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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.