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

Misrepresentation claims are a common feature of commercial litigation as well as more mundane suits, such as those brought by property owners who sue the former owner for concealing mold or pollution problems at the time of sale. Last month, for instance, a domestic supplier of Chinese drywall sued German-based Knauf Gypsum A.G. seeking $100 million in damages that Banner claims to have suffered as the result material misrepresentations by Knauf concerning the fitness and safety of its drywall products.

The focus of the case law addressing these coverage claims has generally been whether a misrepresentation, whether intentional or merely negligent, can ever be an “accident” given the tort’s intentional underpinnings. While the principal focus of these coverage disputes has been on whether the claims allege an “accident” or not, Preau v. St. Paul Fire & Marine Ins. Co., No. 10-30816 (5th Cir. June 23, 2011), a Louisiana case decided recently by the U.S. Court of Appeals for the Fifth Circuit, has highlighted a different means of resolving the problem for insurers that has heretofore received relatively little attention.
 

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While more and more jurisdictions have rejected policyholder "all sums" claims in long-tail suits, there is still a striking lack of uniformity in the approach that these courts are taking to individual allocation issues.  In particular, there is a major division as to whether allocation applies to the entire period of injury or just those years for which insurance is "available."    This division reflects the thinking of some courts, led by the New Jersey Supreme Court's original Owens-Illinois opinion, that allocation is not necessarily a function of policy wordings but, rather, a public policy tool that should be applied to encourage policyholders to transfer risk by purchasing insurance and to punish them for failing to do so.

Five years ago, the Minnesota Supreme Court adopted the "unavailability" exception to pro rata allocatio in a construction defect case.  In Wooddale Builders, Inc. v. Maryland Cas. Co.,, 722 N.W.2d 283 (Minn. 2006), the Court declined to allocate loss to the years after 2002 because the insured had allegedly been unable to buy coverage for water intrusion losses after that date.

In light of Wooddale, questions remain with respect to what it means for insurance to be "unavailable."  In particular, is insurance "unavailable" because of an insurer's insolvency?

There are a legion of cases in which courts have held that insolvent insurance is "unavailable" to a policyholder.  However, these are all "other insurance" cases in the context of an excess carrier's claimed drop down duties.  Should the same logic apply to allocation?

In H.B. Fuller Co. v. U.S. Fire Ins. Co., No. 09-02827 (D. Minn. July 18, 2011), Judge Tunheim ruled yesterday that Wooddale does not apply to carrier insolvency.  The District Court ruled that the Supreme Court's discussion of "availability" was only meant to apply in the context of when insurance was generally unavailable in the marketplace.   Further, citing case law from other jurisdictions, Judge Tunheim declared that it made sense to place this burden on the insured, who was the party that had chosen to buy insurance from the company that later went insolvent, rather than other insurers, who had been strangers to the transaction.

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It isn't often that insurers prevail on the same issue in California and New Jersey but such was the case last month with the intriguing issue of whether a policy's coverage for "damages" includes not only money paid to settle claims but cases in which the insurer provides non-cash services or otherwise relinquishes assets of value in lieu of paying money.

In Passaic Valley Sewerage Commissioners v. St. Paul Fire & Marine Ins. Co., A-97-09 (N.J. June 21, 2011), a wastewater utility agreed to settle claims brought against it by a waste hauler by agreeing to treat and dispose of sludge for a customer of the plaintiff for a period of five years.  The insured sought indemnification for this loss from Coregis under a policy that provided coverage for “loss,” which was defined, in pertinent part, as “money damages.” The policy  policy defined "money damages" as “monetary compensation for past harms” and expressly excluded indemnification for relief “in any form other than money damages. . . including equitable relief.”

Under the circumstances, the New Jersey Supreme Court ruled that the clear and unambiguous meaning of “money damages” could not be extended, as the insured argued, to the surrender of assets of value and required a cash payment. Rather, the Court ruled that the clear and ordinary meaning of “monetary” was “of or relating to money” and that the policy therefore required a cash payment by the insured and did not extend coverage, as the insured had argued, to any settlement involving the insured’s surrender of valuable consideration such as an agreement to provide services in the future. 

To related effect is the newly published opinion of the California Court of Appeal in Ultra Salon, Cosmetics & Fragrance, Inc. v. Travelers Property Casualty Company of America, No. B224586 (Cal. App. June 10, 2011).  The Second District sustained Travelers' demurrer  on the basis that the civil penalties available for the insured’s claimed violations of Proposition 65, the California Safe Drinking Water and Toxic Enforcement Act of 1986 for failing to give clear warnings about the dangers associated with its cosmetic products did not allow recovery of insured “damages.” The Court of Appeals observed that Prop 65 penalties “do not grow out of a claim for moneys due and owing for personal harm or property damages that have resulted from discharge of pollutants or other toxic chemicals…” The court declined to impose a duty to defend based upon speculation that the plaintiff might later sue for bodily injury.

These are helpful rulings for cases involving intellectual property disputes and other types of commercial litigation where as a condition of the settlement, the insurer is called upon to do more than write a check.

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In Desrosiers v. Hudson Specialty Ins. Co., 2011 U.S. App. LEXIS 12591 (9th Cir. Or. June 21, 2011), the Ninth Circuit found that an insurer had a duty to defend an insured against a complaint alleging negligence and intentional torts. The Ninth Circuit also found that the insurer had a duty to indemnify, stating that “an insurer that breaches its duty to defend may not later argue that it has no duty to indemnify.” 

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