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

The fate of climate change litigation now rests in the hands of the United States Supreme Court. Electric utilities, having suffered a surprising defeat at the hands of the Second Circuit last year in American Electric Power Co. Inc. et al. vs. State of Connecticut, 582 F.3d 309 (2d Cir. 2009), rehearing denied (2d Cir. March 5, 2010) filed a petition for certiorari with the nation’s highest court on August 2, 2010 seeking reversal of the Second Circuit’s opinion reinstating the plaintiffs’ federal common law nuisance claims against the utilities for allegedly contributing to global warming. In their cert petition, American Electric, Duke Power, Xcel Energy and Southern Company argue that such a cause of action should not be implied under the common law and that these are political issues that are best left to the Congress to decide.

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For decades, the American Law Institute has had a seminal influence on the law through its widely-cited Restatements.  Now the ALI is embarking on its first ever foray into the world of insurance coverage.

In May 2010, the ALI Council approved an ambitious proposal for a “Principles of Liability Insurance Law.”  “Principles” differ from the more familiar ALI “Restatements” in that they analyze what the law ought to be as distinguished from setting forth what it presently is.

The insurance Principles project will consist of three chapters: (1) Principles of Contract Law in the Liability Insurance Context; (2) Principles of Liability Insurance Coverage; and (3) Principles of the Management of Insured Liabilities. The reporter for the project is Professor Thomas Baker of the University of Pennsylvania, who will be assisted by several dozen academics, judges and insurance law specialists.

For a complete listing of the advisory group, click on http://www.ali.org/index.cfm?fuseaction=projects.members&projectid=23#RAS
 

 

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Many thanks to our readers and the folks at the Insurance Law Center for recognizing the Forum as among the Top 50 Insurance Law Blogs for 2009!

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As we complete our third year of blogging, we're pleased to report that the National Insurance Law Forum has been selected as a candidate for the LexisNexis Top 50 Insurance Blogs of 2009.  The Top 50 will be selected in mid-July, when Insurance Law Center readers will be asked to vote for the Top Blog of the Year.  The insurance community is invited to comment on and support nominees at the Insurance Law Center site through July 9, 2010.  We look forward to reading your comments, and many more years of blogging.  Thanks for your continued interest and support.

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An article in Tuesday’s New York Times discussed the growing trend of merchants to file defamation actions against aggrieved consumers who post unflattering statements about them on the internet through social media such as Face Book or Yelp.  While such claims may be subject to anti-SLAPP statutes in many states, they nonetheless pose a daunting prospect for the defendants, most of whom are likely to be citizens with little or no experience in the legal system.

So will these end up in the lap of the insurance industry?  While such claims are likely subject to various HO-3 exclusions, depending on the specific circumstances of the claim, they may well trigger at least a duty to defend if the homeowner's policy includes "personal injury" coverage extending to libel, slander or defamation.

 

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A month after the Deepwater Horizon driling rig exploded, releasing vast volumes of oil into the Gulf of Mexico, the coverage wars have begun.

On May 21, the Phelps Dunbar law firm filed an action for declaratory relief in the federal district court in Housting, seeking a declaration that various Lloyd's syndicates do not owe additional insured coverage to British Petroleum under various excess policies issued to the rig's owner, Transocean.  In Certain Underwriters at Lloyd’s London vs. BP P.L.C., 4:10-cv-01823, U.S. District Court, Southern District of Texas (Houston), Lloyd's argues that its coverage obligations with respect to BP do not extend to sub-surface releases as an agreement entered into between Transocean and BP only extended coverage to pollution “originating above the surface of the land or water from spills, leaks or discharges” and therefore should not apply to subsurface contamination.

Stay tuned.

 

 

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A tip of the cap to White & Williams coverage maven Randy Maniloff for his hilarious satirical send up of a surprising opinion issued yesterday by the New Jersey Supreme Court in  Three Jokers recanting the heresy of its 1994 "triple trigger" decision in Owens-Illinois as no longer being worthy of predecential value.  I had to check the Supreme Court's web site to make sure it wasn't the real thing.  Now if wishes were horses...

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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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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.

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2008:  The Year of The Rat

New Nasty Claim Threat:                 Swine Flu

Athletic Achievement:                      Michael Phelps

Furthest Fall from Grace:                 Eliot Spitzer

Coolest New Gadget:                        Kindle

Hottest Coverage Issue:                   Concurrent Causation

 

The Eight Most Important Insurance Coverage Rulings of 2008

 

Acuity v. Bagadia, 750 N.W.2d 817 (Wis. 2008)

The Wisconsin Supreme Court ruled in this case that allegations that a software company infringed the copyrights and trademarks of Symantec by marketing and distributing knock-off copies of Symantec’s security software through advertisements that featured the copyrights and trademarks of Symantec triggered Coverage B.  The court ruled that the copyright claims were clearly covered but that trademark infringement was also covered as involving the infringement of a “title.”  The court ruled that various dictionaries defined both “title” and “trademark” as involving distinctive marks or descriptions.  Furthermore, the court found that this infringement had occurred in the course of the insured’s advertising.  The court observed that as “advertising” was susceptible to both a broad and narrow interpretation, it would be deemed to be ambiguous and should be construed in favor of coverage.  The court found that the insured’s activity in accepting sample orders from existing customers and then sending those customers samples in unmarked sleeves comports with the broad definition of advertising that it had adopted as involving a “solicitation of business.”  Finally, despite the fact that the insured had earlier settled similar claims against Continental Casualty for a payment of $165,964, the court refused to order that Acuity receive an off-set for this payment due to factual questions with respect to what CNA had paid for and why.

Comment:  With this case, the Wisconsin Supreme Court undid years of favorable Seventh Circuit jurisprudence and did for Coverage B what it had been doing to Coverage A in the years since American Girl.  As with the “W” states in general, the Wisconsin Supreme Court seems to relish the opportunity to pioneer new territory for which it can claim coverage.

 

 Bi-Economy Market v. Harleysville Ins. Co. of NY, 10 N.Y.3d 387, 886 N.E.2d 127 (2008).
Panasia Estates v. Hudson Ins. Co., 10 N.Y.3d 200, 886 N.E.2d 135 (2008)

In these cases, the Court of Appeals ruled for the first time that a policyholder may recover consequential damages against property insurers if the insured shows that the damages were foreseeable and contemplated by the parties at the time of contracting.  the court ruled that lower courts had erred in dismissing a property owner’s claim that the failure to his business resulted from the insurer’s bad faith refusal to pay a fire loss, holding that such damages were reasonably foreseeable and contemplated by the parties.  Likewise, in, the court ruled that the contractual exclusion for consequential losses did not preclude such awards. Three dissenting judges accused the majority of allowing a backdoor claim for punitive damages without the requisite proof of egregious conduct that the court has required since Rocanova.   Further, the dissent argued that the whole idea of consequential damages had no place in contractual dispute over a duty to pay.

Comment:  These cases were an eye-opener.  After years of dormancy, consequential damages are now a prominent feature of insurance jurisprudence in New York.  As the dissenters point out, however, there is some irony in this given the general reluctance of New York courts to award punitive damages in most cases.  Now, policyholders have an alternative means of recovery even in the absence of bad faith.

 

Continental Cas. Co. v. Employers Ins. of Wausau, 2008 N.Y. slip op. 10227 (N.Y. App. December 30, 2008)

The Appellate Division has ruled that a trial court erred in holding that Continental Casualty had a potentially unlimited indemnity exposure for claims against a now insolvent company that installed products containing asbestos at Consolidated Edison facilities prior to 1972.  The First Department held that the insured not only had been guilty of laches in its failure to pursue claims for coverage against CNA on a non-products theory but that its failure had equal effect against third party claimants who stood in the shoes of Keasbey.  Furthermore, the Appellate Division ruled that the trial court had erred in finding that CNA had failed to establish that all of the underlying claims against Keasbey fell within the “products/completed operations hazard” and were therefore subject to aggregate limits in the policies.  The court took note of the fact that all of these suits were originally pleaded as products claims based upon an alleged failure to warn of the hazards of asbestos.  The court distinguished the Court of Appeals’ opinion in Frontier Insulation as involving the duty to defend whereas these claims solely pertained to Continental Casualty’s claimed indemnity duties.  The Appellate Division also emphasized the fact that mere exposure to asbestos fibers was not itself an injury and that given the length of time that it took for asbestos-related diseases to develop, said injuries plainly occurred after any installation operations conducted by Keasbey occurred.  The court emphasized that an “injury in fact” trigger is not the same as an “exposure” trigger and there was no evidence that any of the underlying claimants suffered an injury in fact at the time of any ongoing operations conducted by Keasbey.

 

Corn Plus Cooperative v. Continental Cas. Co., 516 F.3d 674 (8th Cir. 2008)

The Eighth Circuit has ruled in this Minnesota case that a consent judgment that did not allocate between covered and non-covered damages was invalid.  Having found that a portion of the underlying loss (which concerned lost ethanol production caused by defective welding that contaminated the plaintiff’s corn mash) was subject to various “business risk” exclusions, the court ruled that the failure of the Miller-Shugart agreement to allocate between covered and non-covered damages made it impractical for the court to determine whether it was reasonable or not and therefore rendered the agreement unenforceable as a matter of law.  The court also rejected the plaintiff’s argument that it should be allowed to revive its claims against the insured, holding that the plaintiff had waived this right as the agreement stipulated that the release of the plaintiff’s claims was unaffected by the lack of enforceability of other parts of the agreement.

Comment:  Minnesota, Arizona and Missouri have long been the epicenter of consent judgment disputes.  With this opinion, the Eighth Circuit pioneered a new tool by which insurers might challenge the efficacy of such agreements in jurisdictions that recognize an insurer’s right to allocate losses between covered and non-covered claims.

 

Don’s Building Supply v. OneBeacon Ins. Co., 267 S.W.2d 20 (Tex. 2008)

In this case, the Texas Supreme Court adopted an “injury in fact” trigger for construction defect cases, declaring that allegations of ongoing property damage as the result of the insured’s negligent installation of EIFS in the plaintiffs’ homes triggered coverage throughout the period that water intrusion allegedly occurred.  A mere six months after oral argument (possibly a record for a court that lately has taken over two years to resolve coverage appeals), a unanimous court declared that despite the fact that numerous lower Texas courts had adopted a manifestation approach to such claims over the years, such a theory was not reflected in the actual wording of the policy.  The court observed that “the policy in straightforward wording provides coverage if the property damage “occurs during the policy period,” and further provides that property damage means “[p]hysical injury to tangible property.” Whatever practical advantages a manifestation rule would offer to the insured or the insurer, the controlling policy language does not provide that the insurer’s duty is triggered only when the injury manifests itself during the policy term, or that coverage is limited to claims where the damage was discovered or discoverable during the policy period.”

Comment:  Prior to Don’s Building, Texas “trigger” case law was a complete mess, with state and federal courts disputing whether “manifestation” or “exposure” triggers should apply and other courts distinguishing between BI and PD claims.  Since it’s issuance, Don’s Building has been given broad scope by the Court of Appeals.  See Union Ins. Co. v. Don’s Building Supply, No. 05-06-00884-CV (Tex. App. September 23, 2008)(insurer held to owe duty to defend even though the homeowners in question had not purchased the property until 2003, five years after the policies in question had expired) and Thos. S. Byrne, Ltd. v. Trinity Universal Ins. Co., 2008 WL 5095161 (Tex.App. December 4, 2008)(water intrusion could have begun from the date of the insured’s contractors work first work at the property).

 

Mutual of Enumclaw Ins. Co. v. T&G Construction, Inc., 2008 WL 4670256 (Wash. October 23, 2008)

In this en banc opinion, the Washington Supreme Court ruled that a liability insurer that defended its policyholder under a reservation of rights but declined at the conclusion of a mediation session to pay for the settlement of construction defect claims could not now contest the reasonableness of the settlement.  Although the court’s prior ruling in Besel had declared that an insured’s good faith settlement establishes the insured’s presumptive damages if  an insurer declines in bad faith to participate in the liability suit, the Supreme Court has now ruled that the same rule applies even in the absence of bad faith.  In so ruling, the Supreme Court reversed a holding of the Court of Appeals that the insurer should have been free to contest its policyholder’s liability since issues of liability had not been finally resolved.  Instead, the Supreme Court ruled that although the insurer was correct that the insured’s affirmative defense of the statute of limitations had not been litigated to “absolute finality,” it had been “substantially resolved” to the point that the settlement was binding on the insurer absent a showing of collusion or fraud.  The court declared that although “an insurer is entitled to a final determination on coverage questions…if a coverage question turns on the very same facts that are in dispute in the underlying litigation between its insured and the claimants, the insurer will be bound by the factual findings of a good faith settlement, which is judicially approved as reasonable.”

Comment:  Issues relating to consent judgment plagued insurers throughout this decade.  With this opinion, the Washington Supreme Court thrust itself to the forefront of jurisdictions that impose an all but impossible burden of proof on insurers that wish to contest the reasonableness of settlements that insureds enter into over their objections even where, as in this case, the insurer is defending under a reservation of rights and has not acted in bad faith in disputing is claimed indemnity obligations.

 

Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 73 Cal. Rptr.3d 770, 161 Cal. App.4^th 184 (4^th Dist. 2008), review denied (Cal. 2008).

The California Court of Appeal ruled that a policyholder could not force its excess D&O carrier to pay the “excess” amount of a class action settlement where the insured had compromised its claim against the primary insurer for less than the full $20 million primary limits.  Despite the insured’s agreement to itself make up the difference between the primary limit and the amount that it had received in settlement, the Fourth District held that the language in question unambiguously stated that the excess carrier’s obligation should only arise after the primary insurer had paid the limits of his coverage or after the insured had been held liable to pay the full amount of the underlying limits of liability.  The court ruled that the phrase “had paid the full amount of limits of liability” could only reasonably be interpreted as meaning the actual payment of no less than $20 million, particularly when considered in the overall context of the policy in which it was included.  Further, the court ruled that language required that the insured “had been liable to pay the full amount of the underlying limit of liability” was not susceptible of contrary meanings and could only reasonably be understood as requiring coverage where a court order or judgment had entered declaring the insured’s liability to pay more than the underlying limits.

Comment:  We have included relatively few intermediate appellate opinions in this survey.  Qualcomm warrants inclusion, however, because it was the rare instance in which an appellate court at any level given strict effect to the underlying exhaustion provisions in an umbrella policy.  Although the ruling may be unique to the particularly London wordings that were at issue here, the case had a profound impact on the manner in which policyholders thereafter settled multi-layered claims in California, particularly in the D&O arena.

 

Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008)

The Georgia Supreme Court ruled in this case that an absolute pollution exclusion precludes coverage for carbon monoxide poisoning claims against a landlord.  The court declared that carbon monoxide is clearly a toxic fume within the exclusion’s definition of a “pollutant.”  The court held that dissenting judges in the Court of Appeals who had attempted to limit the scope of the exclusion based upon its perceived purpose had improperly looked outside the actual wording of the exclusion to find ambiguity.  Two justices argued in dissent that words in an insurance policy should not be given a literal meaning that would lead to absurd results.

Comment:  Earlier in the decade, several major states (California, Illinois, Massachusetts, New York, etc.) had used indoor fumes cases to adopt an extremely constricted view of absolute pollution exclusions that presumed that the origin of such exclusions impliedly required that their scope be limited to “environmental” claims.  By the end of the decade, however, decisions such as Reed and the 2007 opinion of the Iowa Supreme Court in Bituminous Cas. v. Sand Livestock Systems had restored some balance to the rules that courts were applying.  In the interim, however, ISO had promulgated very different endorsement and exclusionary wordings that restored coverage for BI claims due to malfunctioning heating systems.

 

Sony Computer Entertainment America, Inc. v. American
Home Assurance Co., 532 F.3d  1007 (9^th Cir. 2008),

The Ninth Circuit ruled in this California case that class actions brought against Sony for claimed defects in its Play Station II did not trigger CGL or Media E&O policies. The court rejected Sony’s contention that the AISLIC Media E&O policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations.  The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc.  The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement and that a more limited definition of the term consistent with the case law and the policy context would be to only afford coverage for the publication of material that leads the reader to commit a harmful act.  As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Play Station II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.”  The court took note of the fact that although the plaintiffs alleged that these disks had not properly played on the Play Station II, there was no suggestion that they did not function properly on other devices.  In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury.  The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Play Stations.  Rather, the court found that these allegations suggested that the devices deteriorated over time.  Writing in dissent, Judge By bee argued that the majority had given an unduly narrow construction to Aisle’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

Comment:  Sony reflects the confluence of several interesting factors:  the modern ferment on intellectual property disputes, California’s principles of policy interpretation and the emergence of media E&O policies as an alternative target for policyholder IP claims.  

 

Unauthorized Practice of Law Committee v. American Home Assur. Co., 261 S.W.3d 24 (Tex. 2008)

Nearly three years after agreeing to hear this case, the Texas Supreme Court ruled that liability insurance companies may rely upon staff counsel to undertake the defense of their policyholders so long as the interests of the parties are congruent and so long as staff counsel fully discloses his employment relationship to the insured.  In a lengthy opinion that reviewed the evolution of legislative control over the practice of law in Texas and the evolving role of insurer use of staff counsel in Texas and elsewhere, the court rejected the Committee’s argument that American Home and Travelers were acting as corporations engaged in the practice of law when they employed staff attorneys to provide legal services to third-party policyholders.  Just as a corporation could use in-house attorneys to represent its own interests, the Supreme Court held that a liability insurer was not prohibited from using such attorneys to represent its policyholders so long as they shared a mutual interest in the outcome of the case.  While giving credence to the Committee’s argument that even absent an actual conflict of interest, the profit motivation of insurers to reduce legal expense created a situation where the relationship was “fraught with the potential for a conflict,” the majority observed that the Committee had not presented any empirical evidence of injury to a private or public interest caused by a staff attorney’s representation of an insured.  Given that insurers have used staff counsel for decades, the Supreme Court found this lack of evidence telling.  In an interesting aside, the court noted that even though actual conflicts of interest might result from coverage disputes, a reservation of rights letter ordinarily does not, by itself, create a conflict between the insured and the insurer as it merely recognizes the possibility that such a conflict may arise in the future.  The court therefore declined to hold that staff attorneys should never represent insureds in cases where the insurer is defending under a routine reservation of rights although it suggested that this might be the safer course.  The court also noted that private and staff counsel were subject to the same ethical obligations and problems as regards the acquisition of confidential information or obligations to provide objective settlement evaluations that might thereby subject the insurer to Stowers liability for failing to settle within policy limits.  The Supreme Court observed that it saw no reason why staff counsel would be less respectful of these obligations than private counsel.  The court also declined to accept the Committee’s declaration that insureds’ defense counsel represents only the insured and that, as a result, staff attorneys, who necessarily represent the insurer, cannot defend insureds without violating this rule.  The Supreme Court observed that, “We have never held that an insured’s defense lawyer cannot represent both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer.”  In conclusion, the majority found that although the use of staff attorney comes with risks owing to the possibility of conflicts, there are a great many cases where the interests of the parties are congruent and where an insurer may use staff attorneys without conflict and to the mutual benefit of it and its policyholder.  As a result, it concluded that the use of staff attorneys in such cases does not constitute the unauthorized practice of law.  Writing in dissent, Justices Johnson and Green argued that liability insurers were acting in the unauthorized practice of law by managing court proceedings on behalf of third parties when the used staff counsel.  As a result, the dissenters argued that because acts of staff attorneys are acts of the insurers, when staff attorneys defend insureds in lawsuits, the insurer violates the State Bar Act.

Comment:  Like the Battle of New Orleans, the insurers’ win in the Texas Supreme Court was the decisive victory in a war that had largely run its course even before the news of the battle was announced.  By 2008, insurers and insurance defense lawyers had reached an uneasy truce in the tripartite wars that had begun a decade earlier.   During this period, the role and scope of staff counsel’s role changed dramatically.  By the end of the decade, only North Carolina and Tennessee continued to prohibit insurers from using staff counsel to defend their insureds.

 

 

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2007:  The Year of The Pig

 

New Nasty Claim Threat:                 Contingent Commissions    

Athletic Achievement:                      Tiger Woods

Furthest Fall from Grace:                 Dickie Scruggs          

Coolest New Gadget:                        Streaming Video

Hottest Coverage Issue:                   “Occurrence”

 

The 7 Most Important Coverage Rulings of 2007

Cinergy Corp. v. St. Paul Surplus Lines Ins. Co., 865 N.E.2d 571 (Ind. 2007). 

In this case, the Indiana Supreme Court held that a liability insurer has no obligation to pay for the cost of implementing new technology to prevent future environmental harm.  In holding that AEGIS did not owe coverage for a lawsuit in which the federal government sought to compel Duke Energy and other utilities to comply with the federal Clean Air Act and implement new clean air technologies to prevent widespread harm to public health and the environment, the Supreme Court agreed with other jurisdictions that a distinction should be drawn between remedial and prophylactic remedies and that coverage was not required here where the federal lawsuit was directed at preventing future harm to the public not obtaining control, mitigation or compensation for past or existing environmentally hazardous emissions.  The court ruled that the policy’s requirement that injury be “caused by an accident” precluded coverage for cases such as this where the complaint sought to prevent an occurrence from happening. 

Comment:  Notwithstanding broad language in its 2001 opinion in Hartford v. Dana that damages covered under a general liability policy might include costs “to prevent further releases of hazardous substances,” the Indiana Supreme Court ruled in Cinergy that coverage only extends to existing harm and does not insure against costs that a policyholder must undertake to prevent future injuries.  The opinion has since been widely cited by insurers as proof against claims that they should be liable for the cost of limiting greenhouse gas emissions that are claimed to contribute to global warming.

 

Donegal Mut. Ins. v. Baumhammers, 938 A.2d 286 (Pa. 2007).

After the Pennsylvania Superior Court ruled 5-3 that a shooting spree in which the insured’s son fatally shot five people and wounding another involved six separate “occurrences, a nearly equally divided Supreme Court tilted the opposite way, ruling that the claims involved a single ‘occurrence.”  ), the Supreme Court held that the appropriate focus of a “cause” analysis was on the act of the insured that gave rise to his or her liability rather than the “immediate injury-producing act.”  The court held that, “Determining the number of occurrences by looking to the underlying negligence of the insured recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured.  Since the policy was intended to insure [policyholders] for their liabilities, the occurrence should be an event over which [policyholders] had some control.”  Justice Baldwin’s opinion was joined by Justices Castille, Saylor and Eakin.  Justices Cappy and Baer filed separate concurrences joining the majority’s analysis with respect to whether the underlying claims alleged an “accident” but dissenting with respect to the analysis of the “occurrences” issue.  Chief Justice Cappy argued that the majority had been inconsistent in finding that the definition of “occurrence” focused on the violent acts of Richard Baumhammers in shooting his victims whereas its analysis of “occurrences” had focused on the negligent acts of the parents and that the majority should have adopted the “cause” approach proposed by the Florida Supreme Court in Koikos v. Travelers Ins. Co., 849 So.2d 263 (Fla. 2003) wherein “cause” was the immediate act causing bodily injury.  Justice Baer took a somewhat different approach arguing that the number of occurrences should be determined not based on the negligent acts of the insured or the events directly causing each individual’s injury or death. 

Comment:  A depressing number of appellate rulings in this decade addressed serial crimes.  With this ruling, the Pennsylvania Supreme Court, despite its deep divisions, took a relatively pragmatic approach, finding coverage for the innocent defendants whose conduct may have contributed to the perpetrator’s violence while reining in the nearly unlimited amounts of coverage that other courts had allowed in such cases.

 

In Re: Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)

Rejecting a District Court’s distinction between floods that result from natural and manmade causes, the Fifth Circuit has held that property policies do not cover Katrina claims.  Mere weeks after hearing oral argument, the panel ruled that the policies’ flood exclusions were not ambiguous, nor should ambiguity be inferred merely because they could have been worded more explicitly to make their intent clearer as was the case with similar water damage exclusions. Further, the court held that numerous dictionary definitions failed to apply the distinction that the District Court had relied on and, indeed, in certain cases had included the inundation of land from burst levies as an example of a “flood.”  Nor was the court persuaded that other terms in these exclusions implied an intent on the part of underwriters to limit the scope of the exclusion to natural events.  The court declined to reach the issue of whether anti-concurrent causation language applied here, declaring that the efficient proximate cause doctrine would only arise in cases where there were two distinct perils, one covered and one excluded, that resulted in a loss whereas here the plaintiffs’ loss was solely attributable to a flood.  The court declared that negligent design, construction or maintenance of the levies may have contributed to the plaintiffs’ losses but was only one factor in bringing about the flood; “the peril of negligence did not act, apart from flood, to bring about damage to the insureds’ property.”  For similar reasons, the court precluded any argument on the part of the policyholders that sought to recharacterize their flood damage as actually resulting from negligent design, holding that the flood exclusions were meant to apply regardless of what other factors contributed to the development of the flood.

Comment:   Hurricane Katrina brought on a flood of coverage litigation against property insurers along the Gulf Coast in Louisiana and Mississippi, along with a political firestorm orchestrated by Dickie Scruggs and his political allies in Mississippi.  Central to many of these disputes was the debate over whether the plaintiffs’ homes were damaged by wind (covered) or water (not) and the efficacy of anti-concurrent causation language that insurers contended barred coverage where covered causes of loss contributed to damage resulting from excluded causes.  This crucial Fifth Circuit opinion proved to be a tipping point in this struggle.   Despite vast amounts of unfavorable publicity and the formidable political forces arrayed against State Farm and other insurers, state and federal appellate courts did a remarkably rational job throughout in giving effect to plain policy wordings.  

 

Lamar Homes Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)

A year and a half after hearing oral argument, a bitterly divided Texas Supreme Court has ruled that construction defect claims can be an “occurrence.”  In keeping with recent opinions from states such as Wisconsin, the majority declared that whether faulty workmanship claims are covered should be a function of policy exclusions, not insuring agreement elements such as “occurrence” or “property damage.” The court further refused to find that the “economic loss” doctrine precluded coverage.  The Texas Supreme Court took note of the fact that certain policy exclusions, notably Exclusion J(6) were clearly directed to the consequences of faulty workmanship causing property damage and preclude coverage for such claims except in circumstances where they result from the work of a subcontractor.  The Texas Supreme Court ruled that, “The proper inquiry is whether an occurrence has caused property damage, not whether the ultimate remedy of that claim was in contract or tort.”  Three dissenting judges took issue with this conclusion, arguing that “selling damaged property is not the same as damaging property,” and arguing instead that the economic loss doctrine should preclude any coverage for such claims.  Three dissenting justices argued that claims for breach of contract due to faulty workmanship are a mere “economic loss” and thus not covered.

Comment:  Lamar Homes concluded the coverage cycle that began with cases such as Vandenberg in California and American Girl in Wisconsin.  It also came during a period when an extraordinary number of major appeals and certified questions were pending before the Texas Supreme Court.  When the logjam finally broke in 2007-2008, insurers learned to rue the day that they had complained about how long it was taking the Supreme Court to answer these questions.

 

Philip Morris, USA v. Williams, 549 U.S. 346 (2007)

Returning to the issue of the constitutionality of punitive damage awards only four years after its landmark opinion in State Farm v. Campbell,  a narrowly divided court ruled 5-4 that awards based on a jury's desire to punish a defendant for harming those who are not parties to the lawsuit amounted to a taking of property from the defendant in violation of the defendant’s constitutional due process rights.  The court therefore set aside a $97 million punitive damages award that had been upheld by the Oregon Supreme Court. Justices Stevens, Ginsberg, Scalia and Thomas issued three separate dissents arguing that the court should not impose limits on the right of the courts to impose damages in such cases.

Comment:  In Williams, the U.S. Supreme Court  made explicit what it had previously suggested in State Farm v. Campbell, namely that juries may not punish civil defendants for injury to parties who are not parties to the litigation.  Although widely-hailed at the time, the court’s opinion proved to be of little benefit to Philip Morris.  On remand, the Oregon Supreme Court reinstated the $97 million award on the basis of a state law jury instruction.  Although the U.S. Supreme Court took the unusual step of accepting the case again in 2008, it dismissed the petitioner’s cert claim following oral argument, apparently due to frustration at the confusing factual record.  Williams does, however, signal a shift in punitive damages jurisprudence from disputes over ratios to a renewed focus on jury instructions.

 

Wilson v. 21st Century Ins. Co., 42 Cal.4^th 713, 723-24 (2007)

Despite an auto insurer’s contention that it was insulated against any claim that it could not have acted in bad faith when it denied the insured’s UIM claim, as there was a genuine dispute with respect to whether the plaintiff’s spinal injuries had been caused by the accident or were the result of a pre-existing condition, the California Supreme Court ruled 5-2 that the trial court had not erred in refusing summary judgment to the insurer, as the insured had established triable issues of fact with respect to whether the insurer had undertaken an adequate investigation, particularly as it appears that the denial was not supported by the medical evidence.  The court ruled that the “genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim” and that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.  By contrast, the court declared that a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances.  Writing in dissent, Justices Chin and Baxter argued that the insurer’s denial was reasonable in light of x-rays that were taken immediately after the accident showing no fracture or degenerative change as well as the fact that the plaintiff thereafter went on an extended backpacking trip in Europe.

Comment:  With this opinion, the California Supreme Court made clear just how thin a defense to bad faith claims the “genuine dispute” doctrine could be.  Wilson is the culmination of a trend that started at the beginning of the decade, when the Ninth Circuit ruled 2-1 in Guebara v. Allstate Ins. Co., 237 F.3d 987 (9^th Cir. 2001), that expert testimony did not automatically insulate an insurer from bad faith claims based on biased investigations, but could, as in this case, create a genuine issue of coverage sufficient to preclude a finding of bad faith.  Following Guebara, several California courts have refused to grant summary judgment to insurers in bad faith cases based on the insurer’s inadequate investigation of the insured’s claim.  See Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1072 (2007) and Chateau Chamberay Homeowner’s Assn. v. Associated International Ins. Co., 90 Cal. App.4th 335 (2001). 

 

Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007)

In what may well be a low point (and one of the most gruesome fact patterns) in Washington insurance jurisprudence, the state Supreme Court has ruled that a lower court erred in refusing to find GL and E&O coverage for emotional distress claims by a dentist’s employee after a bizarre practical joke in which the insured posed the plaintiff with boar’s tusks in her mouth while under anesthesia and took photos of her.  Whereas the Court of Appeals had declared that no reasonable patient would construe such misconduct as involving the rendering of professional dentistry services, the Supreme Court held that E&O coverage applies as the act occurred in the course of preparing the patient for surgery and was “integrated into and inseparable from the overall procedure” and that the insertion of the boar tusk “flipper,” however oddly shaped, conceivably fell within the policy’s broad definition of the practice of dentistry.  The Supreme Court observed that an obligation to defend existed if the law was in doubt, observing that Fireman’s Fund’s decision not to defend was based upon an outside opinion from counsel that was somewhat equivocal.  The Supreme Court also held that the dentist could obtain coverage through his general liability policy, despite the fact that the plaintiff only alleged emotional distress, in light of allegations of depression, panic attacks, nightmares and suicidal impulses.  Further, the court found that the practical joke, despite its intentional nature, was a covered “fortuitous circumstance, event or happening” since the policy required not only that the act be intended but the resulting injuries also be expected or intended by the insured.  In this case, the court found that although the dentist’s conduct was intentional, it was conceivable that he had not intended his conduct to result in the plaintiff’s injuries.  Four justices dissented, arguing that the claims clearly involved intentional conduct none of which involved professional services and that no reasonable person would have understood that such claims would be covered.  The Supreme Court did rule, however, that Fireman’s Fund had no obligation to provide EPL coverage.

Comment:  The Washington Supreme Court is something of a puzzle palace.  Its opinions are often deeply divided, regularly generating more dissents and concurring opinions than any other appellate court in the country.  Even so, a majority of the court seemed determined to stake out the broadest territory that it could in compelling coverage for an incredibly dubious claim.

 

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In our opinion, the most significant insurance ruling in Oregon over the past ten years is the Oregon Supreme Court’s decision in Holloway v. Republic Indemnity Co. of America, 341 Or. 642 (2006). The “central issue” in that case was “whether an anti-assignment clause providing that ‘[y]our rights or duties under this policy may not be transferred without our written consent[]’ is ambiguous and thus should be construed against its drafter.” 341 Or. at 644. The Court’s ruling – that the clause was unambiguous and, therefore, an attempted assignment was void – is significant because it sets Oregon apart from the majority of other states which hold that anti-assignment clauses “prohibit the assignment of only pre-loss rights or duties.” Id. at 652.
 

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2006:  The Year of The Dog

Top New Claim Threat:                    Dick Cheney 

Athletic Achievement:                      Barbaro

Furthest Fall from Grace:                 Duke Lacrosse

Coolest New Gadget:                        WiFi

Hottest Coverage Issue                    524(g) Plans

 

The 6 Most Important Rulings of 2006

Fuller-Austin Insulation Co. v. Fireman’s Fund Ins. Co., 135 Cal. App.4^th 958, 38 Cal. Rptr.3d 716 (2d Dist. 2006), review denied (Cal. April 19, 2006). 

Between the 1940’s and the 1980’s, Houston-based Fuller-Austin was involved in the installation and removal of building materials containing asbestos.  Over time, thousands of asbestos suits were brought against Fuller-Austin that were defended by its primary insurers.  In 1997, Fuller-Austin advised its insurers that it was considering entering into a 524(g) pre-packaged bankruptcy.  After a nine-week trial, a Los Angeles jury ruled in May 2003 that Fuller Austin’s insurers were obligated to contribute over $200 million to a trust fund that the insured had entered into with the underlying asbestos claimants.  The jury held that the allowed asbestos claims was $108,175,000; the value of pending but unresolved claims was $108 million, and the value of future claims was $750 million.  These findings were largely set aside by the Second Appellate District on January 19, 2006.  In keeping with the California Supreme Court’s ruling in Hamilton v. Maryland Casualty, the Court of Appeal held that the bankruptcy confirmation proceedings had none of the attributes of an actual trial as it was not a contested evidentiary hearing, did not provide for the presentation of evidence concerning the debtor/insured’s liability and involved a process of negotiation, not fact finding.  The Court of Appeal also rejected Fuller-Austin’s contention that this was a settlement binding on the insurers.  Although it agreed that the plan was a settlement, it noted that Fuller-Austin had not obtained the insurers’ consent.  The court refused to find that the mere issuance of a reservation of rights letter by an excess insurer waived their right to require consent to a settlement before implicating their indemnity duties.  The Court of Appeal found that allowing Fuller-Austin to enter into a global settlement in the bankruptcy court without the insurers’ participation while permitting the insurers to challenge the plan for fairness, reasonableness and lack of fraud or collusion did no violence to the language in the policies requiring their consent.  While agreeing that insurers should not be permitted to “hover in the background at critical settlement negotiations” resisting all responsibility on the basis of lack of consent, the Court of Appeal held that the bankruptcy court’s confirmation of the Section 524(g) plan could not be read to preclude the right of the carriers to subsequently litigate the issue of whether the plan was unfair, unreasonable or the product of fraud or collusion.

Comment:  Following on the heels of the Third Circuit’s opinion in Congoleum, this decision helped to put a stake through the heart of a legal strategy that posed a critical and unforeseen exposure to excess carriers and that was breeding a terrible culture of corruption among counsel representing some policyholders and asbestos plaintiffs (or both).

 

Glidden Co. v. Lumbermen’s Mut. Cas. Co., 861 N.E.2d 109 (Ohio 2006)
Pilkington North American, Inc. v. Travelers Cas. Ins. Co., 861 N.E.2d 121 (Ohio 2006).

The Ohio Supreme Court issued a pair of opinions on December 20, 2006 that seemed at the time to reflect a deep division within the court with respect to whether and when corporate successors are entitled to claim coverage under a predecessor’s policies for long-tail liabilities arising out of the manufacture, sale or distribution of the predecessor’s products.  In Pilkington, a plurality of the court seemed to hold that, although the terms of a policy might allow a successor to obtain rights to indemnification, coverage was not transferred by “operation of law.”  The court also held, however, that any such rights were not barred by the policies’ anti-assignment clause, as the “chose in action” was fixed as of the date of the underlying injuries triggering coverage.   A concurring opinion by Chief Justice Moyer and Justice O’Connor argued that an insurer’s defense obligation was not assignable, particularly where, as here, multiple parties might be seeking a defense such that the assignment had materially changed or increased the risk faced by the insurer.  A different view was taken by Justices Pfeiffer and Resnick, who concurred in part and dissented in part, arguing that defense costs were likewise assignable.  Finally, Justice Lanzinger filed his own concurring and dissenting opinion declaring that Pilkington’s demand for a defense and indemnification was not a chose in action and therefore should not have been assignable at all.  On the same date, the court ruled that Glidden was not entitled to coverage by “operation of law” for lead paint claims involving policies issued between the 1960s and 1974 to a predecessor entity that manufactured the leaded paint giving rise to Glidden’s present tort liabilities.  Four of the justices found that the underlying corporate transactions that ultimately resulted in the creation of Glidden in 1986 had explicitly excluded insurance policies from the liquidation and distribution of assets of certain entitles.  Nor did the corporate transactions in any way suggest an intent to convey rights under the policies.  However, Judge Lanzinger concurred in the judgment.  Justices Resnick and Pfeiffer dissented, arguing that even though the corporate history in this case was more “tangled” than was the case in Pilkington, the successor entity should still be entitled to obtain the benefits of the predecessor’s policies.

Comment:  Despite the confusion engendered by these various plurality opinions, Glidden and Pilkington helped to “decalifornicate” the California Supreme Court’s Henkel analysis and gave mainstream credibility to insurer arguments that successor entities were not entitled to coverage under their predecessors’ policies “by operation of law.”

 

Kvaerner Metals  v. Commercial Union Ins., Inc., 908 A.2d 888 (Pa. 2006)

In this case, the Pennsylvania Supreme Court ruled that claims for breach of contract and breach of warranty with respect to the design and construction of a coke oven battery failed to seek recovery for an accident” or “occurrence.”  Although these terms were undefined in the subject polices, their ordinary meaning contained an element of fortuity that cannot be present where a claim is for faulty workmanship.  The Supreme Court found that any contrary interpretation of the policies would allow insurers to convert CGL policies into performance bonds that guarantee the insured’s work, rather than the accidental results thereof.   Having found that the underlying claim fell outside the scope of the policy’s insuring agreement, the court elected not to proceed to the issue of the applicability of various business risk exclusions to the underlying claims.

Comment:  The Pennsylvania Supreme Court has long defied easy analysis when it comes to insurance issues.  With Kvaerner, the Supreme Court held to a traditional view of the limitations of liability insurance that was recently followed in Nationwide Mut. Ins. Co. v. CPB International, Inc., 562 F.3d 591 (3d Cir. 2009), in which the Third Circuit ruled that allegations that the insured breached its contract with a domestic manufacturer by providing substandard goods imported from China were “contractual in nature” and therefore failed to allege an “occurrence” under Pennsylvania law.

 

 

Lee Builders, Inc. v. Farm Bureau Mutual Ins. Co., 137 P.3d  486 (Kan. 2006)

The Kansas Supreme Court ruled that moisture problems due to the insured’s defective materials or workmanship in a construction project constitute an “occurrence” for purposes of liability insurance coverage so long as the insured did not expect or intend the damage to occur.  The Supreme Court observed that it would make little sense for a CGL policy to include an exclusion for property damage to the insured’s own work and that of its subcontractors if such property damage was never meant to be an “occurrence” in the first place.  If the insurer had wanted to distinguish between claims for breach of contract and tort, it should have included language to this effect.

Comment:  Although Kansas is not a bellwether jurisdiction, the willingness of a relatively conservative state supreme court to follow the Wisconsin Supreme Court’s American Girl analysis contribute to a general groundswell that swept before it many of the traditional distinctions that had limited coverage for contractual disputes, especially in the construction defect context.

 

Wilkinson v. Citation Ins. Co., 447 Mass. 663, 856 N.E.2d 829 (2006).

 In the decade after 1997, the Supreme Judicial Court steadily expanded exceptions to the “American Rule” in insurance disputes, ruling in a series of cases that insureds were entitled to recover DJ fees in cases involving homeowner’s policies, then all cases involving the duty to defend and finally even cases where the insurer was defending under a reservation of rights but sought to cut off any continuing defense duty.  In Wilkinson, however, the SJC ruled that a Superior Court judge had erred in holding a property insurer that had disputed a first party claim in good faith nonetheless owed the legal fees incurred by its policyholder in pursuing the claim.  While maintaining its earlier-stated view that fees are recoverable for disputes involving a liability insurer’s duty to defend or where the insurer has acted in bad faith, the Supreme Judicial Court found that, short of abandoning the American Rule altogether, there was no principled basis in this case for distinguishing disputes involving insurance policies from other types of contractual disputes. 

Comment:  Few issues influence the willingness of parties to sue or be sued as the rules governing the right of the prevailing party to recover its attorneys fees.  This is particularly so in recent years, where the hourly rates charged by large policyholder-oriented law firms have dramatically outstripped the rates that insurers are used to paying panel counsel.  With this case, the SJC was given an opportunity to rule that policyholders could recover attorneys in all coverage disputes, whatever the policy form or issue.  The refusal of the court to do so, signaled an important leveling off in the court’s swing to the left that was echoed a year later by the Connecticut Supreme Court’s opinion in ACMAT Corp, v. Greater New York Mutual Ins. Co., 282 Conn. 576 (2007). 

 

Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006)

In this case, the Minnesota Supreme Court substantially trimmed back the rights of insurers to allocate defense costs and indemnity in construction defect cases.  The Court of Appeals ruled in a construction defect case that defense costs and indemnity should both be allocated based on “time on the risk,” rejecting the trial court’s “equal shares” approach for defense costs.  The court also ruled that the period of allocation should run through the date that the problems were remediated and should not be cut off, as the trial court ruled, when the insured general contractor received complaints from property owners concerning construction defects.   On further review, however, the Minnesota Supreme Court ruled that continuing injury claims resulting from construction defects should be allocated on a “time on the risk” basis from the start of the policy in which the closing date occurred through the end of the policy year in which the insured received notice of claim.  The court declared that the insured need not bear responsibility for any period of time for which insurance was unavailable for claims of this sort, so that the period of allocation period ends as of the year in which the insured received notice of claim or with the end of the last period of insurance coverage, whichever is earlier.  The Supreme Court held that “strict application” of its Northern States Power “actual injury” rule appropriate because any other result (1) would leave the policyholder uninsured with respect to damages allocated to the period between notice of the claim and the end of remediation and (2) would put a burden on insureds to prove not only that damage was the result of a single discrete occurrence, but during which particular policy period the occurrence took place, thus further increasing the costs of coverage litigation.  The Supreme Court rejected various insurers’ argument that the allocation period should be co-extensive with the period of injury, thus extending up until the property damage from water intrusion in the homes had been fully remediated, despite the fact that Wooddale has apparently been unable to buy coverage for water intrusion exclusions after 2002.  Also, in light of the “known loss” doctrine, the court ruled that coverage cannot be triggered under policies issued after the insured has received a claim, even if remediation is not yet complete.  The court also ruled that if a policy is triggered, an entire policy year applies, even if the closing date or date of notice occurred midway through the policy.   Finally, the Supreme Court held that the Appeals Court had erred in allocating defense costs in the same percentages as applied to indemnity, holding instead that in light of precedents such as Jostens, each insurer should pay an equal share of defense costs and that an “equal shares” approach would minimize or avoid inter-carrier squabbling over how to apportion defense costs.   In a cryptic footnote, the court questioned whether such losses should be apportioned to multiple policies at all, but didn’t pursue the question further since all parties to this case had stipulated that water intrusion claims were subject to a “time on the risk” analysis.

Comment:  Despite cases such as Domtar and NSP, the Minnesota Supreme Court seems to have an ambivalent attitude to trigger and allocation issues.  In 3M, the Supreme Court refused to apply a continuous trigger in a case where the cause of loss was a specific, identifiable event.  Here, the court adopted a continuous trigger but substantially limited the allocation period.  Upon information and belief, this is the first state supreme court decision that has adopted ‘unavailability” as an exception to allocation outside the environmental/toxic tort context.

 

 

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2005:  The Year of The Rooster

Top New Claim Threat:             Hurricane Katrina    

Athletic Achievement:                Roger Federer                       

Furthest Fall from Grace:         Scott Gilbert

Coolest New Gadget:                   HD Television

Hottest Coverage Issue               Absolute Pollution Exclusion

 

The 5 Most Important Insurance Opinions of 2005

 Avery v. State Farm Mutual Auto Ins. Co., 835 N.E.2d 801 (Ill. 2005)

Reversing a $1.1 billion award against State Farm, the Illinois Supreme Court has ruled that two lower courts erred in certifying a national class action of policyholder consumers who alleged injury as the result of the insurer’s practice of using repair parts that were not the original equipment of the car manufacturer.  The Supreme Court declared that the Circuit Court had abused its discretion in certifying the class and finding “commonality” among the plaintiffs’ claims in view of the fact that the claims actually involved different policy wordings used by State Farm in several states.  Further, the Supreme Court held that State Farm’s use of after-market parts was not in violation of its policy obligations, nor did it constitute a violation of the Illinois Consumer Fraud Act.

Comment:  The after-market parts class action crusade against auto insurers reached its high water mark in Illinois with a billion dollar award against State Farm.  In this crucial opinion, newly elected members of the Illinois Supreme Court turned the tide and helped to substantially limit class actions as a plaintiffs’ remedy in similar litigation, a trend that was accelerated around the same by the newly-enacted federal Class Action Fairness Act (CAFA).

 

Elacqua v. Physicians’ Reciprocal Insurers, 800 N.Y.S.2d 649 (3d Dept. 2005)

The Appellate Division of the New York Supreme Court ruled in this case that an insurer had not only ignored a conflict of interest in failing to assign independent counsel to individual physicians and a professional association that were both claiming under its policy but that the insurer had an affirmative obligation to notify its policyholder of that right since “to hold otherwise would seriously erode the protection afforded.”

Comment:  Elacqua poses difficult and troubling questions for insurers.  As the opinion of a single Department of the Appellate Division, is it controlling law in the rest of the state.  And if it is, what types of affirmative duties do insurers have where the carrier is uncertain as to whether a conflict exists or believes that the insured is already protected through the advice of its own counsel.  As a footnote to the 2005 opinion, the same court ruled in Elacqua v. Physician’s Reciprocal Insurers, 860 N.,Y.S.2d 229 (3d Dept. 2008) that a liability insurer’s failure to notify its policyholder of its right to independent counsel due to a conflict of interest was a deceptive practice for which the insured was entitled to recover its attorney’s fees pursuant to General Business Law Section 349. 

 

Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 451 (2005)

In a brief but momentous opinion, the Court of Appeals ruled that a landlord’s insurer was only obligated to pay a single “occurrence” limit for a lead poisoning claim, despite the fact the tenant’s child had suffered bodily injury during all three years of Allstate’s coverage.  While opining that whether limits could be stacked would ordinarily be a “difficult question,” the court held that in this case the issue was controlled by a “non-cumulation” clause that stated that “regardless of the number of insured persons, injured persons, claims, claimants, policies involved, our total liability under the Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for Coverage X shown on the declarations page.  All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss.”

 

Comment:  Together with the Third Circuit’s opinion in Liberty Mutual Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3d Cir. 2005), this ruling of the New York Court of Appeals revived interest in non-cumulation clauses as a means of avoiding successive limits from being stacked in long-tail cases.

 

Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 829 (2005)

The New Jersey Supreme Court ruled that an absolute pollution exclusion did not preclude coverage for personal injury claims against a painting subcontractor arising out of claims for nausea, vomiting and headaches suffered by a tenant who was exposed to fumes in the course of the insured’s work.  In keeping with similar rulings from state supreme courts in California, Illinois, Massachusetts, Ohio, New York and Washington, the New Jersey Supreme Court declared that the history of such exclusions makes clear that their intent is to only preclude coverage for traditional environmentally-related damages, such as CERCLA claims.  In keeping with the analysis of the original pollution exclusion that it adopted in Morton, the court looked to industry statements made to state regulators in the mid-1980’s when absolute pollution exclusions were first proposed for approval and concluded that there was no compelling evidence that the exclusion was intended to have the broad effect proposed by Selective in this case adding that, “The insurance industry may not seek approval of a cause restricting coverage for the asserted reason of avoiding catastrophic environmental pollution claims and then use that same clause to exclude coverage for claims that a reasonable policyholder would believe were covered by the insurance policy.” 

Comment:  Twelve years after the New Jersey Supreme Court shocked the insurance industry by gutting the “qualified” pollution exclusion under the guise of “regulatory estoppel,” the Supreme Court returned to the scene of the crime in Nav-Its.  Apart from Pennsylvania (?), no court in the country has followed the notion that statements made by third parties to state regulators can bind coverage for policyholders who were never aware of or relied on such claimed representations concerning the scope of coverage.

 

Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 115 P.3d 460 (2005)

The California Supreme Court here ruled that in cases where a court determines that an insurer had no duty to defend and the insurer had been defending under a reservation of rights that included a claimed right to recoup defense costs in the event that it was found not to owe coverage, the California Supreme Court has ruled that the insurer is entitled to reimbursement for the costs of defense.  The Supreme Court rejected the Court of Appeal’s holding that the defense obligation was only terminated prospectively and found instead that insofar as the court had ruled that there was no potential for coverage, the insurer never had a duty to defend and is therefore entitled to recover its fees under a Buss analysis.  So long as the insurer had given notice at the time that it agreed to defend that it was reserving rights on this basis.  The Supreme Court held that this was so even if the determination that there was no potential for coverage was based on case law that evolved afterwards, as was the case here where the insurer agreed to defend the case prior to the California Supreme Court’s Hameid ruling clarified the limitations of “advertising injury” coverage as regards such claims.

Comment:  Scottsdale was the third in a trilogy of cases that began with Buss in 1997 (insurer allowed to sue later to recoup that portion of defense costs solely allocable to non-covered claims) and persisted through 2001’s  Blue Ridge v. Jacobsen (insurer allowed to recoup settlement payment is case later held not to be covered).   

 

 

 

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2005:  The Year of The Rooster

Top New Claim Threat:                  Hurricane Katrina    

Athletic Achievement:                    Roger Federer                       

Furthest Fall from Grace:             Scott Gilbert

Coolest New Gadget:                      HD Television

Hottest Coverage Issue                   Absolute Pollution Exclusion

 

The Five Most Important Insurance Coverage Rulings of 2005

 

Avery v. State Farm Mutual Auto Ins. Co., 835 N.E.2d 801 (Ill. 2005)

Reversing a $1.1 billion award against State Farm, the Illinois Supreme Court has ruled that two lower courts erred in certifying a national class action of policyholder consumers who alleged injury as the result of the insurer’s practice of using repair parts that were not the original equipment of the car manufacturer.  The Supreme Court declared that the Circuit Court had abused its discretion in certifying the class and finding “commonality” among the plaintiffs’ claims in view of the fact that the claims actually involved different policy wordings used by State Farm in several states.  Further, the Supreme Court held that State Farm’s use of after-market parts was not in violation of its policy obligations, nor did it constitute a violation of the Illinois Consumer Fraud Act.

Comment:  The after-market parts class action crusade against auto insurers reached its high water mark in Illinois with a billion dollar award against State Farm.  In this crucial opinion, newly elected members of the Illinois Supreme Court turned the tide and helped to substantially limit class actions as a plaintiffs’ remedy in similar litigation, a trend that was accelerated around the same by the newly-enacted federal Class Action Fairness Act (CAFA).

 

Elacqua v. Physicians’ Reciprocal Insurers, 800 N.Y.S.2d 649 (3d Dept. 2005)

The Appellate Division of the New York Supreme Court ruled in this case that an insurer had not only ignored a conflict of interest in failing to assign independent counsel to individual physicians and a professional association that were both claiming under its policy but that the insurer had an affirmative obligation to notify its policyholder of that right since “to hold otherwise would seriously erode the protection afforded.”

Comment:  Elacqua poses difficult and troubling questions for insurers.  As the opinion of a single Department of the Appellate Division, is it controlling law in the rest of the state.  And if it is, what types of affirmative duties do insurers have where the carrier is uncertain as to whether a conflict exists or believes that the insured is already protected through the advice of its own counsel.  As a footnote to the 2005 opinion, the same court ruled in Elacqua v. Physician’s Reciprocal Insurers, 860 N.,Y.S.2d 229 (3d Dept. 2008) that a liability insurer’s failure to notify its policyholder of its right to independent counsel due to a conflict of interest was a deceptive practice for which the insured was entitled to recover its attorney’s fees pursuant to General Business Law Section 349. 

 

Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 451 (2005)

In a brief but momentous opinion, the Court of Appeals ruled that a landlord’s insurer was only obligated to pay a single “occurrence” limit for a lead poisoning claim, despite the fact the tenant’s child had suffered bodily injury during all three years of Allstate’s coverage.  While opining that whether limits could be stacked would ordinarily be a “difficult question,” the court held that in this case the issue was controlled by a “non-cumulation” clause that stated that “regardless of the number of insured persons, injured persons, claims, claimants, policies involved, our total liability under the Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for Coverage X shown on the declarations page.  All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss.”

 

Comment:  Together with the Third Circuit’s opinion in Liberty Mutual Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3d Cir. 2005), this ruling of the New York Court of Appeals revived interest in non-cumulation clauses as a means of avoiding successive limits from being stacked in long-tail cases.

 

Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 829 (2005)

The New Jersey Supreme Court ruled that an absolute pollution exclusion did not preclude coverage for personal injury claims against a painting subcontractor arising out of claims for nausea, vomiting and headaches suffered by a tenant who was exposed to fumes in the course of the insured’s work.  In keeping with similar rulings from state supreme courts in California, Illinois, Massachusetts, Ohio, New York and Washington, the New Jersey Supreme Court declared that the history of such exclusions makes clear that their intent is to only preclude coverage for traditional environmentally-related damages, such as CERCLA claims.  In keeping with the analysis of the original pollution exclusion that it adopted in Morton, the court looked to industry statements made to state regulators in the mid-1980’s when absolute pollution exclusions were first proposed for approval and concluded that there was no compelling evidence that the exclusion was intended to have the broad effect proposed by Selective in this case adding that, “The insurance industry may not seek approval of a cause restricting coverage for the asserted reason of avoiding catastrophic environmental pollution claims and then use that same clause to exclude coverage for claims that a reasonable policyholder would believe were covered by the insurance policy.” 

Comment:  Twelve years after the New Jersey Supreme Court shocked the insurance industry by gutting the “qualified” pollution exclusion under the guise of “regulatory estoppel,” the Supreme Court returned to the scene of the crime in Nav-Its.  Apart from Pennsylvania (?), no court in the country has followed the notion that statements made by third parties to state regulators can bind coverage for policyholders who were never aware of or relied on such claimed representations concerning the scope of coverage.

 

Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 115 P.3d 460 (2005)

The California Supreme Court here ruled that in cases where a court determines that an insurer had no duty to defend and the insurer had been defending under a reservation of rights that included a claimed right to recoup defense costs in the event that it was found not to owe coverage, the California Supreme Court has ruled that the insurer is entitled to reimbursement for the costs of defense.  The Supreme Court rejected the Court of Appeal’s holding that the defense obligation was only terminated prospectively and found instead that insofar as the court had ruled that there was no potential for coverage, the insurer never had a duty to defend and is therefore entitled to recover its fees under a Buss analysis.  So long as the insurer had given notice at the time that it agreed to defend that it was reserving rights on this basis.  The Supreme Court held that this was so even if the determination that there was no potential for coverage was based on case law that evolved afterwards, as was the case here where the insurer agreed to defend the case prior to the California Supreme Court’s Hameid ruling clarified the limitations of “advertising injury” coverage as regards such claims.

Comment:  Scottsdale was the third in a trilogy of cases that began with Buss in 1997 (insurer allowed to sue later to recoup that portion of defense costs solely allocable to non-covered claims) and persisted through 2001’s  Blue Ridge v. Jacobsen (insurer allowed to recoup settlement payment is case later held not to be covered).   

 

 

 

 

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2004: The Year of The Monkey

Top New Claim Threat: Eliot Spitzer
Athletic Achievement: Boston Red Sox
Furthest Fall from Grace: Britney Spears
Coolest New Gadget: Apple I Pods
Hottest Coverage Issue Wardrobe Malfunctions

The year of Spitzer. Aon and Marsh were battered by controversy over contingent commission schemes. Hopes for a federal solution to asbestos reached their high water mark when the U.S. Senate failed to approve the FAIR Act by a single vote. Phase I of the Silverstein WTC cases went to trial. Love Canal was declared cleaned up.

The Five Most Important Insurance Coverage Rulings of 2004

American Family Mutual Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004)

In this case, the Wisconsin Supreme Court ruled that the Court of Appeals erred in refusing to find coverage for breach of contract claims arising out of the insured’s faulty construction of the plaintiff’s warehouse. Whereas the Court of Appeals had declared that the insured’s liability was excluded as being based upon “contractual liability,” the Supreme Court held that the underlying claims not only involved “property damage” that was outside the scope of the economic loss doctrine but that the “contractually assumed liability” exclusion is limited to situations in which the insured contractually assumes the liability of others, as through indemnification or hold harmless agreements, and does not automatically preclude coverage for all suits for breach of contract. In a wide-ranging opinion, the court further declared that a “continuous trigger” was appropriate in cases where injury or damage occurs over more than one policy. Finally, the Supreme Court declared that policies in effect after 1997 need not respond since the claims were a “known loss” by then. The majority’s conclusion was disputed by two dissenting justices who variously argued that (1) the economic loss doctrine should preclude any possibility of coverage that there was no “occurrence” since the insured was aware of existing unstable subsoil conditions that would inevitably result in the building sinking if the work went forward as planned.

 Comment: This landmark opinion was the first time that the Wisconsin Supreme Court addressed several key issues, including “known loss” and “trigger of coverage.” More importantly, American Girl gave significant momentum to policyholder arguments that the absence of coverage for contractual claims is not an inherent aspect of CGL policies and is specific to certain “business risk” exclusions rather than the definition of “occurrence.” American Girl pioneered the path to coverage that would be followed by the Texas Supreme Court and others.

Berges v. Infinity Ins. Co. 896 So.2d 665 (Fla. 2004).

The Florida Supreme Court ruled that an auto insurer with limits of $10,000 per person/$20,000 per accident acted in bad faith when it failed to accept the plaintiff’s offer of settlement within the short time permitted. The court refused to find that the insurer’s insistence on having the settlement, which involved a claim by a minor, first be approved by the court in condition for payment of its policy limits was reasonable or justified. Although the District Court of Appeals found that Infinity could not have acted in bad faith, since the offer that was presented was not one that could have been accepted absent court approval, the Florida Supreme Court adopted the view of Florida appellate districts that court approval was not necessary to create bad faith in claims involving minor claims.

Comment: During the past decade, Florida has become an increasingly troublesome source of bad faith claims. With this opinion, the state Supreme Court gave its stamp of approval to a tactic pioneered by plaintiff’s lawyers who set up insurers by demanding the limits of coverage within a short period of time, with little interest or expectation that the demand will be accepted, thus creating an unlimited pool of funds for their clients. Efforts to impose reasonable limits on this tactic through the Florida legislature have met with little success since then.

Central Illinois Light Co. v. The Home Ins. Co., 821 N.E.2d 206 (Ill. 2004)

 The Illinois Supreme Court concluded that a gas utility was entitled to coverage under various London Market umbrella policies for costs that the insured had voluntarily incurred to clean up former MGP sites to avoid being sued by the Illinois EPA. The court distinguished the California Supreme Court’s contrary holding in Powerine on the grounds that it involved CGL policies that included a duty to defend, whereas these London excess policies merely required that the insured be “liable” to pay these sums. In this instance, the court found that the requirement of liability was satisfied by the fact that the Illinois environmental statutes imposed strict liability. While concurring that insureds should not be entitled to voluntarily undertake liabilities to trigger coverage, the court declared that the “liability” aspect of the insuring agreement would be satisfied so long as the insured was acting in response to a claim (which need not even be a formal demand letter) and which was satisfied here by evidence that the insured agreed to do the clean up after receiving an oral threat from the IEPA that they could deal with this liability “the easy way or the hard way.”

Comment: Much of the hope engendered by Powerine, evaporated with this opinion.

Royal Ins. Co. of America v. Hartford Underwriters Ins. Co., 391 F.3d 639 (5th Cir. 2004)

Where two insurers issued both CGL and professional liability policies to a nursing home, the Fifth Circuit has ruled that allegations that a nursing home failed to provide proper and timely medical and nursing care, causing skin infections and ulcers to develop, triggered the E&O coverage. The court opined that a CGL policy would cover a slip and fall in a waiting room whereas an E&O policy would protect the nursing home against lawsuits by residents who claimed to have been harmed as a result of the medical treatment they received at the facility. On the other hand, while agreeing that the allegations of on-going mistreatment potentially triggered successive professional liability policies, the Fifth Circuit ruled that the District Court had erred in trying to the Hartford “escape” other insurance clause with Royal’s “pro rata” clause, holding instead that both carriers owed coverage since the clauses were in conflict. The court ruled, however, that Hartford was only obligated to pay that share of defense costs that were incurred after the date that the claim was tendered to it.

Comment: This case illustrated a particular aspect of the rising tide of nursing home claims, in which insurers faced not only the difficulty of class actions claims and coverage issues but the pressing question of how “other insurance” disputes could be reconciled as between general liability and professional liability policies.

United National Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153 (Nev. 2004)

In this opinion, the Nevada Supreme Court declared that allegations of negligent construction activity are insufficient to trigger coverage under a CGL policy. Concluding that the CGL policy unambiguously restricts coverage to physical injury to tangible property that occurs during the policy period, the Nevada Supreme Court has declared that the insurers of a metal framing subcontractor whose policies were in effect when the Las Vegas Hilton marquee sign collapsed on July 18, 1994 have no right of recovery against earlier insurers whose policies were in effect during the period of time that the sign was being constructed as there was no evidence that the sign suffered property damage prior to its collapse. Furthermore, despite allegations in the underlying complaint that the insured’s subcontractor had been negligent in the erection of the sign, including improper welding and modifications of the bolts connecting the various steel components of the sign, the Supreme Court refused to find that the earlier insurers had a duty to participate in the defense of the case as these allegations of negligent acts only constituted “intangible, economic injuries and not the type of physical, tangible injury or destruction of property that a reasonable person would contemplate as covered under the policy.”

 Comment: By 2004, the wave of construction defect litigation that had swamped California had spread far into Nevada. With this decision, the Nevada Supreme Court showed that it would be less liberal than its California counterpart in applying liability insurance to such disputes.

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2003:  The Year of The Sheep

 

Top New Claim Threat:                    SARS

Athletic Achievement:                       Lance Armstrong

Furthest Fall from Grace:                Martha Stewart

Coolest New Gadget:                         DVD Camcorders

Hottest Coverage Issue                      Sue and Labor Clauses

 

The Five Most Important Insurance Coverage Rulings of 2003

 Hameid v. National Fire Insurance of Hartford, 1 Cal.3d 401 (2003).

In this case, the California Supreme Court reversed a ruling of the Court of Appeal that had declared that allegations that the insured solicited customers by advertising in the Pennysaver, sending mailers and telephoning former clients constituted “advertising” for purposes of Coverage B.  Rather, the Supreme Court declared that “advertising” required widespread solicitations by the insured to the public at large and therefore did not provide coverage for one on one solicitations to prospective customers.

Comment:  Although HameidI’s interpretation of “advertising” is now embodied in the definition of “advertising” in Coverage B of the CGL, this opinion set the tone in a manner that California courts have since followed in restricting the scope of Coverage B in numerous cases.

 

Henkel Corporation v. Hartford Acc. & Ind. Co.,  62 P.3d 69 (Cal. 2003). 

The California Supreme Court ruled that a successor entity cannot claim coverage under policies issued to a predecessor insured absent evidence that the successor entity to a carrier’s original insured was being sued as the result of a merger, a continuation of the seller or as the result of an fraudulent asset transfer or unless the insurer gives its express assent to an assignment of rights.  The court ruled that because Henkel had not acquire the liabilities of the named insured by operation of law but assumed those liabilities by contact, any purported assignment was invalid as it had not been assented to by the insurer. The court focused on the fact that as of the date of these transactions, the underlying claims had not been reduced to a sum of money due, nor had the insurer’s breached any contractual obligations such that such rights of action could be assigned.  Whereas Henkel argued that an assignment under these circumstances had not increased the risk of losses to be imposed on the insurers, the Supreme Court disagreed, noting that such assignments did impose an additional burden since they created a “ubiquitous potential for disputes over the existence and scope of the assignment.” Likewise, the California Supreme Court has since ruled that an assignment of rights under an insurance policy will only be upheld if (1) at the time of the assignment the benefit has been reduced to a claim for money due or to become due, or (2) at the time of the assignment, the insurer has already breached a duty to the insured and the assignment is of a cause of action to recover damages for that breach. 

Comment:  Before this opinion, most courts had ruled that just as successor entities were sued for the torts of predecessor companies, they were entitled to obtain the benefits of their predecessor’s insurance policies “by operation of law.”  Henkel has largely eviscerated the “operation of law” argument and has gained significant traction in jurisdictions as widespread as Hawaii, Indiana and Ohio.

 

In Re Silicone Implant Insurance Coverage Litigation, 667 N.W.2d 405 (Minn. 2003).

Although silicone breast implants were a significant source of liability claims at the start of the decade, insureds faced the puzzling existential puzzle of arguing for an “injury in fact” trigger for a product that they claimed did not cause injuries.  In this case, the Minnesota Supreme Court held that it was sufficient that the insureds had paid millions to settle these claims, whether there was proof of actual injury or not.  Further, the court held that even though the bodily injuries allegedly attributable to silicone breast implants persist for months or years after the date of initial implantation, the losses attributable to implant claims need not be allocated over the total period of injury.  In overturning the broad “time on the risk” approach that the Court of Appeals had applied, the Supreme Court declared that, unlike its rulings in past pollution cases such as Domtar and Northern States Power, allocation was not required here because the injuries while progressive in nature, were attributable to a specific identifiable event. 

Comment:  As with Johnson Controls, 3M illustrates the peril of litigating with a huge local corporation on its home turf.  More importantly, 3M called into question the extent to which the Supreme Court was committed to allocation and whether it might adopt a different trigger of coverage for losses attribute to distinct events.  In so holding, the court avoided addressing the more difficult allocation issues that had been struggled with by the trial court and the Court of Appeals, namely whether injuries occurring after 1985, when 3M was insured under “claims made” policies should be subject to allocation in he same manner as if conventional “occurrence”-based GL policies had been in effect.

 

Johnson Controls, Inc. v. Employers Insurance of Wausau, 665 N.W.2d 257 (Wis. 2003)

Apparently embarrassed about being one of only two state Supreme Courts (Maine, being the other) still holding to the view that CGL policies were not meant to cover Superfund claims, the Wisconsin Supreme Court did an about face in July 2003 and ruled that it had made a mistake in adopting a “narrow and technical” interpretation of the words “suit” and “damages” in its 1994 opinion in City of Edgerton.  Instead, the court declared that “an insured’s costs of restoring and remediating damaged property, where the costs are based on restoration efforts by a third party (including the government) or incurred directly by the insured, are covered damages under CGL policies, provided that other policy exclusions do not apply.”

Comment:  With Johnson Controls, the Wisconsin Supreme Court thrust itself firmly into the policyholder camp on environmental issues.  Wisconsin is now unique among the major states in ruling for policyholders on all of the key issues impacting pollution claims, including “damages,” suit”, “sudden and accidental,” and “allocation.”  Did we mention that Johnson Control is the largest private employer in Wisconsin?

 

State Farm Mutual Automobile Insurance Company v. Campbell, 123 S. Ct. 1513 (U.S. 2003).  

Expanding on its earlier opinion in BMW v. Gore, the U.S. Supreme Court overturned a bad faith case from Utah in which the state Supreme Court reinstated a $145 million bad faith award, declaring that (1)  out of state evidence should not have been taken into account in calculating punitive damages; (2) that a punitive damage award that was seventy times greater than the plaintiff’s actual damages violated the Due Process Clause to the Fourteenth Amendment of the U.S. Constitution and (3) that courts considering challenges to these awards must employ a de novo standard of review.

Comment:  The impact of Campbell cannot be overstated..  Overnight, it eliminated double and triple-digit punitive damage awards.  Although the opinion’s premise that most awards should not exceed a 1:1 ratio remains largely unfulfilled, the opinion gave insurers numerous new tools to limit the evidence that juries could consider, particularly with respect to injuries occurring in other states or impacting parties not a party to the dispute.

 

 

 

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2002: The Year of the Horse

Top New Claim Threat:       Terrorism

Athletic Achievement:           New England Patriots          

Furthest Fall from Grace: Salt Lake City Winter Olympics

Coolest New Gadget:            GPS

Hottest Coverage Issue:        Vanishing Premiums

 

The Five Biggest Rulings of 2002

Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 149 (9^th Cir. 2002),

The Ninth Circuit ruled that liability insurers had a duty to defend allegations that the insured's defective circuit boards had caused the plaintiffs' computer scanners to crash. In the court held that claims for breach of contract are an "occurrence" under California law and that the plaintiffs' claims alleged a "loss of use" of the scanners. Further, the Ninth Circuit ruled that the underlying suits left open the possibility that the defective circuit boards had caused "sudden and accidental physical injury to the insured's product or the insured's work after it had been put to its intended use" so as to fall within the exception to the "impaired property" exclusion. The court also took note of a consultant's investigative report which had concluded that "thermal stressing" had caused foil layers to separate, commenting that this suggested that the damage may have occurred "suddenly."

Comment: Despite earlier pro-insurer rulings such as Wisconsin Label, this Ninth Circuit opinion re-opened the door to forcing CGL insurers to pay for contract disputes involving defective electronic components at the same time as computers are assuming a ubiquitous position in our lives.

 

Consolidated Edison Co. of NY  v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687 (2002)

In a landmark victory for insurers, the New York Court of Appeals declared that a trial court did not err in adopting a "time on the risk" approach to long-tail pollution cleanup claims. The Court of Appeals ruled that an "all sums" or joint and several approach that would have permitted the policyholder to allocate its entire loss to any single year of coverage was inconsistent with the provisions of such policies limiting coverage to property damage during each year, particularly in cases where the amount of damage in any given year is uncertain. The court declined to adopt a specific theory of pro-ration, however, noting that its ruling was not the "last word" with respect to questions such as whether allocation should be based on the total period of injury, the limits of available insurance coverage or the amount of injury in each year much less as to how allocation should apply to diverse factual circumstances, such as those involving self-insured period, periods when the insured failed to purchase insurance, or periods for which insurance was unavailable for such losses. In another significant ruling, the court concluded that policyholders have the burden of proving an "accident" or "occurrence" in order to trigger coverage, rejecting the insured's contention that such terms are "exclusionary" in effect.

Comment: In recent years, New York has rarely led the way. At the same time, however, opinions of the New York Court of Appeals have a way of consolidating trends that have emerged elsewhere.   This opinion largely stemmed the tide of “all sums” rulings in other states and paved the way for the evolution of “time on the risk” case law in the region as state supreme courts in Connecticut, Massachusetts, New Hampshire and Vermont followed suit.

 

Friedline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002)

While affirming the Court of Appeals' ruling that personal injuries suffered by a building occupant who inhaled carpet glue fumes was outside the scope of an absolute pollution exclusion, the Indiana Supreme Court overturned the lower court's ruling that the assertion of the exclusion is per se bad faith in Indiana. The court ruled in that the Freidlines had failed to establish by clear and convincing evidence that Shelby Insurance lacked a reasonable basis for its coverage position, particularly as it had been adopted by several out-of-state courts.

Comment: Starting around 1996, when the Indiana Supreme Court eviscerated pollution exclusions in Kiger and Seymour, insurance jurisprudence in Indiana went into free fall. Things were so bad that, by 2002, an intermediate appellate court had ruled that an insurer had acted in bad faith by even contending that an absolute pollution exclusion might preclude coverage for indoor chemical exposures.   In this 2002 opinion, the state Supreme Court began to right the ship. While continuing to hold to a limited view of the exclusion, the court acknowledged the right of insurers to contest coverage where legitimate grounds existed for their positions. It was the first (but not the last) major defeat for George Plews, who until them seemed to own the keys to the courthouse.

King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002

The Texas Supreme Court ruled in this case that allegations that an employer was negligent in its hiring, training or supervision of an employee who attacked the plaintiff have been held to set forth a separate claim for an "occurrence" under Texas law. The court declared that the question of whether an "occurrence" exists must be determined independently from the viewpoint of the insured seeking coverage. Although the Fifth Circuit had previously ruled on several occasions that employers are not entitled to coverage in such circumstances inasmuch as their liability is "related to and interdependent" on the intentional acts of the employee who causes the plaintiff's damage, the Texas Supreme Court concluded that this was an erroneous reading of Texas law since, "whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally."

Comment: In King, the Texas Supreme Court rejected an earlier line of cases in which the Fifth Circuit had held that employers are not entitled to coverage in such circumstances inasmuch as their liability is “related to and interdependent” on the intentional acts of the employee who causes the plaintiff’s damage. The Texas Supreme Court declared in King that this was an erroneous reading of Texas law since, “whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally.”

Port of Seattle v. Lexington Ins. Co., 48 P.3d 884 (Wash. App. 2002)

In one of the first Y2K first party coverage rulings,  the Washington Court of Appeals held that millions of dollars that the Port of Seattle had spent to prevent system failures that might otherwise have resulted from the inability of its computer software to distinguish the year 1900 from 2000 fell outside the scope of its 1997 and 1998 first party property policies. The Court of Appeals declared that the Y2K problem was an "inherent vice" and therefore excluded. Further, the court refused to find that the insurers had an independent obligation to pay based on "sue and labor" provisions in their policies inasmuch as the loss that the insured sought to prevent could not have occurred before 2000 and therefore would not have been insurable in any event under these 1997 and 1998 policies.

Comment: Despite the smaller than expected incidence of Y2K-related failures after 2000, first party insurers still received millions of dollars in claims for costs that insureds claimed to have spent to mitigate against the risk of such losses occurring. As one of the first Y2K opinions, Port of Seattle set a tone that ultimately sealed the fate of such claims.

NEXT UP:  2003

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2001.    For those of us of a certain age it was, like 1984, a year in which remembered symmetries clashed with current realities.  For many, it was the year in which the new century finally began.  By the fall, it was clear to all that we had entered a new era.

2001: The Year of the Snake
Top New Claim Threat: Y2K
Furthest Fall from Grace: Enron
Athletic Achievement: Barry Bonds
Coolest New Gadget: Noise cancelling headphones
Hottest Coverage Issue: Attorney-Client Privilege

The Five Most Important Insurance Coverage Rulings of 2001

Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313 (2001)

In the most important allocation/recoupment case to be decided since Buss, the California Supreme Court ruled that where an insurer has defended a lawsuit under a reservation of rights and settles the claim over the objections of its insured, it is entitled to full reimbursement for all reasonable settlement payments in the event that it is later determined that the claims were not covered under its policy. The insurer had only settled after first warning the policyholder that it would seek recoupment and after giving the insured the right to take over its own defense if it so chose. The court distinguished the Texas Supreme Court’s 2000 opinion in Matagorda, noting that insurers are not free in California to immediately pursue a DJ to resolve coverage issues where, as here, the coverage issue conflicts with the underlying tort suit. The court also emphasized the fact that the insured had been offered the right to take over its own defense.

 Comment: At the time, Jacobsen seemed like an entirely equitable and reasonable outcome to the dilemma that insurers face when insureds demand that they pay to settle cases that insurers do not believe are covered. Ironically, the case has since had the unforeseen outcome of placing insurers in the default position of having to fund settlements for insureds, even in cases where coverage likely does not exist.

Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001)

The Ohio Supreme Court ruled 4-3 that correspondence between an insurance company and its outside coverage counsel evaluating a policyholder’s claim for coverage is discoverable in a bad faith case, concluding that “claims file materials that show an insurer’s lack of good faith in denying coverage are unworthy of protection” much like the claim fraud exception to the attorney/client privilege. Three dissenting justices criticized the “unworthy of protection rationale” as being even broader than the claimed fraud exception, which only waives the attorney/client privilege in the event of proof whereas the majority’s analysis permits all such documents to be discovered in any case where bad faith is merely alleged.”

 Comment: Vanliner sent a shiver through the insurance industry. Apart from the Arizona Supreme Court’s Lee opinion, no other court had ruled that a mere allegation of bad faith was enough to vitiate the privilege. In the event, these concerns proved somewhat exaggerated. Since 2001, however, no other state court has taken this view. Even in Ohio, the state legislature approved a measure in 2007 ameliorates Vanliner by now requiring in camera review by a court before privileged communications needed be disclosed.

Certain Underwriters at Lloyd’s v. Superior Court, 24 Cal.4th 945, 16 P.3d 94 (2001)

The California Supreme Court on February 1, 2001 that general liability policies that insure sums that the insured is “legally obligated as damages” only extend coverage to sums that the insured is ordered to pay by a court judgment and, consistently with its ruling in Foster-Gardner, specifically do not encompass “expenses required by an administrative agency pursuant to an environmental statute.” The Supreme Court refused to find that the insuring agreement extended to damages that existed apart from any order by a court. Further, the court refused to read “damages” outside of the insuring agreement or to find that it was redundant with the language requiring the insurer to pay sums for which the policyholder was “legally obligated.”

Comment: Powerine was followed by similar Supreme Court rulings in 2005 that extended its holding to excess policies.  Together, these decisions have largely blunted the effect of the court’s earlier holding in Foster-Gardner that environmental claims are a “suit” and have since significantly reduced the number of environmental claims being litigated in California.

Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593 (Ariz. 2001)

In this case, the Arizona Supreme Court broke new ground, holding that a cause of action for malpractice existed, even if the insurer was not a client per se. Even if the insurer is not the lawyer’s client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications. Further, the court declared that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured “but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith.”

 Comment: Much of the “dual client” case law, a pivotal premise underlying the tripartite relationship, has been decided in the unlikely context of efforts by insurers to sue defense counsel for malpractice. In this case, the Arizona Supreme Court found a way to avoid finding an express client relationship but still acknowledging the right of insurers to sue for malpractice.
 

Sunbeam Corp. v. Liberty Mutual Ins. Co., 781 A.2d 1189 (Pa. 2001)

After nearly two decades of pro-insurer rulings from state and federal courts, the future of the pollution exclusion was cast into doubt by the Pennsylvania Supreme Court when it ruled in this case that the exclusion was ambiguous or that coverage was mandated on a Morton-style theory of regulatory estoppel. While stopping short of formally adopting regulatory estoppel, the Supreme Court remanded the question back to the trial court for further finding and further suggested that such evidence might be relevant to establish a “custom and usage” within the insurance industry that mandates an interpretation of “sudden and accidental” that is contrary to the understanding of the general public. Justices Saylor and Castille argued that the lower court’s ruling should have been affirmed as the plain and ordinary meaning of “sudden and accidental” precludes coverage in a case where contamination occurred gradually over an extended period of time.

Comment: Despite initial concerns that Sunbeam might transform Pennsylvania into “West Jersey,” Pennsylvania’s courts have been slow to embrace the “regulatory estoppel” ‘theory. On the other hand, Sunbeam has made it far more difficult for insurers to obtain summary judgment in old pollution cases in the Keystone state and have opened the door for policyholder to pick and choose 1970-86 years under J.H. France.
 

Next up 2002

 

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The Five Most Important Insurance Coverage Rulings of 2000:

Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 217 F;.3 33 (1st Cir. 2000).

The First Circuit ruled that a reinsurer could be sued for unfair claims handling and bad faith based upon a pattern of evasive claims handling in which it had raised a series of constantly shifting defenses and objections in an effort to delay or avoid paying Commercial Union’s ceded environmental settlement. The First Circuit ruled that Seven Province’s bad faith tactics “were wholly alien to the usual course of dealings between an insurer and a reinsurer.”

Comment: In a decade in which an unprecedented increase in reinsurance disputes largely tore away the “gentleman’s agreement” veneer of relations between reinsurers and ceding companies, the First Circuit set the tone early on with this bad faith opinion.

In re Rules of Professional Conduct, 299 Mont. 321, 2 P.3d 806, 814 (2000).

Efforts by insurers to impose strict litigation guidelines on defense counsel met their Waterloo when the Montana Supreme Court declared that lawyers could not ethically disclose bills to third party auditors for fear that disclosure would waive the privileged content of such documents, since auditors are not part of the “magic circle.” The court also ruled that The rules of professional conduct are not superseded by the terms governing the duty to defend in an insurance policy, nor do they only apply in cases where a conflict of interest between insured and insurer is apparent from the outset. In particular, the court ruled that guidelines requiring the insurer’s prior approval threatened defense counsel’s ethical ability to exercise independent professional judgment on behalf of the insured client.

Comment: Following this opinion, insurers and defense counsel pulled back from a nascent civil war that threatened to tear apart the tripartite relationship. Insurers have since largely revised their guidelines and reached out to defense counsel to find ways to manage litigation in a more nuanced way. Even so, by the end of the decade, many individual practioners and law firms had given up insurance defense work for more lucrative pursuits.

Matagorda County v. Texas Association of Counties Risk Management Pool, 52 S.W.3d 128 (Tex. 2000).

Efforts by the industry to extend Buss beyond California met a 10 gallon pothole when the Texas Supreme Court ruled on December 21 that liability insurers do not have a contractual or implied right to obtain reimbursements for sums that they pay to settle claims on behalf of their insureds that are later found not to be covered. Two dissenting judges argued that the Texas Supreme Court should have followed the California Supreme Court’s lead in Buss in finding an implied obligation to reimburse where the insurer’s payment would otherwise confer a windfall on the policyholder.

Comment: Years later, the Texas Supreme Court would again rule in Frank’s Casing that insurers have no similar right of recoupment. To a large extent, the refusal of Texas courts to imply rights that California courts have recognized is a product of the fact that Texas courts are, in general, much more conservative in imposing such obligations on insurers in the first instance, particularly with respect to claims of bad faith.

Travelers Ins. Co. of Illinois v. Eljer Manufacturing, Inc., 757 N.E.2d 481 (Ill. 2000)

Whereas the Seventh Circuit had ruled in Eljer Manufacturing Co. v. Liberty Mutual Ins. Co., 972 F.2d 805 (7th Cir. 1992) that the presence of a defective component caused “property damage” even if it had not yet caused damage to the product as a whole, the Illinois Supreme Court took a different view in cases involving the same claims under excess policies, declaring that that the installation of a defective product does not result in physical injury to tangible property until it actually fails and causes third party property damage.

Comment: Eljer had consequences well beyond its facts, particularly in the context of asbestos building claims. It was also not the last time in which the Illinois’ two leading course took divergent views on insurance issues. Ironically, the next time that the courts took such conflicting views of the law, it was the Seventh Circuit that held for insurers in refusing to find “personal injury” coverage for junk fax claims, whereas the Illinois Supreme Court took the opposing view, finding CGL coverage for TCPA claims in Swiderski Electronics in 2006.

Wisconsin Label Corp. v. Northbrook P&C Ins. Co., 607 N.E.2d 276 (Wis. 2000)'

In a case that pre-figured many disputes that emerged later in the decade concerning problems involving defective computer software and electronic components, the Wisconsin Supreme Court held that lost profits suffered by a retailer due to the application of incorrect bar codes were not “physical injury to tangible property” or other claim for loss of use that might constitute “property damage.” The Wisconsin Supreme Court ruled in that economic loss suffered by the plaintiff due to the mislabeling of UPC codes on the insured’s product did not result in any physical injury that would constitute “property damage” under the policies. The also court concluded that diminution in value caused by incorporation of a defective product does not constitute “property damage” under post-1973 policies unless it is the result of “physical injury” or “loss of use” and is not a separate basis for claiming coverage.

Comment: In retrospect, Wisconsin Label would prove to be the high water mark of insurance jurisprudence in Wisconsin. In the years to come, the Wisconsin Supreme Court, which had up until then generally been viewed as a reasonable arbiter of insurance disputes, fell under the sway of justices who were willing to find coverage for claims under increasingly improbable circumstances.
 

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A Look Back:  The Decade That Was In Insurance

It was the decade with no name.  Ten years that turned the world upside down.

The decade began with concern over the millennial impact of a mathematical oddity but was ultimately dominated by two iconic events—one natural and one spawned by evil men—that spawned hundreds of insurance coverage law suits and changed our view of catastrophes.

An insurer that began the decade as one of the world’s largest ended the decade on the verge of financial catastrophe, forced to suffer the indignity of federal bail-out.

It was a decade in which new types of liability claims came and went like fashion trends (remember when obesity litigation was going to be “the next asbestos”?).

Some of our most cherished pre-conceptions vanished along with our 401K savings.

A decade that began with an electoral debacle ended with a revolution in our politics that created the promise of hope but has yet to achieve it.

A decade when insurance coverage precedents proved short-lived and where insurers struggled to stay ahead of burgeoning new areas of the law.

A decade that saw enough lawyers, insurance regulators and claims executives go to jail that “captives” took on a whole new meaning.

A decade in which personal communications devices went from obscurity to deafening ubiquity.

We saw changes that will forever changes how claims are presented and litigated:

--the plaintiff’s bar set aside their competitive instincts and demonstrated an unexpected ability to use the Internet and new technologies to quickly marshal and share information and tactics.

--the federal government went from a reluctant by-standard to a front-line player in the  insurance marketplace.

--national boundaries became increasingly irrelevant as more foreign companies purchased domestic insurers and more and more U.S. claims originated overseas.

So much has happened in the past ten years that much of what did happened is now obscured in the cross-currents of history.  Over the next few weeks, as the first decade of the Twenty-First Century comes to a close, we will voyage back through the past ten years, exploring the insurance highlights, low-lights and quirks of the years that were.

Next up:  2000---was it the end of the century or start of a new one?

 

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Drew Berry died last week.  He was on vacation in Maine with his family when he suffered a heart attack.   Drew was a powerful advocate for policyholders and a good friend to his community.  Those of us who only knew him from the courtroom have been surprised to learn from the obituaries how much he did to rebuild Newark  He was "old school" before anyone thought to call it that.  He was smart, tenacious, courtly and a lot of fun  I'll miss him.

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All in all, it hasn't been a great year for Hartford.  First, it had to go down to Virginia to litigate with an insured about contaminated peanuts.  Then there were rumors about HFS selling off its P/C business.  Now John Heintz has sued Hartford and several other insurers for failing to pay up in a convoluted case involving cheap Chinese imported food products.

The Hartford Courant recently reported that a new class action has been filed by the Kelley Drye law firm in the U.S. Court of International Trade in which the mellifluously named "Honey Sioux" company and other U.S. food producers allege that Harfrod, Great American, XL and a division of Swiss Re aided and abetted the dumping of cheap Chinese food products in the United States by issuing customs surety bonds that guaranteed the payment of any dumping duties that the U.S. government later determined were owed. The suit also seeks recovery against the U.S. Customs and Border Protection and the U.S. Department of Commerce, which are accused of failing to collect hundreds of millions of dollars in anti-dumping duties that the plaintiffs now seek to recover under these policies. 

The plaintiffs are represented by John Heintz, Chairman of Kelley Drye’s insurance recovery and litigation practice group, former partner of Scott Gilbert and a veteran of the pollution coverage wars of the 1980s and 1990s.  In a Kelley Drye press release, Heintz explained that"Because these importers were new, thinly capitalized, and had little or no credit history or experience in importing, the insurers knew or should have known that the importers posed an extremely high risk of defaulting on assessed dumping duties. The insurers, nevertheless for years, continuously issued the bonds on behalf of the importers, and made millions of dollars in premiums."

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The LexisNexis Insurance Law Center is receiving nominations for the Center’s “Insurance Law Persons of the Year” award. The award seeks to identify and recognize people who have been a major force in the insurance law during the preceding year in the following categories:

Policyholder Attorney of the Year – the attorney who did the most in 2008 to effectively advance policyholder positions and improve insurance law from the perspective of policyholders.

Insurer Attorney of the Year -- the attorney who did the most in 2008 to effectively advance insurer positions and improve insurance law from the perspective of insurers.

Insurance Regulator of the Year – the international, federal, state, or local regulator who had most impact during 2008.

Insurance Jurist of the Year -- the judge or justice whose rulings had the largest impact on insurance law during 2008.

Nominations will be considered by the Lexis Insurance Center Board, which plans to release a list of finalists at the Center’s website.  Please send nominations to karen.yotis@lexisnexis.com no later than March 6, 2009.
 

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As the storm clouds gather over once might insurance companies, law firms representing insurers should bear in mind the on-going lessons of the insolvency of Home.  Lawyers representing an insurer in perilous financial circumstances face the dilemma of trying to protect their client’s interests even in the face of looming insolvency while trying to avoid being left holding the bag with a large unpaid bill. Such was the unhappy fate of the Sheiness law firm of Houston, Texas in the latest opinion of the New Hampshire Supreme Court arising out of the June 2003 insolvency of the Home Insurance Company.

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Pro se parties can be the bane of litigation.  They come up with crazy legal theories, often fail to play by the rules and sometimes view litigation as a contact sport (but so do counsel sometimes, lest we sound too high and mighty here).  Moreover, one often suspects that a pro se party generally has a lawyer friend or relation drafting their pleadings.

Such is the case with a new opinion from a new opinion from the federal district court in Nashville, Tennesse in a case with tangled roots in Massachusetts and Tennesse.  The court not only denied the defendant insured's motion to dismiss the Tennessee litigation but granted the Plaintiff Insurer's  "Motion for Order Requiring Defendant To Show Proof That She Signed "Pro Se" Motion to Dismiss And/Or Acknowledge Any Ghostwriter Attorneys of the "Pro Se" Motion."

High marks to the insurer lawyer who was creative enough to come up with the idea, much less the title (who knows which FRCP this was filed under, however!).  But I worry about the precedent.  What's next?  requiring outside counsel to disclose their role in drafting interrogatory answers or reservation of rights letters?  The horror.

 

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Global Warming. Has there ever been a topic that generated so many seminars and articles by lawyers hopeful of getting work?  (well yes, there was Y2K).   So will climate change claims be Asbestos II or just a flash in the pan?

Unlike asbestos, clergy abuse, intellectual property or other progenitors of mass coverage litigation in recent years, my guess is that climate change is not so much likely to be a discrete coverage controversy as a phenomenon that influence how societies, businesses and individuals interact that will, in turn, generate diverse types of first and third party claims.  In the near term, we may have just seen the first shot fired in the Climate Change Coverage Wars.

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The ghost of Eliot Spitzer has been sighted roaming the state capitol in Albany!

 In 2007, the New York legislature hurriedly approved legislation that would have done away with New York’s traditional rule that the breach of a condition to coverage waves a policyholder’s right to recovery even if the insured’s untimely notice has not materially prejudiced the insurer. After some hesitation, Governor Spitzer vetoed the legislation, declaring in his veto statement that the issue was too important to be decided in such an abrupt manner.

Spitzer has since departed the scene but his successor, David Patterson, last week submitted a proposal to the legislature that largely embodies the proposals in the legislation that Spitzer vetoed. If enacted into law, this new bill would (1) allow third-party claimants to bring declaratory judgment actions against insurers in cases where an insurer has denied coverage on the basis of late notice; and (2) for the first time imposes a requirement of prejudice in order to avoid coverage on the basis of late notice.

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Last Friday, a divided Texas Supreme Court held liability insurers are permitted to use staff attorneys to defend claims against insureds if the insurer’s interests and the insured’s interests are "congruent," but not otherwise.  In Unauthorized Practice of Law Committee v. Am. Home Assurance Co., Inc., No. 04-0138 (Tex. March 20, 2008), the high court addressed whether a liability insurer that uses staff attorneys to defend claims against its insureds is representing its own interests in handing the defense (which is permitted), or whether it is engaging in the unauthorized practice of law (which is obviously not permitted).  Finding the practice to involve the protection of the insurer's own interests, it permitted the practice of using staff counsel to defend liability claims if the interests of the insurer and insured were "congruent." Continue Reading...

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The U.S. Supreme Court heard oral argument on February 28, 2008 in Exxon Shipping Co. v. Baker, No. 07-219. At issue is whether Exxon, having already paid $400 million in compensatory damages to Alaska citizens who were injured by the Exxon Valdez oil spill, must pay an additional $2.5 billion in punitive damages.

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Sara Thorpe is the chair and speaker, and Mike Aylward, a speaker, at the DRI's Insurance Coverage and Claims Institute in Chicago in April 2008.  The topics to be covered include conflicts of interest, drafting effective reservation of rights letters, independent counsel, settlements, litigation management, e-discovery, emerging insurance coverage issues for commercial and personal lines carriers, and "bad faith."  This seminar is perfect for insurance professionals and lawyers who represent them, both the novice and the experienced.  More information available at: www.dri.org/open/CLE.aspx?sem20080155 or www.dri.org

 

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On remand from the U.S. Supreme Court, the Oregon Supreme Court has reinstated the $79.5 million punitive award in Williams concluding that the trial court did not err in refusing to give a proposed jury instruction concerning whether the jury could use punitive damage to punish Philip Morris for the impact of its misconduct on other persons, for independent state law grounds unrelated to the issues addressed by the US Supreme Court in its 2007 decision. Williams involved a claim by the widow of a longtime smoker that died of lung cancer against Philip Morris for fraud and negligence. At trial, Williams presented evidence that Philip Morris and other tobacco companies knew of the health dangers of smoking since the 1950s but nevertheless carried out an extensive campaign to convince the public that doubts remained about whether smoking actually was harmful to health. Near the end of trial, Philip Morris offered a proposed jury instruction that would have told the jury that it could not use punitive damages to punish Philip Morris for the alleged impact of its misconduct on other persons that could bring lawsuits of their own where a jury may award punitive damages. The trial court refused to give the instruction. The jury ultimately returned a verdict awarding Williams, among other things, $79.5 million in punitive damages.

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We’re pleased to announce that the editors of Matthew Bender and LexisNexis Mealey’s Insurance publications have selected our site for inclusion in the “Top Blogs” section of LexisNexis' Insurance Law Center. The center is an excellent source of real-time news and commentary, which can be accessed by RSS feeds, pod casts and e-mail alerts. This week, the center is featuring one of my favorite commentators, Randy Maniloff, with an article about and link to Randy’s 7th annual look at the top ten insurance law cases of the year: Randy Maniloff's Insurance-Palooza: An Impressive All-Day Sucker, for links to the articles.

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As 2007 draws to a close, we take this opportunity to look back at some highlights of the year past and to peek over the horizon towards 2008...

Most Important Coverage Developments of 2007

--Fifth Circuit largely curtails first party coverage for Katrina claims.
--Courts finding coverage for construction defect breach of contract claims.
--Illinois Supreme Court rules in targeted tenders in Kajima
--Second Circuit adopts broad causation theory for 9/11 claims in Parks Realty
--Illinois and Massachusetts courts find CGL coverage for junk faxes
--Indiana Supreme Court refuses to require coverage for preventing pollution.

Most Worrisome Trends of 2007: 

1.   Legislative involvement in coverage issues.  More and more policyholders are going to the statehouse to get relief that they can't get in court.  Maryland (bad faith), Washington (bad faith) and New York (late notice-almost) are only the latest examples.

2.   News from the Big House:  Scruggs indicted for bribery...Hartford claims people charged with fixing silica settlements...Do you know the way to Corpus Christi?

3.   Excess Exposures:  More and more courts are finding ways to spike claims into excess layers, even where primary limits aren't exhausted.

Issues That Seem So 2006:  Clergy abuse, mold, Eliot Spitzer.

Watch Out for 2008:  Sub-prime mortgages, tainted toys, climate change, privacy claims.

Best '90s Moment of 2007:  Montana Supreme Court rules that first party insurers don't owe coverage for Y2K claims.   Ah, nostalgia.

Most Memorable Quote of 2007:  "We, uh, like I say, it ain’t but three people in the world that know anything about this … and two of them are sitting here and the other one … the other one, uh, being Scruggs … he and I, um, how shall I say, for over the last five or six years there, there are bodies buried that, that you know, that he and I know where … where are, and, and, my, my trust in his, mine in him and his in mine, in me, I am sure are the same.” 

Court Most Determined to Embarass Itself:  Washington Supreme Court.   The court reached a new low with Woo.  Plainly the toothsome dentist didn't have an auto policy or the court would have found coverage under that one too.

Court Most Determined to Disagree With Itself:  Washington Supreme Court.  Every third case prompted one or more dissenting opinions in 2007

Best Christmas Present:   Connecticut Supreme Court rules that Hartford may be able to aggregate Western McArthur asbestos settlement payments for reinsurance purposes.

The Wheels of Justice Grind Slowly in Texas:  Is there another court in the country with more old coverage cases waiting for action?  Trigger, duty to defend, late notice.  And did we mention UPL?

 On the Horizon: 

--California:  Supreme Court is now considering scope of the "genuine dispute" doctrine as a defense to bad faith claims (Delgado) and the application of concurrent causation to pollution liability claims (State v. Llloyds).

--New York:  The late notice wars continue, in and out of court.

--Pennsylvania:  Supreme Court will decide in Baumhammer's how many "occurrence" limits are shooting spree can trigger.

That's all for now.  See you in 2008.

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The First Circuit heard oral argument on Wednesday in the matter of Boston Gas v. Century Indemnity, a case that presents the first opportunity for this Circuit to weigh in on issues of allocation in long-tail coverage disputes.

 

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The U.S. Supreme Court announced earlier today that it has agreed to accept Exxon’s petition for certiorari from a ruling of the Ninth Circuit holding it liable for $2.5 billion in punitive damages for its claimed misconduct in connection with the Exxon Valdez oil spill.  

It appears from the court’s October 29 cert order, which accepted briefing on issues raised by Exxon's petition concerning the propriety of such an award under federal maritime law but not on grounds of constitutional due process, that any resulting ruling will have narrower application to bad faith claims and other punitive damage suits than the Court’s recent rulings in State Farm v. Campbell and Williams v. Philip Morris.

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Todd Hoeffner, the Texas plaintiffs’ lawyer who was indicted last June by a federal grand jury in Houston for paying over $3 million in kickbacks to two Hartford claims handlers to orchestrate $34 million in silicosis settlements, has filed a cross-claim against Harford in the malpractice suit that his former clients have since brought against him, claiming that he was a victim of extortion. In papers filed in the U.S. District Court in Corpus Christi last week, Hoeffner seeks $3 million in  damages from Hartford that he is seeking to treble pursuant to a RICO claim, contending that Rachel Rossow and John Prestage threatened to scuttle legitimate settlements unless he agreed to pay them bribes. Hoeffner claims that “employees of The Hartford held hostage the legal rights of Hoeffner and his clients in a plan calculated to enrich themselves.”

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