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

In Travelers Property v. Centex Homes, No. C 10-02757 CRB (N. D. Cal. April 1, 2011), Centex, a general contractor, was sued in certain construction defect litigation. Pursuant to a reservation of rights, Travelers agreed to defend Centex, an additional insured under its policy. Centex refused to allow counsel retained by Travelers to defend it or to associate in its defense. The court held that under the policies, Travelers had the “right and duty to defend” suits seeking damages to which the policies apply. Upon being provided a defense, Centex had no right to interfere with Travelers’ right to control the defense. 

The court agreed that for an insurer to be excused from its duty to defend and indemnify after an insured’s breach of the cooperation clause, the insurer must show that it suffered substantial prejudice from the insured’s breach. It recognized, however, that the California Supreme Court had held that prejudice may be presumed where it “naturally, inherently and necessarily exists.” It also noted Ninth Circuit authority holding that when an insured refuses an insurer’s choice of counsel, the insured not only violates the duty to cooperate, but also interferes with the insurer’s right to conduct a defense. This breach provides sufficient grounds to deny the insured’s claims for defense costs and indemnification. 

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It's not every day that you get a peek at how a U.S. Supreme Court justice would have ruled in an insurance coverage dispute.  And it's certainly not an everyday occurrence for an ex-SCOTUS justice to declare that your client "got it right" when he wrote a letter to the insured denying coverage.   So you'll forgive us if we have a little fun with Cynosure, Inc. v. St. Paul Fire & Marine Ins. Co., No. 10-1119 (1st Cir. May 12, 2011), a case in which we were local counsel where the First Circuit refused to find coverage for junk fax claims. 

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In the wake of the California Supreme Court's Montrose opinion, ISO promulgated various new clauses purporting to cut off coverage for continuing losses.  Thus, current CGL forms contain language in the insuring agreement precluding coverage for losses that are already known to the insured.  Additionally, some policies now endorsements excluding coverage for the continuation of property damage that first occurred prior to the policy.

Despite the significance of these "Montrose" clauses for construction defect litigation, there has been little or no case law construing their scope and effect until recently.

Shaun Baldwin posted last month concerning a new Indiana opinion that construed a “Montrose” clause in a CGL policy to extend an insurer’s coverage beyond the policy’s expiration. In Grange Mut. Cas. Co. v. West Bend Mut. Ins. Co., No. 29A02-1008-PL 965 (Ind. App. March 15, 2011), the Indiana Court of Appeals had ruled that the insurer whose policy was in effect when the insurer had installed the storm drain pipes must also covered damaged caused by later leakage due to language in its policy extending coverage to “any continuation, change or resumption of that property damage after the end of the policy period.”

Whereas Grange Mutual analyzed the effect of such provisions in extending coverage, a new Fifth Circuit opinion considered the extent to which “Montrose” clauses might serve as a tool for later insurers to bar coverage for known losses. In Maryland Cas. Co. v. Acceptance Indemnity Ins. Co., No. 10-50283 (5th Cir. April 25, 2011), the U.S. Court of Appeals for the Fifth Circuit ruled that a later CGL carrier could not raise “Montrose” wordings as a bar to claims for equitable subrogation brought by the insurer that was on the risk when water intrusion problems first commenced.

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There hasn't been much good news from Florida lately, particularly in the area of bad faith litigation.  In a rare bright note, however, the Florida Supreme Court has declared that the liberal rules that it adopted a few years ago requiring disclosure of work product in first party bad faith cases does not apply with respect to attorney-client privileged communications.

In Allstate Indemnity Co. v. Ruiz, 899 So.2d 1121 (Fla. 2005, the court had declared that “in connection with evaluating the obligation to process claims in good faith under Section 624.155, all materials, including documents, memoranda, and letters, contained in the underlying claim and related litigation file material that was created up to and including the date of resolution of the underlying disputed matter and pertaining in any way to coverage, benefits, liability or damages, should also be produced in a first-party bad faith action.” Further, all such materials prepared after the resolution of the underlying disputed matter and initiation of the bad faith action may be subject to production upon a showing of good cause or pursuant to an order of the court following an in camera inspection.”

Now the Florida Supreme Court has ruled in Genovese v. Provident Life & Accident ins. Co., No. SC06-2508 (Fla. March 17, 2011) that its holding in Ruiz does not similarly require insurers to disclose attorney-client privileged communications. The court held that the attorney-client privilege and work product doctrine are distinct concepts and that the heightened protection required for communications between insurers and their outside counsel precludes discovery of these materials even in cases of bad faith. The court declared therefore that, “When an insured party brings a bad faith action against its insurer, the insured may not discover those privileged communications that occurred between the insurer and its counsel during the underlying action.”

The court cautioned, however, that there might be situations in which an insurer has hired counsel to both investigate the underlying claim and render legal advice. Accordingly, where a claim of privilege is asserted, a trial court should conduct an in camera inspection to determine whether the sought after materials are truly protected by the attorney-client privilege so that work performed by lawyers that do not involve the rendering of legal advice may be discovered. Further, the Supreme Court emphasized that its opinion was not intended to preclude discovery in the event that an insurer waives the privilege, as by relying on the “at issue” doctrine.

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