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

Depending on your point of view (and appetite for risk), nanotechnology is the plastics of the 21st Century or the second coming of asbestos.

Uncertainty concerning the future role of nanotechnology in industry as well as the potential health and toxicological risks that it presents has created a quandary for insurers. On the one hand, pharmaceutical manufacturers and other insureds that are likely to apply nano technologies in the future will want to assure themselves of the availability of coverage for product liability claims and related exposures that may result from the use and application of nano technologies. On the other hand, the appeal of marketing a coverage applicable to this risk is substantially off-set by the horrific exposure that insurers have suffered over the last several decades due to the unexpected liabilities arising from environmental and mass tort exposures such as silica and asbestos.

In 2008, ISO promulgated a Nanotubes and Nanotechnology Endorsement Exclusion (Form CW 33 69 06 08). The exclusion bars coverage for bodily injury and property damage or personal and advertising injury “related to the actual, alleged or threatened presence of or exposure to ‘nanotubes’ or ‘nanotechnology’ in any form or to harmful substances emanating from ‘nanotubes’ or ‘nanotechnology.’” “Nanotubes” is defined as meaning “hollow cylinders of carbon atoms or carbon fibers or any time or form of ‘nanotechnology’ which contain remarkable strength and electrical properties used in any products, goods or material.” “Nanotechnology” is defined as meaning “engineering at a molecular or atomic level.”

As it its wont, the former AIG is going in the opposite direction and is now marketing an insurance product specifically designed to cover nanotech exposures. In a press release issued this week, Lexington Insurance, a Chartis company, announced that is introducing LexNanoShieldSM, which Lexington described as “an integrated insurance product and array of risk management services designed for firms whose principal business is manufacturing nanoparticles or nanomaterials, or using them in their processes.”

The policy includes various “claims made” coverages, including general liability, product liability, product pollution legal liability and product recall liability exposures. Additionally, first party coverage is provided if a product containing nanoparticles or nanomaterials is recalled from the market for safety reasons. Lexington also claims that LexNanoShield provides insureds with legal, technical and loss control consulting services to help develop, implement and assess nanotechnology-specific risk management programs.

Lexington and Chartis have often taken the lead in the past in writing new and uncertain risks. It will be interesting to see if other insurers follow Lexington’s lead or continue on the path of distancing themselves from nanotech until its risks and benefits are better known.
 

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In Averill v. Farmers Ins. Co. of Washington, 2010 Wash. App. LEXIS 554 (March 15, 2010), the Court of Appeals in a published decision carved out a significant exception to Washington’s “made whole” doctrine, ruling that an insurer seeking subrogation from another insurer need not make its at-fault insured “whole.” In the process, it criticized the Insurance Commissioner’s Office for changing an existing regulation to now require that an insurer pursuing its own subrogation interests fully reimburse its insured for its deductible from the insurer’s recovery, finding that this rule change an improper application of the “made whole” doctrine and wrong as a matter of law.

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“Cumis” – California’s rule on the right to independent counsel (codified at Civil Code Section 2860) – continues to raise issues requiring courts to more clearly define, among other aspects:

• under what circumstances does the right to independent counsel arise?
• when is there is an actual “conflict” for defense counsel retained by the insurer?
• can the right to independent counsel arise due to the insurer’s failure to defend immediately (rather than any conflict in that defense)?
• what reporting is required from independent counsel?
• when should an insurer retain defense counsel in addition to paying for the insured’s independent counsel?
• what issues can be arbitrated under Section 2860 along with the dispute over “usual” rates?

In Intergulf Dev. v. Superior Ct., __ Cal.App.4th __ (2010), California’s appellate court for the Fourth Appellate District (San Diego County) held the parties had to first litigate issues of breach of contract and bad faith prior to arbitrating the issue of independent counsel’s rates. The insurer agreed to defend an Additional Insured under its policies in a lawsuit arising out of defects on a construction project. However, the insurer did not respond to the question of whether it would agree that the additional insured had a right to independent counsel. The insurer was sued for breach of contract and bad faith. In the course of that lawsuit, the insurer made payments toward defense costs but claimed independent counsel’s rates far in excess of the usual rates the insurer paid to defend similar actions. Five weeks before trial of the breach of contract/ bad faith case, the insurer filed a petition to compel arbitration. The trial court granted the petition, but the appellate court issued a writ of mandate vacating that order. The appellate court ruled that arbitration over the fees charged by independent counsel was premature. First, there had to be a determination of whether the insurer breached its contract in not defending “immediately” and “entirely.”  As that court explained, breach of those duties may “place the section 2860, subdivision (c) procedures out of [the insurer’s] reach.”

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In the ongoing struggle between policyholders and liability insurers concerning the scope of the independent counsel doctrine, an emerging battlefield has focused on whether disputes between the parties that are unrelated to insurance coverage issues allow policyholders to dispossess liability insurers of their right to control the insured’s defense and appoint defense counsel of the insured’s own choosing Notwithstanding the consequences of this issue, there has been little or no case law addressing this issue up to this point. Now, the Second Circuit has issued a significant new Katrina opinion that emphatically states an insured cannot reject a proposed defense firm merely because the insured believes that they are too small to handle a "bet the company" case.   The opinion also restates New York's interpretation of Cumis that a right to independent counsel should only arise where an insurer has reserved rights on a coverage issues that is of a sort that might influence appointed defense counsel to try the case in such a manner that could result in an uninsured verdict.

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AES has asked the Virginia Supreme Court to overturn a lower court’s ruling that the Village of Kivalina global warning claims do not arise out of fortuitous “occurrence.” Judge Kendrick ruled from the bench in Steadfast Ins. Co. v. AES Corp., No. 2008-058 (Va. Cir. Ct. February 5, 2010) that the allegations of climate change were the foreseeable result of the insured’s routine discharge of millions of tons of carbon dioxide over the years. Despite having earlier found that disputed questions of fact precluded the entry of summary judgment for Steadfast, Judge Kendrick ruled with respect to a subsequent motion for summary judgment by AES that Steadfast had no duty to defend. The court did not reach Steadfast’s alternative argument concerning the pollution exclusion, although Judge Kendrick reportedly intimated during oral argument that he would not have considered carbon dioxide to be a pollutant (take that, U.S. Supreme Court!). The case was otherwise scheduled to go to trial on April 26, 2010.

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In two recent opinions, one from Division One and one from Division Three, the Washington Court of Appeals reiterated that when policy language is clear, it will be enforced as written. 

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In Clarendon Nat’l Ins. Co. v. American States Ins. Co., 2010 U.S. LEXIS 16091 (D. Or. Civil No. 09-548-JO, February 22, 2010), the court addressed whether a contractor qualifies as an additional insured under a policy issued to a subcontractor for injuries to the subcontractor’s employees, and if so is it entitled to defense and indemnity.  Providence contracted to remodel a home and hired Woodmaster as a subcontractor.  During the course of the work, one of Woodmaster’s employees, Michael Stambough, was injured.  Woodmaster was the named insured under a policy issued by American States and Providence was the named insured on a policy issued by Clarendon.

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In Allstate Insurance Company v. Liberty Surplus Insurance Corporation, 2010 Wn. App. LEXIS 351 (Wn. Ct. App. Feb. 22, 2010), an unpublished opinion, the Washington Court of Appeals reversed a trial court’s finding at summary judgment and held that a products-completed operations policy did not provide coverage for claims for injuries that arose from the negligence of the vendor of the insured’s product and not from any defect in that product.

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