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

Pennsylvania has become the latest state to weigh in on the controversial question of whether an insurer that is later held not to owe coverage for a case may recoup its defense costs in a subsequent coverage suit against its policyholder.

In the decade since the California Supreme Court recognized such a right, courts around the country have come to widely different conclusions about whether or when to allow recoupment.  Some have focused on the necessity of the insurer having expressly asserted such a right when it agreed to provide a defense.  If so, some courts have found that am implied contract was created and that the insured, having obtained the benefit of the insurer's defense, must also fulfill its duty to reimburse if coverage was held not to exist.  Other courts, notably the Supreme Courts of Illinois and Texas, have rejected any argument that the insurer can unilaterally impose such a duty or has an implied right pursuant to theories of quantum meruit.

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Q:  When is a claim for damage to property not "property damage"?

A.  When it doesn't involve physical injury to or loss of use of tangible property?

So says the Vermont Supreme Court in a recent coverage dispute arising out of a building contractor's failure to use cedar shingles of the right color and quality in the construction of the plaintiff's home.  The court ruled in Down Under Masonry, Inc. v. Peerless Insurance Company that the contractor's liability insurer had no duty to defend inasmuch as the use of white cedar shingles instead of red cedar shingles as contracted for (as all fans of shingles know, red cedar is much the superior product) had not caused any physical injury to the plaintiff's home or caused him to lose the use of it.  The court concluded that it would not "find coverage for aesthetic damage under a CGL policy that does not explicitly provide for it."

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Spoliation issues have been a perennial concern to insurers. Not only do they present problems in cases that insurers are defending, whether due to the fact that the insured itself has lot a key bit of the plaintiff’s evidence or such evidence has gone missing after being forwarded to the insurer or its consultants for examination, such claims have recently become the subject of direct claims for coverage by policyholders. The recent opinion of the Illinois Appellate Court in United Fire & Casualty Co. v. Keeley & Sons, Inc., No. 5-06-0307 (Ill. App. May 2, 2005) has clearly explained, however, why general liability insurers should not afford coverage for such claims.

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In what can only be called a significant turn around, the New Mexico high court recently overruled twenty-four years of precedent when it announced that actual notice from any source to a liability insurer of a lawsuit against its insured could trigger the duty to defend, even when the insured failed to provide notice of the suit or ask for a defense.   In proving the old adage "bad facts make bad law," the New Mexico Supreme Court ruled notice of a liability claim against the insured could come from any source and the insured's failure to demand a defense didn't excuse the insurer from defending covered claims.  

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In Mamaroneck Avenue Corp. v. Hartford Fire Ins. Co. (N.Y.App., 2nd Dept., April 22, 2008), a New York Appellate court held that invasion of an organization’s leasehold interest is not covered under the “personal and advertising injury” provisions of a CGL policy. The underlying complaint alleged that the insured “embarked on a plan of harassment and coercion with the intention of causing [claimant] to terminate its leasehold,” which included allegations of “[t]respassing upon [claimant's] premises and interfering with [claimant’s] business by appearing, unannounced, accompanied by Fire Department personnel and the City Building Inspector . . . to solicit or elicit non-existent fire code violations.” The policy’s definition of “personal and advertising injury” included “wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.” Noting that other "personal and advertising injury" offenses distinguish between "persons" and "organizations," the court held that wrongful eviction claims apply only to natural "persons."  The court relied on several cases from other jurisdictions to support of its holding, including Stonelight Tile v. California Ins. Guar. Assn., 150 Cal App 4th 19; Mirpad, LLC v. California Ins. Guar. Assn., 132 Cal App 4th 1058; and Supreme Laundry Servs. v. Hartford Cas. Ins. Co., 2007 US Dist LEXIS 18134 (ND Ill. 2007).

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In ExxonMobil Corp. v. Certain Underwriters at Lloyd’s, London (N.Y. App., 1st Dept., April 15, 2008), a New York appellate court applies New York’s “unfortunate event test” to find that an insured’s manufacture and sale of two defective products did not constitute a single occurrence for the purpose of determining applicable deductibles, where each installation of polybutylene resin into a municipal water system, and each introduction of a lubricant into an aircraft engine, created exposure to a condition that resulted in property damage to multiple claimants on different dates over many years. In so holding, the court relied on the Court of Appeals' recent  decision in Appalachian Ins. Co. v General Elec. Co., 8 NY3d 162 (2007), and its own holding in International Flavors & Fragrances, Inc. v Royal Ins. Co. of Am., 46 AD3d 224 (1st Dept.2007).

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As a general matter, course of performance evidence is admissible to interpret insurance policies, explained California’s Appellate Court in Employers Reinsurance Company v. The Superior Court Of Los Angeles County (2008) __Cal.App.4th__ [08 C.D.O.S. 3935] (2^nd District).  However, in the case before it, some of the course of performance evidence was not admissible because much of the performance was pursuant to settlement and claims handling agreements (which contained reservation of rights to dispute coverage), and not pursuant to the insurance policies. 

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In light of the widely different provisions of state law pertaining to insurance issues, the venue in which a coverage dispute is litigated can affect the outcome as much as the merits.  Even so, as with recent New Jersey rulings in cases such as Sensient Colors and Mine Safety Appliances,  insurer efforts to obtain favorable venues have recently been thwarted in cases where courts ruled that the insurers acted with unseemly haste to file in a forum that had little or no connection to the coverage dispute.  Now comes a new opinion of the Second Circuit, reinstating an insurer's forum selection and giving a strong boost to the "first filed" rule.

 

 

 

 

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Full primary insurance limits must be paid (or be held liable to pay) prior to excess coverage attaching where the excess policy requires that the underlying policy “have paid or have been held liable to pay the full amount” of underlying limits. Where the insured settled with its primary insurer for less than policy limits, the excess insurer had no obligation to pay, ruled California’s appellate court in Qualcomm v. Certain Underwriters at Lloyd’s, London, __ Cal.App.4^th __ (2008) [2008 WL 763483] (4^th District - San Diego). The appellate court found the language of the excess policy clear and unambiguous and required this result, regardless of public policy considerations.

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All in all, it hasn't been a good month for the folks at Bear Stearns.  First, a run on the bank results in a takeover by JP Morgan at $2 a share and the prospect of endless shareholder litigation.  Then, the New York Court of Appeals holds that it blew any chance at $50 million in excess E&O coverage for a 2002 settlement of conflict of interest claims.

 

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A Federal District Court Judge from the Southern District of Texas’ Galveston Division recently granted summary judgment against an insurer seeking to enforce identical pro rata sharing provisions contained in multiple primary insurance policies.  In doing so, the court highlighted the lack of options primary carriers now face in Texas when co-primary carriers don't contribute to defense or indemnity benefits to the common insured.  In Nautilus Ins. Co. v. Pacific Employers Ins. Co., No. G-04-619 (S.D. Tex.  February 25, 2008), several insurers were called on to defend and indemnify a seismic testing company which allegedly damaged over 200 buildings in Galveston County while conducting seismic testing.  All of the insurers except Pacific Employers contributed to the settlement and Nautilus Insurance then sought to recover the amounts it overpaid to fund the settlement from Pacific by way of subrogation and enforcement of the policies respective pro rata "other insurance" sharing provisions.  The suit among the co-primary carriers resulted in summary judgment motions being filed on the issue of whether a settling co-primary carrier in Texas can sue a recalcitrant co-primary carrier for not paying it's fair share of the defense costs or the settlement.  Relying on the Texas Supreme Court’s recent decision in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 756 (Tex. 2007), the District Court held last week that because the insured had been fully indemnified, the settling insurer had no claim under Texas law against the non-settling insurer because “there is nothing to which Plaintiff can be subrogated.”  This harsh result is the inevitable consequence of the Texas Supreme Court's decision from February in Mid-Continent v. Liberty Mutual. 

Because of the proliferation of suits involving construction defects, intellectual property violations, toxic torts, premise liability and other significant torts, it is now extremely common for insured defendants to have two or more primary liability carriers whom they turn to for defense and indemnity benefits.  The unwillingness of the Texas Supreme Court to allow one carrier to sue another for reimbursement, contribution or subrogation puts Texas in an extreme minority on this issue and forces carriers in that state to become very creative when settling liability suits when one or more other primary carriers have not or will not contribute to defense or settlement costs.  Carriers in such a situation must consider formal assignments from insureds and other creative alternatives before allowing the underlying liability to be settled and dismissed.   Otherwise, they will find themselves in the same position as Nautilus having overpaid a claim they did not fully owe with no avenues for reimbursement against the carrier who refused to pay timely.  

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In Nejati v. Royal Indemnity Co., 2008 WL 483496 (N.D. Tex., February 19, 2008), Royal was sued by Nejati to enforce a $1.4 million default judgment obtained against Royal’s insured under a commercial auto policy.  Nejati obtained a default judgment because the insured failed to forward suit papers to Royal and repeatedly refused to communicate with Royal about the lawsuit.  Royal received actual notice of the suit from Plaintiff's counsel but it did not file an answer on its insured’s behalf because the insured never made a claim, never asked for a defense, and refused to cooperate with his insurer's efforts to try to protect him.  Royal also never issued a reservation of rights or submitted a non-waiver agreement.  It did, however, engage in limited discussions with Nejati’s attorneys once it was notified of the suit including asking for an extension of the answer date to enable to it contact the insured and including trying to settle the lawsuit before a default judgment was entered. On February 19th, Federal District Court Judge Barbara M.G. Lynn from the Northern District of Texas ruled on cross motions for summary judgment filed by Nejati and Royal. 

The court denied summary judgment determining two fact issues existed: (1) whether Royal was prejudiced by its insured’s breach of the cooperation clause; and (2) whether Royal waived the cooperation clause as a condition precedent to coverage through its conduct.  Consistent with the actions of other Texas courts in recent months, this court implicitly rejected the concept of “prejudice as a matter of law” in finding the referenced fact issues despite the insured’s gross failure to cooperate or to even demand defense or indemnity benefits from his liability insurer.  While there is nothing uniquely significant about this decision, it does illustrate an unfortunate trend among Texas courts (both state and federal) in the last 12 months to refuse to recognize "prejudice per se" when an insured refuses to make a claim, refuses to cooperate, and allows a default judgment to be entered.   While these decisions seem superficially beneficial to policyholders, they are actually harmful to policyholders over the long run.  For example, the efforts of the insurer to try to repeatedly contact the insured, to ask for an extension of time to answer, and to ask opposing counsel how much he wanted to settle the case are obviously good things for the insured.  But, as this case illustrates, if such "good efforts" are going to actually increase the insurer's exposure by creating a fact issue as to its actual prejudice, then the obvious lesson is for insurers to not try to help their insureds and simply wait for actual notice from their insured and wait for a demand for a defense before lifting a finger.  That is a very, very dangerous precedent, but it is the unfortunate implication of the refusal of Texas courts' to recognize prejudice per se or prejudice as a matter of law following late notice.   

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Last Friday, the Texas Supreme Court answered “no” to the following certified questions from the Fifth Circuit: 

"Where an additional insured does not and cannot be presumed to know of coverage under an insurer's liability policy, does an insurer that has knowledge that a suit implicating policy coverage has been filed against its additional insured have a duty to inform the additional insured of the available coverage?"  and,

"Does proof of an insurer's actual knowledge of service of process in a suit against its additional insured, when such knowledge is obtained in sufficient time to provide a defense for the insured, establish as a matter of law the absence of prejudice to the insurer from the additional insured's failure to comply with the notice-of-suit provisions of the policy?"

In National Union fire Insurance Co. v. Crocker, 2008 WL 400398 (Tex. February 15, 2008), a nursing home resident sued the insured nursing home and its employee for injuries suffered when hit by a door swung open by the employee. The employee was terminated after the incident but before suit was filed. The insurer defended the nursing home but did not defend the employee even though the claims against him were covered and the insurer knew he had been served. The insurer attempted to contact the employee by phone and mail without success. During the suit, the employee spoke privately with plaintiff’s counsel at a deposition but refused to speak with the nursing home’s defense counsel. At trial, the jury returned a take nothing defense verdict against the nursing home but the court entered a $1,000,000 default judgment against the employee. The injured resident then sought to collect against the liability insurer because of its alleged coverage on the employee. 

The federal district court hearing the coverage case found the insurer breached its duty to defend the employee by failing to notify him of the available coverage. That court also found prejudice had to be shown to establish a coverage defense based on late notice and the insurer’s “actual awareness” of the suit against the employee precluded it’s ability to establish the required prejudice. On appeal, the Fifth Circuit certified the above questions to the Texas Supreme Court. In addressing the notice requirement in last Friday’s decision, the Texas Court observed that a “more basic purpose” of requiring an insured to forward suit papers to the insurer is to advise them that the insured has been served and the insurer is expected to file an answer on their behalf. An insurer’s knowledge that suit has been filed “does not satisfy this ‘more basic purpose’ or require the insurer to “gratuitously subject itself to liability.” The high court noted: “Simply put, there is not duty to provide a defense absent a request for coverage.”

Addressing the prejudice question, the court distinguished its recent decision in PAJ, Inc. v. Hanover Insurance Co. 2008 WL 109071 (Tex. 2008) (See Texas Insurance Law Newsbrief January 14, 2008), by observing in PAJ the notice was actually late in contrast to the present case where there was no notice from the additional insured at all. Because an insured may opt against seeking a defense from an insurer for a number of reasons, the Texas Supreme Court concluded that “insurers owe no duty to provide an unsought, uninvited, unrequested, unsolicited defense.” As such, the insurer had no duty to inform the employee of available coverage or to voluntarily undertake his defense. And, the high court concluded actual knowledge of the suit against him did not establish prejudice as a matter of law.

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Last Friday, the Texas Supreme Court withdrew its 2006 opinion in Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 2006 WL 1195330 (Tex. May 5, 2006) (where the high court found the additional insured provisions of the liability policy were not broad enough to indemnify the third-party's own acts of negligence, but it failed to decide whether the scope of this coverage is limited in any way by the separate indemnity agreement between the third-party and the policy's named insured). Last Friday, the Texas Supreme Court reversed itself and closely examined the interplay between a contractual indemnity agreement and the scope of coverage afforded to additional insureds. In Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 2008 WL 400394 (Tex. February 15, 2008), the court specifically addressed three specific issues: 1) “whether a commercial umbrella insurance policy that was purchased to secure the insured's indemnity obligation in a service contract with a third party also provides direct liability coverage for the third party;” 2) “whether the insurer is bound to pay the amount of an underlying settlement between the additional insured;” and  3) “whether article 21.55 (now Chapter 542) of the Texas Insurance Code, the “Prompt Payment of Claims” statute, authorized the imposition of penalties and attorney's fees for the insurer's failure to pay the claim timely.”

Addressing the first issue involving the breadth of additional insured coverage, the court focused on the policy language defining who is an insured, the provision discussing the named insured’s duty to indemnify the additional insured, and a separate provision defining an insured to include “A person or organization for whom you have agreed to provide insurance as is afforded by this policy; but that person or organization is an insured only with respect to operations performed by you or on your behalf, or facilities owned or used by you.” The court reasoned that each “who-is-an-insured” clause served to grant coverage independently and, therefore, it held the policy provided the broader scope of coverage and did not exclude liabilities arising out of the additional insured’s sole negligence.  

Addressing the second issue of “whether the insurer was bound to pay the amount of an underlying settlement between the additional insured,” the court revisited related decisions and held the insurer’s “denial of coverage barred it from challenging the reasonableness” of the settlement and the insurer was thus bound to pay the $5.75 million settlement. Addressing the third issue of whether article 21.55 of the Texas Insurance Code applied in this context, however, the court observed the claim in this case was a third-party claim involving the insured’s liability to another and not a first-party claim falling within the statute. Accordingly, the court held that the additional insured was not entitled to attorney fees or damages under article 21.55.

The high court’s treatment of the 21.55 penalty provision is interesting in light of the court’s ruling last month in Lamar Homes where it addressed the same statute in a liability claim involving the duty to defend.   Last Friday’s decision in Atofina Petrochemicals properly ruled the penalty provision does not apply to indemnity benefits under a liability policy.   It still leaves claims for previously tendered defense benefits subject to the 18% statutory penalty pursuant to last month’s decision in Lamar Homes, despite the obvious inconsistency between the two decisions.  A majority of the Texas Supreme Court apparently doesn’t have any problems with applying the 18% statutory penalty to defense benefits under a liability policy when coverage is later determined to exist, but it does have problems applying the same penalty provision to the same claim under the same policy as it relates to indemnity benefits. Friday’s decision in Atofina Petrochemicals is simply a good illustration of why the 21.55 holding in Lamar Homes last month was terribly wrong.  

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This past Friday, the Texas Supreme Court issued a important decision on the availability of liability insurance to cover punitive damage awards when it answered the following certified question presented by the Fifth Circuit: “Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?” In Fairfield Insurance Co. v. Stephens Martin Paving, L.P., 2008 WL 400397 (Tex. February 15, 2008), the Court in a limited holding found “Texas public policy does not prohibit coverage under the type of workers' compensation and employer's liability insurance policy at issue in this case.” In doing so, the Court provided an extensive and thought-provoking discussion of the law from other jurisdictions, Texas statutory and legislative considerations, Texas case law addressing the issue in other contexts and public policy issues including the “freedom of contract” and the underlying purpose of imposing punitive damages.

In this case, an employee died as a result of on the job injuries and the resulting lawsuit alleged the insured employer “failed to follow and enforce OSHA safety rules and regulations.” The policy at issue provided workers’ compensation and employers’ liability insurance that covered “all sums the insured [Stephens Martin Paving] legally must pay as damages because of bodily injury to [its] employees, provided the bodily injury is covered by this Employers Liability Insurance.”  But, it excluded coverage for damages arising from injuries caused by intentional acts and “punitive or exemplary damages because of bodily injury to an employee employed in violation of law.” However, an endorsement provided “[t]his exclusion does not apply unless the violation of law caused or contributed to the bodily injury.” Because the certified question only focused on the public policy considerations, the court did not address the potential coverage issues and presumed the policy covered the punitive damages sought.

In reaching its decision that coverage for punitive damages was not against Texas public policy, the court focused on the statutory workers’ compensation scheme and accompanying insurance regulations.  The court found because the Texas Workers Compensation Act allowed recovery of exemplary damages caused by the employer’s gross negligence and because the Texas Department of Insurance's execution of that scheme and approval of policy forms reveals an “intent to provide coverage for gross-negligence” while excluding intentional acts, the high court of Texas found the “Legislature’s expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context.”

The decision was one of the oldest cases on the Court's docket probably indicating the intense internal struggle over the important issues raised by this case.   While the holding is troubling to this author at multiple levels, the obvious and easy solution is for liability insurers to craft expansive punitive damage exclusions in their liability policies.  This decision only deals with the public policy implications of extending coverage to punitive damages when the policy is otherwise silent on such coverage. 

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Several days ago, the Fifth Circuit Court of Appeals evaluated a primary liability carrier’s tender of its policy limits to its insured for covered claims and whether such a tender triggered an excess insurer's liability coverage when the insured allocated the primary limits across several years of losses.  In Service Corp. Int’l v. Great Am. Ins. Co. of New York, 2008 WL 280900 (5th Cir. February 1, 2008), a funeral services company (SCI), with cemeteries throughout the United States, was sued by individual and class action plaintiffs for grave desecrations and improper burials at two specific cemeteries.  Some, but not all, of the events giving rise to the lawsuits occurred between the policy period in question.  SCI was covered by a $25 million primary liability insurance policy and a $50 million excess liability policy.

As the lawsuits were pending against SCI, the primary carrier determined that its covered claims would likely exceed its policy limit for the policy period. The carrier then tendered $25 million to SCI in exchange for an indemnity and hold harmless agreement.  The lawsuits settled for $100 million, but only $13.75 million was allocated by the insured to claims arising during the policy period of the excess carrier in this suit.  The rest were allocated to other years of losses.  

SCI requested coverage from an excess liability carrier, but coverage was denied.  The excess carrier argued because only $13.75 million was allocated to the policy period (and not the complete $25 million limit which had been tendered), the excess layer of coverage had not been triggered.  In response, SCI filed suit against the excess carrier.  The federal district court granted summary judgment in favor of the excess carrier.

On appeal, the Fifth Circuit noted the excess policy incorporated the primary policy’s definition of “loss,” which was “those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages of injuries or offense.”  The Fifth Circuit then concluded the parties intended any loss to be measured by the sums used for payment of covered claims during the policy period, not simply by the aggregate sums paid by the insureds.  As such, the insured’s own allocation was used by the Court to determine the excess liability policy had never been triggered.

This is a potentially significant decision particularly for claims in those jurisdictions governed by the Fifth Circuit including Texas, Louisiana and Mississippi.  Because policyholder allocations are common in coverage cases arising out of toxic tort cases and other mass torts, this holding gives excess liability carriers more protections than other courts have extended in recent years.  It remains to be seen how the judicial pronouncements in this case will apply to other efforts to artificially allocate prior primary settlements by policyholders, but it is certainly a step in the right direction.

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New York Insurance Law § 3420(d) requires that insurers provide written notice of coverage denials “as soon as reasonably possible” for accident claims involving bodily injury and death. Courts hold that failure to comply with the statute results in a waiver of policy defenses, and that policyholders need not demonstrate prejudice to invoke the statute’s protection. In measuring reasonableness, however, courts have declined to establish fixed periods of time, concluding that reasonableness is determined based upon attending circumstances. Naturally, the absence of bright-line tests has led to uncertainty and considerable litigation. New York’s high court has addressed the issue several times, concluding in Hartford v. County of Nassau, 46 NY2d 1028 (1979), that absent excuse or explanation, a 60-day delay was unreasonable as a matter of law, and in First Fin. Ins. Co. v. Jetco Constr. Corp., 1 NY3d 64 (2003), that a 48-day delay violated the statute. Courts have rarely found that delays of as few as 30 days violate the statute; however, New York’s Second Department recently held in Sirius America Ins. Co. v. Vigo Construction Corp. (NY App, 2nd Dept. Feb. 5, 2008), that a disclaimer issued just 34 days after the insurer knew or should have known of the basis for denying coverage was ineffective as a matter of law.

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Last Friday, the Texas Supreme Court issued its opinion on rehearing in Excess Underwriters v. Frank’s Casing, __ S.W.3d __ (Tex. 2008).  The Court withdrew its three-year old opinion that initially created a firestorm in the Texas insurance industry (and also lead to great consternation with commercial insureds) regarding the rights of reimbursement that a liability carrier possesses under Texas law when it pays a potentially non-covered claim.  But, after keeping the industry waiting for more than two years for clarification since it granted the rehearing, last Friday a deeply divided Court reversed course by withdrawing and disregarding its earlier decision and refused to recognize an exception to the Texas rule that an insurer is only entitled to reimbursement for settling a claim against its insured if (1) the policy provides for it, or (2) the insured has given “clear and unequivocal consent to the settlement and the insurer’s right’s to reimbursement.”  After stating that liability insurers were better equipped to “carry the risk” associated with a coverage dispute, the majority suggested that insurers facing settlement demands on disputed claims have several options: refuse to settle and pursue a declaratory judgment action, leverage a declaratory judgment action to settle the third-party lawsuit, or rewrite the policy to include reimbursement rights.  The two dissenting opinions recognized the problems with the majority approach - the windfall to insureds for coverage that was not underwritten when the policy was issued, and the burden other insureds must carry in increased premium costs due to the insurers’ increased risks of settling uncovered claims.  The dissent by Justice Hecht correctly observed that liability carriers in Texas will now have little choice but to bring a DJ action every time a liability claim raises potential coverage issues.  

Friday’s decision in Frank’s Casing is one of the most significant decisions issued by the Texas Supreme Court in recent years. It raises a host of new issues for liability carriers facing potential coverage problems on both defense and indemnity claims.  A liability carrier’s ability to wait until the underlying tort case gets closer to trial before seeking to address and resolve the coverage issues seems to have been eliminated by last week’s decision.  The ironic aspect of the majority’s decision (which was clearly intended to help commercial insureds in Texas) is that Friday’s decision will hurt Texas insureds in the long run because they will be subject to more litigation rather than less.  Friday’s decision leaves Texas liability insurers with few options other than bringing DJ actions against their insureds every time an underlying tort suit raises coverage questions.

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In Lumbermens Mut. Cas. Co. v. The Commonwealth of Pennsylvania, 2008 NY Slip Op 50161(U) (Sup Ct. NY County, Jan. 24, 2008), New York County Supreme Court considered whether a forum selection clause served as adequate grounds to maintain a declaratory judgment action against the Commonwealth of Pennsylvania that was otherwise subject to that state’s sovereign immunity. The court concluded it was not, and dismissed the case for lack of subject matter jurisdiction.

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In York Specialty Food, Inc. v. Tower Ins. Co. of New York (NY App., 1st Dept., Jan. 31, 2008), a New York appellate court has held that an insured, who became aware of the claimant’s accident within three days, but did not notify its insurer of the accident until eight months later, breached the notice requirements of its liability policy. The court rejected the insured’s excuse for delay premised upon an alleged good-faith belief in non-liability because the insured never investigated the possibility of its liability for the accident. The court found that an investigation by the insured that included interviews of employees who witnessed the accident would have revealed that the claimant, after falling in front of the insured's premises, had been taken from the scene in an ambulance. Since no investigation was conducted, the insured could not claim a good-faith belief in non-liability. As continues to be the law in New York, the insured was not required to demonstrate prejudice to invoke the late notice defense.

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Despite the fact that Zurich filed its action for declaratory relief in New York before a New Jersey insured filed its own suit in New Jersey seeking a declaration of coverage for various claims arising out of contamination at a former paint manufacturig facility in New Jersey, the New Jersey Supreme Court ruled on Wednesday that the normal rule giving precedence to the "first filed" DJ shold be disregarded where the equities require it.   In Sensient Corp. v. Allstate Ins. Co., A-99-06 (N.J. January 29, 2008), the Supreme Court held that "New Jersey is the natural forum for resolving insurance coverage issues concerning hazardous waste infested property located within its borders."  The court also emphasized that it was important that a New Jersey court decided these issues since a New Jersey court would certainly not uphold any pollution exclusion that might limit the availability of funds to clean up this contamination.

The Sensient ruling is hardly surprising given the great weight that New Jersey courts have placed on New Jersey contacts in applying New Jersey law to coverage disputes.  In light of the New York Court of Appeals' recent opinion in Foster Wheeler applying New Jersey law to pollution claims involving a New York insured that had moved to New Jersey.  As long as the law of New Jersey and New Jersey differ on key issues such as pollution exclusions, these disputes over venue and choice of laws will continue.  

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The Fifth Circuit has ruled in Nationwide Mutual Ins. Co. v. Lake Caroline, Inc., No. 06-61084 (5th Cir. January 23, 2008) that a Mississippi district court was correct in holding that the defendant’s CGL policy did not afford coverage for a “slander of title” claim by reason of the “expected or intended” conduct and the “knowledge of falsity” exclusions under Coverage B.

The Fifth Circuit ruled, however, that the district court erred in applying the “knowledge of falsity” exclusion in view of the fact that the allegation of malice in the underlying case did not require knowledge of falsity as a party can be deemed to have acted with malice under Mississippi law upon a showing of reckless disregard for the truth.

Further, the Fifth Circuit held that ht underlying claims failed to trigger Coverage A as, even if such claims satisfy the requirement of an “occurrence” (which the court doubted), there was no claim for property damage since the golf development had not been physically injured nor did pure economic losses satisfy the policy’s requirement that there be “loss of use” of tangible property.

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The Fifth Circuit has ruled in Nationwide Mutual Ins. Co. v. Lake Caroline, Inc., No. 06-61084 (5th Cir. January 23, 2008) that a Mississippi district court was correct in holding that the defendant’s CGL policy did not afford coverage for a “slander of title” claim by reason of the “expected or intended” conduct and the “knowledge of falsity” exclusions under Coverage B.

The Fifth Circuit ruled, however, that the district court erred in applying the “knowledge of falsity” exclusion in view of the fact that the allegation of malice in the underlying case did not require knowledge of falsity as a party can be deemed to have acted with malice under Mississippi law upon a showing of reckless disregard for the truth.

Further, the Fifth Circuit held that ht underlying claims failed to trigger Coverage A as, even if such claims satisfy the requirement of an “occurrence” (which the court doubted), there was no claim for property damage since the golf development had not been physically injured nor did pure economic losses satisfy the policy’s requirement that there be “loss of use” of tangible property.

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Controversy has often arisen in conflicts between primary liability insurance policies that contain “excess” other insurance wordings and “true” excess policies (i.e., umbrella or higher layer excess policies). In such cases, does one policy pay before the other or, as is often the case with conflicting “other insurance” terms, do both policies pay concurrently?

In the latest such case, the Fourth Circuit has held in a dispute between a school board’s umbrella liability insurer and the primary insurer of a high school principal concerning the priority of “excess” coverage for the cost of settling sexual abuse claims against school officials, the a “coincidental” excess policy (a primary policy with an “excess” other insurance clause) should pay before a “true” excess policy.

 

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After the California Supreme Court's 2003 opinion in MacKinnon, rejecting the application of an absolute pollution exclusion to injuries to building occupants by pesticide sprayings and declaring that such exclusions are limited to "injuries commonly thought of as "pollution" (ie. environmental pollution),  one might well have assumed that it would be a rare day indeed before a California court gave effect to such exclusions in bodily injury cases.  In surprising turn of events, however, the Court of Appeal has since done that in several recent cases.

The latest ruling to give an expansive interpretation to MacKinnon's construct of "environmental pollution" is the Second District's opinion this week in American Casualty Co. of Reading, PA v. Miller.  At issue were personal injuries suffered by a workman who, in the course of performing maintenance work in a sewer line, was exposed to methylene chloride that had been flushed into the sewer by Stripper Herk, a furniture stripping business (why don't the insureds in my cases ever have cool names like that).  Stripper Herk ultimately enter into a plea agreement with the U.S. Attorney in which it confessed to have discharged chemicals in violation of its permit. 

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An insurer that undertakes the defense of its insured for a sufficiently lengthy period of time without reserving its rights to deny coverage waives coverage defenses. So held the 7th Circuit in Nutmeg Ins. Co. v. East Lake Management & Development Corp. (7th Cir. (Ill.) Jan. 22, 2008) (unreported). In this case, the insurer hired counsel to defend its insured, but did not issue a reservation of rights until two years later. The insurer continued to defend for another two years before issuing a coverage denial. The court concluded that, whether the delay was two or four years, it was too long under Illinois law. The court rejected arguments that the insured was required to demonstrate prejudice by the delay; while prejudice would be required to establish a claim of estoppel, the delay in this case constituted a waiver for which no showing of prejudice was required. The court also rejected arguments that the loss was uninsurable as a matter of state law, and that neither waiver nor estoppel could create coverage for uninsurable losses. Finding no Illinois cases, the court cited precedent in California and New Jersey for the proposition that the defense of uninsurability may be waived or forfeited, and predicted that Illinois courts would agree. Compare this holding with the rule in New York that an insurer cannot through waiver create coverage that a policy was not written to provide (see Schiff Assoc. v. Flack, 51 NY2d 692 (1980); Zappone v. Home Ins. Co., 55 NY2d 131 (1982); Central General Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997)). While coverage may be created by estoppel (which requires prejudice), waiver applies only to defenses based on policy exclusions and breach of policy conditions.

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Bad news for a primary insurance company and good news for the excess insurers comes from the trial court’s decision finding multiple occurrences on remand in the Kaiser Cement case (Truck Ins. Exchg. v. Kaiser Cement, et al., Los Angeles Superior Court, Case No. BC249550 [Order 1/24/08]).  The number of occurrence issue is of major importance to insurers and their insureds in asbestos, construction, sexual abuse, and other multiple-claimant coverage disputes.  

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The 7th Circuit has asked the Wisconsin Supreme Court to address the numbering of occurrences and allocation questions raised by long-tail losses. In Plastics Engineering Co. v. Liberty Mut. Ins. Co. (7th Cir. (Wis.) Jan. 22, 2008), the insured sought defense and indemnity for multiple asbestos claims spanning successive policy periods. The district court had concluded that each person's injury caused by exposure to asbestos-containing products constitutes a separate “occurrence”; that non-cumulation provisions in the policies limited each claimant's recovery to the maximum amount allowed in a single triggered policy for an occurrence; and, that defense and indemnity would be allocated on an “all sums” rather than pro rata basis. On appeal, the 7th Circuit found that Wisconsin law does not provide sufficient guidance as to how the Wisconsin Supreme Court would resolve these issues, and certified these questions to the Wisconsin Supreme Court:

1. Under Wisconsin law, what constitutes an “occurrence” in an insurance contract when exposure injuries are sustained by numerous individuals at varying geographical locations over many years?

2. Does Wisconsin Statute § 631.43(1) apply to successive insurance policies when an occurrence is ongoing and spans multiple insurance policies, thereby prohibiting efforts by consecutive insurers to reduce coverage to the maximum of a single policy period?

3. In Wisconsin, are insurers obligated to pay “all sums” related to the defense and/or indemnification of an injury that triggers one insurance policy; or alternatively, are insurers liable for a pro rata share of defense costs and/or damages depending on how much of the injury occurred during the triggered insurance policy period?

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In Scottsdale Ins. Co. v. Flowers (6th Cir. (Ky.) Jan. 16, 2008), the 6th Circuit considered whether a therapist was covered under a liability policy for damages arising from his sexual affair with a patient. The policy, issued to a mental health care facility, covered “those sums that the insured becomes legally obligated to pay as DAMAGES because of injury as a result of a WRONGFUL ACT.” The policy defined “wrongful act” as “an act, error, or omission in the furnishing of professional health care services,” and included as “insured” the facility’s “employees and volunteers, but only for acts within the scope of their employment by you.” At issue was whether the phrase “scope of employment” was ambiguous, and, if not, whether engaging in sexual activities with a patient is within a therapist's scope of employment.
Applying Kentucky law, the court concluded the phrase was not ambiguous. “Scope of employment,” the court reasoned, is a legal term of art. While an insured might legitimately contest its application to the particular facts of a case, this does not create an ambiguity.
Turning to the second issue, the court concluded that engaging in sexual activity with a patient is not within the scope of a therapist's employment. The court explained that the focus of the determination is on the employee’s motive. An employee acts within the scope of his employment when his “purpose, however misguided, is wholly or in part to further the master's business.” When the employee “acts from purely personal motives ... which [are] in no way connected with the employer's interests, he is considered in the ordinary case to have departed from his employment.”
The court relied on a case involving similar facts, Osbourne v. Payne, 31 S.W.3d 911 (Ky.2000), in which the Kentucky Supreme Court explained that “to be within the scope of its employment, the conduct must be of the same general nature as that authorized or incidental to the conduct authorized.” The insured attempted to distinguish this case because the complaint also alleged negligence, but the court rejected the argument, noting there was no evidence that the therapist had negligent sex with the claimant. Instead, the complaint alleged negligence because he engaged in sexual activity. “Engaging in sexual relations with a patient,” the court concluded, “is not motivated by a desire to serve the interests of the therapist's employer, but rather, is designed ‘to satisfy the employee's own sexual proclivities.’”
The court, however, left open the possibility that other allegations in the complaint might be covered by the policy. The complaint alleged that “Flowers ... had the obligation to treat and counsel Burke in a professional manner and he breached his professional and ethical duties to so treat her.” This language, the court concluded, encompassed the possibility that the therapist breached these duties by negligently treating her. The district court had not been asked to consider whether the counseling activities, as opposed to the affair, were within the scope of employment, and did not express an opinion on that question. The appeals court therefore declined to broaden the language of the district court's order.

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The total pollution exclusion was held to apply to property damage resulting from the release of home heating oil in Nascimento v. Preferred Mut. Ins. Co., (1st Cir. (Mass.) Jan. 18, 2008). The claim arose from soil contamination to an adjacent property from an UST used by the insured to store home heating oil to heat his business. The insured was sued by subsequent property owners for costs incurred in remediating the property, and for property damages. The insured conceded that section (f)(2)(a) of the exclusion barred coverage for remediation damages; however, he argued that the underlying complaint also sought damages to the property apart from the cost of remediation to which the exclusion do  not apply. The court disagreed, holding that section (f)(1)(a) of the exclusion, which bars coverage for “ ‘property damage’ arising out of the actual ... discharge, dispersal, seepage, migration, release or escape of pollutants ... at or from any premises, site, or location ... which is or was at any time ... occupied by ... any insured,” also applied to the claim. Though the insured did not own the adjacent lot, he did "occupy" the UST within the meaning of (f)(1)(a). Relying on McGregor v. Allamerica Ins.Co., 449 Mass. 400 (2007), decided after the district court's opinion and while this appeal was pending, the court held that once the oil becomes a pollutant, the total pollution exclusion of the CGL policy is triggered and coverage for remediation and non-remediation claims is barred.

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In a coverage dispute arising from a negligence claim brought by victims of a shooting spree, the Pennsylvania Supreme Court considered whether multiple shootings resulting in five deaths and one serious injury qualified as an “accident” under a homeowner’s policy, and whether the shootings constituted a single “occurrence.” In Donegal Mut. Ins. Co. v. Baumhammers (Pa. Dec. 27, 2007), the court held that negligence claims asserted against the perpetrator’s parents qualified as an accident, and that the multiple shooting arose from a single, not multiple occurrences.

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In Catholic Health Services of Long Island, Inc. v National Union Fire Ins. Co. of Pittsburgh, P.A. (NY App., 2nd Dept., Dec. 11, 2007), a New York appellate court has held that an insured health care provider is not entitled to coverage under its liability policy for legal fees it incurred in responding to investigative subpoenas issued upon a joint venture of which it was a member.

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The Ninth Circuit has ruled that an insured’s claim for the difference between the appraised value of uncontaminated properties and the sale price of the properties in an contaminated state is not recoverable under a commercial general liability policy on the basis that the claim did not constitute “property damage” or “damages” that the “insured shall become legally obligated to pay” because of “property damage” under the terms of the subject policy and Washington State law.

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The Illinois Supreme Court has ruled that targeted tenders do not trump the rule of horizontal exhaust