National Insurance Law Forum

National Insurance Law Forum

Published By The Attorneys of the National Insurance Law Forum

Contractor’s Tools Exclusion Bars Coverage for Crane Collapse under Builder’s Risk Policy

Posted in Builder's Risk

In Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Company, New York’s high court holds that the contractor’s tools exclusion barred coverage for a tower crane collapse caused by Superstorm Sandy under a builder’s risk policy. The crane was installed on a reinforce slab on the 20th floor of the building, and was to be removed from the site once the project was completed, though components of the crane were to remain part of the building after construction was completed. The crane tower was damaged when Superstorm Sandy made landfall, causing the boom to collapse in the high winds. At issue was whether the crane was covered by the policy in the first instance, and, if so, whether the contractor’s tools exclusion defeated coverage for the claim.

Whether the crane was covered in the first instance turned on whether the crane was a “temporary structure” within the meaning of the policy, and whether it was “incidental to the project.” The court concluded that the crane was a “structure”, and that it was “temporary”, in that it was to be removed upon completion of the work. The court also concluded that whether the crane was “incidental to the project” was “of no moment,” in that the purpose of the project was the construction of the building, not the crane. However, the court concluded there were issues of fact whether the crane was covered in the first instance, because a dispute about whether the crane was disclosed as part of the “total project value” created a triable issue of fact.

Notwithstanding, the court found that the crane damage was excluded by the contractor’s tools exclusion, which provided:

Th[e] Policy does not insure against loss or damage to … Contractor’s tools, machinery, plant and equipment including spare parts and accessories, whether owned, loaned, borrowed, hired or leased, and property of a similar nature not destined to become a permanent part of the INSURED PROJECT, unless specifically endorsed by the Policy.

In finding that the exclusion applied, the court concluded that the crane was “machinery” within the meaning of the exclusion, and that, although components of the crane were to remain a permanent part of the building, the components were reinforcements and ties; that the principal parts of the crane were not to become a part of the building. The court rejected arguments that the exclusion rendered the coverage illusory, reasoning that the exclusion did not defeat all coverage under the policy’s temporary works provision; coverage still would be available the cost of erecting scaffolding, for “temporary buildings”, and for “formwork, falsework, shoring, [and] fences,” which are not “tools” within the meaning of the exclusion.

Second Circuit Deems Policy Ambiguous Regarding Post-Exhaustion Defense

Posted in Duty to Defend, Liability Coverage

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

In American Commercial Lines LLC, et al. v. Water Quality Insurance Syndicate, 16-91-cv(L) (2d Cir. Feb. 10, 2017), the Second Circuit reversed a decision from the Southern District of New York, which held that a maritime insurer was obligated to continue defending its policyholder in connection with claims arising from an oil spill in the Mississippi River, even after its policy limits were exhausted. The policy at issue contained indemnity coverage for liability arising from oil spills and provided that defense costs would be paid for “any liabilities covered” under the policy. The policy further provided that such defense costs were in addition to the limits of liability. The insurer argued that once the limits of liability were exhausted from indemnity payments, there no longer were any “liabilities covered” under the policy, and, therefore there no longer was an obligation to pay defense costs. The policyholder argued that the phrase “liabilities covered” referred only to the type of liabilities covered under the policy, without regard to the available limits, and therefore that the insurer was obligated to continue paying defense costs, even after the limits were exhausted. The district court sided with the policyholder. The Second Circuit reversed, however, holding that the interpretations offered by the policyholder and the insurer both were reasonable, and, therefore that the policy was ambiguous. Among other things, the court looked at extrinsic evidence – the parties’ own actions after the limits of the policy were exhausted – and the “overall structure and purpose of the policy” as support for the insurer’s proffered interpretation. The court remanded the case to the district court to “assess the extrinsic evidence as well as further evidence adduced through discovery” to determine the intent of the parties.

NY Appellate Courts Address Liability Policy Exclusions

Posted in Liability Coverage

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

New York’s Appellate Division recently issued two decisions of note:

In Country-Wide Ins. Co. v. Excelsior Ins. Co., 2017 N.Y. Slip Op. 00718 (1st Dept. Feb. 2, 2017), the First Department reaffirmed that, in New York, the phrase “arising out of” is to be construed broadly, even where it appears in an exclusion. This case involved coverage for an underlying action in which plaintiff allegedly was injured when a lift gate failed while plaintiff was unloading material from a shipping trailer. The Court held that an exclusion in a CGL policy for bodily injury “arising out of” the use, including loading and unloading, of autos operated by or rented or loaned to the insured, barred coverage for the claim. In so holding, the Court noted that the phrase “arising out of” when found in an exclusion is to be construed broadly, such that a claim is excluded if it would not exist “but for the existence of the excluded activity or state of affairs.” The Court also rejected the insured’s argument that the exclusion did not apply because the injury was caused by the defective nature of the trailer lift gate, holding that, “[t]he focus of the inquiry is not on the precise cause of the accident but the general nature of the operation in the course of which the injury was sustained.”

In  Hansard v. Fed. Ins. Co., 2017 N.Y. Slip Op. 00633 (2d Dept. Feb. 1, 2017), the Second Department held that an insurer had no duty to defend or indemnify an insured under a D&O policy for claims alleging that the employer-insured violated the Fair Labor Standards Act and New York Labor law by (1) depriving employees of regular and overtime pay by requiring them to work “off the clock” and misclassifying them as “salaried,” (2) discharging employees before a certain date to avoid paying promised settlement packages, (3) failing to keep accurate records of wages and hours, and (4) delaying issuance of paychecks beyond when payment was due. The policy provided coverage for “Wrongful Act[s],” as that term was defined, but excluded coverage for “any employment-related Wrongful Act.” The term “employment-related” was not defined in the policy; however, the Court, relying on dictionary definitions of the words, held that the term “employment-related” was unambiguous and meant “connected by reason of an established or discoverable relation to the act of employing or the state of being employed.” Under that definition, the Court found that the allegations of the underlying complaint fell squarely within the exclusion and therefore that there was no coverage. The court also held that it was irrelevant that the phrase “employment-related Wrongful Act” might be ambiguous in the context of other “employment-related” claims, because it was not ambiguous in the context of the claims at issue before the Court.

Washington’s Insurance Fair Conduct Act Does Not Create a Cause of Action for Regulatory Violations

Posted in Auto Liability Coverage, Liability Coverage, News, Recent Cases, Uncategorized

Today, in Isidoro Perez-Crisantos v. State Farm Fire & Casualty Company, the Washington Supreme Court held the Insurance Fair Conduct Act (IFCA) did not “create[] a new and independent private cause of action for violation” of  the Washington Administrative Code (WAC) “in the absence of any unreasonable denial of coverage or benefits.”

This case arose out of Perez-Crisantos’s claim for uninsured motorist (UIM) coverage following an auto accident. Perez-Crisantos’s insurer, State Farm, denied his claim on the grounds that he was seeking benefits for excessive chiropractic treatment and a shoulder surgery unrelated to the auto accident. Perez-Crisantos filed suit, alleging violations of IFCA, IFCA’s implementing regulations, and the Consumer Protection Act, as well as bad faith and negligence claims. Most claims were stayed while Perez-Crisantos’s UIM claim was arbitrated. The arbitrator found mostly in his favor, and ultimately Perez-Crisantos collected approximately $24,000 in UIM benefits.

When the stay was lifted, Perez-Crisantos amended his complaint to clarify he was alleging violation of WAC regulations relating to unfair settlement practices. Perez-Crisantos contended that State Farm required him to litigate in order to receive benefits to which he was entitled, in violation of regulations making it unfair or deceptive to “[c]ompel[] a first party claimant to initiate or submit to litigation, arbitration, or appraisal to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings.”

On motions for summary judgment, the trial court ruled in favor of State Farm. Perez-Crisantos requested direct review, which the Washington Supreme Court granted. The dispute centered on the legislative intent of IFCA. RCW 48.30.015 provides:

  1. Any first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action in the superior court of this state to recover the actual damages sustained, together with the costs of the action, including reasonable attorneys’ fees and litigation costs, as set forth in subsection (3) of this section.
  2. The superior court may, after finding that an insurer has acted unreasonably in denying a claim for coverage or payment of benefits or has violated a rule in subsection (5) of this section, increase the total award of damages to an amount not to exceed three times the actual damages.
  3. The superior court shall, after a finding of unreasonable denial of a claim for coverage or payment of benefits, or after a finding of a violation of a rule in subsection (5) of this section, award reasonable attorneys’ fees and actual and statutory litigation costs, including expert witness fees, to the first party claimant of an insurance contract who is the prevailing party in such an action.

5. A violation of any of the following is a violation for the purposes of subsections (2) and (3) of this section:

(a) WAC 284-30-330, captioned “specific unfair claims settlement practices defined.”

As the Court explained, “given that the trier of fact must find that the insurer acted unreasonably under subsection (1), and that such a finding mandates attorney fees under subsection (3) and gives the trial court discretion to award treble damages under subsection (2), it is not clear what a finding of a regulatory violation accomplishes.”

Resolving a split among Washington federal courts, the Court held that the alleged regulatory violation at issue here was not independently actionable under IFCA. In doing so, the Supreme Court specifically disagreed with the Eastern District of Washington’s ruling in Langley v. Geico, Gen. Ins. Co., 89 F.Supp.3d 1083, 1085 (E.D. Wash. 2015).  Acknowledging IFCA was ambiguous, the court nevertheless concluded that the weight of the legislative history did not support reading IFCA to create an implied cause of action for regulatory violations.

Resolution of this split and the larger uncertainty surrounding IFCA actions is sure to be consequential for insurers. The Court’s holding will also result in a change to the pattern jury instructions for an IFCA claim.

Extrinsic Evidence Triggers Duty to Defend under New York Law

Posted in Additional Insured, Duty to Defend

A recent decision from a New York appellate court reminds us that, under New York law, the duty to defend may be triggered not only by the allegations of a complaint, but also by extrinsic evidence, i.e., actual knowledge of facts outside the four corners of the complaint establishing a reasonable possibility of coverage.

The issue in City of New York v. Wausau Underwriters Insurance Company was whether the City, a putative additional insured under policies issued to its electrical contractor, was entitled to a defense in five underlying personal injury actions. Per the additional insured endorsements attached to the contractor’s policies, the City was an additional insured for “liability caused, in whole or in part, by the negligent acts or omissions of [the electrical contractor]….” The complaints in two of the actions did not mention the City’s contractor; thus, the court found that the duty to defend was not triggered by the facial allegations of the complaints. Notwithstanding, in both cases the insurer had been notified by the City’s law department of facts establishing a reasonable possibility that the injury arose from work performed by the contractor under contract with the City. Thus, in those actions, the court found the duty to defend was triggered by extrinsic evidence.

The complaints in two other actions contained allegations against both the City and its contractor, and the City notified the insurers of facts establishing a reasonable possibility that the injury arose from work performed by the contractor were made known to the insurer. Thus, in both cases, the duty to defend was found to have been triggered both by the facial allegations of the complaints and by extrinsic evidence.

The court found that a fifth action did not trigger a duty to defend because, while there were allegations and extrinsic evidence that the injuries arose from work performed by the contactor, the accident occurred after the contractor’s work was completed, and therefore was excluded by the policy’s products-completed operation hazard exclusion.

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

Posted in Personal and Advertising Injury, Property Insurance, Recent Cases

Criminal Acts Exclusion and Joint Obligations Clauses Bar Coverage for Claims Arising from Insured’s Criminal Act

In Allstate Insurance Company v. Morgan, 123 F. Supp. 3d 1266 (D. Or. 2015), the District of Oregon held an insurer was not obligated to defend their insured’s son against tort claims arising out of the son’s assault on a party guest.

The underlying case arose out of an incident that occurred during a party hosted by the insured’s son at the insured’s home. The insured’s son and three other attendees assaulted another guest, causing serious injury. The insured’s son pled guilty to assault.

The injured guest then filed a complaint against the Morgans for negligence as well as additional claims against others. Allstate denied any duty to defend or indemnify the Morgans. Allstate argued (1) the Criminal Acts Exclusion Clause barred coverage, (2) the Joint Obligations Clause barred coverage, and (3) there was no “occurrence” under the Policy. Allstate also requested the court stay the coverage case pending the resolution of the underlying case.

The magistrate judge declined to stay the case, reasoning that Allstate’s coverage obligation could be determined by considering only the terms of the Policy and the fact that the insured’s son committed a criminal act, as evidenced by his guilty plea.

The Court then concluded the Criminal Acts Exclusion Clause barred coverage of both the insured and her son. The Morgans argued that Allstate’s duty to defend was established by looking only at the complaint, which alleged negligence. Further, the guilty plea did not establish that the insured’s son’s criminal acts actually caused the bodily injuries alleged in the complaint. The Court rejected these arguments, explaining that “[a] guilty plea resulting in a criminal conviction can have a preclusive effect in a subsequent civil proceeding,” and, accordingly, Allstate had no duty to defend the insured’s son. Then, reaching an issue of first impression in Oregon, the court held Allstate had no duty to defend the insured herself, even though she played no role in the assault. Based on the Policy language and out-of-state cases, the Court concluded that the Criminal Acts Exclusion Clause barred coverage for bodily injury that was caused by any insured’s criminal acts.

The district judge adopted the magistrate judge’s recommendation over objection, adding that the Joint Obligations Clause also supported the magistrate’s recommendation. The Court noted that “numerous other courts have interpreted identical joint obligation clauses and have held that the language renders the criminal acts exclusion applicable to claims for negligence against other insureds.” Having decided the case based on the Criminal Acts Exclusion Clause and the Joint Obligations Clause, the Court did not reach the occurrence question.

2016: A Year of Anniversaries

Posted in Continuous or Progressive Property Damage, News, Uncategorized

Even as this annus horribilus passes into oblivion, we note several important anniversaries in 2016.

Fifty years ago saw a confluence of legal theory, case law and insurance industry developments that  led ineluctably to the storm of mass tort litigation that crashed upon the insurance industry within a few years and that continues to plague us fifty years later.

In 1966, the National Bureau of Casualty Underwriters (predecessor to ISO) responded to pressure from the London Market to broaden CGL coverage by abandoning the “caused by accident” language that insurers had relied on up to that point to restrict their policies to “big bang” events.  In its place, the NBCU substitute the modern conception of an “occurrence” that covered not only abrupt happenings but losses due to “exposure to conditions.”   The adoption of “occurrence” language coincided with the American Law Institute’s adoption of a new Section 402A in the Restatement of Torts that pioneered the imposition of strict liability for product manufacturers that, coupled with 1966 amendments to Rule 23 of the Federal Rules of Civil Procedure that liberalized the filing of class actions, pioneered the waves of mass tort litigation and products liability claims that ensued in the following decades:  asbestos, Benedictin, Dalkon Shield, DES, breast implants and so on.

Thirty years ago saw the adoption of largest change to the CGL form since 1973 and the widespread implementation of mandatory exclusions for asbestos and environmental liabilities.   What is often forgotten is the failed effort of ISO and a large segment of the casualty industry to jettison “occurrence” coverage altogether in favor of “claims made” CGL coverage, an effort that resulted in a massive antitrust challenge by nineteen states attorneys general that ended up in the United States Supreme Court in 1993.

Fifteen years ago was, of course, the tragedy of the World Trade Center, a seminal event in our political and cultural history and also the source of an extraordinary number of insurance coverage dispute ranging from the famous two towers/two “occurrences” controversy to innumerable smaller fights over business interruption losses around the country.

Will we remember 2016 in the years to come?

Second Circuit Reconsiders Bellefonte Re Reinsurance Doctrine

Posted in Reinsurance

The fate of the so-called Bellefonte Re doctrine is now up to the New York Court of Appeals.  On December 8, the Second Circuit issued an opinion in Global Reinsurance Corp. v. Century Ind. Co., No. 15-2164 (2d Cir. Dec. 8, 2016) asking New York’s highest state court to answer whether a District Court erred in declaring that the dollar amount stated in the “Reinsurance Accepted” section of certain reinsurance certificates unambiguously caps the maximum amount that a reinsurer can be obligated to pay a cedent for “losses” and “expenses” combined.

In the underlying case, a court ruled that Century Indemnity was obliged to pay defense costs to Caterpillar in addition to the indemnity limits of its policies for the underlying asbestos suits.  Global Re contended (and the District Court agreed), however, that its obligations under these reinsurance certificates were capped by the limits of coverage, whereas Century Indemnity has argued that its reinsurer must also pay expenses in light of language in the certificates stating “the liability of [Global] specified in Item 4 above shall follow that of [Century] and, except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [the underlying liability insurance policy].”

Whereas Global Re argued that the amount stated in the “Reinsurance Accepted” section caps the maximum amount that it can be obligated to pay for both loss and expenses combined and that the maximum amount that it can be required to pay under a particular certificate was the “occurrence” limit exceeding Century’s retention ($250,000), Century contended that the amount stated in the “Reinsurance Accepted” provision applies only to “loss” and that Global must pay all expenses that exceed that amount.

Although it would appear that the District Court’s analysis was consistent with the Second Circuit’s opinion in Bellefonte Reinsurance Co. v. Aetna Casualty & Surety Co., 903 F.2d 910 (2d Cir. 1990), which has been a cornerstone of reinsurance litigation for nearly three decades now, the Second Circuit expressed uncertainty with respect to whether it had correctly decided Bellefonte or had taken industry custom and usage into account in its analysis.  Accordingly, it agreed to certify the following question to the New York Court of Appeals:

Does the decision of the New York Court of Appeals in Excess Insurance Co. v. Factory Mutual Insurance Co., 3 N.Y.3d 577 (2004), impose either a rule of construction, or a strong presumption, that a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs?

In agreeing to reconsider Bellefonte, the Second Circuit was clearly influenced by amicus briefs filed by several large reinsurance brokers warning that continuing to follow Bellefonte could have “disastrous economic consequences” for the insurance industry and that “potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured.” creating a “gaping hole in reinsurance for many companies, and potentially threaten some with insolvency.”

Unsigned Purchase Order Deemed Written Contract under AI Endorsement

Posted in Additional Insured, Liability Coverage

The written contract requirement in an additional insured endorsement does not require that the contract be signed unless the endorsement so provides, holds New York’s Appellate Division, First Department in Zurich American Insurance Company v. Endurance American Specialty Insurance Company.

The endorsement provided that additional insureds included “[a]ny entity required by written contract … to be named as an insured.” The purchase order, which required the contractor to obtain additional insured coverage for the owner and its property manager, contained no signature lines and was unsigned, but stated: “THIS PURCHASE ORDER AND AGREEMENT IS A LEGAL AGREEMENT BETWEEN [owner and vendor]. BY ACCEPTING THE ORDER, VENDOR HEREBY AGREES TO BECOME BOUND BY THE TERMS OF THIS AGREEMENT.” The purchase order was accepted by performance of the work.

The insurer argued that the parties were not additional insureds, because the unsigned purchase order was not a written contract. The court disagreed, finding that the endorsement required only a “written” contract, not a “signed” one (in contrast with endorsements that also require that the contract be executed), and that, by its terms, the purchase order became binding upon its acceptance, not upon signing the document.

Georgia’s Uninsured Motorist Statute Does Not Supersede Excess Policies’ Vertical Exhaustion Requirements

Posted in Additional Insured, Auto Liability Coverage, Bad Faith/Extra Contractual, Excess and Umbrella Insurance

In Coker v. American Guarantee & Liability Insurance Company, 825 F.3d 1287 (11th Cir. 2016), the Eleventh Circuit held that Georgia’s uninsured motorist (UM) statute did not supersede the vertical exhaustion requirements contained in the defendants’ excess policies.

In this case, plaintiff Gary Coker was driving a truck owned by his employer, Ansco & Associates (Ansco), when he was seriously injured in a head-on collision caused by the other driver. The Cokers obtained a $5.5 million consent judgment against the other driver but could only recover $25,000 from him, as he was underinsured. The Cokers pursued the remainder of the consent judgment under five policies held by Ansco, as Coker had been driving the truck in the course and scope of his employment when he was injured.

Ansco had five policies, which were vertically structured. Ansco held a primary automobile policy with Liberty Mutual Insurance Company (Liberty Mutual) with a $5 million limit. Ansco also had a $10 million policy issued by Westchester Fire Insurance Company (Westchester) that provided second-layer umbrella coverage, a $10 million policy issued by Great American Insurance Company (Great American) that provided third-layer excess coverage, a $25 million excess policy issued by American Guarantee & Liability Insurance Company (American Guarantee) that provided fourth-layer excess coverage, and a $25 million policy issued by Endurance American Specialty Insurance Company (Endurance) that provided fifth-layer excess coverage.

The Cokers made written demands of all five companies. The Cokers entered into confidential settlements with Liberty Mutual and Westchester for substantially less than the respective policy limits. The three other insurers did not tender payment. A portion of the $5.5 million judgment still unsatisfied, the Cokers filed a complaint against Great American, American Guarantee, and Endurance (collectively, Defendants) for breach of contract and bad faith. The district court concluded Defendants were required to provide UM coverage by operation of Georgia’s UM statute, finding “that enforcing the vertical exhaustion requirements in the Defendants’ excess policies ‘would place a limit on the amount [the Cokers] are able to recover under the statute and not be in accordance with the remedial purpose of the [UM] statute.’”

The Eleventh Circuit reversed, holding that Georgia’s UM statute did not supersede the vertical exhaustion requirements contained in Defendants’ excess policies. Georgia’s UM statute requires that, absent a written waiver, all automobile policies, including umbrella and excess policies, must provide UM coverage up to the policies’ overall liability limits. See Ga. Code Ann. § 33-7-11. But although Defendants had a statutory obligation to provide UM coverage, “each of the Defendants’ excess liability policies contain[ed] unambiguous language limiting recovery to only those amounts exceeding the policy limits of an underlying insurance policy or policies.” See also Garmany v. Mission Ins. Co., 785 F.2d 941, 945-46 (11th Cir. 1986) (“[U]nder Georgia law, when an excess policy clearly sets a threshold starting point for payment, the contract is unambiguous and must be enforced.”).

The Court drew a distinction between “other insurance” provisions that may be voided by section 33-7-11. The Court observed that interpreting section 33-7-11 to void vertical exhaustion requirements would in effect “convert all excess policies into primary policies” and would eliminate the market for excess UM coverage in Georgia. The Eleventh Circuit did not believe the Georgia courts would favor such a result, as they had “implicitly recognized the validity of” excess UM coverage in, for example, Progressive Classic Ins. Co. v. Nationwide Mut. Fire Ins. Co., 670 S.E.2d 497 (Ga. Ct. App. 2008). Finally, the court explained that vertical exhaustion requirements do not undermine the purpose of section 33-7-11, noting that “[t]he only way an insured might not recover for the full amount of his injures—and therefore realize the harm section 33-7-11 was designed to prevent—is if, as is the case here, he settles with an underlying insurer for less than the policy limits. But in that case, the insured voluntarily settled for less than the policy limits and, therefore, is undercompensated of his own volition.”

In Oregon, excess and umbrella policies are not considered motor vehicle liability policies for the purpose of statutes mandating the type or amount of coverage motor vehicle policies must contain, such as the uninsured motorist statute. See ORS 742.468(2), (3). Similarly, in Washington, uninsured motorist coverage requirements do not apply to umbrella and excess policies. See WRS 48.22.030(2). In states where the uninsured motorist statute does not so specify, practitioners should be familiar with the recent appellate decision in Coker.