When Non-existent Allegations Trigger Coverage, The Carrier Is In Trouble
The "Eight Corners Rule" has become so ridiculous in its application that now plaintiff lawyers actually have a huge financial disincentive to plead their claims against the insured defendant with any degree of factual specificity lest the true allegations become an impediment to collecting insurance money from the defendant's liability insurer. Today in many states, the more ambiguous the petition, the better the coverage arguments. A recent example of just how preposterous things are getting recently came from New Orleans when the Fifth Circuit decided Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 2008 WL 2955568 (5th Cir. August 4, 2008). In this decision, the Fifth Circuit reversed summary judgment for the carrier and remanded the case finding a duty to defend in an arbitration action. How they did so illustrates the unfortunate state of the "Eight Corners Rule" in many jurisdictions.
In this case, Gore entered into an agreement with Orient to perform work on a Boeing 737 Business Jet. Gore alleged it subcontracted the installation and engineering of an in-flight entertainment/cabin management system to BaySys which, in turn, subcontracted the work to AeroTask.
Hartford issued a commercial general liability policy to BaySys which named Gore as an additional insured. Orient sued Gore and AeroTask, but NOT BaySys, and the case went to arbitration. In Orient’s first amended statement of the claim, the paragraph defining Gore stated: “At all times, AeroTask and BaySys were agents, partner[s], joint venturer[s], or otherwise acting on behalf of Gore, and their actions can be imputed to Gore.” The Statement of Claim described the allegedly negligent conduct: “In addition to improperly joining the AC and DC electrical systems, Defendants failed to properly supervise and inspect the work performed on the Aircraft’s electrical system.” It was otherwise silent as to BaySys
Gore tendered defense of the arbitration action to Hartford and Hartford declined to defend, alleging the Statement of Claim did not set forth a claim within coverage. Gore then filed a declaratory judgment action and Hartford moved for summary judgment. The federal district court granted Hartford’s summary judgment and this appeal followed.
While “not a model of clarity,” the court noted the Statement of Claim mentioned BaySys, contended that BaySys was Gore’s agent and sought to hold Gore responsible for its alleged negligence in hiring the wrong people for the job. Under the policy, Gore was only an additional insured with respect to BaySys’ “operations” or “work.” The problem was the arbitration Statement was totally silent as to any aspect of BaySys' work or operations. The negligence allegations were directed to "Defendants," but Gore was not a defendant. After discussing the current state of insurance law related to the Eight Corner’s Rule, the Fifth Circuit applied its interpretation of the law finding Hartford had a duty to defend.
The court also evaluated three separate exclusions 1) “Care, Custody or Control,” 2) “Your Work,” and 3) “Professional Services” to determine Hartford’s obligation for providing a defense in the underlying lawsuit. The court concluded no exclusion applied and, thus, Hartford owed a duty to defend Gore. The Fifth Circuit also reversed the district court’s rendition of judgment in favor of Hartford on the statutory bad faith claims.
There are numerous questions raised by this opinion starting with the questionable application of the Eight Corners Rule to an arbitration "statement." The bigger problems arise from the apparent application of the "Potentiality Test" which most judges seem to read into the Eight Corners Rule. Under this component, if there is some potential for coverage in an otherwise ambiguous (or even silent) pleading, then coverage exists. That is what this court did and it resulted in an additional insured who didn't pay a penny for coverage getting coverage when the coverage trigger -- the insured's work or operations -- was never made a part of the underlying case. To add insult to injury, the Fifth Circuit also reversed the carrier's bad faith summary judgment forcing it to return to district court to defend why its denial of a totally ambiguous arbitration statement lacking any specific allegation to trigger coverage wasn't bad faith. The policyholder lawyers have to be laughing all the way to the bank.
