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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.