National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Just as truth is often said to be the first casualty of war, bad grammar is often the first victor in coverage battles. Such has recently been the fate of the quaint but venerable doctrine of the last antecedent, whereby clauses in a contract are interpreted in accordance with the words or phrases that immediately precede them rather than words that are more remote.

Two courts have considered this doctrine in reaching opposite conclusions with respect to whether standard CGL “personal and advertising injury” coverage for “publication of material that invades a person’s right of privacy” extends coverage to junk fax claims. The issue in these cases was whether it is the “publication” that is invasive or the “material.” Junk faxes, while annoying, rarely contain secret or confidential information such that their content could be said to invade a privacy interest. On the other hand, the legislative history of the TCPA suggests that Congress was concerned about protecting the seclusion interest of private citizens in banning such communications.

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One of the perils of appellate advocacy is asking a court to take on too many complicated issues at once.  Inevitably, some issues don't get the attention they deserve or are dealt with as an after-thought.  Such is the case with an environmental coverage opinion that the Nebraska Supreme Court issued today in Dutton-Lainson Co. v. Continental Ins. Co., No. S-09-164 (Neb. February 5, 2010).

First the headlines:

--Insured's shipment of drums to various landfills all arose out of one "occurrence" (handling of solvents)

--Loss allocated on a "time on the risk" basis (months)

--Insured's agreement to accept liability before giving notice deemed to be prejudicial.

--PRP letter is a "suit"

--Insured's dumping of drums was an "accident." 

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In Canal Indemnity Co. v. Adair Homes, Inc., 2010 U.S. Dist. LEXIS 590 (W.D. Wash. January 4, 2010), the court denied an insured’s FRCP 12(b)(7) motion to dismiss for failure to join an indispensable party. The insurer, Canal Indemnity, brought the declaratory judgment action against its insured, Adair Homes, to determine whether two commercial general liability policies it had issued provided coverage for certain faulty construction claims.

The insured, a home builder, argued that its subcontractor, GEM Construction, and its three insurers were necessary parties because in their absence the insured would not be able to obtain a “complete and adequate adjudication of the insurance coverage potentially available to it.” As one of the subcontractor’s insurers was, like Adair Homes, a Washington resident, joinder would defeat diversity jurisdiction. Accordingly, the insured argued, the federal case should be dismissed for inability to join an indispensable party, and the coverage issues should be resolved in state court.

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In Parks v. Farmers Insurance Company of Oregon, 2009 Or. LEXIS 1014, filed on December 24, 2009, the Oregon Supreme Court examined what constitutes “proof of loss” in the context of ORS 742.061, which requires an insurer to pay an insured’s reasonable attorney fees if (1) the insurer fails to settle the insured’s claim within six months of the date that the insured files a “proof of loss,” and (2) the insured brings an action against the insurer and recovers more than any tender that the insurer has made. The Court held that the insureds had filed “proof of loss” when they telephoned their insurer’s agent seeking help with the cost of cleaning up methamphetamine contamination at an insured rental property. The Court’s holding reversed that of the Court of Appeals which had concluded that as the methamphetamine contamination was excluded from coverage under the particular policy, the insureds’ telephone calls about the methamphetamine contamination could not constitute “proof of loss.”

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And so we bid farewell to the decade that was.  Hasta la vista, AIG, ATLA, “earwigging,” Bernie Law, contingent commissions, Dick Scruggs, Eliot Spitzer, Eric Dinallo, the FAIR Act, GilbertHeinz; Hank Greenberg, John Garamendi, junk faxes, Mel Weiss, PHICO, Ramani Ayer, Reliance, Royal, Sears Tower, 70 Pine Street, the Sopranos, “wardrobe malfunctions,” W.R. Grace and Y2K

2009:  The Year of The Ox

Top New Claim Threat:                    Chinese Dry Wall
Furthest Fall from Grace:                 Tiger Woods
Athletic Achievement:                      Tim Tebow
Coolest New Gadget:                        I Phones
Hottest Coverage Issue:                   Allocation

The 10 Most Important Coverage Rulings of 2009

Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009).

In a case of first impression, the Illinois Supreme Court has ruled that a liability insurer had the burden of proving that separate injuries arose out of a single “occurrence.”  The court ruled that although an insured has the burden of proving that a loss is covered in the first instance, the issue of limits was more of a limitation on coverage for which the insurer had the burden of proof.  In keeping with Nicor, the court declared that the losses would be viewed as separate “occurrences” if they were the result of separate and intervening human acts or each act increased the insured’s exposure to liability.  The case involved the death of two boys who died of hypothermia after getting trapped outdoors in wet sand on a neighbor’s property but were not discovered until days later.  While stating that the two deaths might well have involved a single “occurrence” if the injuries had occurred closely together in time and space, the court found that it was impossible to prove how the boys died.  As the insurer had failed in its burden of proof, the court held that the claims must be treated as involving separate “occurrences.”

Comment:   This case introduced a novel issue to the evolving body of case law construing whether multiple injuries could be grouped together under a single “occurrence” limit.  Prior to Fay, no court had considered the effect of the burden of proof on such issues and to whom the burden should be assigned.  It is hard to escape the conclusion that the court stretched to reach a conclusion that maximized coverage in a case with such sad facts but that may have unimagined consequences in the years to come in less sympathetic cases.

Boston Gas Company v. Century Ind. Co., 454 Mass. 337, 910 N.E.2d 290 (2009)

In a startling decision of significant consequence to the future of environmental and mass tort claim disputes in Massachusetts, the Supreme Judicial Court has ruled that a federal district court erred in assigning the cost of cleaning up pollution from a former MGP to a single policy issued in the 1960s.  On the threshold question of “all sums v. pro rata,” the court held that allocation was consistent with the policy wordings and public policy considerations.  Further, in considering what type of allocation formula should be applied, the court adopted a pure “time on the risk” approach, rejecting suggestions that it should use an Owens-Illinois approach that would take total limits into account, or an “unavailability” analysis that eliminated certain years from the denominator for calculating these percentages.  Finally, in cases such as this where the first layer of coverage was written through policies with self-insured retentions, the court declared that the insured need only pay a proportional share of the SIR for each triggered policy.

Comment:   Boston Gas not only transformed the playing field for allocation disputes in Massachusetts, it marks an important milestone in arguing against “unavailability” as a basis for limiting the period within which losses must be allocated.   It also now creates an odd claims environment in which insureds may argue for a narrow definition of “trigger of coverage,” whereas insurers may claim that periods of time are triggered that in the past might have been disputed as involving losses in progress and the like.

Corban v. U.S.A.A., No. 2008-IA-00645 (Miss. October 8, 2009)

While agreeing that damage from a “storm surge” is subject to a water damage exclusion in a homeowner’s policy, the Mississippi Supreme Court ruled in this case that a lower court had erred in declaring that wind and water claims are necessarily excluded pursuant to the policy’s anti-concurrent causation language. The Mississippi Supreme Court ruled that the anti-concurrent causation language should only apply in cases where excluded and covered perils act in conjunction at the same time to cause direct physical damage resulting in loss whereas, in this case, wind and flood had occurred in sequence causing different damage and resulting in separate losses.  Whereas the trial court had interpreted the “in any sequence” language in the clause broadly to mean “sequentially,” the Supreme Court declared that this interpretation was in conflict with other provisions in the policy and thus gave rise to an ambiguity.  Accordingly, the court concluded that the anti-concurrent causation clause had no application for losses caused by wind peril and that an insurer may not abrogate its coverage obligations for such losses by the occurrence of a subsequent excluded cause or event, such as wind.  As a result, the court found that the insured was entitled to coverage for any wind damage that occurred prior to the storm surge and that the storm surge itself could not be a cause, directly or indirectly, of wind damage that occurred before or after the storm surge.   In such cases, the court ruled that the policyholder must prove that its property has suffered a direct physical loss, at which point in time the burden of proof shifts to the insurer to prove, by a preponderance of the evidence, that the causes of losses are excluded.  . 

Comment:  Corban represented something of a set back for first party insurers after numerous successes on the “wind v. water” issue in the Fifth Circuit.  At the same time, the Mississippi Supreme Court did not go as far as policyholders would have preferred and has left in place significant evidentiary burdens that must be satisfied in order to gain coverage for such losses.

Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, 47 Cal.4^th 302 (2009)

The California Supreme Court ruled that an unreasonable belief on the part of a policyholder that he was acting in self-defense when he assaulted a third party did not give rise to an “accident” triggering the insurer’s duty to defend.  Whereas the Court of Appeal had ruled that a duty to defend arose on the basis that an unreasonable belief in self-defense described conduct that was properly characterized as “non-intentional tortious conduct,” the court rejected the insured’s argument that whether there was an “accident” should be determined from the perspective of the injured party.  The court ruled that language in the insuring agreement defining “accident” as an event “which takes place without the foresight or expectation of the person acted upon or affected by the event” should not be read in isolation and must be interpreted in accordance with the policy’s definition of “accident,” which makes no reference to the perspective of the injured party.  A contrary interpretation, as the court pointed out, would result in even acts such as child molestation being treated as an “accident” since the child neither expected nor intended the molestation to occur.  The court distinguished its 1966 opinion in Gray as interpreting the scope of a policy exclusion for intentional injuries as distinguished form the policy’s insuring agreement noting that the issue in this case was whether the unreasonable self-defense fell within the policy’s coverage for an “accident” not whether it fell within a particular exclusion.  The court also rejected the insured’s argument that an assault could be an accident because of a provocative act by the injured party was unforeseen and unexpected. 

Comment:   This is an enormously significant opinion for California practicioners, albeit one whose importance does not appear to have been recognized by many.   In the five decades since Gray, California courts have steadily expanded the circumstances in which insurers are presumed to owe a duty to defend.  Indeed, the law had progressed to the point where the Court of Appeal had actually ruled in an earlier phase of this case that the insurer’s refusal to defend was bad faith.  The opinion will also do much to stem the tide of cases around the country in which courts have found a duty to defend, notwithstanding intentional act exclusions, based on self-serving claims by policyholders that the assault was undertaking in self-defense.

Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267 (Ind. 2009).

Rejecting a policyholder’s argument that a 3 year delay in tendering the defense of an environmental liability claim did not prejudice the insurer and should therefore be reimbursable, the Indiana Supreme Court has ruled that issues of prejudice are irrelevant to the right of an insured to recover pre-tender costs.  As the insurer could not defend a case of which it was unaware, its duty to defend did not arise until it was finally put on notice.  The court emphasized the limitations of its holding, pointing out that the case did not involve an effort by an insurer to avoid its defense obligation altogether, nor was it a question of the adequacy of notice or whether the insured had some reasonable basis for having failed to give notice at an earlier date.

Comment:  Dreaded not only confirms the Indiana Supreme Court’s recent drift back towards the center but sets forth a helpful analysis of the pre-tender issue that would well be emulated by courts around the country.  Far to many courts (often with the assistance of over-eager insurer counsel0, have confused the principle of “tender” as a pre-requisite to the contractual duty to defend arising with the rules governing timely notice.   A failure to tender a claim on time may also preclude coverage on the grounds of late notice, depending on the rules concerning proof of prejudice in a given state, but prejudice has nothing to do with the insurer’s retrospective obligation to reimburse for defense costs incurred in the interim.

Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009).

The First Circuit has ruled in this Massachusetts case that a federal district court erred in granting summary judgment to a liability insurer for claims arising out of the discharge of fumes from defectively-installed carpet tile and related materials throughout the plaintiff’s building.  The court ruled that the resulting “locker room” smell had resulted in physical injury to tangible property, rejecting the insurer’s contention that there must be tangible injury to the building structure itself.  Having found “property damage,” the First Circuit declared that its finding of physical injury to tangible property precluded the application of the “impaired property” exclusion apart from the fact that it was not clear that the property in question could be restored to use merely by repairing, replacing, adjusting or removing its product or work.  Nor did the “your product” exclusion apply given the allegations of property damage beyond the carpeting installed by the insured.  The court ruled that the concrete sub-floor over which the carpet had been installed was “real property” and thus excluded from the definition of “product” in Exclusion K.  Treating the sub-floor as part of the insured’s product, as the District Court has found, would, in the First Circuit’s view “stretch too far the contours of what an insured might reasonably understand.”

Comment:   This is a very dangerous case. The First Circuit, which heretofore has taken a relatively conservative approach to the scope of “business risk” claims, went out of its way to find “property damage” and narrow the scope of such exclusions    This is also one of the first federal appellate cases to find “property damage” in the context of a liability policy based on the presence of fumes and unpleasant odors in a home.  Insurers may expect to see the case widely-cited in the future in sick building and mold cases.

Lexington Ins. Co. v. AGF Ins., Ltd.,  UKHL 40 (July 30, 2009)

In its final act before becoming the British Supreme Court, the House of Lords declared in this case that just as British reinsurers would not have understood in 1977 when they agreed to facultatively reinsure a portion of Lexington’s first party DIC insurance of Alco that the Washington Supreme Court would one day rule that Lexington was “jointly and severally” liable under Pennsylvania law for the cost of cleaning up pollution at Alcoa’s facilities, neither should  “follow the settlements” clauses in the certificates require reinsurers to pay for loss occurring outside the reinsured period.  While declaring that the law of Washington is not “perverse” (ha!), the High Court declared that not only was the Washington court’s decision to apply the law of Pennsylvania instead of Massachusetts wrong but that the reinsurance agreements were not merely agreements to indemnify Lexington for all of its liabilities but rather separate contracts subject to English law and the understanding of the parties at the time, which therefore limits the reinsurers’ duties to losses solely occurring during the policy period and not extending to principles of “joint and several liability.”

Comment:  Only time will tell how much of an impact this ruling had in undermining the relationship of trust that had developed between domestic insurers and the London Market in the century since the San Francisco Earthquake.   While resting on substantial legal authority, the decision of the House of Lords struck most U.S. insurers as inconsistent with the principles underlying the follow the settlements doctrine, at least as the doctrine had evolved in the U.S. during the past decade.

Plastics Engineering Co. v. Liberty Mutual Ins. Co., 759 N.W.2d 613 (Wis. 2009)

On certified questions from the Seventh Circuit, the Wisconsin Supreme Court ruled in this case that an insured has no duty to pay for orphan shares and may assign its entire loss to a single insurer on an “all sums” basis.  Further, the court ruled that each individual claimant’s exposure to asbestos constituted a new “occurrence” rejecting the insurer’s argument that it was the insured’s manufacture and sale of asbestos-containing products without warning that was the “cause” of these losses.  On the other hand, the court agreed with Liberty Mutual that its “non-cumulation” clause was not in violation of Wisconsin Statute Section 631.43(1) as it is not an “other insurance” clause and as the disputed question involves successive policies  rather than the concurrent coverages to which the statute applies.  Justice Gableman dissented on the allocation issue, arguing that the policy itself limited coverage to losses occurring during the policy period and required pro rata allocation on a “time on the risk” basis.  He also disagreed with the majority’s conclusion that the duty to defend could not be pro-rated, arguing instead that Plenco had chosen to be self-insured for certain periods and must therefore bear a proportional share of its own defense costs.  He also argued that joint and several liability had no application in these circumstances since there were no other insurers for Liberty Mutual to be jointly liable with or seek contribution from.

Comment:  With this opinion, the Wisconsin Supreme Court gave new hope to policyholders, who had up until then lost a series of significant “all sums” appeals around the country.  At the same time, Wisconsin joined the majority view that individual claimants may not be grouped together as a single “occurrence.”   What is left unstated in the opinion is whether insureds may stack separate policy limits or, as in Keene, are limited to the single “occurrence” limit in the policy year to which each separate “occurrence” is assigned.

Safeco Ins. Co. of America v. White, No. 2009-Ohio-3718 (Ohio August 4, 2009),

The Ohio Supreme Court has ruled that allegations of negligent supervision may trigger coverage even where the actual injuries result from an excluded illegal or intentional act.  The court ruled that exclusions that preclude coverage for injuries that are expected or intended by an insured or that arise out of an insured’s intentional or illegal acts do not preclude coverage for independent theories of negligence, even where they are predicated on the commission of those intentional or illegal acts.

Comment:  This is a disappointing opinion, especially as changes within the composition of the Ohio Supreme Court in recent years had suggested that it might be less aggressively pro-policyholder in its approach to coverage disputes than its opinions in cases such as Vanliner and B.F.Goodrich might have foretold.   The opinion also runs against the trend in most states, wherein courts have declined to find coverage for the parents and supervisors of violent individuals.

Tri-Etch, Inc. v. Cincinnati Ins. Co., 49 SO2-09-01-CV-8 (Ind. July 21, 2009).

The Indiana Supreme Court has ruled that the negligent failure of an alarm company to carry out its contractual responsibilities, leading to the kidnapping and death of a store employee, failed to seek recovery for an “occurrence.”  The court ruled that claims like this that are based on the insured’s negligent performance of commercial or professional services should be covered, if at all, under E&O policies but were not covered by the CGL.  Nor was the fact that the liability action was tried on a tort theory rather than a claim for breach of contract dispositive.   The Court separately ruled that Cincinnati was entitled to assert late notice as a defense to coverage, notwithstanding the fact that it had denied coverage on other grounds, observing that “there is no reason why an insurer should be required to forego a notice merely requirement merely because it has other valid defenses to coverage.”

Comment: A surprising and encouraging opinion, not least because it comes from the court once thought lost to insurers.  As with Kvaerner in Pennsylvania, this opinion sketches out broad rules limiting the scope of liability insurance coverage for disputes that are best left to the contractual dealings between the parties.

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Illinois law makes no express provision for awarding attorney’s fees to prevailing parties. However, Section 155 does allow recovery of such fees in cases where the insurer has acted vexatiously or unreasonably. A recent opinion of the Illinois Appellate Court has broadened this remedy to include insurers who pursue equitable contribution claims on behalf of their insureds.
 

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As we round out review of what happened over the past decade in the insurance coverage world, I agree with Mike’s inventory as it pertains to California.  (If you are interested in year by year summaries of California cases, please respond to this blog or send me an email as we collected those cases.)  I would add one notable case to the decade highlights. There is little appellate authority in the area of "number of occurrences" and thus this decision was very important.

In London Market Insurers v. Truck Insurance Exchange (2007) 146 Cal.App.4th 648, the California appellate court held that the policy language before it and common sense led to the conclusion that all of the asbestos claims were not one occurrence. This case had a significant impact on not only the primary insurers’ obligations in that particular case (because there were no aggregate limits in many of the primary policies), but on many pending asbestos coverage cases.

All decade long people pondered what would be the next asbestos, when it turns out that asbestos is the next asbestos. . .  Asbestos claims continue to cost companies and insurers millions, . . . make that billions of dollars, and the litigation is not only in the defense of the claims, but in the coverage litigation as insurers and insureds sort out who owes what to whom.

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2008:  The Year of The Rat

New Nasty Claim Threat:                 Swine Flu

Athletic Achievement:                      Michael Phelps

Furthest Fall from Grace:                 Eliot Spitzer

Coolest New Gadget:                        Kindle

Hottest Coverage Issue:                   Concurrent Causation

The Eight Most Important Insurance Coverage Rulings of 2008

Acuity v. Bagadia, 750 N.W.2d 817 (Wis. 2008)

The Wisconsin Supreme Court ruled in this case that allegations that a software company infringed the copyrights and trademarks of Symantec by marketing and distributing knock-off copies of Symantec’s security software through advertisements that featured the copyrights and trademarks of Symantec triggered Coverage B.  The court ruled that the copyright claims were clearly covered but that trademark infringement was also covered as involving the infringement of a “title.”  The court ruled that various dictionaries defined both “title” and “trademark” as involving distinctive marks or descriptions.  Furthermore, the court found that this infringement had occurred in the course of the insured’s advertising.  The court observed that as “advertising” was susceptible to both a broad and narrow interpretation, it would be deemed to be ambiguous and should be construed in favor of coverage.  The court found that the insured’s activity in accepting sample orders from existing customers and then sending those customers samples in unmarked sleeves comports with the broad definition of advertising that it had adopted as involving a “solicitation of business.”  Finally, despite the fact that the insured had earlier settled similar claims against Continental Casualty for a payment of $165,964, the court refused to order that Acuity receive an off-set for this payment due to factual questions with respect to what CNA had paid for and why.

Comment:  With this case, the Wisconsin Supreme Court undid years of favorable Seventh Circuit jurisprudence and did for Coverage B what it had been doing to Coverage A in the years since American Girl.  As with the “W” states in general, the Wisconsin Supreme Court seems to relish the opportunity to pioneer new territory for which it can claim coverage.

 Bi-Economy Market v. Harleysville Ins. Co. of NY, 10 N.Y.3d 387, 886 N.E.2d 127 (2008).
Panasia Estates v. Hudson Ins. Co., 10 N.Y.3d 200, 886 N.E.2d 135 (2008)

In these cases, the Court of Appeals ruled for the first time that a policyholder may recover consequential damages against property insurers if the insured shows that the damages were foreseeable and contemplated by the parties at the time of contracting.  the court ruled that lower courts had erred in dismissing a property owner’s claim that the failure to his business resulted from the insurer’s bad faith refusal to pay a fire loss, holding that such damages were reasonably foreseeable and contemplated by the parties.  Likewise, in, the court ruled that the contractual exclusion for consequential losses did not preclude such awards. Three dissenting judges accused the majority of allowing a backdoor claim for punitive damages without the requisite proof of egregious conduct that the court has required since Rocanova.   Further, the dissent argued that the whole idea of consequential damages had no place in contractual dispute over a duty to pay.

Comment:  These cases were an eye-opener.  After years of dormancy, consequential damages are now a prominent feature of insurance jurisprudence in New York.  As the dissenters point out, however, there is some irony in this given the general reluctance of New York courts to award punitive damages in most cases.  Now, policyholders have an alternative means of recovery even in the absence of bad faith.

Continental Cas. Co. v. Employers Ins. of Wausau, 2008 N.Y. slip op. 10227 (N.Y. App. December 30, 2008)

The Appellate Division has ruled that a trial court erred in holding that Continental Casualty had a potentially unlimited indemnity exposure for claims against a now insolvent company that installed products containing asbestos at Consolidated Edison facilities prior to 1972.  The First Department held that the insured not only had been guilty of laches in its failure to pursue claims for coverage against CNA on a non-products theory but that its failure had equal effect against third party claimants who stood in the shoes of Keasbey.  Furthermore, the Appellate Division ruled that the trial court had erred in finding that CNA had failed to establish that all of the underlying claims against Keasbey fell within the “products/completed operations hazard” and were therefore subject to aggregate limits in the policies.  The court took note of the fact that all of these suits were originally pleaded as products claims based upon an alleged failure to warn of the hazards of asbestos.  The court distinguished the Court of Appeals’ opinion in Frontier Insulation as involving the duty to defend whereas these claims solely pertained to Continental Casualty’s claimed indemnity duties.  The Appellate Division also emphasized the fact that mere exposure to asbestos fibers was not itself an injury and that given the length of time that it took for asbestos-related diseases to develop, said injuries plainly occurred after any installation operations conducted by Keasbey occurred.  The court emphasized that an “injury in fact” trigger is not the same as an “exposure” trigger and there was no evidence that any of the underlying claimants suffered an injury in fact at the time of any ongoing operations conducted by Keasbey.

Corn Plus Cooperative v. Continental Cas. Co., 516 F.3d 674 (8th Cir. 2008)

The Eighth Circuit has ruled in this Minnesota case that a consent judgment that did not allocate between covered and non-covered damages was invalid.  Having found that a portion of the underlying loss (which concerned lost ethanol production caused by defective welding that contaminated the plaintiff’s corn mash) was subject to various “business risk” exclusions, the court ruled that the failure of the Miller-Shugart agreement to allocate between covered and non-covered damages made it impractical for the court to determine whether it was reasonable or not and therefore rendered the agreement unenforceable as a matter of law.  The court also rejected the plaintiff’s argument that it should be allowed to revive its claims against the insured, holding that the plaintiff had waived this right as the agreement stipulated that the release of the plaintiff’s claims was unaffected by the lack of enforceability of other parts of the agreement.

Comment:  Minnesota, Arizona and Missouri have long been the epicenter of consent judgment disputes.  With this opinion, the Eighth Circuit pioneered a new tool by which insurers might challenge the efficacy of such agreements in jurisdictions that recognize an insurer’s right to allocate losses between covered and non-covered claims.

Don’s Building Supply v. OneBeacon Ins. Co., 267 S.W.2d 20 (Tex. 2008)

In this case, the Texas Supreme Court adopted an “injury in fact” trigger for construction defect cases, declaring that allegations of ongoing property damage as the result of the insured’s negligent installation of EIFS in the plaintiffs’ homes triggered coverage throughout the period that water intrusion allegedly occurred.  A mere six months after oral argument (possibly a record for a court that lately has taken over two years to resolve coverage appeals), a unanimous court declared that despite the fact that numerous lower Texas courts had adopted a manifestation approach to such claims over the years, such a theory was not reflected in the actual wording of the policy.  The court observed that “the policy in straightforward wording provides coverage if the property damage “occurs during the policy period,” and further provides that property damage means “[p]hysical injury to tangible property.” Whatever practical advantages a manifestation rule would offer to the insured or the insurer, the controlling policy language does not provide that the insurer’s duty is triggered only when the injury manifests itself during the policy term, or that coverage is limited to claims where the damage was discovered or discoverable during the policy period.”

Comment:  Prior to Don’s Building, Texas “trigger” case law was a complete mess, with state and federal courts disputing whether “manifestation” or “exposure” triggers should apply and other courts distinguishing between BI and PD claims.  Since it’s issuance, Don’s Building has been given broad scope by the Court of Appeals.  See Union Ins. Co. v. Don’s Building Supply, No. 05-06-00884-CV (Tex. App. September 23, 2008)(insurer held to owe duty to defend even though the homeowners in question had not purchased the property until 2003, five years after the policies in question had expired) and Thos. S. Byrne, Ltd. v. Trinity Universal Ins. Co., 2008 WL 5095161 (Tex.App. December 4, 2008)(water intrusion could have begun from the date of the insured’s contractors work first work at the property).

Mutual of Enumclaw Ins. Co. v. T&G Construction, Inc., 2008 WL 4670256 (Wash. October 23, 2008)

In this en banc opinion, the Washington Supreme Court ruled that a liability insurer that defended its policyholder under a reservation of rights but declined at the conclusion of a mediation session to pay for the settlement of construction defect claims could not now contest the reasonableness of the settlement.  Although the court’s prior ruling in Besel had declared that an insured’s good faith settlement establishes the insured’s presumptive damages if  an insurer declines in bad faith to participate in the liability suit, the Supreme Court has now ruled that the same rule applies even in the absence of bad faith.  In so ruling, the Supreme Court reversed a holding of the Court of Appeals that the insurer should have been free to contest its policyholder’s liability since issues of liability had not been finally resolved.  Instead, the Supreme Court ruled that although the insurer was correct that the insured’s affirmative defense of the statute of limitations had not been litigated to “absolute finality,” it had been “substantially resolved” to the point that the settlement was binding on the insurer absent a showing of collusion or fraud.  The court declared that although “an insurer is entitled to a final determination on coverage questions…if a coverage question turns on the very same facts that are in dispute in the underlying litigation between its insured and the claimants, the insurer will be bound by the factual findings of a good faith settlement, which is judicially approved as reasonable.”

Comment:  Issues relating to consent judgment plagued insurers throughout this decade.  With this opinion, the Washington Supreme Court thrust itself to the forefront of jurisdictions that impose an all but impossible burden of proof on insurers that wish to contest the reasonableness of settlements that insureds enter into over their objections even where, as in this case, the insurer is defending under a reservation of rights and has not acted in bad faith in disputing is claimed indemnity obligations.

Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr.3d 770, 161 Cal. App.4^th 184 (4^th Dist. 2008), review denied (Cal. 2008).

The California Court of Appeal ruled that a policyholder could not force its excess D&O carrier to pay the “excess” amount of a class action settlement where the insured had compromised its claim against the primary insurer for less than the full $20 million primary limits.  Despite the insured’s agreement to itself make up the difference between the primary limit and the amount that it had received in settlement, the Fourth District held that the language in question unambiguously stated that the excess carrier’s obligation should only arise after the primary insurer had paid the limits of his coverage or after the insured had been held liable to pay the full amount of the underlying limits of liability.  The court ruled that the phrase “had paid the full amount of limits of liability” could only reasonably be interpreted as meaning the actual payment of no less than $20 million, particularly when considered in the overall context of the policy in which it was included.  Further, the court ruled that language required that the insured “had been liable to pay the full amount of the underlying limit of liability” was not susceptible of contrary meanings and could only reasonably be understood as requiring coverage where a court order or judgment had entered declaring the insured’s liability to pay more than the underlying limits.

Comment:  We have included relatively few intermediate appellate opinions in this survey.  Qualcomm warrants inclusion, however, because it was the rare instance in which an appellate court at any level given strict effect to the underlying exhaustion provisions in an umbrella policy.  Although the ruling may be unique to the particularly London wordings that were at issue here, the case had a profound impact on the manner in which policyholders thereafter settled multi-layered claims in California, particularly in the D&O arena.

Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008)

The Georgia Supreme Court ruled in this case that an absolute pollution exclusion precludes coverage for carbon monoxide poisoning claims against a landlord.  The court declared that carbon monoxide is clearly a toxic fume within the exclusion’s definition of a “pollutant.”  The court held that dissenting judges in the Court of Appeals who had attempted to limit the scope of the exclusion based upon its perceived purpose had improperly looked outside the actual wording of the exclusion to find ambiguity.  Two justices argued in dissent that words in an insurance policy should not be given a literal meaning that would lead to absurd results.

Comment:  Earlier in the decade, several major states (California, Illinois, Massachusetts, New York, etc.) had used indoor fumes cases to adopt an extremely constricted view of absolute pollution exclusions that presumed that the origin of such exclusions impliedly required that their scope be limited to “environmental” claims.  By the end of the decade, however, decisions such as Reed and the 2007 opinion of the Iowa Supreme Court in Bituminous Cas. v. Sand Livestock Systems had restored some balance to the rules that courts were applying.  In the interim, however, ISO had promulgated very different endorsement and exclusionary wordings that restored coverage for BI claims due to malfunctioning heating systems.

Sony Computer Entertainment America, Inc. v. American
Home Assurance Co., 532 F.3d  1007 (9^th Cir. 2008),

The Ninth Circuit ruled in this California case that class actions brought against Sony for claimed defects in its Play Station II did not trigger CGL or Media E&O policies. The court rejected Sony’s contention that the AISLIC Media E&O policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations.  The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc.  The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement and that a more limited definition of the term consistent with the case law and the policy context would be to only afford coverage for the publication of material that leads the reader to commit a harmful act.  As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Play Station II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.”  The court took note of the fact that although the plaintiffs alleged that these disks had not properly played on the Play Station II, there was no suggestion that they did not function properly on other devices.  In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury.  The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Play Stations.  Rather, the court found that these allegations suggested that the devices deteriorated over time.  Writing in dissent, Judge By bee argued that the majority had given an unduly narrow construction to Aisle’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

Comment:  Sony reflects the confluence of several interesting factors:  the modern ferment on intellectual property disputes, California’s principles of policy interpretation and the emergence of media E&O policies as an alternative target for policyholder IP claims.  

Unauthorized Practice of Law Committee v. American Home Assur. Co., 261 S.W.3d 24 (Tex. 2008)

Nearly three years after agreeing to hear this case, the Texas Supreme Court ruled that liability insurance companies may rely upon staff counsel to undertake the defense of their policyholders so long as the interests of the parties are congruent and so long as staff counsel fully discloses his employment relationship to the insured.  In a lengthy opinion that reviewed the evolution of legislative control over the practice of law in Texas and the evolving role of insurer use of staff counsel in Texas and elsewhere, the court rejected the Committee’s argument that American Home and Travelers were acting as corporations engaged in the practice of law when they employed staff attorneys to provide legal services to third-party policyholders.  Just as a corporation could use in-house attorneys to represent its own interests, the Supreme Court held that a liability insurer was not prohibited from using such attorneys to represent its policyholders so long as they shared a mutual interest in the outcome of the case.  While giving credence to the Committee’s argument that even absent an actual conflict of interest, the profit motivation of insurers to reduce legal expense created a situation where the relationship was “fraught with the potential for a conflict,” the majority observed that the Committee had not presented any empirical evidence of injury to a private or public interest caused by a staff attorney’s representation of an insured.  Given that insurers have used staff counsel for decades, the Supreme Court found this lack of evidence telling.  In an interesting aside, the court noted that even though actual conflicts of interest might result from coverage disputes, a reservation of rights letter ordinarily does not, by itself, create a conflict between the insured and the insurer as it merely recognizes the possibility that such a conflict may arise in the future.  The court therefore declined to hold that staff attorneys should never represent insureds in cases where the insurer is defending under a routine reservation of rights although it suggested that this might be the safer course.  The court also noted that private and staff counsel were subject to the same ethical obligations and problems as regards the acquisition of confidential information or obligations to provide objective settlement evaluations that might thereby subject the insurer to Stowers liability for failing to settle within policy limits.  The Supreme Court observed that it saw no reason why staff counsel would be less respectful of these obligations than private counsel.  The court also declined to accept the Committee’s declaration that insureds’ defense counsel represents only the insured and that, as a result, staff attorneys, who necessarily represent the insurer, cannot defend insureds without violating this rule.  The Supreme Court observed that, “We have never held that an insured’s defense lawyer cannot represent both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer.”  In conclusion, the majority found that although the use of staff attorney comes with risks owing to the possibility of conflicts, there are a great many cases where the interests of the parties are congruent and where an insurer may use staff attorneys without conflict and to the mutual benefit of it and its policyholder.  As a result, it concluded that the use of staff attorneys in such cases does not constitute the unauthorized practice of law.  Writing in dissent, Justices Johnson and Green argued that liability insurers were acting in the unauthorized practice of law by managing court proceedings on behalf of third parties when the used staff counsel.  As a result, the dissenters argued that because acts of staff attorneys are acts of the insurers, when staff attorneys defend insureds in lawsuits, the insurer violates the State Bar Act.

Comment:  Like the Battle of New Orleans, the insurers’ win in the Texas Supreme Court was the decisive victory in a war that had largely run its course even before the news of the battle was announced.  By 2008, insurers and insurance defense lawyers had reached an uneasy truce in the tripartite wars that had begun a decade earlier.   During this period, the role and scope of staff counsel’s role changed dramatically.  By the end of the decade, only North Carolina and Tennessee continued to prohibit insurers from using staff counsel to defend their insureds.

 

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2007:  The Year of The Pig

New Nasty Claim Threat:                 Contingent Commissions    

Athletic Achievement:                      Tiger Woods

Furthest Fall from Grace:                 Dickie Scruggs          

Coolest New Gadget:                        Streaming Video

Hottest Coverage Issue:                   “Occurrence”

The 7 Most Important Coverage Rulings of 2007

Cinergy Corp. v. St. Paul Surplus Lines Ins. Co., 865 N.E.2d 571 (Ind. 2007). 

In this case, the Indiana Supreme Court held that a liability insurer has no obligation to pay for the cost of implementing new technology to prevent future environmental harm.  In holding that AEGIS did not owe coverage for a lawsuit in which the federal government sought to compel Duke Energy and other utilities to comply with the federal Clean Air Act and implement new clean air technologies to prevent widespread harm to public health and the environment, the Supreme Court agreed with other jurisdictions that a distinction should be drawn between remedial and prophylactic remedies and that coverage was not required here where the federal lawsuit was directed at preventing future harm to the public not obtaining control, mitigation or compensation for past or existing environmentally hazardous emissions.  The court ruled that the policy’s requirement that injury be “caused by an accident” precluded coverage for cases such as this where the complaint sought to prevent an occurrence from happening. 

Comment:  Notwithstanding broad language in its 2001 opinion in Hartford v. Dana that damages covered under a general liability policy might include costs “to prevent further releases of hazardous substances,” the Indiana Supreme Court ruled in Cinergy that coverage only extends to existing harm and does not insure against costs that a policyholder must undertake to prevent future injuries.  The opinion has since been widely cited by insurers as proof against claims that they should be liable for the cost of limiting greenhouse gas emissions that are claimed to contribute to global warming.

Donegal Mut. Ins. v. Baumhammers, 938 A.2d 286 (Pa. 2007).

After the Pennsylvania Superior Court ruled 5-3 that a shooting spree in which the insured’s son fatally shot five people and wounding another involved six separate “occurrences, a nearly equally divided Supreme Court tilted the opposite way, ruling that the claims involved a single ‘occurrence.”  ), the Supreme Court held that the appropriate focus of a “cause” analysis was on the act of the insured that gave rise to his or her liability rather than the “immediate injury-producing act.”  The court held that, “Determining the number of occurrences by looking to the underlying negligence of the insured recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured.  Since the policy was intended to insure [policyholders] for their liabilities, the occurrence should be an event over which [policyholders] had some control.”  Justice Baldwin’s opinion was joined by Justices Castille, Saylor and Eakin.  Justices Cappy and Baer filed separate concurrences joining the majority’s analysis with respect to whether the underlying claims alleged an “accident” but dissenting with respect to the analysis of the “occurrences” issue.  Chief Justice Cappy argued that the majority had been inconsistent in finding that the definition of “occurrence” focused on the violent acts of Richard Baumhammers in shooting his victims whereas its analysis of “occurrences” had focused on the negligent acts of the parents and that the majority should have adopted the “cause” approach proposed by the Florida Supreme Court in Koikos v. Travelers Ins. Co., 849 So.2d 263 (Fla. 2003) wherein “cause” was the immediate act causing bodily injury.  Justice Baer took a somewhat different approach arguing that the number of occurrences should be determined not based on the negligent acts of the insured or the events directly causing each individual’s injury or death. 

Comment:  A depressing number of appellate rulings in this decade addressed serial crimes.  With this ruling, the Pennsylvania Supreme Court, despite its deep divisions, took a relatively pragmatic approach, finding coverage for the innocent defendants whose conduct may have contributed to the perpetrator’s violence while reining in the nearly unlimited amounts of coverage that other courts had allowed in such cases.

In Re: Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)

Rejecting a District Court’s distinction between floods that result from natural and manmade causes, the Fifth Circuit has held that property policies do not cover Katrina claims.  Mere weeks after hearing oral argument, the panel ruled that the policies’ flood exclusions were not ambiguous, nor should ambiguity be inferred merely because they could have been worded more explicitly to make their intent clearer as was the case with similar water damage exclusions. Further, the court held that numerous dictionary definitions failed to apply the distinction that the District Court had relied on and, indeed, in certain cases had included the inundation of land from burst levies as an example of a “flood.”  Nor was the court persuaded that other terms in these exclusions implied an intent on the part of underwriters to limit the scope of the exclusion to natural events.  The court declined to reach the issue of whether anti-concurrent causation language applied here, declaring that the efficient proximate cause doctrine would only arise in cases where there were two distinct perils, one covered and one excluded, that resulted in a loss whereas here the plaintiffs’ loss was solely attributable to a flood.  The court declared that negligent design, construction or maintenance of the levies may have contributed to the plaintiffs’ losses but was only one factor in bringing about the flood; “the peril of negligence did not act, apart from flood, to bring about damage to the insureds’ property.”  For similar reasons, the court precluded any argument on the part of the policyholders that sought to recharacterize their flood damage as actually resulting from negligent design, holding that the flood exclusions were meant to apply regardless of what other factors contributed to the development of the flood.

Comment:   Hurricane Katrina brought on a flood of coverage litigation against property insurers along the Gulf Coast in Louisiana and Mississippi, along with a political firestorm orchestrated by Dickie Scruggs and his political allies in Mississippi.  Central to many of these disputes was the debate over whether the plaintiffs’ homes were damaged by wind (covered) or water (not) and the efficacy of anti-concurrent causation language that insurers contended barred coverage where covered causes of loss contributed to damage resulting from excluded causes.  This crucial Fifth Circuit opinion proved to be a tipping point in this struggle.   Despite vast amounts of unfavorable publicity and the formidable political forces arrayed against State Farm and other insurers, state and federal appellate courts did a remarkably rational job throughout in giving effect to plain policy wordings.  

Lamar Homes Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)

A year and a half after hearing oral argument, a bitterly divided Texas Supreme Court has ruled that construction defect claims can be an “occurrence.”  In keeping with recent opinions from states such as Wisconsin, the majority declared that whether faulty workmanship claims are covered should be a function of policy exclusions, not insuring agreement elements such as “occurrence” or “property damage.” The court further refused to find that the “economic loss” doctrine precluded coverage.  The Texas Supreme Court took note of the fact that certain policy exclusions, notably Exclusion J(6) were clearly directed to the consequences of faulty workmanship causing property damage and preclude coverage for such claims except in circumstances where they result from the work of a subcontractor.  The Texas Supreme Court ruled that, “The proper inquiry is whether an occurrence has caused property damage, not whether the ultimate remedy of that claim was in contract or tort.”  Three dissenting judges took issue with this conclusion, arguing that “selling damaged property is not the same as damaging property,” and arguing instead that the economic loss doctrine should preclude any coverage for such claims.  Three dissenting justices argued that claims for breach of contract due to faulty workmanship are a mere “economic loss” and thus not covered.

Comment:  Lamar Homes concluded the coverage cycle that began with cases such as Vandenberg in California and American Girl in Wisconsin.  It also came during a period when an extraordinary number of major appeals and certified questions were pending before the Texas Supreme Court.  When the logjam finally broke in 2007-2008, insurers learned to rue the day that they had complained about how long it was taking the Supreme Court to answer these questions.

Philip Morris, USA v. Williams, 549 U.S. 346 (2007)

Returning to the issue of the constitutionality of punitive damage awards only four years after its landmark opinion in State Farm v. Campbell,  a narrowly divided court ruled 5-4 that awards based on a jury's desire to punish a defendant for harming those who are not parties to the lawsuit amounted to a taking of property from the defendant in violation of the defendant’s constitutional due process rights.  The court therefore set aside a $97 million punitive damages award that had been upheld by the Oregon Supreme Court. Justices Stevens, Ginsberg, Scalia and Thomas issued three separate dissents arguing that the court should not impose limits on the right of the courts to impose damages in such cases.

Comment:  In Williams, the U.S. Supreme Court  made explicit what it had previously suggested in State Farm v. Campbell, namely that juries may not punish civil defendants for injury to parties who are not parties to the litigation.  Although widely-hailed at the time, the court’s opinion proved to be of little benefit to Philip Morris.  On remand, the Oregon Supreme Court reinstated the $97 million award on the basis of a state law jury instruction.  Although the U.S. Supreme Court took the unusual step of accepting the case again in 2008, it dismissed the petitioner’s cert claim following oral argument, apparently due to frustration at the confusing factual record.  Williams does, however, signal a shift in punitive damages jurisprudence from disputes over ratios to a renewed focus on jury instructions.

Wilson v. 21st Century Ins. Co., 42 Cal.4^th 713, 723-24 (2007)

Despite an auto insurer’s contention that it was insulated against any claim that it could not have acted in bad faith when it denied the insured’s UIM claim, as there was a genuine dispute with respect to whether the plaintiff’s spinal injuries had been caused by the accident or were the result of a pre-existing condition, the California Supreme Court ruled 5-2 that the trial court had not erred in refusing summary judgment to the insurer, as the insured had established triable issues of fact with respect to whether the insurer had undertaken an adequate investigation, particularly as it appears that the denial was not supported by the medical evidence.  The court ruled that the “genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim” and that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.  By contrast, the court declared that a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances.  Writing in dissent, Justices Chin and Baxter argued that the insurer’s denial was reasonable in light of x-rays that were taken immediately after the accident showing no fracture or degenerative change as well as the fact that the plaintiff thereafter went on an extended backpacking trip in Europe.

Comment:  With this opinion, the California Supreme Court made clear just how thin a defense to bad faith claims the “genuine dispute” doctrine could be.  Wilson is the culmination of a trend that started at the beginning of the decade, when the Ninth Circuit ruled 2-1 in Guebara v. Allstate Ins. Co., 237 F.3d 987 (9^th Cir. 2001), that expert testimony did not automatically insulate an insurer from bad faith claims based on biased investigations, but could, as in this case, create a genuine issue of coverage sufficient to preclude a finding of bad faith.  Following Guebara, several California courts have refused to grant summary judgment to insurers in bad faith cases based on the insurer’s inadequate investigation of the insured’s claim.  See Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1072 (2007) and Chateau Chamberay Homeowner’s Assn. v. Associated International Ins. Co., 90 Cal. App.4th 335 (2001). 

Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007)

In what may well be a low point (and one of the most gruesome fact patterns) in Washington insurance jurisprudence, the state Supreme Court has ruled that a lower court erred in refusing to find GL and E&O coverage for emotional distress claims by a dentist’s employee after a bizarre practical joke in which the insured posed the plaintiff with boar’s tusks in her mouth while under anesthesia and took photos of her.  Whereas the Court of Appeals had declared that no reasonable patient would construe such misconduct as involving the rendering of professional dentistry services, the Supreme Court held that E&O coverage applies as the act occurred in the course of preparing the patient for surgery and was “integrated into and inseparable from the overall procedure” and that the insertion of the boar tusk “flipper,” however oddly shaped, conceivably fell within the policy’s broad definition of the practice of dentistry.  The Supreme Court observed that an obligation to defend existed if the law was in doubt, observing that Fireman’s Fund’s decision not to defend was based upon an outside opinion from counsel that was somewhat equivocal.  The Supreme Court also held that the dentist could obtain coverage through his general liability policy, despite the fact that the plaintiff only alleged emotional distress, in light of allegations of depression, panic attacks, nightmares and suicidal impulses.  Further, the court found that the practical joke, despite its intentional nature, was a covered “fortuitous circumstance, event or happening” since the policy required not only that the act be intended but the resulting injuries also be expected or intended by the insured.  In this case, the court found that although the dentist’s conduct was intentional, it was conceivable that he had not intended his conduct to result in the plaintiff’s injuries.  Four justices dissented, arguing that the claims clearly involved intentional conduct none of which involved professional services and that no reasonable person would have understood that such claims would be covered.  The Supreme Court did rule, however, that Fireman’s Fund had no obligation to provide EPL coverage.

Comment:  The Washington Supreme Court is something of a puzzle palace.  Its opinions are often deeply divided, regularly generating more dissents and concurring opinions than any other appellate court in the country.  Even so, a majority of the court seemed determined to stake out the broadest territory that it could in compelling coverage for an incredibly dubious claim.

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