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

In this latest case, the Pennsylvania Superior Court ruled in American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2008 PA Super. 1994 (Pa. Super. May 5, 2008), that a trial court erred in holding  that Royal was entitled to reimbursement for the cost of defending various class action gun cases that it was later held not to have any obligation to defend because the NAACP case did not allege or involve “bodily injury.”

Whereas the trial court had found that an implied contract existed between the parties in light of the fact that the insured had accepted Royal’s defense pursuant to a reservation of rights letter that included an asserted right to recoupment of fees, the Superior Court held that such an analysis undercut the focus of the duty to defend on the possibility of coverage as distinguished from such facts as might ultimately be adjudicated.

The appellate court also took note of the fact that it was Royal’s suggestion that the insured retain independent counsel as opposed to participating in a joint defense involving multiple defendants that would have resulted in substantially lower legal costs to the policyholder. Where the insurer had a contractual duty to defend and had obtained various benefits by exercising that right to defend, the Superior Court refused to find that an implied contractual right to reimbursement existed or that the insured was unjustly enriched by the defense that Royal had provided so as to entitle Royal to reimbursement of attorney’s fees under a theory of quantum meruit.

Plainly the outcome of this case was influenced by its unique facts.  At the same time, the court was clearly persuaded by the Illinois Supreme Court's 2005 opinion in Gainsco (which also involved recoupment claims in the context of the NAACP gun suits).  It will be interesting to see whether the case proceeds to the Pennsylvania Supreme Court.

The dispute in Keeley arose out of a construction defect accident involving three of Keeley’s employees who fell from an I-beam and were injured. In addition to the claims for personal injury that the plaintiffs brought against Keeley, they claimed that he had subsequently destroyed or disposed of the I-beam, thwarting their ability to investigate and confirm its allegedly defective nature. Keeley’s insurer (United) denied coverage and brought a declaratory judgment action.

The claims in Employers Ins. of Wausau v. Fox Entertainment Group, 06-4652 (2d Cir. March 27, 2008) arose out of claims for copyright infringement involving music for the 1980's TV potboiler, Santa Barbara.  In 2004, a class action was brought in California against the parent companies of the show's producer (New World Entertainment) on behalf of all of the individuals who had composed music for the show.  After receiving a separate demand by various music companies, Fox Entertainment's legal department faxed a notice from its California office to its media E&O carriers, Wausau and National Casualty.  The insurers sought information concerning the relationship between Fox and their original insured.  Within weeks after receiving this confirming information, the carriers filed a DJ in federal district court in Manhattan against  various Fox entitites but not New World Entertainment.  Two weeks later, they also issued a formal denial of coverage.

Wthin weeks, Fox filed its own DJ in state court in California, including all of the New York parties, as well as New World Entertainment.  Although the insurers then added New World as a defendant in the New York case, Judge Mukasey (now our Attorney General) subsequently dismissed the DJ, holding that the defendants had established "special circumstances" warranting their claim that the California DJ should go forward even though it was not the first DJ to be filed.  The court focused on the fact that Wausau and National Casualty had filed the  DJ even before announcing their coverage position and had initially not included New World Entertainment, presumably in view of its close ties to California.  Around the same time, the federal court in California declined to transfer venue to New York.

In reversing the District Court's dismissal, the Second Circuit adopted an analysis of the "special circumstances" exception to the "first filed" rule similar to that followed by courts in assessing forum non convenients challenges.  The court held that "special circumstances" would only apply in a narrow group of cases, as where the DJ was anticipatory in nature or was filed in order to thwart  the natural selecton of forum for the controversy.  In this case, the court ruled that the insurers' DJ was not anticipatory as not having been filed in response to any direct threats of litigation or deadlines from the insureds and that the insurers were under no obligation to announce their coverage position before filing the DJ.  Further, the court ruled that the insurers' choice of New York (whose law is more favorable than California's on late notice issues (at least for now)) was not purely prompted by forum shopping.  While acknowledging that strategic considerations properly play a role in where to sue, the court found that there were, in fact, significant links between New York and this controversy. Fox TV is a New York corporation and has offices in NY, even though its headquarters is in California.  The court did not express an opinion on the relative merits of this controversy, however, and remanded the issue back to the District Court for a determination of whether New York or California was the more appropriate forum using a forum non conveniens analysis.

The dispute in Vigilant Ins. Co. v. The Bear Stearns Co., No. 25 (N.Y. March 13, 2008) arose out of a joint investigation by the SEC and various states attorney-general (hello, Eliot) of claimed conflicts of interest between in-house research and investment banking at ten major financial service firms on Wall Street.  Following meetings with regulators, Bear Stearns signed a settlement in principle on December 20, 2002 wherein it committed to pay $50 million in retrospective relief, together with $25 million to fund independent research and $5 million for investor education.  The document stated that it was subject to final approval by the SEC and state regulators.  In April 2003, the parties entered into a final consent agreement memorializing these terms.  This agreement was filed with a U.S. District Court in Manhattan which approved it in October 2003.  Under the terms of the final agreement, Bear Stearns paid a $25 million penalty to the SEC; disgorged $25 million in past profits and agreed to fund $25 milion for research and $5 million for investor education.  Bears Stearns agreed as part of the settlement not to seek insurance coverage for the $25 million penalty.

Three days after signing the consent agreement, Bear Stearns had belatedly given notice of the settlement to its excess professional liability insurers:  Vigilant, Gulf and Federal.  Vigilant had written a $10 million layer excess of a $10 million self-insured layer.  Federal and Gulf (now Travelers) underwrote a $40 million following form excess layer over that.

These carriers disclaimed coverage due to the insured's failure to give notice to them before settling.  Additionally, the insurers noted that their policies contained an exclusion for claims arising out of investment banking.  Finally, issues were raised with respect to whether the disgorgement penalty or sums paid for investment research or education were a covered loss.

In the ensuing coverage litigation, a state trial declined to grant summary judgment to the carriers, finding issues of fact with respect to whether the settlement in principle constituted a breach or whether the investment banking exclusion applied.  The Supreme Court also ruled that the insurers could not look beyond the terms of the settlement to determine whether the $25 million payment was for disgorged ill-gotten gains.  The court also rejected the insurers' "loss" argument.

In 2006, the Appellate Division agreed that issues of fact precluded summary resolution of the insured's claimed breach of the policies' consent to settle condition but granted summary judgment against the carriers on their alternative defenses to coverage.  The Appellate Division subsequently agreed to certifiy its ruling to the New York Court of Appeals.

In its analysis, the Court of Appeals focused on the consent to settle clause, which stated that Bear Stearns would not enter into any settlement or confess liability for an amount over a $5 million threshold without first obtaining its insurers' consent, said consent not to be unreasonably withheld.  The court concluded that Bear Stearns clearly breached this condition to coverage when it signed the consent agreement in April 2003 agreeing to pay $80 million to state and federal authorities.  Unlike the lower courts, the Court of Appeals declined to assign any significance to the fact that the consent agreement did not become final until it was approved by a U.S. District Court the following October.  The court noted that even though court approval was required, Bear Stearns was not free to walk away from its committments in the interim, nor was the consent agreement drafted so as to be subject to final approval by the insurers.  In light of its sophistication as a business entity, the court concluded that Bear Stearns could not on the one hand enter into insurance contracts stating that its insurers would not be liable for settlements entered into without their consent and then execute a consent agreement calling for the payment of millions of dollars without informing the insurers of the terms of the settlement.

The Court of Appeals therefore directed that judgment enter for the insurers on the basis of the insured's breach of the consent to settle clause.  As a result, the court did not reach the issue of whether portions of the settlement payment that called for payments into an investor educational fund or for disgorgement of profits would otherwise be a covered loss.

In light of the swirl of political and legal events now going on in New York state concerning conditions to coverage, this opinion is perhaps as surprising for what is not contained in it as for what is stated.  Nowhere in the opinion is there any discussion of whether this was a "material" breach or one that prejudiced the insurers.  Nowhere is there any argument that, given the District Court's holding that the settlement was reasonable, the insurers might have obtained a windfall due to the insured's negligence since they might well have given their assent to the settlement otherwise.  Nor is there any questioning of whether the the insured knew that it had coverage for such claims or whether its E&O carriers, who are all large sophisticated insurers who may well have read press reports at the time of the December 2002 settlement in principle, had actual knowledge of this agreement.  Indeed, none of the arguments that insureds have typically made in late notice cases appears in this opinion, nor does the court make any reference to notice issues beyond the specific condition at issue.

One may well surmise that the court's attitude was hardened by the inexcusable negligence of Bear Stearns in waiting months after signing the settlement in principle to notify its insurers.   The court's willingness to take the case and the absence of any dissents may also reflect the sense that much if not all of the settlement was also not covered by these policies.  Finally, the court may well be sending a signal to the legislature with respect to the fact that it continues to believe that New York businesses should stand by the terms of their written agreements.

In Goddard v. Farmers Ins. Co. of Oregon, an Oregon jury had awarded $20.7 million in punitive damages against Farmers after its failure to pay its $100,000 auto limit resulted in a $863,274 verdict against the insured.  The Oregon Supreme Court affirmed te jury's finding of bad faith, noting that:

In summary, we conclude that defendant's actions were directed at a financially vulnerable victim, were not confined to this victim alone, and involved intentional malice and deceit. On the other hand, defendant's actions caused economic harm only and did not evince a reckless disregard for the health or safety of others, although defendant is entitled to little credit for either factor -- cases of economic harm like the present one seldom provide malefactors with an opportunity to meet either of those criteria. Taken together, our analysis of the five reprehensibility factors set out in Gore, considered in light of the economic nature of defendant's wrongdoing, leads us to conclude that defendant's actions were very reprehensible.

Despite Farmers' argument that Campbell required a 1:1 ratio of punitive to compensatory damages, the Oregon Supreme Court concluded that a ratio of 4:1 was more appropriate.  Since the ratio here was closer to 16:1, the court held that a new trial limited to punitive damage was necessary unless the insured agreed to accept a reduced award based on a 4:1 ratio.

In calculating the ratio, the Supreme Court held that it was appropriate to consider pre-judgment interest awarded to the plaintiff in applying such ratios but that the amount of the damages was also properly reduced by the jury's finding of 20% comparative fault.

The claims in Bates v. Phenix Mut'l Ins. Co.,  2007-177 (N.H. February 18, 2008) involved damage to the insured's real and personal property after a culvert above the insured's house gave way following a period of extremely heavy rain, deluging the insured's property.  Phenix Mutual denied coverage on the basis of the flood exclusion in its policy, a position that was upheld by a state trial court in the ensuing coverage liltigation.

On appeal to the New Hampshire Supreme Court, Bates argued that the failure of the culvert and the resulting collapse of the roadway was a covered "explosion" under the policy because it was caused by a "sudden release of energy in the form of movement of water."  The trial court had rejected this argument but further found that any resulting coverage was defeated by the water exclusion in the policy.  The Supreme Court agreed.

Exclusion G to the policy stated that the policy excluded "loss or damage caused directly or indirectly" by water "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."   Since the insured conceded that water was at least an indirect cause of this loss, the Supreme Court declared that Exclusion G barred coverage.

Further, the court refused to find that the release of water caused an explosion within the ensuing loss provision of the exclusion.   The Supreme Court agreed with the trial court that applying "the ensuing loss provision to provide coverage for what is essentially a flood would subvert the intent of the parties."  In any event, the court observed that the actual damage complained of by the insured was not for damage due to an explosion (e.g.  flying rocks or debris).

The case came to the U.S. Supreme Court on a petition for certiorari from the Ninth Circuit, which had upheld a lower court’s finding that punitive damages were warranted but halved the amount of the award from the original $5 billion.

As the transcript of the argument reveals, the questioning was brisk. The initial focus of the Justices’ inquiry was on whether federal maritime law allowed an award of punitive damages based on the conduct of some other than a senior executive. Although counsel for Exxon conceded that the captain of the Exxon Valdez was a “managerial agent,” he argued that Captain Hazlewood, while more than a mere cabin boy, was not someone who had responsibility over that area of the company’s operations for an award of punitive damages against the company to be justified. There was a clear split among the Justices with respect to whether this is a long-standing tradition in federal maritime law and whether it is appropriate to treat maritime corporations differently from other U.S. corporations in this regard.

Although Exxon is clearly not an insurance case, this aspect of the court’s analysis has interesting implications for insurers in view of the fact that many states, while generally barring insurance for punitive damages, permit coverage where the insured’s liability is vicarious and not the direct result of misconduct by the company itself.

The second question addressed by the Justices was whether punitive damages are warranted under federal maritime law for unintentional oil spills. Exxon pointed out to the court that there had only been four cases of federal maritime punitive damage awards prior to the passage of the federal Clean Water Act. Exxon argued that there was no common law tradition of such awards and that Congress had indicated an unwillingness to sanction such awards by failing to provide a punitive remedy in the Clean Water Act.

Finally, counsel for Exxon argued that deterrence was not a realistic consideration in cases of this sort where there was no evidence of malice or bad motive, no possibility of concealment, no effort to gain a profit and the defendant had already paid vast sums in compensatory damages and for remedial efforts.

Arguing for the plaintiffs, counsel argued that the Exxon Valdes was a discrete business unit of Exxon over which Captain Hazelwood had executive control. Justice Roberts pressed counsel as to why a corporation should be liable for punitive damages if it had a policy a that only appropriate individuals should be hired that, unbeknownst to it, was violated by the employee. Counsel argued that it was insufficient to merely have a paper policy, that policy must be implemented soundly.
The Justices also debated what sort of “guideposts” should determine the amount of awards in federal maritime cases and, in particular, whether the same Gore standards (e.g., reprehensibility) that had guided their “due process” cases should be determinative or whether greater emphasis should be placed on statutory standards such as the Clean Water Act. Counsel for the claimants argued vehemently against any “bright line” ratio notwithstanding the suggestion of certain Justices that a ratio of 5-1 might be appropriate.

As among the Justices, only Chief Justice Roberts and Justice Scalia appeared to clearly be leaning Exxon’s way, with both Justices Ginsburg and Breyer adopting a more hostile attitude to both the legal and procedural aspects of Exxon’s claim.

Given the tone of the Justices’ questioning and the fact that they only accepted certiorari on issues specific to federal maritime law, it seems relatively unlikely that much of their opinion, when it is issued, will have a significant impact upon the manner in which state and federal courts around the country continue to address due process issues involving awards of punitive damages in non-maritime cases.

The Fourth Circuit ruled in Horace Mann Ins. Co. v. General Star National Ins. Co., No. 06-2156 (4th Cir. January 23, 2008) that because the General Star umbrella policy was a “true excess” policy, whereas the Horace Mann policy merely contained an “other insurance” clause purporting to make it excess of all other available insurance, a West Virginia district court erred in holding that Horace Mann had no obligation to contribute to the settlement.

Whereas the District Court had found that the two “excess” clauses were not in conflict since the General Star policy stated that it was excess to all other insurance “other than insurance that is in excess of the insurance afforded by this policy,” the Fourth Circuit ruled that these principles did not apply in a conflict between a primary policy and a true excess policy. Despite the fact that Horace Mann had developed this particular policy for school principals who typically would be entitled to coverage under other policies, the court rejected Horace Mann’s contention that this was, in fact, an excess policy holding that it was clearly designed to be a primary liability policy that might operate as excess insurance depending on the circumstances. While the excess other insurance clause in the Horace Mann policy might reduce the insurer’s exposure in most cases, the court held that it did not transform the policy into a true excess policy.

Writing in dissent, Judge Niemeyer argued that the district court had correctly undertaken a common sense reading of the respective wordings to reconcile their effect and that the Horace Mann policy therefore was excess of the General Star umbrella policy. The dissent also argued that this interpretation was consistent with the intent of the parties in structuring this insurance program for principals and educators.

In the ensuing coverage litigation, the Los Angelese Superior Court ruled for CNA in 2006, holding that the worker's suit for injuries caused by exposure to the methylene chloride were clearly subject to the APE in a 2002 American Casualty policy as arising out of a discharge of pollutants on or from the insured's premises.  This finding was affirmed by the Second District of the Court of Appeal on January 29.

The court ruled that “an ordinary insured would reasonably expect that the release of methylene chloride into a public sewer is environmental pollution.”   In keeping with other recent opinions such as Ortega Rock Quarry and Garamendi v. Golden Eagle, the court held that the insured's discharge of methylene chloride into the sewer was a widespread dissemination of a pollutant into the environment.  The court rejected the insured's argument that such exclusions do not apply to "one-time, negligent" discharges or should be limited to "catastrophic events such as large scale industrial pollution   The court also held that the fact that the sewer in question was sealed merely limited the scope of injury and did not alter the fact that there had been a release into the environment.. Finally, the Second District held that the operator of a furniture stripping business should have been well aware of the need to handle such chemicals carefully.

Although not discussed in the opinion, the Second District's analysis is in keeping with the First District's opinion late last year in Cold  Creek Compost, Inc. v. State Farm Fire & Casualty Co., A114623 (Cal. App. November 20, 2007), in whichh the Court of Appeal ruled that neighbors’ nuisance claims due to exposure to offensive odors, dust and noise from the insured’s composting operations are subject to an absolute pollution exclusion. The First District declared that “the widespread dissemination of offensive and injurious odors from a commercial compost facility is ‘environmental pollution’ under MacKinnon and thus excluded from coverage...”

It will be interesting to see if the California Supreme Court takes an appeal from one of these cases.  Meanwhile, it appears that the rumors of the demise of the absolute pollution exclusion  in California were exaggerated after all.

For the last several years, Illinois has followed the unique path of allowing insureds to designate the particular line of coverage under which they wish to be covered where multiple policies cover a construction claim.  In most such cases, therefore, a general contractor's first line of coverage is the CGL policy issued to a subcontractor on which it is listed as an additional insured.   The logical extension of this "targeted tender" theory would make the sub's umbrella policy the second line of defense.   However, that analysis conflicts with the principle of "horizontal exhaustion," wherein all available primary insurance must be exhausted before an umbrella pollicy must pay.  As a result, most courts have ruled that the general contractor's own CGL policy must pay after the sub's primary insurance.

In adopting the majority rule, the Illinois Supreme Court seems to have implicitly acknowledged some of the practical and doctrinal problems that result from a court making up a legal doctrine that is rooted more in a court's vision of public policy than the language of the policies themselves.

The tragic nature of the njuries in cases of this sort place great moral pressure on courts to contort insurance policies to provide funds where none may otherwise exist to compensate the victims of criminal acts.  Increasingly, however, courts are resisting pressure to find coverage for "negligent" crimes and are looking beyond the headings in a plaintiff's complaint to determine whether the facts warrant coverage or not.

The case of The Yaffe Companies v. Great American Ins. Co.,  arose out of an explosion at Yaffe’s scrap yard in Muskogee, Illinois which caused significant property damage and bodily harm.  Ultimately, Yaffe paid $1.8 million to settle the various claims brought against it.  It sought coverage from Ace, which had issued a CGL policy to it with a $1 million per occurrence limit but a deductible of $10,000 per claim.  Owing to the numerous underlying claims, Ace ultimately paid only half a million dollars for the losses with the Yaffe Companies absorbing the rest. 

Yaffe sued Great American contending that its umbrella liability policy, which was issued excess of the Ace $1 million policy was responsible for the difference between its total loss and $1 million.  Great American denied the claim arguing that it was only liable for that portion of the loss that remained after the underlying insurer had exhausted its limits. 

An Oklahoma district court granted summary judgment for Great American but the Tenth Circuit reversed.  Construing the various provisions of the umbrella policy together, the court found ambiguity and declared that the fortuity that the insured had chosen to purchase primary insurance on a “per claim” basis was irrelevant to the construction of the language of the Great American policy.  Since Yaffe had clearly paid more than $1 million, the court ruled that Great American was responsible for the remaining $800,000 in loss.

A dissenting judge argued that the language was, in fact, unambiguous and was keyed to the underlying limits of coverage, not the amount of the insured’s loss.  Judge Briscoe rejected the majority’s conclusion that the umbrella language referring to the “applicable limits of the underlying policies” merely set a dollar threshold at which point the excess carrier should pay, declaring instead that the language was clear that it was only intended to imply in excess of the retained limit, being the greater of the total amount of the limits of the underlying policies or the self-insured retention.

This case illustrates the trouble that excess underwriters can get into when their policies are not written on all fours with the primary coverage.  In this case, the underwriting file merely stated that the primary policy had a $10,000 deductible.  It is unclear whether the underwriter was aware that this was a “per claim” deductible that could have profound consequences in the event of mass tort incidents such as the Muskogee plant explosion giving rise to these claims. 

At the same time, it appears that the majority’s analysis did considerable violence to the manner in which umbrella carriers are conventionally called upon to pay and contorted the language of the policy in an effort to contrive coverage for the unfortunate and expensive consequence of the bargain that The Yaffe Companies had struck with its primary insurer.  Without saying so, the majority has in effect created a third form of umbrella coverage.  Whereas the policy itself only provides coverage for payments in excess of the primary limits or for cases outside the scope of the primary insurance, the Tenth Circuit’s analysis now creates an intermediate form of coverage requiring the umbrella carrier to also pay for that portion of an otherwise insured loss that is not owed by the primary insurer by reason of features such as deductibles or self-insured retentions.

The insurers' latest win came this morning in the New Hampshire Supreme Court.  On a certified question from the U.S. District Court, the court held in EnergyNorth Natural Gas, Inc. v. Certain Underwriters that indemnity claims arising out of the clean up of the insured's former gas site cannot be spiked in a single year to trigger a third layer excess policy issued by American Re in 1972.  Having adopted a "continuous trigger" 3 years ago in another EnergyNorth MGP case, the court this time held that the insured must bear the consequences of this extended period of property damage, as insurers are only responsible for that portion of the loss corresponding to the duration of their coverage. 

In a lengthy (for this court) opinion, the court concluded that pro rata allocation was (1) more consistent with its trigger of coverage analysis than "joint and several" liability; (2) gives insured's incentives to buy insurance and avoid environmental carelessness and (3) that joint and several is based on an untenable assumption, namely that at every point in a progressive, developing loss, the injury will be substantially the same.  Further, the court found that joint and several didn't resolve the issue of allocation, it merely postponed it by spawning another round of contribution litigation between the spiked carrier and other potentially triggered insurers that had avoided the insured's initial embrace.  

As any means of allocation spread the risk too thinly to reach AmRe's layer, the New Hampshire court (much like the NY Court of Appeals in ConEd) chose not to be much more specific about the details of allocation, although it expressed a strong preference for the "years times limit" approach pioneered by the New Jersey Supreme Court in Owens-Illinois.  Should that approach prove unfeasible, however, the court opined that lower courts should feel free to pro rate by years.

Owing to the fact that three justices were conflicted, only Justices Dalianis and Duggan (who wrote the opinion) sat, with the assistance of retired Justice Sherman Horton.  Fans of NHSC history will recall that it was Sherm Horton who, shortly before retiring, handed gas utilities their first appellate defeat by ruling in Concord Gas that the intentional discharge of tar waste into a body of water could not be an "occurrence."   How the wheel turns...

As is the case with many similar opinions, there are a host of details that remain to be worked out.  Notably, the court did not specify what denominator should be used.  Insofar as the court sought to align its trigger and allocation analyses, it would seem that this period should run from the date that the site was placed in operation (1852--which was the year that Franklin Pierce--New Hampshire's native son--became President of the United States).  The court's reference to OI suggests, however, that this period must take into account the amount of insurance a reasonable business would have bought and thus the question of whether insurance could have been purchased for casualty risks for some of that time.

While the court's statement that loss continued through manifestation implied that the denominator should extend until 2000, when this pollution was first documented, the Court's reference to OI again raises the possibility that later years containing pollution exclusions should be cut off, as policyholders in Minnesota have argument since Wooddale.