauthorized TRIA for an additional six years, until December 31, 2020. The act does not apply retroactively; thus, TRIA was not in effect during January 1, 2015 to January 11, 2015. There is minimal risk that this gap affected or will affect policies that were placed prior to the expiration of TRIA. However, policyholders who placed coverage during the gap should review their policies and evaluate whether the temporary expiration of TRIA affected policy terms.

The new act also contains several changes from the prior act. For instance, an act of terrorism needs to be certified only by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security (certification by the Secretary of State and the Attorney General is no longer required); the program trigger (where the government provides reinsurance) will be increased from $100M to $200M in phases ($20M increase every year beginning 2016); and the insurers’ co-pay will be increased from 15 percent to 20 percent in phases (1 percent every year beginning 2016).

Jeremiah M. Welch and Ling D. Ly, Saxe Doernberger & Vita, P.C., Hamden, CT

Keywords: insurance, coverage, litigation, federal law, Terrorism Risk Insurance Act, TRIA, Terrorism Risk Insurance Program Reauthorization Act of 2014, TRIPRA, terrorism, general liability, commercial property, failure to reauthorize


December 29, 2014

Insurer Must Defend Manufacturer in Defect Suits, But No Coverage for Prelitigation Proceedings

IThe U.S. Court of Appeals for the Tenth Circuit has held that the Cincinnati Insurance Co. must defend a window manufacturer in product defect suits brought by Nevada homeowners. The Cincinnati Insurance Co. v. AMSCO Windows, 2014 U.S. App. LEXIS 22492 (10th Cir. Nov. 26, 2014) <link to https://www.ca10.uscourts.gov/opinions/13/13-4155.pdf> (Utah law). Affirming a federal judge’s order on summary judgment, see 921 F. Supp.2d 1226 (D. Utah 2013), the court held that damage to surrounding property allegedly caused by AMSCO’s window products comprised an occurrence under the company’s policies, but the insurer had no obligation to pay costs of prelitigation proceedings because these were not “suits” within the meaning of the policies.

AMSCO manufactured windows that were installed in new homes in Nevada. Homeowners filed claims against the contractors who built the residences, alleging that defective windows and improper installation caused damage to the interior and exterior of their residences. The contractors submitted claims to the dealer that sold the windows, the dealer then asserted claims against AMSCO.

Nevada’s Chapter 40 governs homeowner construction defect claims. Nev. Rev. Stat. §§ 40.600 et seq. Under the statute, before a claimant can bring a construction defect lawsuit, she must first give written notice to the contractor detailing the nature of the alleged defects and the nature and extent of the damage. The homeowner must then afford the contractor a reasonable opportunity inspect and repair the damage. The contractor must send the homeowner’s defect notice to subcontractors or suppliers whom the contractor “reasonably believes” is responsible for the specified defect(s). At the conclusion of this process, unresolved claims may then proceed to Nevada state court.

AMSCO held a series of CGL and umbrella policies issued by Cincinnati from 2002 to 2007, each with similar language that provided Cincinnati would “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damages’ to which this insurance applies. We will have the right and duty to defend any ‘suit” seeking those damages . . . .” AMSCO tendered its defense of the homeowners’ claims to Cincinnati, but Cincinnati refused to defend AMSCO and brought a declaratory judgment action in the district court seeking a declaration that it had no duty to defend or indemnity AMSCO.

AMSCO filed a motion for summary judgment arguing that the homeowners’ claims were occurrences under the policy, thus triggering Cincinnati’s duty to defend and pay all of the legal fees AMSCO had incurred.  The district held that the claims in active litigation constituted occurrences under the policies “where defective workmanship causes damage to property other than the work product itself.” However, the district court ruled that the insurer’s duty to defend did not extend to the prelitigation proceedings under Chapter 40 because these were not “suits.”  Cincinnati and AMSCO filed cross-appeals. The Tenth Circuit affirmed the district court ruling on both issues.

With respect to whether the property damage claims were occurrences, Cincinnati argued that “in claims involving manufacturing defects in windows and doors, there are no circumstances where any resultant damage to surrounding areas . . . could ever be deemed an ‘occurrence’ under the Policies[]” because such damage was not an accident, but a “natural and probable result of faulty workmanship.” The appellate court disagreed, reasoning that “whether harm is a natural and probable consequence of certain conduct must be determined from the perspective of the insured.” The court noted that “nothing suggests that the damage at issue was expected – from AMSCO’s perspective – to result from its manufacturing process.”

In considering the Chapter 40 proceedings, the appellate court concluded that Cincinnati’s duty to defend extended only to “suits”, defined in the policies as “civil proceeding[s] in which money damages because of . . . ‘property damage’ . . . to which this insurance applies are alleged.” Because Nevada’s Chapter 40 contemplated a purely informal resolution to homeowner construction defect claims through the notice, inspection and opportunity to repair, and the statute imposed only limited consequences for noncompliance, the prelitigation proceedings did not meet the definition of “suits” under the policies.  The court further reasoned that even if the Chapter 40 prelitigation process could be considered a civil proceeding, it would be an “alternative dispute resolution proceeding” under the policies and any duty to defend would only arise if Cincinnati had consented to AMSCO’s participation in those proceedings and Cincinnati had not done so.

Keywords: insurance, coverage, litigation, Utah, Nevada, CGL, commercial general liability, construction defect, duty to defend, suit, prelitigation proceedings, negligence

Karen L. Stevenson is with Buchalter Nemer, Los Angeles.


December 29, 2014

Is There a Silver Lining to Policyholder Bankruptcies?

Insurance matters are frequently more difficult and complex when they involve a bankruptcy of the policyholder. In the settlement context, however, a corporate bankruptcy may provide an opportunity to craft critical deal terms not available outside the bankruptcy context.

Various bankruptcy-related procedural and statutory protections may be available to insurers and other nondebtor third parties in the settlement context. First, settlement agreements or bankruptcy plans may incorporate a release, injunction, and/or bar order pertaining to potential claims against its insured or insurers, including contribution claims and claims regarding the insurer’s handling of the settlement, even in the absence of consent by the enjoined party. Such a release or injunction is highly beneficial to insurers and settling insureds in attempting secure finality and avoiding future claims.

The ability to seek a release or injunction as a component of a settlement agreement depends on the location of the bankruptcy court. The federal appellate circuits are split on whether a bankruptcy court has the authority to issue a release or injunction of claims against nondebtor third parties. The Fifth, Ninth, and Tenth Circuits have ruled that bankruptcy courts do not have the authority to release or permanently enjoin suits against nondebtors. See In re American Hardwoods, 885 F.2d 621 (9th Cir. 1989); In re Western Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990); In re Zale Corp., 62 F.3d 746 (5th Cir. 1995). In contrast, the Second, Fourth, Sixth, Seventh, and Eleventh Circuits permit bankruptcy courts to approve releases and injunctions protecting nondebtors (including insurers) from claims by nondebtors in limited circumstances and despite objections from enjoined creditors. See In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992); Behrmann v. National Heritage Foundation, 663 F.3d 704 (4th Cir. 2011); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re Airadigm Commc’ns, 519 F.3d 640 (7th Cir. 2008); In re Mumford, Inc., 97 F.3d 449 (11th Cir. 1996). Courts in the First, Third, and D.C. Circuits have not reached a clear decision on whether a bankruptcy court has the authority to issue a release or injunction of nondebtor claims, but have not definitively foreclosed the availability of such relief. See In re AOV Indus., Inc. 792 F.2d 1140 (D.C. Cir. 1986); Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Cir. 1995); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000). Accordingly, outside of the three Circuits that have affirmatively rejected a bankruptcy court’s authority to issue a nonconsensual nondebtor release or injunction (the Fifth, Ninth, and Tenth Circuits), insurers and insureds may attempt to avail themselves of the benefits of the bankruptcy proceedings by seeking a release or injunction to bar claims of nondebtors.

Second, settling insurers in bankruptcy court may also seek good faith findings in conjunction with the approval and ratification of settlements. Bankruptcy Rule 9019 provides that “[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P. 9019(a). Settling insurers may seek a determination by the bankruptcy court of good faith by the insurer in the order approving and enacting the settlement between the parties. See, e.g., In re Dewey & Leboeuf LLP, No. 12-12321 (Bkrtcy. S.D.N.Y. May 30, 2013) (“Order, Findings of Fact and Conclusions of Law Approving Settlement of Mismanagement and Other Claims”) (stating that insurer “acted in good faith” with regard to entering the settlement agreement and effectuating the terms of the agreement). Such a finding can incorporate language stating that the insurer acted in good faith in negotiating and entering the settlement agreement, settling the relevant claims, and agreeing to make the settlement payment. Such findings may help protect insurers from claims asserted by other insureds or other insurers who did not participate in the settlement.

Keywords: insurance, coverage, litigation, federal law, bankruptcy, settlement

Kimberly M. Melvin is with Wiley Rein LLP, Washington, D.C.


September 25, 2014

Coverage and Damage Must Be Determined Before A Bad Faith Action Becomes Ripe

In Cammarata v. State Farm Fla. Ins. Co., 2014 Fla. App. LEXIS 13672, 1-2 (Fla. Dist. Ct. App. 4th Dist. Sept. 3, 2014), the Fourth District Court of Appeal of Florida recently reversed a circuit court decision out of the Seventeenth Judicial Circuit for Broward County, holding that an insurer’s liability for coverage and the extent of damages, and not necessarily an insurer's liability for breach of contract, must be determined before a bad faith action becomes ripe.

In Cammarata, the insureds filed a claim for Hurricane Wilma in October 2007, approximately two years after the date of the loss. After State Farm determined through its inspection and investigation that the damages were lower than the policy deductible, the parties agreed to proceed to appraisal, and State Farm paid the neutral umpire’s damage estimate. Thereafter, the insureds filed a bad faith action against State Farm for not attempting in good faith to settle their claim.

In response, State Farm filed a motion for summary judgment arguing that because State Farm’s liability for breach of contract had not been determined, the insureds’ bad faith action was not ripe. The insureds argued in response that only an insurer’s liability for coverage and the extent of damages must be determined before a bad faith action becomes ripe. After considering the parties’ arguments in the pending matter, the circuit court granted State Farm’s motion for summary judgment. The insureds subsequently appealed the circuit court decision.

The appeals court agreed with the insureds’ arguments, holding that an insurer’s liability for coverage and the extent of damages, and not an insurer’s liability for breach of contract, must be determined before a bad faith action becomes ripe. The court explained that its ruling was based on the evolution of the Florida Supreme Court’s holdings in Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So. 2d 1289 (Fla. 1991) to Vest v. Travelers Insurance Co., 753 So. 2d 1270 (Fla. 2000). In Blanchard, the Florida Supreme Court held that an insured’s underlying first-party action for insurance benefits against the insurer must be resolved favorably to the insured before the insured can bring a cause of action for bad faith. The 4th DCA further referred to the Florida Supreme Court ruling in Vest, which held that the determination of the existence of liability and the extent of the insured’s damages are elements of a cause of action for bad faith.

Based on the Florida Supreme Court rulings in Blanchard and Vest, the appeals court found that an insurer’s liability for coverage and the extent of damages, and not an insurer’s liability for breach of contract, must be determined before a bad faith action becomes ripe. By applying these principles in Cammarata, the court found that the parties’ settlement by way of appraisal established the first two conditions for brining a bad faith action. As such, the court held that the circuit court was in error in holding that because the insurer’s liability for breach of contract had not been determined, the insureds’ bad faith action was not ripe. Based on the foregoing, the 4th DCA reversed the circuit court decision and remanded the insureds’ bad faith action for reinstatement.

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

Marni Newman is with Powers, McNalis, Torres, Teebagy, Luongo, West Palm Beach, FL


September 10, 2014

Appellate Dissent Maps Potential Challenge to Bad Faith Punitive Damages

A potential roadmap for navigating around a bad faith punitive damages award may be lying in Justice H. Walter Croskey’s dissent in Nickerson v. Stonebridge Life Insurance Company.

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

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


Read the full case note.


September 10, 2014

Broad Prior Knowledge Exclusions May Not Be Enforceable As Written

A recent Texas decision demonstrates that, while insurers are entitled to rely on exclusionary language designed to prevent indemnifying policyholders for known liability exposure at the time a policy is purchased, courts may elect not to enforce broadly drafted prior knowledge exclusions as written if such a result would interfere with the fundamental nature of the coverage provided. 


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

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


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August 25, 2014

Tenth Circuit Invokes Public Policy to Interpret Unambiguous Insurance Policy Language

The U.S. Court of Appeals for the Tenth Circuit, in recently deciding Glacier Construction Co. v. Travelers Property & Casualty Co. of America, Nos. 12-1503, 12-1514, 2014 U.S. App. LEXIS 11630 (10th Cir. June 20, 2014), relied on its own conception of public policy to reach what it perceived to be a desirable result in a case involving otherwise unambiguous policy language.

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

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


Read the full case note.



July 28, 2014

Faulty Work not an Occurrence

In Pacific Indemnity Co. v. Lampro, No. 13-P-1510 (Mass. Ct. App. July 24, 2014), the Massachusetts Appeals Court held that faulty work by the insured’s subcontractor in removing trees and brush from the claimants’ property was not an accident and therefore not an occurrence under the CGL policy. The court also held that in addition to its conclusion that the faulty work was not an occurrence, the policy’s business risk exclusions, particularly j(5) and j(6), “also provided [the insurer] an alternative defense.” 


Keywords: occurrence, faulty work, CGL policy, Massachusetts


Suzanne M. Whitehead, Zelle McDonough & Cohen LLP, Boston.



June 27, 2014

Alabama Holds Construction Defect Is An Occurrence

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

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

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


Read the full case note.


May 30, 2014

The Bermuda Form: Actual or Alleged Liability?

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

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

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


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May 30, 2014

Are Bad Faith Claims Assignable? Pennsylvania Decides to Weigh In

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

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

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


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April 22, 2014

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

IThe U.S. District Court for the Eastern District of Virginia has ruled that an insurer must defend its insured in connection with allegedly defamatory articles posted on the insured’s website under the personal and advertising injury provisions of a business owners policy

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

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


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April 9, 2014

New York Court of Appeals Limits Application of Suit Limitation Clause

In Executive Plaza, LLC v. Peerless Ins. Co., -- N.E.3d --, 22 N.Y.3d 511; 2014 N.Y. LEXIS 165 (Feb. 13, 2014), the New York Court of Appeals refused to enforce a two-year suit limitation provision against a policyholder, finding the provision to be unreasonable where its application would require that suit be filed before the loss was complete.


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

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


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March 26, 2014

Third Party Indemnification Payments Can Satisfy Self-Insured Retention

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

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

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


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March 26, 2014

NY Court Denies Coverage for Sony Data Breach

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

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

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


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February 25, 2014

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

On February 18, 2014, following a rehearing held on January 7, 2014, the New York Court of Appeals reversed its own ruling set out in the original case of K2 Investment Group v. Am. Guarantee & Liability Ins. Co., 21 N.Y.3d 384 (June 11, 2013) (“K2-1”).

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

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


Read the full case note.


January 31, 2014

Waiver of Exclusions When Insurer Breaches Duty to Defend Revisited

On January 7, 2014, the New York Court of Appeals held a rehearing on the June 2013 decision of K2 Investment Group, LLC v. American Guarantee & Liability Insurance Co., 2013 N.Y. LEXIS 1461 (N.Y. June 11, 2013), which held that an insurer breaching its duty to defend waives its rights on policy exclusions. The bench was active and engaged during oral argument, critiquing both parties, and it is unclear how the court will ultimately rule.

The court appeared to be compelled by two central arguments of the insurer. First, the court expressed concern for stare decisis and the potential departure from the 30-year precedent of Servidone Construction Corporation v. Security Insurance Co. of Hartford, 64 N.Y.2d 419 (1985), which held that the breach of the duty to defend in New York does not automatically create coverage for indemnity. Second, the court recognized that the new waiver rule set down by K2 would place New York in the minority of states such as Illinois with the Elcho precedent, 186 Ill.2d 127 (1999), and Missionaries of Mary, 155 Conn. 104 (1967) in Connecticut. The court queried K2's counsel as to why this minority rule would be the correct approach for New York.

With that considered, the court also was seemingly sympathetic to the plight of the insured. Judge Smith, who wrote the original opinion, and Judges Pigott, Graffeo, Read, and Lippman, all seemed critical of the notion that an insurer would suffer no consequences for abandoning the defense in a close coverage case and for allowing for a large judgment against its undefended insured. On several occasions during argument, the court asked why the insurer did not defend and bring a declaratory judgment action, which the court noted was the existing rule from Lang v. Hanover Ins. Co., 3 N.Y.3d 350 (2004). From a public policy perspective, the court also asked why the burden of paying a large judgment in a seemingly defensible case should fall to an innocent insured when the carrier improperly abandoned the defense.

In the end, the court circled back to consider the Appellate Division dissent. The court was urged to allow the trial court to consider evidence on the application of the K2 exclusions without reopening the issue of damages awarded in the underlying claim, which had been the existing rule in New York at the time of the June decision. The court mentioned that it would strive to find the better of the two policies presented by counsel.

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

Melinda B. Margolies, Kaufman Borgeest & Ryan, New York.


January 31, 2014

Grand Jury Investigation and Subpoena Are a Claim

In Syracuse University v. National Union Fire Insurance Co. of Pittsburgh, PA, No. 2012EF63, 2013 N.Y. Misc. LEXIS 2753 (N.Y. Sup. Ct. Mar. 7, 2013), aff’d, __ N.Y.S.2d __, 2013 N.Y. App. Div. LEXIS 8670 (N.Y. App. Div. Dec. 27, 2013), the Appellate Division of the New York Supreme Court recently affirmed the trial court’s ruling that grand jury investigations and grand jury subpoenas issued to the university constitute a “claim” within the meaning of a professional liability insurance policy.


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

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November 1, 2013

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

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


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

Read the full case note.



October 30, 2013

Texas Supreme Court Reaffirms All Sums Allocation Approach for Continuous Losses

Finally resolving 12 years of litigation, the Texas Supreme Court ruled on August 23, 2013, that the triggered insurer—not the insured—bears the responsibility for allocating costs among insurers when a continuing loss extends over several policy periods.

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

Read the full case note.


September 12, 2013

Second Circuit Weighs in on D&O Excess Coverage

The court held that where the excess policies at issue applied only upon exhaustion of underlying coverage “as a result of payment of losses,” these policies were triggered solely through liability payments meeting their attachment points, not through the existence of liability exceeding the underlying limits.

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

Read the full case note.


August 27, 2013

Insurer Not Entitled to Discovery of Social Media Posts

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

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

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July 31, 2013

Defective Construction Claims May Be an Occurrence

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

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

Read the full case note.


July 31, 2013

Insurers Breaching Duty to Defend Can’t Avoid Indemnity Obligations

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

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

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June 12, 2013

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

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

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

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June 12, 2013

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

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

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

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May 31, 2013

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

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

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

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May 31, 2013

Court Rules Insurer Must Issue Litigation Hold to Independent Agents

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

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

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March 27, 2013

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

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

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

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March 22, 2013

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

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

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

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March 11, 2013

Proximate Cause Theory Applied to Determine Number of Occurrences

In Mitsui Sumitomo Ins. Co. v. Duke Univ. Health System, Inc., 2013 U.S. App. LEXIS 3039 (4th Cir. Feb. 11, 2013) (unpublished), Mitsui Sumitomo filed suit seeking a declaratory judgment that it owed no further obligation to its insured, Automatic Elevator Company, because the carrier had already paid the per occurrence limit under the applicable policy and there was only one occurrence at issue. Duke University Health System, Inc., which had sued Automatic Elevator, argued that the aggregate limit of Automatic Elevator’s policy applied because there was more than one occurrence at issue. The district court agreed with the carrier, and the Fourth Circuit Court of Appeals affirmed.

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

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February 27, 2013

The Case of the Vanishing Self-Insured Retention

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

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

Read the full case note.


February 27, 2013

Voluntary Payment Clause in a Legal Malpractice Policy Unenforceable

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

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

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January 9, 2013

Broker Owed No Duty to Explain Policy Terms to Insured

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

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

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December 3, 2012

EEOC Lawsuit Is a Claim Under an Employment Practices Liability Policy

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

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

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

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November 9, 2012

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

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

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

Peter J. Georgiton, Dinsmore & Shohl LLP, Cincinnati

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November 9, 2012

Coverage for Computer Hacking Under Commercial Crime Policies

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


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

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

Read the full case note.


October 29, 2012

Dispute Over Valuation of Property Stayed Pending Completion of Appraisal Process

Making an analogy to enforcement of a binding arbitration clause, the North Carolina Court of Appeals reversed summary judgment in favor of an insurance carrier, holding that the case should instead be stayed until the parties completed the appraisal process provided for in the subject insurance policy.  Patel v. Scottsdale Ins. Co., 728 S.E.2d 394 (N.C. Ct. App. 2012).


Keywords: insurance, coverage, litigation, North Carolina, first-party property, appraisal, summary judgment

K. Alan Parry , Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, NC.

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September 29, 2012

Indemnification Policies: Coverage Applies When Damage Actually Occurs

In Memorial Properties, LLC v. Zurich American Ins. Co., 210 NJ 512 (2012), the Supreme Court of New Jersey recently held that when a delay exists between a wrongful act and the resulting damages, the time of the relevant occurrence, for indemnification insurance purposes, is when the actual harm is suffered. The court also held that when an insurance policy excludes coverage for damages caused by certain specific events, claims arising out of such events, regardless of how they are particularly worded, will trigger the exclusion and relieve the insurer from defending or indemnifying such a claim.


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

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

Read the full case note.


August 29, 2012

Republic Underwriters—How Many Occurrences?

In Republic Underwriters Insurance Company v. Moore, No. 11-5075 (10th Cir. July 20, 2012) (Oklahoma law), Country Cottage Restaurant prepared food both for itself and for a catered church event. The food contained E. coli bacteria, which sickened hundreds of people and killed one. This bodily injury was clearly covered under Country Cottage’s general liability policy. The issue in the case was, how many occurrences took place? Did the preparation of the food at one place mean there was one occurrence? Since two locations were involved, were there two occurrences? Or was each infected person a separate occurrence? The court found that the processing and preparation of the food was the cause of the injuries, and that one occurrence had taken place, minimizing Country Cottage’s recovery.


Keywords: insurance, coverage, litigation, Oklahoma, food, CGL, occurrence, number of occurrences

Robert (Bob) D. Chesler, Lowenstein Sandler, Roseland, New Jersey

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August 29, 2012

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

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

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

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

Read the full case note.


July 26, 2012

An Insurer Cannot Deny a Claim and Reserve Its Rights

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

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

Heather Smith Michael, Arnall Golden Gregory LLP, Atlanta

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July 26, 2012

CGL Insurer Must Try to Settle Even Without Demand

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

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

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

Shaun H. Crosner, Dickstein Shapiro LLP, Los Angeles

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July 25, 2012

No Duty to Defend Appeal of Non-Covered Claims

The U.S. District Court for the District of Oregon recently held that an insurer has no duty to defend the policyholder’s appeal of an underlying action, where the appeal related only to non-covered claims.  City of Medford v. Argonaut Ins. Group, Nos. 1:06–cv–3098–PA, 1:11–cv–3037–PA, 2012 U.S. Dist. LEXIS 86114 (D. Or. June 21, 2012). 

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

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

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

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June 27, 2012

Court Determines When Malicious Prosecution “Occurs”

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

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

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

Read the full case note.

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

Benjamin E. Shiftan, Sedgwick LLP, San Francisco, CA.


May 24, 2012

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

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

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

Read the full case note.

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

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




May 24, 2012

Claims for Breach of Contract and Bad Faith are Properly Bifurcated

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

Read the full case note.

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

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


May 4, 2012

Court Rules Coverage Exists for Mitigation Costs

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

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

Read the full case note.

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

Richard Leedham, Addleshaw Goddard, London, England



May 4, 2012

CGL Policies Triggered by Allegations of Physical Damage to Adjacent Property

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

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

Read the full case note.

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

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



April 30, 2012

Computer Data Is Not “Tangible Property” Under Federal Act

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

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

Read the full case note.

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

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



April 9, 2012

Court Holds Pollution Exclusion Ambiguous, Unenforceable

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

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

Read the full case note.

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

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



March 28, 2012

Virginia Issues Two Decisions Addressing Pollution Exclusions


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

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

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

Read the full case note.

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

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



March 27, 2012

Connecticut Changes Course on Late Notice


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

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

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

Read the full case note.

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

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



February 23, 2012

Ninth Circuit Holds Insurers Can Challenge Bankruptcy Plan


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

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

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

Read the full case note.

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

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



January 23, 2012

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


Universal 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.

Read the full case note.

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


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.

Read the full case note.

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


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.

Read the full case note.

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


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.

Read the full case note.


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


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.

Read the full case note.

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


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.

Read the full case note.

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


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.

Read full case note

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


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. 

Read full case note

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

—Lee Epstein , Fried & Epstein LLP, Philadelphia, Pennsylvania. 

The authors represented Federal Insurance Company in this case.



October 17, 2011

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


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.

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.

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.


Read full case note


September 29, 2011

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


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 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. 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.

As the decision demonstrates, subcontractors have been exposed to substantial awards of attorney’s 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


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.

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




September 28, 2011

Right of Privacy Construed Broadly to Expand Coverage


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.

The insurers argued that the underlying TCPA claim was not a privacy tort and, therefore, it was not covered by the CGL policies. In their view, secrecy was not violated because the faxes did not disclose information to a third party. 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.

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, litigation, Minnesota, TCPA, privacy, advertising injury


Darren Dwyer, Cozen O’Connor, Philadelphia, Pennsylvania



September 27, 2011

Global Warming Complaint Does Not Allege An “Occurrence” Under CGL Policy


The Virginia Supreme Court recently issued an opinion holding that an insurer has no duty to defend or indemnify an insured against a complaint alleging global warming damages from greenhouse gas emissions because the complaint does not allege an "occurrence" as required for coverage under the relevant insurance policies. AES Corp. v. Steadfast Ins. Co., 2011 Va. LEXIS 185 (Va. Sept. 16, 2011).

In 2008, the native village of Kivalina and city of Kivalina in Alaska (Kivalina) sued AES and other companies for allegedly damaging Kivalina by causing global warming through emissions of greenhouse gases. Kivalina alleges in its lawsuit that AES intentionally released carbon dioxide as part of its business and that global warming and the damages claimed by Kivalina are a natural and probable consequence of such emissions. The commercial general liability policies Steadfast issued to AES require for coverage that any damage be caused by an occurrence, defined as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The Virginia Supreme Court held that Kivalina does not allege that its damages were the result of a fortuitous event or an accident and that such loss therefore is not covered under the Steadfast policies.


Keywords: insurance coverage, litigation, Virginia, global warming, greenhouse gases, commercial general liability, occurrence, accident


Max H. Stern and Jessica La Londe, Duane Morris LLP, San Francisco, California.



August 17, 2011

Sole Negligence Provision Does Not Bar Defense for Additional Insured


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. 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. 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.


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


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

Read full case note


July 19, 2011

Breach of Contract Needed for Bad-Faith Discovery


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 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.

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


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

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July 19, 2011

Jury Trials Allowed for Bad Faith


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).

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

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July 14, 2011

“Other Premises” Exclusion May Not Bar Coverage for Negligence


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 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, Ohio

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June 30, 2011

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


June 1, 2011

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 Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909, 2011 S.C. LEXIS 15 (S.C. Jan. 7, 2011).

The Crossman 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 Crossman, 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



ALI's "Principles of Liability Insurance Law"

The American Law Institute (ALI) has embarked upon its first Principles of the Law of Liability Insurance. ALI’s “Principles” differ from the more familiar ALI “Restatements” in that they analyze what the law ought to be rather than set forth what it presently is. As recently approved by the ALI Council, the project will consist of three chapters: Principles of Contract Law in the Liability Insurance Context; Principles of Liability Insurance Coverage; and Principles of the Management of Insured Liabilities.

The reporter for the project is Professor Thomas Baker of the University of Pennsylvania, who will work with the assistance of several dozen academics, judges, and insurance law specialists. For a more information about the project, visit ALI’s Principles of the Law of Liability Insurance page or the complete listing of advisory group participants.

Michael F. Aylward, Morrison Mahoney, LLP, Boston, Massachusetts


Hawaii Appellate Court Determines Construction Defects Are Not Occurrences

Ever since the Ninth Circuit made an Erie guess that Hawaii’s appellate courts would find construction defects do not constitute an occurrence under a CGL policy, see Burlington Ins. Co. v. Oceanic Design & Constr. Inc., 383 F.3d 940 (9th Cir. 2004), coverage practitioners, insurers, and insureds have waited for an answer. Recently, the circuit’s prediction proved accurate when the Hawaii Intermediate Court of Appeals (ICA) determined that construction defect claims are not occurrences. See Group Builders, Inc. v. Admiral Ins. Co., No. 29402, 2010 Haw. App. LEXIS 234 (Haw. Ct. App. May 19, 2010).

The case arose out of mold damage discovered at the Hilton Hawaiian Village’s Kalia Tower in Waikiki. Construction of the new Tower was completed in May 2001. In mid-2002, extensive mold growth was discovered, forcing closure of guest rooms on floors five through twenty-five. An investigation revealed numerous construction defects in the Tower, some of which contributed to or caused the mold growth.

Hilton filed suit in 2003 against numerous defendants, including the subcontractor responsible for insulation in the Tower, Group Builders (Group). Group was insured by Tradewind Insurance Company, Ltd. (Tradewind) from October 1999 to October 2000, and thereafter by Admiral Insurance Company (Admiral). When Group sought a defense for Hilton’s suit, Admiral refused. Hilton eventually settled with Group, Tradewind, and other insurers. Group then assigned to Tradewind its claim against Admiral, as well as the right to sue in Group’s name.

Tradewind sued Admiral for its refusal to defend or indemnify, but the circuit court concluded there was no evidence of property damage caused by an occurrence. Consequently, Admiral’s motion for summary judgment was granted.

On appeal, the ICA noted there was no dispute that the mold damage and resulting loss of use qualified as property damage. Instead, the dispute was whether Group’s alleged defective workmanship constituted an occurrence, defined by the policy as, “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The ICA summarized at length the circuit’s decision in Burlington. The split of authority on the issue was also noted. The majority holds that claims of poor workmanship, standing alone, are not occurrences that trigger coverage under CGL policies. In contrast, under the minority position, the damage resulting from faulty workmanship is an accident and, therefore, a covered occurrence.

Adopting the majority rule, the ICA held that breach of contract claims based on allegations of shoddy performance were not covered under CGL policies. Further, tort-based claims, derivative of the breach of contract claims, also were also not covered.

Normally, one would expect this case to be on its way to the Hawaii Supreme Court. As an insurer, however, Tradewind may deem an appeal is against its long-term interest.

— Tred R. Eyerly, Damon Key Leong Kupchak Hastert


No Duty to Defend Successor Company under Predecessor Policies

In Ford, Bacon & Davis LLC v. The Travelers Insurance Co., et al., No. 08-2911, 2010 U.S. Dist. LEXIS 34212 (S.D. Tex. Apr. 7, 2010), a Texas federal district court, applying Texas law, granted summary judgment to a liability insurer. The court held that the insurer did not have a duty to defend an alleged successor company that sought coverage under its predecessor’s liability policies because the successor company failed to establish that it could be subject to potential liability for its predecessor’s liabilities.

Factual and Procedural Background
Ford, Bacon & Davis, LLC (Ford) acquired certain assets of Ford, Bacon & Davis, Inc. and its subsidiaries (FBD) pursuant to an asset purchase agreement. The asset transfer excluded any liability arising from FBD’s pre-sale production of asbestos. It also “explicitly excluded” the transfer of “‘all policies of insurance . . . or any rights thereunder. . . .’” Additionally, FBD agreed to defend and indemnify Ford for any claim brought against Ford arising out of matters that occurred prior to the asset transfer.

For several years after the transfer, if Ford was sued for FBD’s asbestos liabilities, FBD would inform the asbestos plaintiffs that FBD was the proper defendant. Ford would then be dismissed from the suit. In 2005, FBD apparently dissolved. With the dissolution of FBD, Ford was unable to convince plaintiffs to dismiss it from asbestos litigation or to obtain indemnity from FBD.

In 2007, Ford sought defense and indemnity from The Travelers Indemnity Company (Travelers), under the liability policies issued to FBD. Ford filed suit against Travelers seeking a declaration that Travelers owed it a defense against the asbestos products liability lawsuits.

Travelers moved for summary judgment, arguing that no coverage was owed because Ford is not a named insured and did not acquire FBD’s policies as part of the asset purchase agreement.  Ford countered and argued that a defense is owed by “operation of law,” regardless of whether the rights under the insurance policies were actually assigned to Ford. Ford argued that coverage under the “operation of law” doctrine is triggered by an allegation that an unrelated entity is a corporate successor to the insured entity.

Complaint Allegation Rule Does Not Establish Insured
Ford first argued that it was entitled to a defense under the FBD policies because the plaintiffs’ complaints alleged that Ford was the corporate successor of the insured entity, FBD. The court held that Ford’s reliance on the complaint allegation rule (also referred to as the eight corners rule) was misplaced. The court explained that determining whether an entity is an insured is a preliminary question that must be answered before deciding whether the allegations of a complaint trigger a defense obligation.

Successor Not Entitled to Defense Under Predecessor’s Policies
Ford next argued that it was entitled to coverage under the “operation of law” doctrine. Under that doctrine, an entity that purchases most of the assets of a firm assumes the liability for the purchasers pre-sale liabilities and is entitled to coverage under the seller’s liability policies, irrespective of a provision to the contrary in the asset purchase agreement. See Northern Ins. Co. of N.Y. v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992). The doctrine rests on the assumption that “regardless of any transfer the insurer still covers only the risk it evaluated when it wrote the policy.” Id. at 1358. The court explained, however, that the doctrine breaks down when the original insured still exists because if both the predecessor and successor seek coverage, the insurer might be forced to cover both, which would unfairly increase the insurer’s risk.

The court noted that Travelers continued to defend FBD in asbestos litigation after the transfer of assets to Ford. The court also noted that “[t]hough [FBD’s] dissolution years subsequent to the Asset Purchase Agreement may nonetheless avoid this specific problem of double coverage going forward, this is mere happenstance. There is no principled basis upon which coverage, which did not extend to [Ford] under the ‘operation of law’ theory during [FBD’s] existence, should years later suddenly be conferred upon Ford by ‘operation of law’ solely by virtue of [FBD’s] unrelated subsequent dissolution.”

To determine if Ford was entitled to coverage under the FBD policies, the court stated that the first question that must be answered is whether the purchaser, Ford, could actually be held liable for underlying asbestos lawsuits. If the answer is in the affirmative, then the next question is whether Travelers duty to defend FBD under the FBD policies passed to Ford by “operation of law.”

The court explained that Texas law recognizes that a successor entity that purchases only the assets of another acquires liability for the seller’s pre-sale production liabilities only (1) when the successor expressly agrees to assume liability, or (2) when the acquisition results from a fraudulent conveyance. The court stated that it was uncontested that Ford did not expressly agree to assume the pre-sale asbestos liabilities of FBD, and there was no allegation that the asset purchase agreement was a fraudulent conveyance. Based on this, the court granted summary judgment to Travelers, and concluded that because there was “no evidence sufficient to raise even an issue of fact that [Ford] could be subject to potential liability for [FBD’s] presale asbestos liability, [Ford] does not qualify for a right to a defense from Travelers by ‘operation of law’ even if Texas law should recognize that theory of insurance coverage.”

— Ruth S. Kochenderfer Of Counsel Steptoe & Johnson, LLP


Trademark Infringement Suit Not Covered Under CGL Policy

In Premier Pet Prods., LLC v. Travelers Prop. Cas. Co. of Am., 2010 U.S. Dist. LEXIS 494 (E.D. Va. Jan. 5, 2010), the policyholder, Premier Pet, was sued for trademark infringement by a competitor who alleged that the policyholder manufactured and sold dog training collars bearing designations which infringed the competitor’s “Gentle Spray” trademark. The policyholder sought a defense against the suit under the advertising injury coverage of a commercial general liability policy issued to the policyholder. The issue presented was whether the trademark infringement complaint alleged “an offense committed in the course of advertising your goods, products or services” within the policy’s insuring agreement for advertising injury.

The policyholder argued that although the complaint did not mention any specific advertising activities, “the inherent nature of a trademark” eliminated the need for the complaint to allege any advertising activities—because the trademarks served as the prime instrument in the advertising and sale of the policyholder’s dog collars. In other words, according to the policyholder, a trademark infringement complaint always satisfies the “committed in the course of advertising” requirement of the policy.

The court rejected this reasoning, holding that in order to trigger the policy’s advertising injury coverage, the trademark infringement complaint must allege either an offense committed in the course of advertising or that harm from advertising resulted. Because the complaint did not mention any specific advertising activities or harm from such activities, but simply alleged the general use by the policyholder of the disputed mark, the court held the policy’s advertising injury coverage was not triggered and the insurer did not owe a duty to defend.

— John B. Mumford, Jr., Hancock, Daniel, Johnson & Nagle, P.C., Glen Allen, Virginia