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

In Terminal Freezers Inc. v. U.S. Fire Ins., 2009 U.S. App. LEXIS 20321, an unpublished opinion issued on September 11, 2009, the Ninth Circuit Court of Appeals employed Washington law to examine the meaning of the undefined term “ice” as used in an “all risk” property insurance policy. In Terminal Freezers, the plaintiff, who runs a cold storage facility, made a claim for loss under three commercial “all risk” property insurance policies issued by U.S. Fire when areas of the facility were damaged by ice. U.S. Fire denied the claim. See Terminal Freezers, Inc. v. U.S. Fire Ins., 2008 U.S. Dist. LEXIS 48280 (W.D. Wash. June 23, 2008). Terminal Freezers’ claim involved two freezer warehouses, and the parties agreed that their construction was deficient in several respects, including that vapor retarders were not properly installed and caused excessive ice formation. Id. The district court granted U.S. Fire’s summary judgment motion brought on the grounds that the policy’s faulty workmanship exclusion precluded coverage, and that there is no coverage for damage caused by ice. Id.

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In Marsh v. American Family Mut. Ins. Co., ___ Or. App. ___, (2009), an opinion issued on October 14, 2009, the Oregon Court of Appeals reversed the judgment of the trial court and held that damage caused by water leaking from a shower was not covered under the terms of the particular homeowners’ policy.

The insurer appealed a judgment for its insureds asserting that the homeowners’ policy did not provide any coverage for the insureds’ claim. The insureds cross-appealed, assigning error to the trial court’s limitation of their recovery to $5,000.

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A new federal district court opinion in Massachusetts has taken a curious twist on conventional rules governing the duty to defend. Massachusetts, like most states, imposes a duty to defend where the underlying claims present a “potential” for coverage whether or not the actual facts in evidence at trial would sustain the allegations presented in the complaint. In Whittaker Corp. v. American Nuclear Insurers, however, U.S. District Court Judge Richard Stearns declared that a duty to defend may arise base upon the “potential for coverage” in a case where there was a dispute between the parties as to whether the policy contained an exclusion that would clearly have precluded any defense duty.
 

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When an insurer contemplates the pros and cons of filing a declaratory relief action to determine a coverage issue, one important factor is whether the action is likely to be stayed until conclusion of the underlying dispute against the insured.  In California, coverage actions are stayed to avoid having facts that impact both coverage and the insured’s liability in the underlying action decided (or even the subject of discovery) in the coverage lawsuit if this would prejudice the insured’s defense of the underlying lawsuit. See Haskel, Inc. v. Sup. Ct. (1995) 33 Cal.App.4th 963, 980; Montrose Chem. Corp. v. Sup. Ct. (1993) 6 Cal.4th 287, 302.

In Great American v. Sup. Ct. (Angeles Chem. Co.) ___ Cal.App.4th __ (2009 WL 3234636), California’s appellate court  (Second District – Los Angeles/Crosky) reviewed the issue of overlapping facts.  However, after doing so (and finding the coverage action could proceed because it raised contract interpretation issues and not factual issues pertinent to the underlying lawsuit), the court still remanded the case to the trial court to “balance the possible prejudice to the parties by the grant or denial of the insured’s motion to stay.”  This may pose a nearly impossible situation for an insurer if no other insurer is defending the lawsuit.  However, CGIS Insurance Services, Inc. v. Sup. Ct. (2008) 168 Cal.App.4th 1493 (also written by Justice Crosky) should also be considered, in which the court found a stay inappropriate where the question presented was a strictly legal issue.
 

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