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

Just as truth is often said to be the first casualty of war, bad grammar is often the first victor in coverage battles. Such has recently been the fate of the quaint but venerable doctrine of the last antecedent, whereby clauses in a contract are interpreted in accordance with the words or phrases that immediately precede them rather than words that are more remote.

Two courts have considered this doctrine in reaching opposite conclusions with respect to whether standard CGL “personal and advertising injury” coverage for “publication of material that invades a person’s right of privacy” extends coverage to junk fax claims. The issue in these cases was whether it is the “publication” that is invasive or the “material.” Junk faxes, while annoying, rarely contain secret or confidential information such that their content could be said to invade a privacy interest. On the other hand, the legislative history of the TCPA suggests that Congress was concerned about protecting the seclusion interest of private citizens in banning such communications.

 

In State Farm General Ins. Co. v. JT’s Frames, Inc., B215457 (Cal. App. January 27, 2010), the Second District Court of the California Court of Appeal rejected the insured’s argument that the annoying receipt of telefaxed communications constituted a “publication” invading the recipient’s privacy. Rather, the court ruled that the “last antecedent rule,” as well as the context of the coverage itself, made clear that it was the “material” that the insured published that must invade the insured’s privacy rather than the manner of communication.

A contrary view was taken by the Florida Supreme Court in Penzer v. Transportation Ins. Co., No. SC08-20608 (Fla. January 28, 2010). On a certified question from the Eleventh Circuit, the court concluded that sending 24,000 unsolicited blast fax advertisements fell within the common dictionary meaning of “publication” as involving the distribution of material to the public. Further, the court ruled that the faxes themselves were “material,” noting that “material” may mean both solid objects as well as the content of said objects. Finally, the court found that the unhappy recipients of these faxes had suffered an invasion of privacy, rejecting any suggestion that the policy’s reference to “right of privacy” created any material distinction. Accordingly, piecing these conclusions together, the Florida Supreme Court found that the insured’s conduct involved the publication of material that violated a person’s right of privacy.

Transportation  argued that the doctrine of the last antecedent required a contrary conclusion. Relying on this doctrine, Transportation had argued that the phrase “that violates a person’s right of privacy” modified the term “material” as opposed to “publication” and thus coverage should only arise when it is the content of the material that violates a person’s right of privacy. The Florida Supreme Court disagreed. First, it ruled that this doctrine was not an absolute rule of contract interpretation and that, in this case, the clause “that violates a person’s right of privacy” is applicable as much to “publication” as to “material.” Furthermore, the court found that even if the phrase only modified the term “material,” the receipt of an unsolicited blast fax could still invade a homeowner’s privacy interest in seclusion without regard to whether the content of the material had also violated the privacy interest in secrecy.

As the Tenth Circuit recently cheerfully observed in Payless Shoesource v. Travelers Co., Inc., 482 F.3d 976 (10th Cir. 2009, “we know that grammatical rules are bent and broken all the time and we will not enforce the more grammatical interpretation of a contract when evident sense and meaning require that a different construction.” In rejecting a Kansas policyholder’s reliance on the last antecedent rule, the Tenth Circuit declared in Payless that “while misplaced modifiers are syntactical sins righteously condemned by English teachers everywhere, our job is not to critique the parties’ grammar, but only, if possible, to adduce and enforce their contract’s meaning. Here, a punctuation peccadillo notwithstanding, the meaning of the parties’ contract is unambiguous.”
 

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One of the perils of appellate advocacy is asking a court to take on too many complicated issues at once.  Inevitably, some issues don't get the attention they deserve or are dealt with as an after-thought.  Such is the case with an environmental coverage opinion that the Nebraska Supreme Court issued today in Dutton-Lainson Co. v. Continental Ins. Co., No. S-09-164 (Neb. February 5, 2010).

First the headlines:

--Insured's shipment of drums to various landfills all arose out of one "occurrence" (handling of solvents)

--Loss allocated on a "time on the risk" basis (months)

--Insured's agreement to accept liability before giving notice deemed to be prejudicial.

--PRP letter is a "suit"

--Insured's dumping of drums was an "accident." 

The discussion of allocation is particularly interesting.  It appears that the court was assuming that only years in which disposal activity actually took place should be triggered.  As a result, it ruled that if each of the sites was treated as a separate occurrence, the insured would lose CNA's coverage, since the disposal activity at some sites ended before its policies were issued.  Conversely, the court rejected CNA's argument that the trial court should have tacked 30 years onto the denominator for allocation, as the clean up won't be finished until 2017.   The Supreme Court ruled that the trial court correctly looked to the period (1947-87) when the contaminants were deposited, rather than the estimated time for the clean up.  So is this an "exposure" trigger ruling?  

The court also suggests that it might have agreed with Dutton that a "joint and several" approach was appropriate if the insured could have shown the amount of damage allocable to each year in question.   But isn't the basic premise underlying the policyholders argument that long-tail claims involve indivisible injuries that all of their insurer are jointly liable for if they owe anything at all? 

The "occurrences" analysis is also interesting.  Even though the sites in question were operated independently of each other, the court ruled that they all involved the same underlying cause, namely the insured's manufacturing processes, without which the insured would not have had waste TCE/TCA that had to be disposed of.  This is, at least to the best of my knowledge, the first state supreme court in which separate waste sites have been held to arise out a single "occurrence."  Given the growing number of rulings on this issue, the limited case authority cited (two opinions from the Third Circuit and an old federal trial opinon from Massachusetts) is odd indeed.

Bottom line:  a great result but one that reflects some incomplete analysis that may create headaches for carriers in other cases in the future.

 

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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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Illinois law makes no express provision for awarding attorney’s fees to prevailing parties. However, Section 155 does allow recovery of such fees in cases where the insurer has acted vexatiously or unreasonably. A recent opinion of the Illinois Appellate Court has broadened this remedy to include insurers who pursue equitable contribution claims on behalf of their insureds.
 

In Statewide Ins. Co. v. Houston Gen. Ins. Co., No. 1-07-1798 (Ill. App. December 14, 2009), a divided panel of the First Division ruled that “the remedy under Section 155 is intended for the protection of both the insured and the assignee who succeeds to the insured’s position.” Accordingly, the court ruled that an insurer pursuing equitable contribution claims on behalf of a mutual insured was entitled to recover over $260,000 in attorney’s fees for successfully prosecuting the claim. Writing in dissent, Justice Garcia argued that the prosecuting insurer in this case was not a judgment debtor or otherwise entitled to pursue a claim under Section 155. Justice Garcia argued that if Statewide had an independent obligation to provide a defense to its insured under its own policy, it was not entitled to seek relief under Section 155 for the insurer’s purported vexatious delay since it did not succeed to the same position of the insured under the disputed policy.

This recent Illinois opinion may be contrasted with a 2009 opinion of the Supreme Judicial Court of Massachusetts in which the SJC ruled that an insurer that obtains a declaration that another insurer owed a duty to defend their mutual insured had no right to recover its DJ fees, even though the claim concerned subrogated rights that would otherwise have entitled a prevailing policyholder to a few award. In John T. Callahan & Sons, Inc. v. Worcester Ins. Co., 453 Mass. 447, 902 N.E.2d 923 (2009), the court ruled that the public policy underlying the exception to the “American Rule” that it had enunciated in cases such as Gamache, is not intended “to punish wrongdoers or to reward those who act responsibly” but rather “is a policy designed to protect the insured’s right to receive the full benefits of its liability insurance contract.” Since the insured had in fact received the full benefits of its contract, the court held that there was no right of equitable subrogation to be pursued by Zurich. In any event, the court ruled that Zurich had, in fact, received a benefit since the other insurer had ultimately been forced to reimburse it for half of the costs of defense and settlement.

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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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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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The Supreme Judicial Court is due to hear oral argument on January 4, 2010 in the matter of Wheatley v. Mass. Insurers Insolvency Fund, SJC-10510. At issue is whether the state guarantee fund can be held liable under M.G.L. c. 176D for the sort of unfair claims settlement practices that would ordinarily subject a domestic insurer to liability under M.G.L. c. 93A. Wheatley has appealed from a ruling in the Superior Court that the fund was not "in the business of insurance" and was therefore outside the purview of Chapter 176D. The claim in question arises out of serious personal injuries that a special needs student suffered on October 26, 2001 while attending a public elementary school in the Town of Duxbury. At the time, the Town was insured by Legion Insurance, which was put into insolvency the Pennsylvania Insurance Commissioner in July 2003. As a result, when Wheatley made a claim against the Town in August 2003, responsibility for the investigation and disposition of her liability claim was undertaken by the Massachusetts Insurers Insolvency Fund. Wheatley alleges that the Fund never responded to her various demands, including a demand presented pursuant to M.G.L. c. 93A, § 9 and that it had a legal responsibility to do so as Wheatley contends that the liability of the Town of Duxbury was reasonably clear. Her bad faith claims against the MIIF were dismissed in 2008 in light of earlier rulings such as Barrett v. MIIF, 412 Mass. 774 (1992) and Poznik v. Mass. Medical Professional Ins. Assn., 417 Mass. 48 (1994) in which Massachusetts courts had declared that only conventional insurers were meant to fall within the jurisdiction of Chapter 176D. On appeal to the Supreme Judicial Court, Wheatley has argued that 1996 amendments to Chapter 176D, which amended the definition of "person" to include the MIIF and certain joint underwriting associations, evidence an intent on the part of the legislature to treat the Guaranty Fund and JUAs as being in the "business of insurance" for purposes of Chapter 176D. Wheatley further argued that the timing of these legislative amendments clearly indicated an intent on the part of the legislature to reverse the Supreme Judicial Court's holdings in Barrett and Poznik. In light of subsequent cases in which courts have ruled that JUAs may be held liable for unfair claims practice prohibited by Chapter 176D, Wheatley argues that the same should be true as regards the MIIF. In response, the MIIF has argued that the legislature plainly never intended to subject it to the same range of liabilities as actual insurance companies and that the Supreme Judicial Court has itself made clear that it views the MIIF as the "insurer of last resort." The MIIF emphasized in its brief that it has limited financial resources and is dependent on assessments from admitted carriers that are, in turn, passed along to policyholders. As a result, it argues that such a radical expansion of its potential liabilities should not be implied and should only result from a direct action of the legislature. A ruling should be received from the SJC by May or June of 2010. Note that the issue in Wheatley is whether the MIIF can be held liable for its own claimed misconduct in handling claims of a policyholder. It is far less likely that the SJC would impose liability if the issue was whether 176D liability could be imposed based on the claimed misconduct of an insurer prior to being declared insolvency.

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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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In recent months, there have been press reports of client claims against the Anderson Kill firm by disgruntled clients whose representation was handled by a paralegal who passed himself as a lawyer on various insurance coverage cases as well as products liability actions. A new opinion of the First Department of the New York Supreme Court in Natural Organics, Inc. v. Anderson Kill and Olick, P.C., 2008 N.Y. slip op. 08472 (App. Div. November 17, 2009) considers aggrieved policyholders can sue the firm for malpractice in such circumstances.

The case in question involved a large insurance coverage matter that AKO had apparently told Natural Organics was worth at least $1.3 million. Several years later, the case settled for $750,000. Thereafter, Natural Organics learned that one of the lead attorneys involved in the case was, in fact, a paralegal who had never been to law school or passed the bar. Natural Organics sued AKO, seeking the difference between $1.3 million and the $750,000 settlement as well as all the legal fees billed in the interim arguing that it would have obtained a more favorable result had it been represented by lawyers.
 

In affirming the trial court’s dismissal of the plaintiff’s malpractice claims, the First Department ruled that the allegations in the plaintiff’s complaint had failed to support any inference that, but for the defendant’s alleged negligence, the plaintiffs would have obtained a more favorable result. Further, the court ruled that the malpractice claims must be dismissed with prejudice as re-pleading a new set of facts would now be barred by the statute of limitations. Additionally, the First Department affirmed the lower court’s dismissal of the plaintiff’s breach of contract claims insofar as allegations based upon a breach of professional standards was duplicative of the malpractice claim.

The First Department ruled, however, that Natural Organics was entitled to proceed with a lawsuit against AKO for $70,000, the amount that the law firm had billed out for Brian Valerie claiming that he was a licensed attorney. The court ruled that, at this early stage of the proceedings, it cannot be said that these particular damages were too speculative.

Although the Appellate Division’s opinion is brief and contains few details concerning the back story to the dispute, subsequent reports in the Wall Street Journal and the New York Times indicate that the “lawyer in question, Brian Valery was a 32-year old paralegal who fooled the firm into believing that he was a lawyer and masqueraded as such for two years.” Valerie is scheduled to be arraigned on criminal charges of perjury and impersonating a lawyer. Valery went to work for Anderson Kill as a paralegal in 1996. In 2004, he told the firm that he had passed the bar. According to filings in a state proceeding in Connecticut, it appears that Anderson Kill never confirmed his account and hired him as an associate where he continued to work until October 2007 when the deception finally came to light.
 

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A recent opinion of the U.S. Court of Appeals for the Third Circuit has emphasized the general rule that an insurer’s failure to follow its own internal procedures does not necessarily equate to bad faith.

In Smith v. Continental Cas. Co., No. 08-4140 (3rd Cir. October 8, 2009), Continental Casualty’s insureds were sued for marketing various securities in what later proved to be a Ponzi scheme. The insured tendered its claim to its professional liability insurer, Continental Casualty, which denied coverage. The insured thereafter entered into a settlement with the plaintiffs for $150,000 and an assignment of their rights against their insurer. The plaintiffs thereafter sued Continental Casualty for breach of contract and bad faith.
 

 

The Third Circuit affirmed the Pennsylvania District Court’s conclusion that the claims in question were subject to an exclusion in the Professional Liability policy for unapproved financial products, as was the case here.

Turning to the issue of the plaintiffs’ bad faith claims, the Third Circuit took note of the two-part test for recovery under 42 Pa. Const. Stat. § 8371. Thus, in order to recover, a bad faith claimant must establish by “clear and convincing” evidence that (1) the insurer lacked a reasonable basis for denying benefits and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis. In this case, the court found that the plaintiff had evidence of neither prong. In light of the fact that Continental Casualty had prevailed on the contractual issue, it clearly had had a “reasonable basis” for denying coverage. Furthermore, there was no evidence that it had known or disregarded the lack of a reasonable basis for denial. Finally, although Continental Casualty’s internal best practice procedures apparently suggest that the insurer should communicate with the policyholder before denying coverage, the court observed that, “While perhaps Continental should have spoken with Sprecker before it made a final coverage decision, a failure to follow best practices does not give rise to a bad faith claim.”

The Third Circuit opinion also contains an interesting footnote with respect to the scope of the reasonable expectations doctrine in Pennsylvania. In this case, the court ruled that reasonable expectations doctrine “applies only to unsophisticated, non-commercial insureds, and only to protect such insureds from ‘policy terms not readily apparent and from insurer deception.’” In this case, the court found not only that the insureds were sophisticated but that in light of the clear application of this exclusion, any suggestion that they were entitled to coverage was not a reasonable one to hold.
 

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One of the more nagging problems in bad faith litigation is failure to settle cases in which more than one insurance company is involved. In such circumstances, where the insurer does not have full control as to whether the case can settle or not, may a liability insurer be liable for bad faith where the failure of the settlement owes to the intransigence of an excess insurer or other parties.  It was with some relief, therefore, that we received a ruling from the Georgia Supreme Court earlier this decade that created a "safe harbor" for primary insurers that had done everything in their power to effect a settlement within the overall limits.  Last month, however, the Georgia Supreme Court took a disturbingly narrow view of its earlier ruling in Brightman and declared that any sort of condition imposed by the insurer in offering its limits vitiates this protection.
 

Several years ago, the Georgia Supreme Court recognized the dilemma that such cases pose for primary insurers and ruled in Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003) that an insurer is not protected from liability merely because the plaintiff’s demand against it was conditional on a second insurer also making an offer of settlement. In such circumstances, the court ruled that even though the insurer had no control over the involvement of the second carrier, it was nonetheless obligated to give equal consideration to its policyholder’s financial interests by offering its limits.

The Supreme Court disagreed with the 2002 analysis of the intermediate appellate court (256 Ga. App. 451 (2002) that would have imposed an affirmative obligation on the part of the insurer to engage in negotiations concerning a settlement demand within policy limits. The Supreme Court ruled that it was “unwilling to ascribe a duty to insurers to make a counter-offer to every settlement demand that involves a condition beyond their control. Instead, we conclude that an insurance company faced with a demand involving multiple insurers can create a safe harbor from liability for an insured’s bad faith claim under Holt by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured.”

Last month, however, the Georgia Supreme Court held that a primary insurer might have been liable for a bad faith failure to settle notwithstanding the “safe harbor” recognized in Brightman. In Fortner v. Grange Mut. Ins. Co., S09G0492 (Ga. October 19, 2009), the plaintiff was injured in a car accident caused by Alan Arnsdorff. At the time, Arnsdoftf had a $50,000 policy with Grange Mutual as well as a $1 million limit with the Auto Owners policy issued to his plumbing business. Fortner offered to settle the claims for $50,000 contingent on Auto Owners’ payment of $750,000.

Although Auto Owners did not respond within the time limit set forth by Fortner, Grange responded that it would pay its $50,000 limit contingent on Fortner signing a full release within indemnification language and dismissing his claim against Arnsdorff with prejudice. Fortner considered this a rejection of his offer and took the case to trial where he won a $7 million verdict that was affirmed on appeal. As is often the case in such matters, Arnsdorff then assigned his rights to Fortner who brought a bad faith action against Grange for failing to settle.
At trial, the jury ruled in favor of Grange. On appeal, Fortner argued that the trial judge had erred in instructing the jury that it must rule for the insurer if it had offered its policy limits.

This instruction was affirmed by the Georgia Court of Appeals.  On furthe rreview, however, the Georgia Supreme Court ruled on October 19, 2009 that the instruction had precluded the jury from considering whether Grange Mutual had breached its obligations by imposing those conditions. It declared that its earlier analysis in Brightman was limited to situations in which the insurer had done everything within its power to effect a settlement. In this case, it was Grange Mutual that had elected to impose the conditions that the plaintiff enter a full dismissal with prejudice of its rights against the insured and agree to indemnify it.

Noting the fact that Fortner had eventually obtained a $7 million judgment, the court found that any such argument would have required Fortner to forfeit his access to Arnsdorff’s $1 million business policy, a condition that was entirely within Grange Mutual’s control. The Supreme Court declared, therefore, that it was not enough to instruct the jury that a liability insurer is blameless if it has tendered its limits but must also consider whether conditions are added to the offer. The case was therefore remanded to the trial court for further consideration of whether the insurer had acted in an ordinarily prudent manner in its response to Fortner’s settlement offer.
 

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Although Massachusetts courts have generally given effect to absolute pollution exclusions, recent case law has developed an interesting distinction between claims for “clean up costs” and damages attributable to more traditional forms of property damage, such as diminution in the value of the plaintiff’s property due to the presence of pollutants. A new opinion of the Appeals Court has suggested that this distinction is broad enough that it may swallow the exclusion itself.

The distinction between clean up costs and “permanent” property damage,” which so far as the author is aware is unique to Massachusetts jurisprudence, dates back a decade to Utica Mutual Insurance Company v. Hall Equipment, Inc., 73 F.Supp.2d 83 (D. Mass. 1999), aff’d, sub nom, 292 F.3d 77 (1st Cir. 2002), a case in which the insured negligently repaired a pumping mechanism on the plaintiff’s property, causing a spill of fuel oil. In 1999, Judge Lasker had ruled that the absolute pollution exclusion applied to the cost of cleaning up pollution but did not eliminate coverage for permanent damage to the plaintiff’s property in the form of diminution in the fair market value of the property, loss of rental income and the like were separate and distinct from environmental response costs that were meant to be excluded.

On appeal, the First Circuit conceded that the language in Utica’s exclusion was sufficiently broad that it could reasonably be argued that these non-remediation damages nonetheless constituted a "loss, cost or expense arising out of a[ ] ... demand ... that [Hall] ... in any way respond to ... the effects of pollutants," since such non-remediation damages arose from the Weathermark lawsuit and would not have been incurred but for the oil spill. Nevertheless, the court declared that a reasonable businessman could also have interpreted this language in the manner that the District Court did and that it was, therefore, ambiguous and must be construed in favor of coverage. Further, the court found that the District Court’s interpretation was consistent with terms in the exclusion, which suggested an intention to restrict this section of the exclusion to actual clean up measures and other “response costs” and remediation damages.

This distinction between remedial and non-remedial damages was also explored in Nascimento v. Preferred Mut. Ins. Co., 513 F.3d 273 (1st Cir. 2008). However, whereas the U.S. District Court had relied on the fact that the plaintiff’s claim was solely for remedial damages, the First Circuit affirmed on the alternative basis that the leaking tank in question had been used by the insured during the period in question and was therefore “occupied” by the insured so as to fall within Section 1(a) of the exclusion.

Most recently, the Appeals Court has ruled in Clean Harbors Environmental Services, Inc. v. Boston Basement Technologies, No. 08-P-576 (Mass. App. Ct. November 9, 2009) that an exception to Section 2 of the total pollution exclusion for “liability for damages because of property damage that the insured” would have had in the absence of a governmental cleanup directive provided coverage for damage to the property of an individual where Clean Harbors was installing a waterproofing system.

In the course of the insured’s work, a heating oil line was broken, causing approximately 150 gallons of heating oil to leak into the plaintiff’s basement. Boston Basement Technologies hired Clean Harbors to clean up the work at a cost of $12,638. After Boston Basement Technologies failed to pay Clean Harbor’s bill, Clean Harbor sued Basement Technologies, which filed a third-party complaint against its liability insurer (Admiral).

Although the Superior Court granted summary judgment to Admiral, holding that the costs in question were subject to the total pollution exclusion in its liability policy, the Appeals Court ruled on November 9, 2009 that questions of fact precluded summary judgment with respect to the scope of the exclusion. The court held that even absent the DEP’s issuance of a Notice of Responsibility to Basement Technologies, the insured would still have had common law liability for the cost of cleaning up the oil spill. The court declined to accept Admiral’s proposed distinction between cleanup costs (which would be excluded) and long-term damage to the property itself, such as diminution in the value as the result of the oil spill.

The Appeals Court declared that diminution in property value resulting from an oil spill clearly fell within the exception to this exclusion for statutory cleanup costs. However, the court ruled that diminution in value is not the sole measure of damages for harm negligently caused to property. Rather, the court noted the traditional distinction between temporary damage, where the cost of repairs is the appropriate measure of damage, and permanent injury where diminution in value is the measure of damage. In cases involving common law recovery for damage caused to property by pollution, the court concluded that the cost of restoring the property may be the more appropriate measure of damages since remediation essentially results in the restoration of the property to its pre-damaged value. As such, it held that cleanup costs might form a traditional common law value of “property damage” subject to this exception.

The Appeals Court distinguished the federal court’s analysis in Hall Equipment, in which the court had distinguished between damage to the property and cleanup costs, noting that in this case, the policy lacked an exception to the exclusion for property damage for which the insured would be liable at common law and thus eliminated the “remediation v. non-remediation distinction” that the Hall Equipment court had relied on. Further, the court found that this analysis was consistent with the intent of the underwriters since an insurer was able to assess risk when considering common law liabilities in a manner that might not exist with respect to statutory claims that could far exceed the diminution in value of the contaminated property. The court concluded, therefore, that it could discern no rationale in the policy language or case precedents “for excluding common law restoration costs from coverage when their recovery is a more appropriate remedy than recovery for diminution in property value.” However, the court found that questions of fact remained with respect to the costs involved and, in particular, with respect to a potential overlap between claims for costs of restoration and diminution in value.

The Appeals Court therefore directed the court below to determine whether Admiral’s indemnification for Clean Harbors’ cleanup work would be duplicative of amounts paid to the property owner and damages for diminution in value. The court declared that coverage also depends on the portion of Clean Harbors’ services that constituted appropriate or reasonable restoration costs under principles of common law recovery whereas tasks performed solely to meet statutory requirements over and above what was necessary for common law property restoration, would not be covered.
 

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A federal district court has ruled in Genzyme Corp. v. Federal Ins. Co., No. 08CV10988 (D. Mass. September 28, 2009) that a shareholder class action in which the plaintiffs alleged that Genzyme’s directors and officers had schemed to depress the market value of a subsidiary so that it could fold it into the corporation in a manner favorable to other shareholders failed to trigger coverage under a Directors & Officers policy.

Judge Gertner ruled that the sums that Genzyme had paid to settle these claims were not an insurable loss both because the policy should not insure directors and officers for being forced to disgorge monies to which they were not entitled and by reasons of public policy.

The District Court distinguished cases in which other courts had refused to find coverage for restitution, archly observing that in this case, “Genzyme was less a Butch Cassidy than a Robin Hood as its thefts were for the benefit of others, not for itself.” The court ruled that, “Genzyme should not be able to divide the benefits of equity ownership among its shareholders one way, redistribute those benefits, and then demand indemnification from its insurer for the re-division.”

In any event, the court ruled that these claims were subject to a “bump up” provision in the Federal policy which stated that there was no coverage for that part of loss arising out of any payment of “allegedly inadequate consideration in connection with [the insured’s] purchase of securities issued by any insured organization.”

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A new federal district court opinion in Massachusetts has taken a curious twist on conventional rules governing the duty to defend. Massachusetts, like most states, imposes a duty to defend where the underlying claims present a “potential” for coverage whether or not the actual facts in evidence at trial would sustain the allegations presented in the complaint. In Whittaker Corp. v. American Nuclear Insurers, however, U.S. District Court Judge Richard Stearns declared that a duty to defend may arise base upon the “potential for coverage” in a case where there was a dispute between the parties as to whether the policy contained an exclusion that would clearly have precluded any defense duty.
 

Nuclear liability risks have been excluded from CGL policies since the 1950s. In response to this gap in coverage, the Nuclear Energy Liability Insurance Association provides coverage pursuant to special policy forms. In this case, the Nuclear Metals Division of Whittaker Corporation sought coverage under an ANI policy for the cost of responding to a U.S. EPA clean up directive concerning its nuclear metals manufacturing facility in Concord, Massachusetts.

According to ANI, it had issued an environmental endorsement (Endorsement 112) in 1990 adding coverage for certain environmental liabilities but stating that the policy would not cover “environmental clean up costs or on-site clean up costs.” A copy of Endorsement 112 was reflected in the ANI file but not in the insured’s own copy. Although ANI argued that it was its standard procedure to send a copy of its policy to the agents of all of its insureds, Judge Stearns found that evidence of a general procedure was not proof that the insured itself had received this policy. Furthermore, although the general rule in Massachusetts is that an insured is charged with its agent’s knowledge of the terms and conditions of a policy, the court took note of the fact that Condition 13 to this policy stated that, “Notice to any agent or knowledge possessed by any agent or by any other person shall not effect a waiver or change in any part of this policy.”

Judge Stearns concluded that it was ANI’s burden to prove the existence of this exclusion and that whether or not the policy contained the endorsement presenting this exclusion was a question of fact that must be resolved at trial. While denying the parties’ cross-motions for summary judgment with respect to the case as a whole, Judge Stearns granted the insured’s motion for summary judgment on the issue of the duty to defend, finding that as there was a possibility that the policy did not exclude coverage for environmental clean up costs, “It is at least plausible that the Policy will cover EPA’s demand for environmental testing and remediation.”

There are two puzzling aspects to Judge Stearns’ analysis. First, the general principle cited by the court with respect to the parties’ respective burdens of proof has to do with the application of policy terms, not their existence. Thus, it is the general rule in Massachusetts that insureds bear the burden of proving claims within a policy’s insuring agreement at which point the burden of proof shifts to an insurer to establish that coverage is precluded by reason of exclusions, conditions or other limitations to coverage. Judge Stearns appears to have confused this rule with the separate principle that an insured bears the burden of proving the existence and material terms of an insurance policy.

Second, the potential for coverage arises from the question of whether the underlying facts fall within the scope of coverage. The court should not have granted summary judgment on this issue while questions of fact remained to be resolved concerning the actual wording of the policy.

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During the 1990’s, I often delivered the opening talk at DRI’s annual conference on environmental coverage disputes. In the course of presenting charts showing the evolution of case law among the fifth states, it was always a comfort to point to Hawaii as one of the few remaining “white spaces” on the map.

While Hawaii remains blessedly free of most of the long-tail coverage controversies that continue to plague many other states, its Supreme Court has now been asked to tackle the vexing issue of whether absolute pollution exclusions apply to all injuries caused by pollutants or whether, as policyholders contend, they are limited to “traditional” environmental pollution.

The claims in Apana v. TIG Ins. Co., No. 08-15369 (9th Cir. July 15, 2009) come to the Hawaiian Supreme Court by way of the Ninth Circuit from an appeal of a Hawaiian district court’s ruling that a total pollution exclusion precluded coverage for personal injuries suffered by a Walmart employee after inhaling noxious fumes from a caustic drain cleaner that the insured plumber was using to clear a clogged store drain.

Allegations that a store employee suffered injuries as a result of inhaling noxious fumes from a drain cleaner being applied by the insured plumber were held subject to a total pollution exclusion in Apana v. TIG Ins. Co., 504 F.2d 998 (D. Haw. 2007). This finding has been appealed to the Ninth Circuit and has recently been certified to the Hawaii Supreme Court for resolution.

While acknowledging that a literal application of the total pollution exclusion would preclude coverage in a case of this sort, the court took note of numerous state and federal rulings in which courts have refused to give effect to such exclusions on the grounds that they are either ambiguous or conflict with the insured’s reasonable expectations of coverage. In this case, the injuries clearly arose out of the “discharge” or release” of a gaseous vapor or chemical so as to involve a “pollutant.” On the other hand, would a plumber have expected that its use of a cleaning fluid to clear a drain should be subject to a pollution exclusion?

Finding itself unable to predict how a Hawaii court would resolve this conundrum, the 9th Circuit has certified this question to the state Supreme Court: “

Does a total pollution exclusion provision in a CGL insurance policy apply to localized uses of toxic substances in the ordinary course of business (such as when a plumber uses chemicals to open a clogged drain and an employee working nearby inhales the fumes and suffers injuries), or is it limited to situations that a reasonable layperson would consider traditional environmental pollution?”

The court’s phrasing of the certified question is itself interesting. Quite a few courts have refused to apply the exclusion in cases of this sort on the grounds that localized exposures (most of these cases involve contractors) do not involve a “discharge” or “release” (the theory being that these terms imply an escape of some distance between the point of release and the place of injury). Here, however, the 9th Circuit has concluded that the literal wording of the exclusion would defeat coverage and looks instead to whether the reasonable expectations doctrine should trump the wording of the policy.

Insofar as the issue is whether different types of insureds should have different expectations of coverage, the insurer should prevail. Under similar circumstances, the Massachusetts Supreme Judicial Court recently ruled in McGregor v. Allamerica Ins. Co., 449 Mass. 400, 868 N.E.2d 1125 (2007) that a trial court erred in refusing to give effect to claims against a contractor for a spill of oil inside a customer’s residence. The fact that the location of the oil spill was a residence rather than an industrial or manufacturing site did not, in the court’s view, “automatically alter the classification of spilled oil as a pollutant.” The court cautioned that not every claim involving oil, soot or smoke would be excluded particularly if they were incidentally discharged in the course of an otherwise covered event. On the other hand, the court refused to find that giving effect to the exclusion in this case vitiated the value of McGregor’s policy or made its coverage illusory. “Costs associated with spilled oil are no less excluded by pollution exclusions merely because the insured regularly works with oil as part of his ordinary business activities.”

McGregor was clearly an “environmental”(ie. clean up) case, however. The SJC’s holding was that oil in the ground that has to be cleaned up is a “pollutant,” whether the claim is presented by a “polluter” or not. (Those of us who are old enough will recall that similar “active polluter” arguments enjoyed a brief flurry of favor back in the 1980s).

It is far from clear, however, that the Hawaii Supreme Court will consider the issue as narrowly as the question framed to it by the Ninth Circuit or will examine it more broadly, as courts in Illinois, New York and other states have in finding that only “traditional” environmental contamination is meant to be excluded. At the same time, it should be recognized that the recent trend in such cases has favored the insurance industry, as carriers have recently defeated “traditional” environmental contamination arguments in the Georgia and Iowa Supreme Courts.

Aloha!
 

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In a "perfect storm" of a claims made case, the First Circuit has sustained rulings by a Massachusetts court that three "claims policies" did not apply to a malpractice claim for three independent reasons. The opinion illustrates the growing impact of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) shaping Rule 12(b)(6) as a significant tool for dismissing baseless coverage claims early on in a case. The holding also reaffirms strong existing Massachusetts precedents governing how “claims made” policies apply.
 

Gargano v. Liberty International Underwriters, Inc., No. 08-2287 (1st Cir. July 14, 2009) concerned an attorney’s failure to give timely notice of a malpractice claim to his E&O carriers. Gargano had taken over a worker’s compensation claim after his client fired the lawyer had worked on the case for four years. Gargano ultimately obtained a large settlement but only after assuring the state court that there were no liens on the file and that he had solely been responsible for the representation of his client. Predecessor counsel sued Gargano in 2005 and ultimately recovered a substantial judgment for the insured’s fraud and misrepresentations.

Following the entry of the judgment in 2007, Gargano belatedly reported this claim to three professional liability insurers that had successively issued “claims made and reported” policies to him in 2005, 2006 and 2007. The insurers jointly moved to dismiss the insured’s claims pursuant to Fed. R. Civ. P. 12(b)(6) attaching a copy of the underlying court judgment against Gargano. On the basis of these undisputed facts and the “claims made and reported” language in the insurers’ policies, Judge Young dismissed the insured’s contractual claim, along with his assertion of bad faith. These findings were affirmed by the First Circuit.

As a preliminary matter, the First Circuit upheld the district court’s consideration of the lower court judgment in the context of a Rule 12(b)(6) motion. While noting that courts do not ordinarily consider materials outside the complaint when reviewing a motion to dismiss, a narrow exception is permitted for documents the authenticity of which are not disputed by the parties, for official public records, for documents central to the plaintiff’s claim and other documents that are referred to in the complaint itself. In this case, the court found that the superior court judgment fit squarely within this exception.

Turning to the merits of the insurers’ defenses, the court observed that the underlying malpractice action, which involved a claim first made in 2005 and not reported until 2007, ran afoul of the “claims made and reported” language in each of the insurers’ policies. As to Policy 1, the claim was received during the policy period but not reported until after it expired. As to Policy 2, the claim was neither reported nor received during the policy period. Finally, as to Policy 3, the claim was reported to the insurer during the policy period but received by the insured prior to the policy period.

Gargano argued that these terms should not be applied against him since he had never seen the policies and was unaware of their terms. (It is unlikely that any court would ever find such an argument to be credible when presented by a lawyer given the ubiquity of “claims made” terms in professional liability insurance policies.) Even so, the First Circuit found in this case that there was no basis in Massachusetts law for suggesting that the enforceability of an insurance contract was dependent on its issuance. Unless the policy makes issuance and delivery a condition to the existence of the contract itself, the court ruled that the policy was self-enforcing. In any event, the court found that Gargano could hardly have had a reasonable expectation of coverage and could not claim ignorance of the terms of the policies as they had been delivered to his insurance agent or broker. In such circumstances, the knowledge of the agent or broker is imputed to the insured.

Finally, in keeping with established principles of Massachusetts “claims made” jurisprudence, the court refused to require the insurers to establish prejudice as the result of the insured’s failure to establish these conditions to coverage. The court observed that, “To require the insurer of a claims made and reported policy to demonstrate prejudice from the insured’s failure to report a claim within the relevant policy period would defeat the fundamental concept on which claims made policies are premised with the likely result that claims made policies, which offer substantial benefits to purchasers of insurance as well as insurance companies, would vanish from the scene.”

There are several interesting aspects to this new opinion. First, it demonstrates the benefits of a Rule 12(b)(6) motion where the crucial facts supporting an insurer’s defense to coverage may not be specifically pleaded in the underlying suit but are either undisputed or are contained in documents reference din the complaint. While reference to such extrinsic sources of proof would ordinarily have required a Rule 56 motion for summary judgment in the past, which many courts will not consider until later in a suit, a growing number of courts have adopted a more expansive interpretation of Rule 12(b)(6) in the wake of the U.S. Supreme Court’s opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

Gargano also affirmatively stifles the oft-repeated but baseless contention that an insured cannot be bound by terms in an insurance policy of which it was unaware. While this argument is effective in cases where exclusions or coverage limitations are new to a policy, as where they are added in a renewal policy without due notice to the insured, such an argument is ineffective where the provisions in question are neither ambiguous nor obscure or where the policy itself was in fact delivered to the insured’s agent or broker.

Finally, Gargano is a useful reference case given that it involved a “perfect storm” of all of the permutations of trouble that an insured may face with “claims made and reported” language. For all of the foibles of Massachusetts insurance jurisprudence, it is nearly unique among the fifth states in upholding all of the key aspects of “claims made” coverage requirements for insurers. This is the rare case, however, where the facts of the case illustrate the problems presented by claims being received during the policy but not being reported on time, after the policy was issued but not being reported on time, and being reported on time but after the policy was issued.

Congratulations to MM alum Bill Bogaert who argued the case for Liberty International.

 

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The Fourth Circuit  ruled yesterday  that allegations that employees of an American security firm that abetted the torture of detainees at the Abu Ghraib prison in Iraq are outside the Coverage Territory of a CGL policy issued by St. Paul. In CACI, International, Inc. v. St. Paul Fire & Marine Ins. Co., No. 08-1885 (4th Cir. May 14, 2009), the court voted 2-1 to affirm the findings of a West Virginia District Court that the alleged abuses did not occur within the territory of the United States and its possessions. The court declined to find that allegations that conduct that did occur in the United States wherein the insured was allegedly negligent in hiring these employees triggered coverage. Apart from the fact that the Complaint did not expressly allege where these acts occurred, the court ruled that it is the place of injury, not of the insured’s negligent acts, that governs the application of the Coverage Territory clause.  Justice Shedd authored a brief dissent, arguing that the claims fell within the exception for insureds working outside the territory for a “short period.”

Kudos to Walter Andrews of Hunton & Williams!

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The Supreme Judicial Court of Massachusetts issued a brief order yesterday in Boston Gas v. Century Indemnity announcing that it is waiving an internal court guideline that requires issuance of rulings within 130 days of oral argument.  At issue in Boston Gas is whether the cost of cleaning up pollution from a former manufactured gas plant can be allocated to an excess insurer on an "all sums" basis or must be allocated to multiple years on some basis.  As the case was argued on January 8, the 130 day period was due to expire this week.

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The Eighth Circuit's recent opinion in Westchester Fire Ins. Co. v. Wallerich, No. 07-3624 (8th Cir. April 24, 2009) has added further confusion to the conflicting law in Minnesota as to whether liability insurers can sue their insurers to recoup defense costs if they are adjudged not to have owed a defense, Although Minnesota’s state appellate courts have yet to weigh in on this issue, it appeared up until now that federal courts were recognizing a right of recoupment. Now it’s unclear.

In the earliest Minnesota case to address this issue, a federal district court ruled in Knapp v. Commonwealth Land Title Insurance Co., 932 F. Supp. 1169 (D. Minn. 1996) that a title insurer could recoup defense costs that it had paid pending a determination that it did not, in fact, owe coverage for the underlying title dispute. The court focused on the fact that the insurer had expressly reserved a right of recoupment when it agreed to defend and that the insured had not protested this claimed right. The court concluded, “Under these circumstances, the Court finds it appropriate to determine that Knapp’s silence in response to Commonwealth’s reservations of rights letter, and subsequent acceptance of the defense provided by Commonwealth, constitutes an implied agreement to the reservation of rights.”

The Eighth Circuit seemed to follow this line of reasoning a decade later in a Texas case. Despite the insured’s argument that Texas law, as exemplified by the Texas Supreme Court’s opinion in Matagorda County v. Texas Association of Counties Risk Management Pool, 52 S.W.3d 128 (Tex. 2000) precludes insurers from unilaterally asserting a right to recoupment of defense costs, the Eighth Circuit ruled in St. Paul Fire & Marine Ins. Co. v. Compaq Computer Corp., 457 F.3d 766 (8th Cir. 2006) that St. Paul’s assertion of a right to recoupment was not “unilateral” but rather was impliedly agreed to by Compaq when it accepted St. Paul’s partial payment of its defense costs after the insured itself had demanded a defense beyond that provided for under the policy. As a result, the court found that the insured had, in effect, created a supplemental agreement that required payments beyond those contemplated in the original agreement but that also gave St. Paul both rights asserted in the reservation of rights letter pursuant to which it had agreed to make any such payments.

Since then, however, it appears that the Eighth Circuit has gotten cold feet (or been taken aback by emerging case law in other jurisdictions rejecting a right of recoupment). In any event, the court’s recent opinion in Westchester Fire Ins. Co. v. Wallerich, No. 07-3624 (8th Cir. April 24, 2009) declined to find a right of recoupment and narrowly distinguished Knapp and Compaq.
In Wallerich, a directors and officers carrier agreed to provide a defense under a reservation of rights but stated that it would seek reimbursement for any sums advanced if a court later ruled that it did not have a duty to defend. Westchester Fire proceeded to bring a DJ and ultimately obtained a ruling that the “insured v. insured” exclusion in its policy precluded any duty to defend. The Minnesota District Court ruled that Westchester Fire was entitled to recoup the defense costs that it had paid in the interim.

On appeal, the Eighth Circuit affirmed the lower court’s ruling that Westchester Fire had no duty to defend but rejected its claims to recoup defense costs.. The court took note of the split in authority around the country and the growing number of courts that have rejected the insurers’ position and concluded that it was persuaded by the more recent state and federal court opinions from other jurisdictions that have adopted the “minority” position barring reimbursement for defense costs.
The court also distinguished the facts in Knapp and Compaq. In particular, the Eighth Circuit emphasized that Wallerich had not acquiesced in the insurer’s assertion of this right and, indeed, had loudly protested at the time that it should not have to repay Westchester Fire.

Under the circumstances, the court ruled that Westchester’s decision to still go forward with a defense despite the insured’s rejection of the terms in its reservation of rights letter constituted an implied acceptance of the insured’s terms. Furthermore, unlike Compaq, the court held that the insurer had never explicitly agreed to forego any rights that it otherwise had in return for tendering a defense.

Is Wallerich a complete repudiation of Compaq or just a refinement of the court’s earlier analysis in a different fact pattern where the insured’s objection at the time invalidates the “implied in fact” contract that insurers have argued to advantage in other cases.

From the author’s own point of view, the defense cost recoupment cases are much more difficult to prove than is the case where an insurer agrees to pay a settlement on its insured’s behalf and later seeks repayment after it is held not to owe coverage. The real issue with the defense cost recoupment cases is that courts are increasingly viewing these claims as subverting the promise to defend set forth in the policy’s insuring agreement. What value is the duty to defend, so goes this argument, if the insurer demands its money back later?

In fact, there is real merit to insurer arguments for recoupment where the absence of a defense obligation is apparent on the face of the pleadings or uncontroverted facts and the defense being provided to the insured is truly a “courtesy” defense that may minimize any liability that the insured may otherwise face. Where an insurer does have a duty to defend, however, it may only recoup defense costs that are attributable to non-covered claims (as in Buss) or that were incurred after it was found not to owe a defense.

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In recent years, the Seventh Circuit has emerged as a beacon of sanity in the morass of federal insurance jurisprudence (well, yes, there was Eljer butr everyone makes a mistake occasionally).  As among the judges on the court, Posner and Easterbrook are particularly interesting to read.  So it is with pleasure that we commend to your consideration a savage new opinion from Judge Easterbrook saving a policyholder who had the effrontery to challenge the scope of the "your work" exclusion in a recent Indiana case.

The dispute at issue in Westfield Ins. Co. v. Sheehan Construction Co., No. 08-3463 (7th Cir. April 29, 2009) arose out of the now familiar scenario of a lawsuit brought by property owners whose homes had acquired moisture and mold as a result of defective workmanship by the insured’s subcontractors. In this case, Sheehan Construction settled the claims for $2.8 million and assigned its coverage rights to the homeowners. In the interim, the contractor’s general liability insurer had brought an action for declaratory relief in Indiana seeking a declaration that the claims were subject to the “your work” exclusion.

The Westfield coverage was notable in that its “your work” exclusion did not contain the endorsement that has been contained in standard CGL policies since 1986 stating that, “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The only issue, therefore, was whether the property damage had arisen out of “work or operations performed by you or on your behalf.”
Justice Easterbrook concluded that the “on your behalf” language clearly extended to work performed by subcontractors.

In a footnote, the Seventh Circuit also approved the action of the federal district court in dismissing the testimony of a former insurance adjuster who stated that he would have paid Sheehan’s claim where this “expert” conceded on the stand that he knew nothing about Indiana law and was merely opining with respect to legal issues that were properly the province of the judge.

The Seventh Circuit rejected the insured’s argument that various Indiana cases supporting this limited construction of coverage for faulty workmanship claims were “out-dated” observing with some asperity that judicial decisions do not come “stamped with expiration dates.”

The court observed that the policy was intended to indemnify a contractor for losses caused by construction machinery that damaged adjacent property or for an injury to a passer by as by a misplaced nail. On the other hand, the court held that such policies were not meant to indemnify a contractor for negligent work. In such circumstances, “The moral hazard would be considerable: the prospect of indemnity would lead the general contractor to save money by hiring sub-standard contractors, then turning to the insurer to fix the customer’s home.”

Justice Easterbrook concluded by chastising the insured’s lawyers who, even after losing in the district court in Indiana, had argued in their briefs to the Seventh Circuit that Westfield’s denial of coverage was in bad faith for which punitive damages should be awarded. The court questioned how an insurer could exhibit bad faith by taking a position that not only followed the policy language but had been endorsed by a lower court.

The Seventh Circuit concluded that the insured’s arguments were no more than a strategy “to strong arm a settlement by in terrorem claims rather than to vindicate its legal entitlements. Lawyers should think carefully about the message that their contentions convey to this court, as well as the effect they may have on the other litigants.”
 

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There was a time back in the 1980’s when Indiana was viewed as a relatively conservative jurisdiction as far as insurance law went. During this era, there was also a general view that the duty to defend did not arise until such time as a claim was presented to an insurance company to defend.  Since then, however, Indiana has become a notoriously difficult jurisdiction for insurers and courts around the country have warmed to the idea that insureds can recover “pre-tender” defense costs unless their delay in giving notice caused prejudice to the insurer.

Now, in an astonishing turn of events, the Indiana Supreme Court has turned the clock back and has adopted a sensible analysis of an insurance policy that clearly distinguishes between the prejudice rules that most jurisdictions have adopted in the context of an insured’s failure to give timely notice of an accident or suit, and the requirement of tender as being a pre-condition to the duty to defend in the first instance.

The insured in Dreaded, Inc. v. St. Paul Guardian Ins. Co., had received cleanup demands from the Indiana Department of Environmental Management in November of 2000 and again in August 2003 but failed to alert its CGL carriers to these claims until March 2004. St. Paul thereafter agreed to provide a defense under a reservation of rights but declined to reimburse its insured for costs incurred prior to March 2004. The trial court entered summary judgment for St. Paul, declaring that even if a showing of prejudice was required, a delay of three and a half years in tendering the underlying claims was unreasonable as a matter of law and gave rise to a presumption of prejudice.

In December 2007, the Indiana Court of Appeals reversed, declaring that although the insured’s delay was unreasonable, the insured had raised sufficient facts to rebut any presumption that St. Paul had been prejudiced by its delay. The court took note of the fact that St. Paul did nothing after receiving notice to alter the manner in which the case was being defended and retained the same attorneys and environmental consultants. Further, the court was persuaded by evidence presented by the insured that its defense up to that point had been reasonable and appropriate. As a result, the Appeals Court held that the trial court should not have granted summary judgment to St. Paul.

On April 29, 2009, however, the Indiana Supreme Court held that although the “presumption of prejudice” rule applied with respect to an insured’s failure to give notice of an accident, in this case what was at issue was the insurer’s duty to defend. The court ruled that an insurer cannot defend a claim of which it has no knowledge and that, “The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement. Until an insurer receives such enabling information, it cannot be held accountable for breaching this duty.” As a result, the Supreme Court ruled that the insurers were not liable for reimbursing Dreaded for its pre-tender costs.

It should be admitted that some of the confusion that courts have engendered in this area arose in part from the advocacy of insurance coverage lawyers who relied on case precedents involving the voluntary payment prohibition and other breaches of the cooperation clause as a basis for arguing that insurers had no duty to reimburse for costs incurred prior to the date of tender. See, e.g. Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 976 (4th Dept. 2000).

This new opinion from the Indiana Supreme Court should remind us, however, that the stronger argument in such cases is that the requirement of tender is a condition precedent to any defense obligation arising as a matter of contract and that, as no defense obligation can exist prior to a lawsuit being tendered for defense, an insurer should have no obligation to reimburse pre-tender defense costs.
 

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There is a quaint notion in northern New England that insurance policies exist to pay claims.  This is abundantly true in the State of Maine, where courts have been remarkably liberal over the years in finding coverage for liability claims. 

In the most recent case of this sort, the First Circuit ruled last week in Centennial Ins. Co. v. Patterson, 08-1521 (1st Cir. April 23, 2009) that a professional liability insurer had a duty to defend a veterinarian for allegedly giving false testimony at a public hearing involving the plaintiff.

The coverage dispute arose out of a pro se law suit brought by Carol Murphy, a local farmer who alleged that  dozens of state officials and other defendants (80 in all) had conspired to take away her animals by pursuing animal cruelty charges against her for failing to provide them with proper food, care and shelter.  Among the defendants was Dr. Robert Patterson,  who had examined the animals and testified about their condition at an Animal Possession hearing.

Patterson tendered the defense of Murphy's suit to Centennial, which had insured him under a Veterinarian's Professional Liability policy.  Centennial denied that testifying at a public hearing involved rendering "veterinary professional services" and commenced an action for declaratory relief in federal court.  Although Murphy's suit was soon thereafter dismissed with prejudice, Centennial's efforts to withdraw its coverage litigation as moot were denied by the U.S. District Court were denied owing to the fact that Dr. Patterson had incurred the cost of engaging his own defense counsel.  In 2006, the District Court ruled that Centennial owed coverage for the insured's defense costs ($121--hey, this is Maine) and DJ fees ($3036).  Centennial appealed.

On April 23, 2009, the First Circuit issued its opinion, affirming the lower court's finding of coverage.  Crucially, the court found that the conduct giving rise to Patterson's claimed liability was not just his public testimony but the examination and care for Murphy's animals that formed the basis for his testimony.  As a result, the court found that these actions involved his special training as a veterinarian and were properly the subject of coverage for "professional veterinary services” within the policy’s definition of a covered “veterinary incident.”

The court also observed that the policy would be triggered by the underlying complaint’s allegation that Dr. Patterson had committed libel and slander despite the fact that such allegations were apparently limited to various media outlets that were named as co-defendants in the Complaint. Furthermore, despite the fact that Centennial suggested that any covered libel or slander must occur in connection with the furnishing of professional veterinary services, the First Circuit observed that such events were unlikely to occur in the course of treating an animal and must therefore reasonably be given broader applicability to testimony that the insured was giving in the course of his special expertise and training as a veterinarian.

Finally, despite the fact that the underlying suit alleged that the statements were made with fraudulent intent, the First Circuit held that an exclusion to the policy for making knowingly false statements did not apply since allegations in a pro se Complaint characterizing Dr. Patterson’s actions as “criminal” for which he was “guilty” did not necessarily mean what they stated and might result in an ultimate determination that the insured was merely negligent.

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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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In a wide ranging opinion with significant negative implications for the ability of insurers to contest construction defect claims in Massachusetts, the First Circuit has ruled in Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750 (1st Cir. April 16, 2009), 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.
 

In 2000, Boston Financial Data Services ("BFDS") retained Suffolk Construction Corporation as general contractor for a tenant improvement project at its offices in Massachusetts. In undertaking the project, Suffolk subcontracted with BloomSouth for the installation of carpet tile and related materials throughout the building. This work included testing and cleaning the concrete floor. BloomSouth itself subcontracted out the installation to two other companies. One was charged with supplying the carpet and the other with installing it.

After the work was completed, however, BFDS employees began to complain that their offices smelled like a "locker room" and alleged headaches or other ill effects. In an effort to eliminate the source of the odors, one of BloomSouth's subcontractors scraped up the original carpet adhesive and re-carpeted the floor. That effort failed to correct the problem, however, and the problem spread to other areas of the building.

After further voluntary efforts to remediate the problem failed, BFDS ultimately hired other contractors to repair the problem, at a cost of $1,417,500 and brought suit against Suffolk Construction and BloomSouth. The Complaint alleged that 1) BloomSouth was responsible for negligently and defectively providing and installing carpet "resulting in damage to and loss of use of the building, including an alleged unwanted odor which permeated the building," and (2) BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor. Money was spent on, among other things, "the installation of carbon air filters to the ventilation system in the building," and "removal of the existing carpet tile and adhesives, bead-blasting of the concrete floor and replacement of the carpet tile and related materials."

The defendants both sought coverage under a CGL policy that Essex had issued to BloomSouth. Essex disclaimed any duty to defend, citing the absence of property damage and the applicability of its “business risk” exclusions. A U.S. District Court in Boston agreed. BloomSouth appealed.

As a preliminary matter, the First Circuit declared that the suit against BloomSouth sought recovery for "property damage."  The First Circuit ruled that the resulting “locker room” smell had resulted in physical injury to tangible property, rejecting the insurer’s contention that “property damage” required tangible injury to the physical structure itself. The court also concluded that “bead blasting” to the concrete floor to eradicate the carpeting had resulted in physical injury to the concrete substrate despite the insurer’s argument that the bead blasting was part of the replacement process for the defective carpet.

Having found “property damage,” the First Circuit further concluded that Essex had failed to establish that these claims were subject to the business risk exclusions in its policy. To begin with, the court 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.

For similar reasons, the court held that the “your product” exclusion did not apply since there were allegations of property damage beyond the carpeting installed by the insured. The court ruled that the preexisting building structures, including the concrete sub-floor over which the carpet had been installed, were “real property” and thus excluded from the definition of “product” in Exclusion K. The First Circuit declared that the lower court’s conclusion that the sub-floor had become the insured’s product “stretches too far the contours of what an insured might reasonably understand.”

There is much to be concerned about here. Outside the context of asbestos, few courts in the past have found that mere unhealthful conditions inside a building suffice to constitute “property damage” under liability policies.  The pastiche of out of state cases and first party case law relied on by the First Circuit may now yield a road map that insureds will follow to find coverage for “sick building” claims or other cases where there has been a loss of functionality of the plaintiff’s property but not enough to satisfy a “loss of use” requirement.

This idea of "loss of functionality" as property damage is emerging as a synthesis of first and third party insurance law that is now appearing in both types of cases.  For a first party example of what I'm talking about, have a look at the New Jersey Appellate Division's opinion this week in Wakefern v. Liberty Mutual, declaring that food spoilage losses after the 2003 electrical blackout resulted from "physical damage" to the electrical grid even though the grid itself had merely shut down due to a cascade of failures and not due to physical injury to the system itself.  The court ruled that such nuanced distinctions between physical damage and a loss of functionality were beyond the reasonable expectations or understanding of supermarkets that had paid good money for coverage and expected to be reimbused for spoiled lettuce.

The BloomSouth opinion also echoes the growing influence of the “reasonable expectations” doctrine in Massachusetts insurance jurisprudence. It appears that the cumulative weight of a decade’s work of dicta and footnotes has now embedded this principle as an accepted fixture of our case law even in the absence of a single Supreme Judicial Court case that has squarely considered and adopted it as a rule of contract interpretation.
 

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Can it be that there are allocation issues that have yet to be addressed in New Jersey?  It seems so.

In Franklin Mut. Ins. Co. v. Metropolitan Property & Cas. Ins. Co., No. A-5265-07T2 (App. Div. April 17, 2009), the Appellate Division was asked to consider how the cost of cleaning up contamination from a leaking tank should be paid for where the pollution had begun a few prioir to the insured's purchase of the property in question.  In short, should each insurer’s share of the cost of clean up be measured by reference to its insured’s period of ownership or as a percentage of the overall period of time that pollution occurred?

The case in question involved leaks of home heating oil from an underground storage tank at property that was initially owned by John Clark and sold to Peter and Carol Tsairis in 1995. Between 1995 and 1999, Tsairis either did not have insurance or could not document the available coverage. Thereafter, they were insured by Metropolitan (1999-2002) and Franklin Mutual (2002-2005).

After contamination was discovered on the property, Franklin Mutual paid to clean up the pollution and sought pro rata reimbursement from Metropolitan. Franklin Mutual and Metropolitan agreed not to seek contribution from Tsairis for that portion of the pollution that occurred while he was uninsured. However, the insurers could not agree on the method of allocation as between them.
Metropolitan argued that all of the liability insurance from all policies covering the property during the entire period of contamination should be considered, regardless of who owned the property at the time. Franklin Mutual asserted that Metropolitan’s liability should reflect its pro rata allocation of the cleanup costs solely with respect to the period of time that their mutual insured (Tsairis) owned the property and that any insurance issued to Clark was irrelevant to these considerations.

At trial, the Superior Court ruled that Metropolitan had been on the risk for 36 months out of the 116 months between the time that Tsairis purchased the property and the date that contamination was discovered and therefore owed about a third of the overall cost of cleanup. Franklin Mutual was obliged to bear sole responsibility for the rest, including the share allocable to the uninsured period of time between 1995 and 1999.

On appeal, Metropolitan argued that its share should actually be substantially less (15.6%) because the court should have taken into account the insurance issued to the prior property owner (Clark). The Appellate Division disagreed.

Whereas the New Jersey Supreme Court has ruled in cases such as Owens-Illinois and Carter-Wallace that insurance for long-tail losses should be allocated in the proportion that the limits of coverage apply to the overall loss, the Appellate Division drew a distinction between the allocation rules applying to policies and those pertaining to the underlying liability of insured polluters. The latter responsibility is joint and several under the terms of the New Jersey Spill Act (NJSA 58:10-23.11, et seq.) whereas allocation among insurers is pro rata.

As a result, the Appellate Division agreed with the trial court that Metropolitan was obligated to reimburse Franklin Mutual for its pro rata share of the ten year period when its insured owned the property, without reference to the pollution or coverage applicable to the prior Clark period of ownership.

To the author’s knowledge, this is the first case in the United States that has addressed this particular issue. What is perhaps more striking is that Metropolitan chose to appeal a case in which the difference between what it agreed that it owed and what the trial court had ruled that it owed was only approximately $6,000.

Despite the trivial dollar amount at issue in this particular case, the principle at issue is of vital consequence in many large environmental coverage disputes, where much of the contamination may have pre-dated the insured seeking ownership period of coverage.   What the Appellate Division's analysis failed to discuss, however, is the apparent inconsistency between limiting the coverage denominator in such cases to the insured's period of ownership despite the fact that the insured's liability extends to pollution that pre-dates its acquisition of ownership. 

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Despite the growing body of case law that has emerged in recent years construing the limits of coverage under CGL policies, there is still a surprising dearth of first party "occurrences" jurisprudence. 

Although most of the original "occurrences" cases involved disputes between policyholders and insurers in which policyholders sought a finding of multiple "occurrences" to trigger additional limits, most of the recent cases have falled into two different areas:  (1) disputes between primary and excess insurers over the applicable limits and (2) disputes with policyholders with respect to the number of SIRs for which the insured is responsible.

This latter type of claim was recently considered by a federal district court in Wisconsin.  The case is an interesting illustration not only of problem that case precedents that help insureds in some cases can present in the SIR context but also of how case law that has arisen in the context of liability insurance may have little application with respect to first party claims.

At issue in  Basler Turbo Conversions v. HCC Ins. Co., No. 08-C-732 (E.D. Wis. March 5, 2009) was a claim by an airplane parts manufacturer for products theft committed by an employee on 33 occasions over a six month period.  As the insured's policy had a $5000 "per occurrence" deductible, Basler argued that the insurer owed it coverage, minus a single deductible.

In a considered decision, District Court Judge Griesbach rejected the insured’s contention that an employee’s “continuous and repeated theft of spare parts from its storage facility constituted a single “occurrence.” In keeping with the Wisconsin Supreme Court’s recent Plenco ruling, the district court declared that the 33 thefts occurring over a six-month period were not so closely linked in time and space as to be treated as a single “occurrence.”

The court also declined to give effect to wording in the policy that defined “occurrence” as involving exposure to conditions, noting that this specific definition of “occurrence” only applied to the term when it appeared in bold face in the policy, which it did with respect to liability provisions but not the first party insurance relied on in this instance. In any event, applying the liability definition of “occurrence” would negate first party coverage since a theft by definition is not an “accident.”

Applying the common and ordinary meaning of “occurrence” as “something that takes place,” the court held that each theft was a separate occurrence. The court rejected the insured’s argument that the thefts were the result of a common scheme noting that it was not the thief’s “modus operandi” or scheme that caused the succession of thefts but separate and independent human actions that were the product of human deliberation and choice separated by significant intervals of time.

While Judge Griesbach observed that this particular finding might prove harsh to the insured in this instance, it would not always result in a reduction of coverage in other cases, it nonetheless held that the finding might in fact reinforce the entire purpose of a deductible as giving the insured an additional incentive to increase security to prevent such thefts from occurring at all whereas limiting the insured’s exposure to a single $5,000 deductible no matter how many instances of loss occurred “would encourage laxness on the part of the insured that would make theft more easy to accomplish.”

 

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It appears that Chief Justice Roberts recent sabre rattling about punitive damage awards is having some impact.

In the years since the court’s seminal decision in State Farm v. Campbell, which had suggested in dicta that punitive damage awards should generally not exceed the amount of compensatory damages in most cases, only the Eighth Circuit has consistently applied a 1:1 ratio. By contrast, most state and federal appellate courts ignored this language as dicta and have generally sustained punitive damage awards so long as they are less than ten times the size of the compensatory award.

Last December, the U.S. Supreme Court heard oral argument in Williams v. Phillip Morris, a smoking/punitive damages case that has already been considered by the court once. Questions asked by the justices reflected considerably skepticism that the Oregon Supreme Court had, in fact, ignored the dictates of Williams I in reaffirming the original $80 million punitive damages award on the basis of Oregon state law, thus circumventing the constitutional due process concerns that the Court had expressed in its earlier opinion. In a surprising development, Chief Justice Roberts suggested the possibility that the court might itself take on the core issue of whether a specific punitive to compensatory damages ratio should be set by the Court, a task that the court had avoided several years ago in Campell and had expressly not agreed to consider when it accepted review of Williams.

Since then, the Third and Sixth Circuits have issued a pair of unpublished opinions reducing punitive damage awards to a 1:1 ratio.

In Jurinko v. Medical Protective Co., 2008 WL 5378011 (3rd Cir. December 24, 2008), the Third Circuit ruled in a Pennsylvania case that although a medical liability insurer acted outrageously in failing to settle the claims, an award of punitive damages that was four times the size of the compensatory damage award was unconstitutionally excessive. In ordering that a 1:1 ratio be used (thus reducing the punitive award to $1.6 million from $6.25 million), the court emphasized the substantial size of the compensatory damages awarded, as well as the fact that the injury in question was economic, not physical, and not the product of repeated reprehensible conduct by the insurer. The opinion is unpublished, perhaps because Judge Marion Trump Barry recused herself after oral argument after belatedly discovering facts giving rise to a conflict of interest.

More recently, the Sixth Circuit has ruled in an age discrimination case that where the jury awarded $1 million in past compensatory damages, $4.5 million in future economic compensatory damages, $500,000 in non-economic compensatory damages and $10 million in punitive damages, that although the punitive award did not violate Ohio state due process protections, it conflicted with the guideposts set forth by the U.S. Supreme Court in Campbell. The court ruled inMorgan v. New York Life Ins. Co., 07-4186 (6th Cir. March 12, 2009) therefore, that the punitive award must be reduced to an amount not to exceed $6 million for a ratio of 1-1.

It remains to be seen how the U.S. Supreme Court will rule this time around in Phillip Morris. In the interim, these new decisions lend encouragement to defendants facing such awards. At the same time, the fact that both opinions are unpublished suggests an air of hesitancy and caution in the manner in which these courts are approaching this issue.
 

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Disputes concerning the applicability of Coverage B to intellectual property disputes have flared anew in three recently filed suits.

On January 29, 2009, Intel sued American Guarantee & Liability Insurance (Zurich) in the federal district court in San Francisco seeking to impose coverage for claims by Advanced Micro Devices that Intel engaged in unfair marketing practices in the sale and distribution of computer microprocessor chips. Beginning in mid-2005, chip rival Advanced Micro Devices and consumers filed lawsuits against Intel, alleging that the chipmaker engaged in anticompetitive conduct and unfair business practices in the sale, promotion, and marketing of its microprocessors. Intel claims that it has exhausted a $5 million fronting policy and $11 million in coverage afforded by Old Republic and may now access the $50 million excess policy issued by American Guarantee. Intel claims that it is entitled to $50 million in defense costs. American Guarantee has filed an action of its own in Delaware Chancery Court

Seagate Technology has sued National Union seeking recovery of $6 million out of a total of $10 million spent defending patent infringement claims with Cornice, Inc. that the insurer refused to pay owing to disputes over hourly rates, the reasonableness of the sums and costs attributable to prosecuting claims that were not “defense” related. Seagate is represented by Orrick Herrington; National Union by Drinker Biddle.

MGA Entertainment has brought suit against its liability insurers in the federal district court in Riverside, California seeking a declaration that it is entitled to CGL coverage for trade disparagement dispute with Mattel involving its popular line of Bratz™ dolls. It has been reported that more than $63 million in legal fees is at issue. In April 2008, MGA filed three separate DJs against Crum & Forster; Hartford and Lexington. The cases have since been consolidated into a single proceeding
 

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The debate over whether “collapse” coverage extends to buildings that are in structural disrepair but have not yet fallen down has reached a new low in New York. The U.S. Court of Appeals for the Second Circuit has ruled in Dalton v. Harleysville Worcester Mut. Ins. Co., 07-3545 (2nd Cir. February 19, 2008) that a New York District Court erred in interpreting a first party policy’s coverage for “collapse” as being limited to cases involving “total or near total destruction.” Given conflicting New York rulings with respect to this coverage, the Second Circuit declared that “collapse” was ambiguous and should be extended to cover this case where hidden decay had substantially undermined the structural integrity of the insured’s property but had not yet caused it to fall.

The owners of a building in Brookly were ordered to vacate it by the New York Department of Buildings after hidden decay was found to have damaged a structural party wall.   Harleyvsville disclaimed coverage on the grounds, among others, that there had not been a collapse.  The U.S. District Court agreed, declaring that under New York law, a building must have suffered near or total destruction to have "collapsed."

On appeal, however, the Second Circuit declared that there was a conflict in the opinions of intermediate appellate courts in New York as to whether a building must have suffered "near or total destruction" to be covered or wheher coverage could arise due to a mere "substantial impairment of the structural integrity" of the building. In the absence of any clear statement by New York courts, the Second Circuit held that the language was ambiguous as being capable of two reasonable interpretatoins.

The Second Circuit also rejected Harleysville's contention that the policy required that the damage result from a "sudden" destructive force.   The court noted the policy covered "hidden decay," which was unlikely to ever occur suddenly.

 

 

 

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Legislation has been proposed in the Florida Senate that would ameliorate present law with respect to the liability of insurers for failing to accept “time limited” policy limit demands.

Since the Florida Supreme Court’s ruling in Berges v. Infinity Ins. Co. 896 So.2d 665 (Fla. 2004), liability insurers have been plagued by set up claims in cases with severe injuries and relatively low limits. The signature aspect of these cases is a demand by counsel for the tort claimant soon after the accident that the insurer pay its full limits within a short period of time (e.g. 30 days) that is generally less than the insurer would ordinarily need to conduct an investigation of the claim against its insured. Failure to accept the settlement as presented has been held tantamount to a counter-offer, subject the insurer to liability far in excess of the policy limits when the plaintiff thereafter withdraws the offer of settlement and pursues the case to trial.

Unlike the typical “failure to settle” claim, the plaintiff does not want the insurer to accept its settlement offer. Rather, the offer is only a pretext whereby the insurer’s failure to settle can form the basis for making funds available to the plaintiff commensurate with the plaintiff’s injuries. Nevertheless, Florida courts have refused to find that this transparently deceitful practice is a basis for avoiding bad faith claims.

 In contrast to current law, which only requires that insurers act promptly to effectuate settlements on behalf of their insureds, Senate Bill 1650 would amend Section 624.155 to impose a reciprocal obligation on both the insured and any third party claimant demanding payment. Such parties would be required to cooperate fully with respect to settlement.

Further, a failure by the tort claimant to cooperate would serve as a defense to any subsequent bad faith claim against the insurer for failing to settle. Additionally, the legislation would give the insurer a 90-day window after receiving a written complaint to cure its claimed violation. Additionally, the legislation provides that in cases where multiple claimants are seeking compensation under a single policy, the insurer shall not be liable for extracontractual damages if it makes a written offer of its policy limits or tenders its limit into court for apportionment to the claimants. In such cases, the legislation provides that the insurer that tenders its limits is entitled to a release from its insured if the claimant accepts the tender.

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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.

Sheiness Scott Grossman & Cohn LLP had been engaged by Home in 2002 to defend it against efforts Home’s insured J.T. Thorpe to impose a 524(g) bankruptcy to resolve its asbestos liabilities. Despite rampant rumors that Home might collapse any date, the firm could took on the case and put a great deal of time and effort into it over a period of a few months, ultimately minimizing what might otherwise have been a far more serious problem for Home.

As of the date that Home was declared insolvent, the firm was owed $74,7845. SSGC duly placed a claim for this amount with Home’s liquidator in New Hampshire. The liquidator approved the claim but assigned it a Class V residual priority and observed that the limited funds in the estate made it unlikely that anything but Class I and Class II claims would be paid.

In its appeal to the New Hampshire Supreme Court, SSGC advanced two arguments. First, that its fees were in fact Class I costs of administration, which are stated by RSA 402-C:44, I to include “reasonable attorney’s fees.” In the alternative, it advanced an equitable argument, suggesting that a refusal to reimburse lawyers who had loyally served the interests of the insurers prior to insolvency would create a disincentive in the future for other firms called to provide similar services and make it harder for insurers to protect their interests.

As to the first argument, the Supreme Court held that RSA 402-C:44 clearly distinguished between legal services incurred in connection with the administration of the insurer’s liquidation and pre-liquidation legal services. The court found that the language of the statute, which speaks in terms of an “estate” and “administration,” clearly contemplated work done after liquidation had already begun.

Despite the law firm’s argument that denying them payment would create a disincentive for any future law firm to ever continue to defend insurers that were in financial peril, the court observed that it could not discern “any principled way to distinguish between the fee for SSGC’s pre-liquidation legal representation and the fees of other pre-liquidation professionals falling within the residual classification of RSA 402-C:44, V.

The court’s comments clearly suggest its concern that allowing SSGC’s claim would open the floodgates to other law firm claimants and substantially dilute the funds available to pay claims that may be brought by other Home creditors, including large policyholders and state Guaranty Funds. At the same time, one can only see this as rough justice for a law firm that did was it was ethically bound to do on behalf of a client in trouble.

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Casualty coverage litigation has been dominated by five issues this decade: allocation, recoupment, the scope of the absolute pollution exclusion, coverage for breach of contract claims and multiple “occurrences.” The last issue has been the most surprising as, until recently, parties were reluctant to take positions on an issue that might hurt them in future claims. Now the state supreme courts of Illinois and Wisconsin have joined the fray.

The Illinois Supreme Court’s opinion in Addison Ins. Co. v. Faye, No. 105752 (Ill. January 23, 2009) is the more surprising of the two, if only because the court focused on the burden of proof issue, an aspect of this dispute that has received surprisingly little attention from other courts. At the same time, given that the outcome of the case essentially turned on a “tie goes to the winner” analysis, one must wonder what attracted the court to the case in the first place.

 

As with many of these cases, the facts in Addison were tragic. Fourteen year old Everett Hodgkins and fifteen year old Justice Carr had left home with plans to go fishing. When the boys did not return that evening, a search began. Four days later, the boys were located in an excavation pit near the insured’s home. The sand and clay around the pit was saturated creating, in effect, quicksand. The police concluded that the boys had become trapped in the wet clay and sand and had died of hypothermia. The boys were facing different directions and were in close proximity to each other although a subsequent examination could not conclude exactly when each had died or what the precise cause of death was. The investigators concluded, however, that one had become trapped in the pit and the other had died trying to save him, becoming trapped himself.

The boys’ parents brought a wrongful death action against the property owner alleging that he had allowed an unsafe condition to exist on his property. His homeowner’s insurer (Addison) provided a defense and offered to settle the claims for an amount equal to its policy limits but the families had demanded a separate limit for each boy. The trial court found separate occurrences but the Appellate Court reversed concluding that the boys’ deaths were “so closely linked in time and space as to be considered by a reasonable person as one occurrence.”

The crucial issue in Addison was the party to whom the burden of proof should be assigned. While reaffirming the general rule that a policyholder bears the burden of proving that its claim falls within the coverage of a policy, the Supreme Court held that issue of limits was in the nature of a limitation to coverage for which the insurer bore the burden of proof.

Turning to the issue of “occurrences,” the court distinguished its analysis in Nicor in the instant case. In Nicor, the court found that the issue was the insured’s affirmative act of negligence whereas here the question was the insured’s failure to maintain safe conditions. Nevertheless, the court rejected the insurer’s effort to bundle together separate injuries occurring days or even weeks apart arising out of the same negligent omission, holding that such arguments could leave policyholders unprotected by the limits of their coverage. The court ruled that the insured “could not have intended to expose himself to greater liability by allowing multiple injuries, sustained over an open-ended time period, to be subject to a single, per occurrence limit.”

The Supreme Court also addressed similar circumstances that had lead the New Jersey Appellate Division to find one occurrence where two boys had drowned in a swimming pool trying to save each other in Doria v. INA, 509 A.2d 220 (N.J. Super. 1986). The Supreme Court suggested that the Appellate Division’s focus on injuries that occurred closely together in time and space was an appropriate limiting principal consistent with the insured’s reasonable expectations. While finding that the Appellate Court had inappropriately relied on a Doria “time and space” analysis, the Supreme Court refused to find that the insurer had presented facts sufficient to show that the boys’ injuries had occurred closely together in time and space and that the claims must therefore be treated as separate “occurrence.” The Supreme Court refused to find, however, that one of the boys’ efforts to rescue his friend was a “separate intervening act that would necessarily require a separate occurrence.” The court ruled that the separate intervening act must be considered by the insured, not a third party.

The issue of “occurrences” was also considered the following week by the Supreme Court of Wisconsin in Plastics Engineering Co. v. Liberty Mutual Ins. Co., 2009 WI 113 (Wis. January 29, 2008). Plenco sought coverage from Liberty Mutual for thousands of asbestos liability claims arising out of the insured’s sale of products containing asbestos between 1950 and 1983. The Liberty Mutual policies, which had been issued between 1968 and 1988, contained limits of $500,000 per occurrence and $500,000 in the aggregate. Liberty Mutual had also issued umbrella policies during much of this period. The policies in question contained standard CGL language although several contained combined single limits of coverage with non-cumulation language stating that “If an occurrence gives rise to bodily injury or property damage which occurs partly before and partly within the policy period, the liability of the company under this policy for such occurrence shall not exceed $500,000 minus the total of all payments made with respect to such occurrence under a previous policy or policies of which this policy is a replacement.”
 

The issue presented to the Wisconsin Supreme Court was whether the cause of the insured’s liability was the decision to sell products containing asbestos (or failure to warn with respect to such products) of the injuries suffered by each individual client. In keeping with the recent trend in this area, the Wisconsin Supreme Court ruled that the occurrence was the exposure of various claimants to asbestos fibers from the insured’s products. The court rejected Liberty Mutual’s argument that the “continuous or repeated exposure” language in the Limits of Liability required a finding of a single occurrence. Rather, the court ruled that this language limited any individual claimant from arguing that subsequent exposures to asbestos should give rise to a new “occurrence.”
 

Applying a “cause” test, the court refused to find that exposures to separate individuals at different times and places involved a “single, uninterrupted chain of causation.” Rather, the court found that each individual’s exposure was a new “occurrence.”
 

On the other hand, the court upheld the non-cumulation language, holding that it was not an “other insurance” clause subject to the limitations imposed by Wisconsin Statute Section 631.43(1) which bars insurers from using “other insurance” wordings to reduce limits of coverage.
 

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In a case that amply illustrates the problems that may arise from permitting parallel actions to go forward in two different states, the Illinois Appellate Court has ruled in Allianz Ins. Co. v. Guidant Corp., No. 2-07-0814 (Ill. App. December 29, 2008) that a trial court did not err in refusing to hold that a duty to defend ruling of an indiana court did not collaterally estop a pharmaceutical manufacturer’s liability insurers from contesting coverage in an Illinois proceeding particularly as the Indiana trial court decision was reversed in early 2008 by the Indiana Court of Appeals.

The Appellate Court also affirmed the Illinois trial court’s determination that subsequent product liability claims brought against Guidant could not be aggregated with certain earlier claims based on the policies’ batch clause as the later claims did not arise out of the same claimed product defect. The court rejected the insured’s claim that losses could be aggregated so long as they involved a particular product with any type of defect regardless of whether the claims at issue involve a common product defect. The court held that the batch clause would not have applied in any event as the “Dear Doctor” letters issued by Guidant during the initial policy period did not satisfy the requirement of an “advisory memorandum” for purposes of the batch clause.

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The fate of dozens of major Massachusetts environmental and other long-tail insurance coverage disputes now hangs in the balance as the Supreme Judicial Court takes up the issue of whether insurers are only responsible for an allocated share of these multi-year losses.

On January 8, the SJC heard oral argument in the matter of Boston Gas Co. v. Century Indemnity. At trial, a federal district court jury in Boston had found that Century Indemnity was required to indemnify Boston Gas for $6.2 million in clean up costs under its 1966-69 policy despite the fact that the pollution had occurred on a continuous basis since the opening of the site in 1908. Following certification by the U.S. Court of Appeals for the First Circuit, the case was taken up by the Supreme Judicial Court on the issue of allocation.

The Boston Gas case has attracted considerable amicus attention, not least because this is the first time that the SJC has addressed allocation issues, having expressly declined to rule on the issue in several earlier pollution and asbestos cases.

While there is considerable risk in predicting the outcome of an appeal based on the questions asked by the justices during oral argument, it must be observed that the overall tone of the argument seemed to favor the insurer’s arguments for pro rata allocation. In particular, the SJC appears to be viewing these issues on a clean slate and is giving little weight to the two intermediate appellate rulings (Rubenstein and Chicago Bridge) that policyholders have relied on over the past decade in persuading trial courts to impose coverage on a “joint and several” or “all sums” basis.

 

At the outset of oral argument, Justice Margot Botsford asked counsel for Century Indemnity (Guy Cellucci) where in the record there was any evidence that the pollution had commenced in 1908. She noted that the instruction to the jury and the jury’s finding had only concerned pollution during the Century Indemnity policy period (1951 and 1969). Cellucci responded that there was expert testimony for both parties that pollution had begun contemporaneously with the operation of the site.

Justice Botsford, who took an unusually active role in the argument, inquired whether the policy language that the Appeals Court had considered in Chicago Bridge had involved a different form (London Market) and different policy wordings. Cellucci agreed and stated that, in fact, the wording in the INA policies at issue here correspondence to the line of Illinois insurance cases where courts had applied allocation as opposed to the Chicago Bridge-type wordings that had found for “all sums.”

Indeed, Cellucci noted that the words “all sums” did not appear in the INA policy. Justice Robert Cordy archly observed that he hoped that the insurer’s argument did not hinge solely on that consideration. Cellucci responded that it was only a “minor point” but that it did bear observing that a policyholder could hardly have a reasonable expectation of coverage in the absence of policy wordings to support such an expectation.

Cellucci contended that Massachusetts jurisprudence requires that policy wordings be read together as a whole and not to the exclusion of one term or another. In this case, he argued that the “during the policy period” language clearly limited any insurer’s obligations to those damages attributable to loss during the stated policy period. Judge Botsford observed, on the other hand, that the policy wording was not necessarily all that clear.

Chief Justice Margaret Marshall inquired whether, given the $17 million limit in its 1966-69 policy, only Century Indemnity was on the hook for the insurance cleanup costs. Cellucci stated that this was the case and that the effect of this was to require Century Indemnity to sue other insurers for contribution. Botsford observed that in this event, the other insurers would surely argue that the claims against them were barred in light of settlements.

Justice Spina spoke up for the first time at that point noting that because “all sums” was based in part on the theory of joint and several liability, such claims might be barred by the Massachusetts statute governing claims against tortfeasors. Cellucci appeared to be confused on this point indicating that the issue was not tort law but the meaning of the insurance policies. Spina observed however that, “Any such construction of ‘all sums’ would become ‘muddied up’ by the introduction of joint tortfeasor concepts.”

Returning to his theme, Cellucci argued that the SJC should follow the approach of Massachusetts’ sister states in adopting pro rata allocation. He also emphasized that the issue had not been fully developed in Rubenstein or Chicago Bridge and, indeed, had barely been addressed by the trial court in Rubenstein (at this point, Justice Botsford, who was the trial judge of Rubenstein, appeared to nod her head vigorously).

Justice Spina asked what effect pro rata allocation would have on periods where there was no insurance. Cellucci responded that the policyholder would bear responsibility for periods of self-insurance as it had chosen not to buy insurance.

Justice Cordy wondered how allocation would spread loss and, in particular, whether the insured would be forced to pay a full retention for each triggered year. This led to a discussion of what the “occurrence” was. Justice Spina expressed the view that the reasonable expectation of the parties probably required payment of a separate retention per year. Cordy suggested that there might be other ways of assigning risk so that the insured only paid one full SIR.

Cordy commented that at some level there was a “fictional element” in all of the proposals and the only question was “how much fiction and which fiction we elect to adopt.”

Arguing for Boston Gas, David Elkind urged the Court to simply apply the wording of the policies. Justice Marshall archly responded that he could get at least six votes for this proposition but that the problem was somewhat more complicated than this simple statement. Elkind argued that Century Indemnity was conflating the concepts of “trigger” and “scope” and that the question with respect to “during the policy period” was not whether the policy responded but how much would be paid.

Botsford asked Elkind how he dealt with the “to which this policy applies” language in the policy. Elkind responded that this language dealt with other aspects of the policy and took note of the fact that the Century Indemnity policy contained provisions allocating defense costs but not indemnity. He also argued that since these were liability policies, coverage should track the nature of the insured’s liability.

Justice Cordy inquired whether the language in question was similar to the Century Indemnity policy that the New Hampshire Supreme Court had examined in its pro-insurer analysis in EnergyNorth v. Century Indemnity. Elkind was forced to concede this but suggested that most other states that had considered similar language had adopted an “all sums” approach. Justice Cordy took issue with him on this point and appeared to reject any suggestion that decisions such as Consolidated Edison involved principles of law differing from those applying to Massachusetts.

Justice Marshall took note of the fact that the policies in question were issued in the 1950s and 1960s and pre-dated the long-tail liabilities that have since emerged as the result of asbestos litigation and the adoption of statutes such as CERCLA. She wondered whether, outside of the long-tail claim situation, any business would have expected to obtain coverage in the manner proposed by Boston Gas.

A colloquy ensued with respect to the effect of “occurrence” language. Botsford asked whether the occurrence could take place during the policy period. Elkind responded that the “occurrence” was the causative event and not necessarily the continuing property damage. Botsford wondered whether separate wells that leaked on the site might still be one “occurrence.” Elkind agreed, noting the “conditions” language in the policy.

Botsford next raised a question with respect to the scope of the contra proferentum doctrine and asked whether the policies were manuscripted. Elkind responded that although these were not standard wordings there was no evidence of joint negotiation and it appeared that any manuscripted wording had solely been presented by INA.

Justice Spina broke in wondering “what the point” was since any resolution on the terms proposed by Boston Gas would merely necessitate a second round of complex and lengthy litigation between its insurers to resolve the issues of allocation. Elkind responded that it was not appropriate for the Court to worry about the equities of the situation and that it should solely interpret the wording of the policy.

Botsford also wondered what remedy was available to Century Indemnity. Elkind responded that it had substantial reinsurance for the amounts that it paid that might well entirely take care of its loss and that otherwise it was entitled to pursue claims for contribution and would in any event receive a set-off for settlements with the other insurers. Justice Cowin, who had been entirely silent up to that point, wondered whether Century Indemnity agreed that it had these rights. Justice Botsford noted that there would in any event be a fight about allocation in any subsequent ensuing contribution proceedings.

Wrapping up, Elkind argued that pro rata allocation should not be adopted and that in any event the extreme version proposed by Century Indemnity had only to date been followed by one state (Minnesota) and need not be followed here. Additionally, he argued that at most Boston Gas should be responsible for a single self-insured retention for the entire period of coverage.

Justice Ireland asked no questions throughout the argument. Justice Gants did not participate in the oral argument as his nomination to the SJC has not been approved by the Governor’s Council. He may yet participate in the decision, however, if his nomination is approved in January, as expected.

Based on the justices' questioning, the court does not seem satisfied with the insured's theories of "all sums" or "joint and several" liability.  On the other hand, they also do not feel that the policy wordings at issue are necessarily clear as applied to such claims.  It remains to be seen whether the SJC will follow the lead of  the New Jersey Supreme Court in developing extra-contractual rules for allocating long-tail losses or will find ambiguity due to the lack of clear policy wordings.  It is also unclear whether the court will adopt a broad standard for resolving future disputes or will simply deal with the crucial threshold question of whether allocation should be permitted to uninsured periods, leaving issues such as "collapsing bathtubs" and the like for future cases.

A decision is expected by April or May. 

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So you haven't finished your holiday shopping yet?  No worries--here are three new matters that are due to be decided shortly in Massachusets, Pennsylvania and Texas that every insurance maven will want on their year end wish list!

1.  Boston Gas v. Century Indemnity, SJC 10246  (Mass.)

The Supreme Judicial Court will hear oral argument on January 8, 2009 on allocation issues certified to it from the First Circuit in Century Indemnity's appeal from this pollution clean up case, Boston Gas v. Century Indemnity Co., 529 F.3d 8 (1st Cir. 2008)    At issue is whether a federal district court erred in allowing a gas utility to allocate the entire cost of cleaning up a former MGP site to excess coverage issued in the 1960s.  Unlike several neighboring states (CT, NH, NY, VT), whose Supreme Courts have adopted pro rata approaches to long tail cases, Massachusetts has, to date, appeared to go its own way as lower courts have permitted "spking" whether on an "all sums" or joint and several theory. 

The Boston Gas appeal has drawn significant attention from amici despite the fact that tjhe SJC, contrary to its recent practice, made no formal request for amicus briefing.  

It will be interesting to see if the attitude of the court is affected by the fact that Judge Botsford, who authored the trial court in Rubenstein v. Royal Ind. adopting joint and several liability, is now sitting on the SJC.  Another interesting sidebar will be whether Ralph Gants plays a role.  Gants, who was nominated this week by Governor Patrick to take the seat of retiring Justice Greaney, must still be approved by the Governor's Council, which may or may not take place in the next 30 days.  Gants currrently sits in the state's business court where he has devoted significant time and attention to insurance issues, albeit with mixed results for carriers. 

 

2.  American & Foreigh Ins. Co. v. Jerry's Sports Center  (PA). 

On November 19, 2008, the Pennsylvania Supreme Court announced that it would accept review of American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 948 A.2d 834 (Pa. Super. 2008) in which the Superior Court ruled that where an insurer had a contractual duty to defend, it may not recoup its defense costs later on, even if found not to owe coverage, under a theory of unjust enrichment or quantum meruit.

Jerry's Sport Center was a defendant in one of the nuisance suits that the NAACP and numerious municipalities brought against gun manufacturers, distributors and vendors a few years ago.   Royal defended under a reservation of rights but later obtained a ruling that it had no duty to defend because the NAACP case did not allege or involve “bodily injury.”   Consistent with its reservation of rights, Royal then sought to recoup the sums that it had paid in the interim to defend.

Royal's claim was accepted by the Court of Common Pleas, which 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.  On appeal, however, 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 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.

It is heartening that the Supreme Court has accepted Royal's appeal, although it faces an uncertain fate given the fractious composition of the court and closely divided way that high profile cases such as Baumhammer's and Madison Construction have been resolved in recent years.

3.  Tanner v. Nationwide Indemnity, No. 07-0760 (TX)

And you thought that the Texas Supreme Court had emptied its insurance docket!

In this case, the court is being asked to decide whether accident victims can compel coverage for the insurer of a motorist who collided with them after driving over 100 mph in an effort to elude police.   The insured (Gibbons) was charged with using his car as a deadly weapon but later jumped bail.  His insurer (Nationwide) disclaimed coverage on the basis of an intentional acts exclusion which provides, in pertinent part, that the policy did not cover “willful acts the result of which the insured knows or ought to know will follow from his conduct.”

A decade ago, the Texas Supreme Court ruled in Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997) that a liability insurers had no duty to provide coverage for emotional distress claims brought by a customer against a camera store that surreptitiously copied and circulated of “candid” photos.  In Cowan, the court held that the insured's intentional acts were no “accident” as the resulting emotonal distress was the reasonable foreseeable result of these acts. The question in Tanner will be whether the same sort of analysis should apply to conduct that, while highly reckless, was not intended to cause injury and might not necessarily have resulted in injury. 

The Supreme Court heard oral argument on October 19, 2008 (the briefs and and a video and audio transcript are on the court's web site).  Press reports concerning the justices' questions have since prompted some newspapers to editorialize that the the court has gotten to friendly to the insurance industry (Lamar Homes, Frank's Casing???).

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When is a policyholder not an insured?  That was the issue considered by the Seventh Circuit last week in Iowa Physicians’ Clinical Medical Foundation v. Physicians’ Ins. Co. of Wisconsin, No. 08-1297 (7th Cir. October 31, 2008), an Illinois case in which the court declared that an insurer’s obligation to act in good faith in responding to offers to settle within policy limits only extends to insured entities.

The Estate of Dennis Goetz sued Dr. Randall Mullen and Iowa Health Physicians (IHP) for failing to properly vaccinate Goetz against malaria before he took a trip to Africa and, upon his return, for failing to properly diagnose or treat the malarial condition that ultimately killed Goetz.  At the time, Goetz was insured under a medical malpractice policy issued by Physicians’ Insurance Company of Wisconsin with limits of $1 million.  The policy was issued in the name of Iowa Health Physicians, Mullen’s employer, which also paid the premiums on behalf of Dr. Mullen as part of a financial package to entice him into working at the clinic.  Although IHP was listed as the policyholder, the policy itself made clear that it was not an insured and, indeed, IHP declined to pay the additional premium that would have entitled it to coverage under its policy.  Rather, IHP was covered through a combination of self-insurance and a separate commercial insurance policy.

Prior to trial, the Goetz Estate twice offered to settle for $900,000.  Despite the opinions of several experts that Mullen had provided substandard care to Goetz and that his Estate had suffered a significant loss in earnings, PIC failed to respond to these offers.  After a defense expert admitted in his deposition testimony that Mullen’s treatment was inadequate, the plaintiffs withdrew their $900,000 offer and demanded $1.5 million instead.  PIC eventually countered at $200,000.  Ultimately, the case went to trial and resulted in a verdict of $3.5 million against Mullen and IHP.  In the ensuing coverage litigation, the District Cout held that Mullen could pursue a claim for damage to his reputation and for emotional distress even though IHP had paid the $2.5 million excess judgment over the $1 million PIC limit.  However, the District Court ruled that IHP had no cause of action since it was not an insured under the policy.

Under Illinois law, an insurer is deemed to have a good faith obligation to settle within limits and may be liable for the entire judgment against its insured if it fails to act in good faith in responding to offers to settle.  See, e.g. Haddick v. Valor Ins. Co., 763 N.E.2d 299 (Ill. 2001)   Given the facts in this case, the Seventh Circuit opined that Dr. Mullen himself probably had a strong argument against his insurer.  The issue before the court, however, was whether the district court had acted correctly in declaring that the same duty of good faith extended to PIC as the non-insured policyholder. 

IHP argued that it should be treated as a de facto insured given its contractual relationship as a policyholder and customer of the insurer.  The Seventh Circuit rejected this analysis, however, observing that what was important was not the mere existence of a contractual relationship but rather the substance of the insurance contract itself.  The court emphasized the fact that IHP had chosen not to purchase insurance coverage.  “The duty to settle is meant to protect the bargained-for insurance coverage, not extend it.  An insurer who acts in bad faith may end up paying above the contracted policy limits but only when doing so protects the insured’s legitimate expectation of coverage under the policy. . . .” 

The Seventh Circuit also emphasized the fact that the Illinois Supreme Court’s analysis of this issue in cases such as Haddick had analyzed the duty to settle as arising out of the insurer’s exclusive control over the duty to defend, including the right to settle.  In this case, the court pointed out that although PIC had exclusive control over Dr. Mullen’s defense, IHP had arranged its own defense.

Finally, IHP argued that it was unfair to saddle it with an uninsured liability given the fact that it was blameless and merely faced vicarious liability as the result of the misconduct of its agent Mullen.  The Seventh Circuit held that there was a distinction between blame and liability and that IHP’s remedy was not insurance coverage but rather a claim for contribution or indemnification against Mullen depending on what the terms of its employment contract with him permitted.

 

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A recent opinion of the federal district court in Minneapolis has for the first time construed the extent of liability insurance coverage for “spyware” claims. At issue in Eyeblaster, Inc. v. Federal Ins. Co., No. 07-4379 (D. Minn. October 7, 2008), was the availability of general liability or professional liability insurance coverage for a lawsuit brought in federal court in Houston wherein the plaintiffs claimed that Eyeblaster, a worldwide business involved in the creation, delivery and management of online internet advertising, had fraudulently enticed him to visit its website so that Eyeblaster could surreptitiously download its spyware onto its computer allowing it to install tracking cookies, executable code, java script and jifs that changed his security settings, installed pop-up advertising, renamed files and redirected his computer and web browsing. The plaintiff contended that this spyware had also caused his computer to freeze up, causing him to lose data on a tax return on which he was working and that required him to hire a computer technician to repair the damage.
 

Eyeblaster tendered the defense of the Texas lawsuit to Chubb, which had provided both GL and E&O coverage to it. Chubb denied any duty to defend and this coverage litigation ensued.
As a preliminary matter, Judge Montgomery declared that the plaintiff’s allegation that his computer froze up failed to allege any physical injury to tangible property, citing the Fourth Circuit’s opinion in America Online, Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89 (4th Cir. 2003). As with the America Online case, Judge Montgomery observed that the policy language clearly stated that “tangible property” does not include software. Although implying that damage to a computer hard drive would have been covered, the court declared that injury to software or lost data was not itself covered under the GL policy.

As to the E&O policy, the court ruled that the alleged intentional acts of Eyeblaster in placing spyware on the plaintiff’s computer failed to seek recovery for a covered “wrongful act.” Despite “fleeting references” to misrepresentation, trespass and invasion of privacy, the court ruled that the substance of the allegations were intentional conduct that failed to allege an “error, unintentional omission or negligent act” within the scope of coverage. The court noted that, “Had Eyeblaster intended to give its customers one type of software but instead mistakenly provided them with a different version that caused a problem, this error would be covered under the language of the E&O policy.”

In this case, however, where the insured specifically intended that the software would install itself on the plaintiff’s computer, the court ruled that the E&O policy did not apply whether or not the insured had also intended such acts to cause injury to the plaintiff.

Eyeblaster had argued to the district court that any such interpretation of its policy would render the coverage illusory because the very nature of its business required it to place cookies, flash technology and java script on user’s computers. Judge Montgomery rejected this argument, holding that the E&O policy would still require coverage in certain cases of this sort such as where the insured had installed incorrect software. The court observed that, “The E&O policy covers a bundle of risks and while this act by Eyeblaster may possibly be uninsurable, the policy is not illusory because there is no coverage.”
 

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The dispute with respect to whether insurers may recoup costs of settlement has moved north to the State of Maine. In American National Fire Ins. Co. v. York County, No. 2:06-cv-200 (D. Me. October 20, 2008), a federal district court ruled that a liability insurer’s failure to expressly reserve the right to recoup settlement costs precluded its ability to subsequently recover those sums from its insured.  While leaving open the issue of whether recoupment is ever permitted, this opinion emphasizes the importance of insurers asserting these rights early and consistently if they ever hope to prevail on this question.

In 2004, York County was sued by three inmates of the York County Jail for strip searches that the plaintiffs claimed had violated their constitutional rights. York County tendered the defense of this case to American National and other insurers that had provided Law Enforcement Liability insurers that have provided LEL coverage to it during the period in question. American National agreed to defend under a reservation of rights noting the fact that its policy in question contained a $5,000 “per claim” deductible. A dispute arose between the parties as to whether this deductible applied to each individual class member or, as the insured contended, applied to its claim for coverage as a whole.

Despite this reservation, American National ultimately agreed to contribute $750,000 towards a package settlement of the claims. At the time, its agreement to contribute was not explicitly tied to any claim to reimbursement reflecting its position with respect to the $5,000 “per claim” deductible. Thereafter, American National sought to recover its settlement contribution, noting that it was undisputed that none of the members of the underlying class action had been subjected to strip searches during its policy nor had any of the claimants who were approved to payments from the class action settlement fund obtained recovery in excess of $5,000 per claimant.

In the ensuing coverage litigation, Judge Singal agreed with American National that the policy deductible was unambiguous and applied individually to each underlying claimant. The court ruled, however, that the application of this deductible to American National’s contribution to settlement was far from clear given the size and makeup of the class and the numerous parties participating in funding the settlement. Further, the district court held that American National had no right to recover back these payments as York County had proved that there was a binding agreement between it as of 2004 without any reservation to recoup these sums.
Alternatively, the district court held that York County had proved the affirmative defense of equitable estoppel that it had relied to its detriment on American National’s agreement to contribute these sums without any right to recoupment. The district court concluded that it was “unreasonable for [American National] as the insurer to ‘gamble’ in this manner without explicitly disclosing its position to the insured, who, in the absence of any such disclosure, reasonably believed that its own $50,000 contribution to the York County class action settlement fund was the maximum extent of its payment under the terms of the settlement.”

The district court held that accord and satisfaction would not exist so as to create a contract if American National had explicitly reserved its rights regarding the deductible at the time that the parties were agreeing on the various contributions to the settlement or, later, when it tendered its settlement contribution. The court took note of the fact, however, that American National had last pressed the issue of its deductible months earlier and had not sought clarification as to how the deductible would be reimbursed or reiterated its reservation of rights during the final stages of the settlement discussions, a period of time when it was well aware of its insured’s position that the County’s maximum contribution would be capped at $50,000.

As to the issue of estoppel, the court ruled that American National’s conduct was, in fact, unreasonable, not because of its willingness to contribute $750,000 but because of its failure to alert its policyholder that this sum was not the contribution it appeared to be. Rather, the district court concluded that American National had evolved its strategy of seeking recoupment after the fact without appropriate disclosure to its policyholder who had in the interim justifiably and detrimentally relied on the insurer’s “misleading offer.”

Judge Singal’s order did not reach the crucial question of whether an insurer ever has a right to recoup settlement payments. Courts around the country have reached different conclusions on this issue although most have ruled as a matter of equity that if an insurer funds a settlement at the request of the insured for which it is later held not to owe coverage, an insurer is entitled to recoupment and the insured would otherwise obtain a windfall. Compare. Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313, 106 Cal. Rptr.2d 535 (2001)(right to recoupment) with Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew and Rental Tools, No 02-0730 (Tex. February 1, 2008)(no right).

In all of these cases, however, courts have emphasized the need for transparency and, in particular, for disclosure of the insurer’s intent to seek contribution. Without such an explicit assertion, few courts will uphold or imply a right to recovery.
 

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The U.S. Court of Appeals heard oral argument last week in Emhart Ind. v. Century Ind. Co. a large and complicated insurance dispute that promises to say much about the future of environmental coverage jurisprudence in the Ocean State. 

The dispute in Emhart involves a chemical manufacturer’s efforts to compel coverage for Superfund claims arising out of a former manufacturing facility in Rhode Island. After settling with most of its primary carriers, Emhart belatedly discovered that Century Indemnity’s predecessor (INA) had issued a primary liability insurance policy to it in the late 1960s. Only at the close of trial did the U.S. District Court (Smith, J.) declare that Century Indemnity had a duty to defend. Despite the absence of any statement in the underlying Notice of Responsibility from the U.S. EPA or other “charging documents” to the effect that pollution had become manifest during the INA policy period or otherwise satisfied Rhode Island’s “discoverability” standard for trigger of coverage, the court ruled that silence was sufficient to give rise to a potential for coverage triggering the policy under a Montrose-type analysis of the duty to defend.

Tthe Court is considering cross-appeals from a 93 page opinion of a Rhode Island District Court as to (1) whether a primary liability insurer’s failure to defend exposes it to an indemnity exposure without limits (notwithstanding a jury’s finding that the insurer’s policy was not actually triggered) and (2) whether the Rhode Island District Court erred in finding a duty to defend notwithstanding the absence of any statement in the “charging documents” suggesting that property damage had been “discoverable” within the policy period pursuant to Rhode Island’s “manifestation” analysis.

--The Century Indemnity Appeal

In its appeal (07-2806), Century Indemnity argued to the First Circuit that the District Court erred in finding a duty to defend in the absence of anything in the “charging documents” suggesting that pollution was discoverable during its policy period or that the insured had reason to test for pollution. The twist in this case is that Emhart denies that it was the source of this pollution and therefore was hard pressed at trial to present evidence as to the date when it had reason to look for pollution on its property.

In the alternative, Century Indemnity argued that if Rhode Island’s four corners “pleadings test” was to be applied so broadly, it should logically apply to all primary insurers such that Century Indemnity should only have been obligated to pay a pro rata portion of defense costs.

The panel questioned whether this was, in fact, inequitable as any insurer forced to bear the full costs of defense under such circumstances was free to seek contribution from other carriers. Counsel for Century Indemnity responded that this was bad public policy and would merely multiply the volume of litigation with respect to allocation issues.

Counsel for Emhart rejoined that the insurer had purchased a “defense” and that insurers were therefore obligated to defend, not merely to pay a portion of defense costs. As with Justice Boudin’s comment, Attorney Pirozollo argued that the insurer was free to seek recovery from other insurers for contribution. Pirozollo also argued that Rhode Island law was settled with respect to the scope of the “four corners” test even as applied to pollution claims as evidenced by the Rhode Island Supreme Court’s trigger decision in Truckaway. Justice Howard questioned, however, whether if Rhode Island law was so clear why the District Court (Smith, J.) hadn’t entered summary judgment against Century Indemnity early on rather than waiting until the conclusion of the trial to find that it had a duty to defend.

--Emhart's Cross Appeal

Turning to the second appeal before the Court, counsel for Emhart argued that the U.S. District Court had erred in failing to give literal application to the Rhode Island Supreme Court’s Conanticut rule. Under the Conanticut rule, an insurer that fails to defend is barred from raising indemnity defenses. In this case, the District Court questioned whether Conanticut was still good law, as it has not been followed in Rhode Island, has been criticized by out of state authority and is at odds with recent Rhode Island rulings holding that coverage cannot be created by estoppel. As a result, Judge Smith had refused to impose damages against INA beyond the insured’s costs of defense.

Emhart’s arguments met with skepticism from the First Circuit. Justice Boudin, who generally took the lead in the questioning, observed that the Conanticut rule had evolved in situations where policyholders had suffered grievous consequences as a result of an insurer’s failure to defend and questioned whether it made sense to extend the rule in this case where the insured was a large corporate conglomerate that had defended itself exactly in the same manner as would have been the case had an insurer been paying for independent counsel.

Counsel for Century Indemnity argued to the panel that unlike the facts in Conanticut, Emhart had not suffered any consequential damages. In the absence of such damages, applying Conanticut in this case would be equivalent to creating coverage through waiver or estoppel, which Rhode Island courts have made clear is not appropriate.

While appearing to be unimpressed by Emhart’s arguments, the panel did raise the possibility that the issue should be certified to the Rhode Island Supreme Court.

Given the exchange among the justices, it seems likely that Justice Boudin will write this opinion. It will be recalled that Boudin served on the panel that generated the Boston Gas opinion last June. A decision is unlikely before early 2009.

The First Circuit now has streaming audio of oral arguments: http://www.ca1.uscourts.gov/

 

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Washington just got a little stranger.  (No, not Washington, D.C.--the other one).  In a lengthy and fascinating opinion that the Washington Supreme Court released on September 4, a unanimous court (unusual in any of itself) has ruled that defending insurers can pursue a claim for subrogation but not equitable contribution against a carrier who was not identified until after the underlying construction defective claims were resolved.  As regards the claim for equitable contribution, the court ruled that the "selective tender" rule (insured chooses to tender to certain carriers but not others) trumped the "late tender" rule (delay in tender doesn't defeat coverage unless it causes prejudice). 

Does the Enumclaw opinion mean that Illnois is now no longer the only state that allows "targeted tenders"?   Frankly, it's not clear since it's not apparent that the insured in this case made a deliberate decision not to notify USF Insurance (or maybe they just confused USF with U.S. Fire!).  Even so, the broad language in the opinion made lead future litigants to press "targeted tender" claims in Washington State.

The real question is what difference it makes, since the court ruled that the settling insurers, who had obtained an assignment of the insured's rights, could still pursue a claim for subrogation.  Indeed, subrogation might be a preferred remedy since some courts have blocked claims for equitable contribution if the insurer asserting the claim was itself previously derelict in some respect such that it doesn't deserve to get equity.

The most interesting aspect of the claim is the court's treatment of the prejudice issue.  In most states, prejudice will be presumed as a matter of law if the insured's isn't notified of a claim until it has already settled.   In this case, however, the Supreme Court adopted a "flexible" or "nuanced" approach that will require USF to show exactly how its inability to participate in the insured's defense affected the outcome of the case or why its inability to conduct a timely investigation of the underlying claims impaired that investigation.  

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Two recent opinions illustrate the on-going conflict with respect to whether pollution exclusions should apply to companies that do not cause pollution but nonetheless face pollution-related liabilities. At the heart of these cases is the question whether the literal wording of the policy should control or the insured’s expectation of coverage.

In Sealed Air Corp. v. Royal Indemnity Co., No. A-5951-06T3 (App. Div. August 15, 2008), the corporation sought coverage under its Directors & Officers policy for suits by shareholders who complained that the insured had failed to disclose its liability for environmental problems facing a corporate subsidiary. The Appellate Division of the New Jersey Superior Court ruled that a pollution exclusion in Royal’s D&O policy did not apply because the insured’s liability was the result of allegedly misleading financial statements, not as the result of airborne asbestos or other pollutants. The court declared that, “The gravamen of the securities holders’ complaint has its roots in securities fraud and misrepresentation, not pollution.”
The Appellate Division declined to adopt the insured’s argument that the New Jersey Supreme Court’s analysis of pollution exclusions in Navits was not limited to CGL policies and should bar such an expansive interpretation of a pollution exclusion in a D&O policy. The court held that it need not reach the applicability of Navits to D&O policies because it found that the wording in the policy at issue precluded Royal from disclaiming.

Although the Appellate Division refused to disregard the wording of the policy as a whole, as the insured had proposed based upon the Navits regulatory estoppel paradigm, it held that in this case “arising out of” should not be given the broad meaning proposed by Royal as in this case the words “arising out of” were included with a series of limiting clauses such as “based on” or “in any way involving” that required that there be a more direct causal relationship between the pollution and the excluded harm. In a case such as this, where the injuries were far too attenuated, the court held that giving effect to the exclusion would be unfair and contrary to the reasonably expectations of the insured.

In contrast to the New Jersey court’s approach, the Eleventh Circuit has recently declared in James River Ins. Co. v. Ground Down Engineering, Inc., No. 07-13207 (11th Cir. August 20, 2008) that such exclusions do apply to non-polluters. Ground Down Engineering sought coverage for a lawsuit brought against it by a client for its alleged negligence in failing to discover construction debris and fuel tanks during an environmental site assessment. Although its professional liability insurer disputed coverage on the basis of an absolute pollution exclusion in the policy, the Florida district court declared in 2007 that the customer’s claims arose out of the insured’s failure to carry out professional responsibilities, not out of pollution and that it would be “unconscionable at best” to interpret the policy as excluding from coverage claims relating to any form of pollution, regardless of causation. Since the insured had not caused the pollution, the district court found that the exclusion should not apply and that James River had therefore erred in failing to provide a defense.

This finding was reversed on appeal by the Eleventh Circuit on August 20, 2008. Unlike the District Court, the Eleventh Circuit held that the application of the exclusion did not depend on whether the insured itself had negligently caused pollution but rather applied to all losses arising out of pollution. In this case, the Eleventh Circuit observed that the Florida Supreme Court had given the term “arising out of” a broad and unambiguous meaning as applying to all losses that have some causal connection or relationship to something such that “arising out of” contemplates a more attenuated link than the phrase “because of.” Finally, the Eleventh Circuit rejected the insured’s contention that construction debris was not an excluded “pollutant.” In this case, the Eleventh Circuit found that the underlying complaint alleged that the construction debris had caused “environmental contamination.” Furthermore, the court ruled that the exclusion was not limited to “irritants” or “contaminants” but also included “waste which clearly encompassed construction debris.

The key distinction in these cases is the manner in which the courts interpreted the phrase “arising out of.” The Eleventh Circuit adopted the traditional view that “arising out of” has a far broader meaning than “because” or “caused by” and merely requires that a loss be connected to or somehow related to pollution in order to be excluded. Contrariwise, the New Jersey Appellate Division held that policies need not be given a literal reading if to do so would result in something “unfair and contrary to the reasonable expectations of the insured.”

As these opinions make clear, courts continue to be sharply divided on the crucial issue of whether an insured’s expectations (or hopes?) of coverage should trump otherwise clear and unambiguous policy exclusions.

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While all but two states permit insurers to use staff counsel to represent their insureds, many have adopted rules requiring defense counsel to clearly explain that they are employees of the insurance company.  Yet how can counsel do so in a trial context without improperly introducing the fact of the existence of insurance, to the prejudice of insured and insurer alike?

Five years ago, the Florida Supreme Court adopted a new Rule 4-7.10 back in 2003 requires staff counsel to advise their insured client of their relationship at the very outset of the representation. On the other hand, staff counsel need not disclose their relationship with their insurer during the trial or representation of the policyholder as Florida courts have recognized the public policy of not disclosing the existence of insurance coverage to juries.

Despite this seemingly sensible resolution of the issue, the same problem resurfaced in West Virginia, a state that often seems to create headaches for insurers..

 

The facts in Nationwide Mut. Ins. Co. v. Karl, No. 33651 (W. Va. February 14, 2008) concerned an auto case in which Nationwide assigned its staff counsel to defend the insured defendant.  During voir dire, the plaintiff proposed that the jury panel be asked whether any of the prospective jurors had a relationship with the members of defense counsel's law firm, which was identified as the "Nationwide Trial Division."  After the judge refused, the defendant sought a continuance so that it could appeal the ruling.  Although plaintiff's counsel offered to withdraw the request to avoid a continuance or delay of the trial, the judge insisted on giving the original proposed question, stating that he felt that this was an important issue to resolve given the large number of cases on his docket in which the Nationwide Trial Division was involved.   Nationwide thereafter filed a Petition for Writ of Prohibition and the trial was continued while the appeal proceeded.

In its opinion, the West Virginia Supreme Court grappled with two conflicting concerns.  On the one hand, identifying potential personal prejudice is an important aspect of voir dire.  On the other hand, rules of court bar the introduction of information about available insurance coverage for fear that it may prejudice juries and result in higher verdicts. 

While attempting to balance these concerns, the Supreme Court refused to find that the rule against introducing evidence of insurance should bar any inquiry into the affiliation of defense counsel, citing similar holdings from Indiana and Missouri. Despite Nationwide’s contention that such a requirement would improperly inject the issue of insurance coverage into the trial, the Supreme Court agreed with the trial judge that inquiry into whether a prospective juror is associated in some manner with the Nationwide Trial Division was a proper subject of voir dire.Nevertheless, in recognition of Nationwide's concerns, the Supreme Ccourt recommended that a different method of inquiry be used whereby jurors would only be asked if they had any interest with respect to the Nationwide Trial Division without specifically identifying its relationship to defense counsel

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The Appellate Court has rejected a wife’s contention that she was entitled to coverage for the loss of the family home despite her husband’s conviction for arson. In Aurelius v. State Farm Fire & Cas. Co., No. 2-07-0266 (Ill. App. August 5, 2008), the Second District affirmed a lower court’s declaration that the homeowner’s policy unambiguously barred coverage for first party losses resulting from intentional acts by “you or any person insured under this policy.”

Further, the court ruled that the spouse’s claim was barred by reason of her husband’s lies during an examination under oath given the concealment or fraud language in the policy which states that the policy was void “as to you and any other insured, if you or any other insured under this policy” intentionally conceals or misrepresents facts.

The court also declined to imply ambiguity based on a claimed conflict with language in the liability provisions of the policy which stated that coverage was only precluded for intentional acts of “the insured” and required that the interests of each insured be considered separately, holding that the liability provisions were irrelevant to the scope of coverage for first party losses.

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Even as briefing has begun before the Massachusetts Supreme Judicial Court with respect to the issue of allocation, Vermont has joined the growing number of Northeastern states adopting a “time on the risk” approach in long-tail cases. In its first comprehensive assay into the murky world of environmental jurisprudence, the Vermont Supreme Court has ruled in Towns v. Northern Security Ins. Co., 2008 VT 98 (Vt. August 1, 2008), that (1) a continuous trigger is appropriate, not “manifestation;” (2) the own property exclusion does not apply to groundwater contamination; (3) even de minimis levels of environmental contamination constitute “property damage;” and (4) a waste hauler’s use of debris from his business to redevelop his personal home is not subject to the “business pursuits” exclusion in a homeowner’s policy.

This insurance coverage dispute arose out of dumping activity by Richard Towns between 1972 and 1987. Towns operated a waste hauling business. Over time, he culled some of the debris from his business and used it to fill in a steep embankment at his house. Some of the debris was also used to fill in a swimming hole in front of the property.

Towns sold his home in 1987. Thereafter, the new owners, concerned about the fill, contacted the Vermont Attorney General’s Office which ultimately issued an order to Towns directing him to engage an environmental consultant and clean up the property.

Towns initially sought coverage for the state’s claim from Vermont Mutual, which had insured him after he sold the property in 1987. Ultimately, the Vermont Supreme Court affirmed a lower court’s ruling that the Vermont Mutual policy did not cover the loss. Towns v. Northern Security Ins. Co., 726 A.2d 65, 67 (Vt. 1999).

Thereafter, Towns sued Northern Security, which had insured him between 1983 and 1987. Northern Security disputed its claimed obligations, citing the “business pursuits” exclusion in its homeowners’ policy and contending that the loss in question had “manifested” after its policies had expired. These arguments were for the most part rejected by a state trial court in a 2007 opinion although the court declared that Northern Security was only liable for its “time on the risk” (25%) as its coverage had only been in effect for four of the sixteen years that Towns had lived there.

On appeal, the Vermont Supreme Court agreed with the trial court that the “business pursuits” exclusion did not apply. Although the debris had been generated in the course of the insured’s business, the court held that what was relevant was the dumping activity, which is subject to the non-business exception to the exclusion. This point was contested by Chief Justice Greiber, who argued in a dissenting opinion that the sheer amount and duration of the fill activity was clearly integral to the insured’s waste hauling business.

The Supreme Court also rejected Northern Security’s reliance on the “own property” exclusion. In keeping with the approach followed by most courts, the court held that groundwater contamination was a public resource and not the insured’s “own property.” The court also rejected Northern Security’s argument that because the groundwater contamination was below state action levels, it did not satisfy the policy’s requirement of “property damage.”

The court suggested, however, that the exclusion might yet apply to any costs that were solely related to the insured’s property, as distinguished from the cost of preventing third-party property damage.

The court also rejected Northern’s argument that a manifestation trigger was appropriate, declaring instead that it would follow the majority rule which applies a continuous trigger to claims of this sort where the disposal activity and resulting damage was ongoing over a period of years.
On the other hand, the Supreme Court also sustained the lower court’s decision to limit the insurer’s obligation to that portion of defense and indemnity during its “time on the risk.” The court noted that a “time on the risk” method offers several policy advantages including spreading the risk to the maximum number of carriers, providing a ready means of identifying each insurer’s liability through a relatively simple calculation and avoiding the necessity for subsequent indemnification actions between or among insurers. In cases of this sort, the court held that as the policy was self-insured, it was fair and reasonable to require the insured to bear responsibility for that portion of total defense and indemnity for which he or she chose to assume the risk.

Vermont is an unusual state within which to litigate environmental coverage issues. Unlike states in southern New England, Vermont lacks the type of heavy industry that have historically generated significant numbers of environmental claims in the past. On the other hand, insurers for the most part have been denied the opportunity to include pollution exclusions by reason of regulations followed by Vermont regulators since the early 1970s. Even so, there has been a relative dearth of clear appellate case law construing the availability of insurance coverage for such claims.

The Towns opinion may ultimately be particularly important in two respects.  First, it reenforces the growing consensus in the Northeast and New England that "all sums" has no place in insurance jurisprudence.   Although the Massachusetts SJC has a proud tradition of forging its own path without regard for the views of sister states, it is less likely to view "time on the risk" as a made up argument by insurers where allocation has been approved by the Supreme Courts of Connecticut, New Hampshire, New Jersey, New York and now Vermont.

Second, this is the rare case (Security in Connecticut being another), where a court has explicitly applied  allocation principles to the duty to defend.  As many of these cases (e.g.  ConEd, EnergyNorth) have arisen in the context of excess policies, the focus of most cases has been on insurer's claimed indemnity duties.  Towns rightly affirms that the same analysis applies to the scope of an insurer's duty to pay or reimburse defense costs.

 

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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.

You may have missed it (like most insurance matters, the underlying claim generated far more headlines than the ensuing coverage suit) but on July 9, 2008, an insurer of one of the defendants in the sinking Alaska village case filed a DJ in Alexandria, Virginia asking a state court to rule that its CGL policies do not cover the Village of Kivalina’s climate change claims.

On February 26, 2008, the Native Village of Kivalina, Alaska sued Exxon and various energy companies in federal court in San Francisco, alleging that the defendants’ production of fossil fuels was causing global warming that had in turn melted the Arctic ice that had historically protected the Inupiat village from coastal winter storms, threatening the Village’s future. Among the defendants is AES Corporation, a Virginia-based energy conglomerate that operates various coal-fired plants. The Village seeks to impose liability on theories of public and private nuisance and sought monetary damages for each defendant’s contribution to global warming.

AES tendered the Kivalina law suit to Steadfast Insurance, which has insured it since 2003 under CGL policies with $1 million limits. Steadfast agreed to defend under a reservation of rights and has since filed a Complaint for Declaratory Relief in the Arlington County Circuit Court in Virginia.

 The DJ asks the state court to find that Steadfast does not owe coverage on the grounds that (1) global warming is not the result of any “accident” given the industry’s long-standing knowledge of risks associated with greenhouse gases; (2) in light of the long-standing nature of the problem, it is clearly a “loss in progress” subject to a Montrose endorsement in the policy; (3) the emission of greenhouse gases is “air pollution” subject to a total pollution exclusion in the Steadfast policy.

Steadfast is represented by David Florin and Andrew Marks of D.C.’s Crowell & Moring in association with Tom McKay and Bill Stewart of Cozen O’Connor.

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There's a recent opinion from the Ninth Circuit that doesn't seem to be getting the attention that it deserves.  For anyone handling, high tech or IP coverage claims, the court's July 15 opinion in Sony Computer Entertainment v. American Home is a must read.

The case involved efforts by Sony to get coverage under its CGL and media E&O policies for a class action suit brought by disgruntled purchasers of Sony's ubiquitous PlayStation 2 game.  The underlying plaintiffs alleged that CD and DVD video games skipped or froze while being played on the PlayStation or made " banging and clicking" noises.  Sony argued that allegations that it misrepresented the qualities of its product triggered its E&O coverage for the wrongful act of "negligent publication" or that the claims against it were for a "loss of use" triggering its CGL coverage.  The Ninth Circuit disagreed.

As to the media E&O policy issued by AISLIC, the court rejected Sony argument that the AISLIC Multimedia Professional Liability 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.  The Ninth Circuit reviewed various tort cases in which publishes had been held liable for the negligent publication of material that had prompted third parties to commit harmful acts and found this constructioni of the term was consistent with the context of coverage.

As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Playstation 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 cour t distinguished its opinion in Anthem Electronics, noting that although t that although the plaintiffs alleged that CDs and DVDs had not properly played on the PlayStation 2, 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 Playstation IIs. Rather, the court found that these allegations suggested that the devices deteriorated over time.

Writing in dissent, Judge Bybee argued that the majority had given an unduly narrow construction to AiSLIC’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

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Among the more anomalous aspects of Coverage B jurisprudence is the nearly complete absence of case law on the issue of the "trigger of coverage" for "personal and advertising injury" claims.  This dearth of case law is all the more astonishing when you consider the thousands (yes, it's true!) of reported "trigger" cases under Coverage A, especially in the latent injury context. 

It may be, therefore, that the First Circuit will be the first appellate court to consider whether continuing injuries arising out of offenses committed prior to the policy period are sufficient to trigger coverage.  In a case that our law firm won in the U.S. District Court, the insured's assignee has filed an appeal to the First Circuit, arguing that a "continuous trigger" should apply to Coverage B.

The dispute in Sarsfield v. Great American Ins. Co. of New York, No. 07-11026 (D. Mass. June 2, 2008) arose out a 1986 rape in Marlborough, Massachusetts.  Eric Sarsfield was convicted of the rape in 1987 and sentenced to prison.  In 1999, he was released after DNA testing excluded him as a possible suspect. 

Sarsfield sued the Town of Marlborough for gross violations of his civil rights in the manner in which it investigated and prosecuted him.   In 2006,  a U.S. District Court judge (Zobel, J) awarded him $13.6 million in damages.  Sarsfield subsequently took an assignment of the Town's rights and pursued the judgment against its liability insurer, Great American.  Great American argued that the claims could not trigger its Law Enforcement Liability coverage since the claimed wrongful acts of the Town pre-dated the policy.

On June 1, 2007, Judge Zobel entered judgment for Great American.  She held that the continued incarceration of the plaintiff as a consequence of  investigative prosecutorial misconduct pre-dating Great American’s policies failed to seek recovery on account of a covered  “wrongful act” during the GA policy period.  The court emphasized that the plaintiff's claims were based on acts that occurred earlier, not his incarceration.

Further, the court held that the police and prosecutorial misconduct had not resulted in any personal or bodily injury to the plaintiff. The court rejected the plaintiff’s argument that the defendants’ concealment of their misconduct constituted a “continuing injury” noting that the “continuous trigger” case law that it has evolved in the context of latent injuries such as asbestos “is not well-suited to a situation where, as here, any injury was evident from the outset and first occurred prior to the institution of insurance coverage.” Rather, as with the malicious prosecution cases, the court held that any injury for insurance purposes occurred when the underlying charges were brought against Sarsfield in 1987.

We expect that the First Circuit appeal will be briefed this fall.  If any insurer has interest in the case or wishes to participate as an amicus, contact us.

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Even as the Wisconsin Supreme Court has recently ruled that a trademark is a “title” whose infringement may trigger Coverage B to the CGL policy, the Seventh Circuit has followed a more conservative path that may bring it into direct conflict with the state court's recent rulings concerning the application of CGL policies to IP claims.

In Guaranty Bank v. Chubb Corp., No. 07-3367 (7th Cir. July 17, 2008), the Midwest Guaranty Bank sued “Guaranty Bank” for alleged violation’s of Michigan’s unfair competition law and for infringing the plaintiff’s trademark by announcing its intent to enter the same geographic market with such a similar name. Guaranty Bank sought coverage from Chubb under a Great Northern CGL policy that covered injury “caused by an offense of infringing, in that particular part of your advertisement about your goods, products or services upon their registered collective mark, registered service mark or other registered trademarked name, slogan, symbol or title.” Since the plaintiff’s claim was for the infringement of an unregistered trademark and as Midwest Guaranty Bank was not claiming such an infringement, the Seventh Circuit ruled that Great Northern would not have had a duty to defend.

While this aspect of the court’s ruling might be subject to reconsideration in light of the Wisconsin Supreme Court recent Acuity opinion, the ruling may yet stand in light of the Seventh Circuit’s independent declaration that coverage was barred by the insured’s failure to provide timely notice to Chubb. In this case, Guaranty Bank did not give notice for over a year, during which time a preliminary injunction had entered against the insured.

The District Court had granted summary judgment to Great Northern based upon the Wisconsin statute that places the burden of disproving prejudice on a policyholder where notice is delayed by more than a year. The Seventh Circuit noted, moreover, that even if this burden shifting had not occurred, prejudice likely existed in this case owing to the momentum that the plaintiff’s claims had received as the result of the injunctive remedy as well as the inability of Great Northern to engage the case earlier and undertake a defense or otherwise attempt to resolve it. In dicta, the Seventh Circuit also noted that the “lenity” that the Wisconsin legislature and courts might exhibit to policyholders was for the benefit of individual insureds. The court observed that businesses and other sophisticated insureds would have well aware of the requirement of timely notice and should not be permitted to avoid the insurer taking control of the defense by “spending generously for counsel on the insurer’s dime even though the insurer might be able to defend the suit more cheaply.”

It should come as no surprise to those who follow the Seventh Circuit that the author of Guaranty Bank is Judge Posner.

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"Badgered" by the courts?  New song, same "title"?  Trust Wisconsin to add a layer of confusion to an area of AI law that seemed to be settling down.

Since the deletion of the explicit exclusion for trademark infringement in the earlier Broad Form endorsements, insurers and the ISO have struggled to set the right  balance for covering some IP torts but not others.  Thus, current forms typically  limit coverage to disputes involving the infringement of a copyright, title or slgan.  While most courts had ruled that these are related terms and have limited the meaning of "title" to a non-copyrighted title to an artistic work  (e.  Diplomatic Triumphs of the Bush Administration), the Wisconsin Supreme Court has now mixed and matched dictionary definitions to contrive coverage for trademark infringement claims. 

 

In Acuity, A Mutual Ins. Co. v. Bagadia, 2008 WI 62 (Wis. June 18, 2008), Symantec sued the insured software company for infringing various copyrights and trademarks by selling knock off copies of Symantec’s security software through advertisements that featured the copyrights and trademarks.  The court held that this was not only "advertisiing" but  that the trademark infringement were covered as involving the infringement of a “title.    The Supreme Court reached this conclusion by comparing the dictionary definitions of "title" and "trademark" and noting that both involve descriptiions concluded that they must have the same meaning (yes, and "mud" and :"paint" both involve elements in a liquid solution, so your 3 year old daughters' class project must be a Rembrandt).

Although we have learned to expect surprising things from the Wisconsin Supreme Court of late, this new AI opinion is disappointing, as the meaning of "title" has seemed relatively settled for the last 10 years or so or at least since the California Supreme Court ruled in Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 988 P.2d 568 (1999) that coverage for “infringement of copyright or of title or of slogan” only extends to claims for infringement of the names of literary or artistic works or names that are “slogans,” not to other names. In rejecting the insured’s contention that coverage extend to unfair competition claims that the insured had wrongfully utilized colored flags, signs and slogans that the plaintiff was using for a competing real estate development. The court held that the term “title,” read in the broader context of the policy, can only mean the name of a literary or artistic work, and did not extend to any claim based on “formal right of ownership of property.” Further, although the underlying suit alleged that the insured had used a slogan in its own marketing, the Supreme Court declared that there was no indemnity obligation as the jury’s award had been based upon the insured’s infringing use of a trademark. “The infringing use of a trademark that is merely a word and a phrase used as a slogan is not the same as the infringing use of a slogan which would give rise to coverage under the policy.”

As an interesting footnote for those of you waiting for the Supreme Court to rule on allocation issues, the court ducked the issue of set-offs here.  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.

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Over the past ten years, an emerging body of law has emerged concerning the efforts of State Guaranty Funds to avoid paying insolvent claims on the bais that self-insured programs are "insurance"  within the statutory exception to their obligations. 

Thus, the Iowa Supreme Court ruled in Iowa Contractors Worker’s Compensation Group v. Iowa Insurance Guaranty Association, 437 N.W.2d 909 (Iowa 1989) that a pooled self-insured worker’s compensation program was not “insurance” In a dispute with the Iowa Insurance Guaranty Association.  On the other hand, a group self-insurance fund was found to constitute “insurance” in Maryland Motor Truck Assoc. Worker’s Compensation Self-Ins. Group v. Property & Cas. Ins. Guaranty Corp., 871 A.2d 590 (Md. 2005) and South Carolina Property & Cas. Ins. Guaranty Assn. v. Carolina’s Roofing & Sheet Metal Contractors Self-Ins. Fund, 446 S.E.2d 422 (S.C. 1994).

Now the Sixth Circuit has added a new wrinkle to the debate, holding that although an individual self-insured plan is not "insurance" because there is no transfer of risk to third parties, the same is not true of a group plan.

In Associated Industries of Kentucky, Inc. v. U.S. Liability Ins. Group, No. 07-5662 (6th Cir. June 27, 2008), the courtr held that a liability exclusion for lawsuits arising out of the insured’s operation of any “insurance plan or program” precluded coverage for claims arising out of a self-insurance fund that a trade association sponsored so as to allow local manufacturers to pool their worker’s compensation liabilities. While agreeing that individual self-insurance is not “insurance” as that term is defined under Ky. Rev. Stat. § 304.1-030 since the self-insured entity bears all of its own risks, the court held that in the case of group self-insurance, the participants shifted their risks to another, the group self-insurance fund.

 

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Last winter, I posted on an oral argument in the First Circuit that presented significant implications for the future of long tail coverage disputes in Massachusetts. Well, be careful what you ask for. In a momentous new opinion, the First Circuit declared that last week that intermediate state appellate opinions were not a clear indicator of what Massachusetts law is on “allocation” and has therefore certified the issue to the state’s Supreme Judicial Court.

At issue in Boston Gas Co. v. Century Indemnity Co., No. 07-1452 (1st Cir. June 10, 2008) was a jury’s award of $6 million to a gas utility for the cost of cleaning up a former production facility in Everett, Massachusetts. Despite the fact that the site was operated from 1908 to 1969, the District Court instructed the jury that Boston Gas could assign its entire loss to an individual policy issued by Century Indemnity’s predecessor and need only pay a single $100,000 SIR.. Additionally, Judge Zobel issued a declaration that Century was liable for all future cleanup costs.

On appeal, the First Circuit expressed perplexity with respect to whether Massachussets law allows such “all sums” recoveries or would require some sort of allocation. The court was not persuaded that the Appeals Court’s 1998 opinion in Rubenstein, which the District Court had relied on, was particularly persuasive, describing the Appeals Court’s analysis as “cursory.”
As a result, the First Circuit has certified three allocation questions to the Supreme Judicial Court:

1. Should long tail losses be pro rated in some manner among all insurers “on the risk” so that the sued carrier is only liable for its fractional share?

2. If some sort of pro rata liability is called for in such circumstances, what allocation method or formula should be sued?

3. If a single insurer in such circumstances is subject to liability under more than one policy and each policy has a separate deductible or self-insured retention, how many self-insured retentions must be applied?

It will be interesting to see how these issues are briefed to the SJC and, in particular, whether the court will be asked to hold that allocation should be done on a “pure time on the risk” basis (back to 1908) or merely, as the First Circuit suggests, among the period of available insurance policies. The distinction may not matter much to Century Indemnity, given the fact that, as in Con Ed many years ago, the insured had SIRs in all of the applicable policies, but it will surely have major implications in other cases in the future.

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Has there ever been a court that certifies more insurance issues to state courts than today’s Eleventh Circuit? (well, yes, there’s the Fifth Circuit too). Now a state court, after initially answering a question concerning insurance coverage for construction defect claims, has changed its mind and tossed the file back to the federal courts due to a lack of clarity with respect to a key factual question.

Back in December, the Florida Supreme Court had answered a certified question from the Eleventh Circuit in Auto-Owners Ins. Co. v. Pozzi Window Co., No. SC06-779 (Fla. December 20, 2007) that a lawsuit brought against a contractor for water damage caused by the defective installation of windows at a multi-million dollar house in Coconut Grove was not covered since CGL policies do not cover the cost of repair and replacement of defective work.

In Pozzi Window Co. v. Auto-Owners Ins. Co., 446 F.3d 1178 (11th Cir. 2006), the Eleventh Circuit certified to the Supreme Court the issue of whether the defective windows were completed works such that the cost of repairing or replacing the defective windows fell within the scope of the policy’s coverage for claims within the “products/completed operations hazard.” In light of recent Florida appellate decisions that have split on the issue of whether repair or replacement costs are covered under a CGL policy, the Eleventh Circuit asked the Florida Supreme Court to answer whether a standard CGL policy that included coverage for claims within the products/completed operations hazard would cover a general contractor’s liability to a third party for the cost of repairing or replacing defective work by its subcontractor. Unlike its opinion J.S.U.B., the Florida Supreme Court observed that in this case, while the defective installation of the windows was an “occurrence,” the cost of repairing and removing defective work was not a claim for “property damage.”

Last week, however, the Florida Supreme Court withdrew its December 20, 2007 opinion and declared in Auto Owners Ins. Co. v. Pozzi Window Co., No. SCO6-779 (Fla. June 12, 2008) that it was unable to answer the Eleventh Circuit’s certified question owing to the fact that the court had failed to clarify whether the water damage resulted from defective installation, for which there would not be coverage, or defects in the installed windows themselves. In keeping with its  opinion  in U.S. Fire Ins. Co. v. JSUB, the Supreme Curt noted that if the windows were not defective prior to their installation, coverage would exist for the cost of repair or replacement of the windows because there was physical injury to tangible property (the windows) caused by their defective installation by a subcontractor. However, a different result would follow if the windows were in a defective condition before being installed and the damage to the completed project was therefore caused by defective windows rather than faulty installation alone.

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The availability of coverage for negligent supervision claims brought against the parents of troubled teenagers has been a persistent source of litigation and controversy under homeowner's policies.  As courts have increasingly found that independent theories of negligence against parents are an "occurrence" despite the intentional nature of their children's acts, homeowners' insurers have countered with new exclusions for intentional or criminal acts.  In true Clintonian fashion, the effect of such exclusions sometimes turns on whether the exclusion applies to the intentional or criminal acts or "an," "any" or "the insured.

The New Jersey Supreme Court has become the latest court to hold that an exclusion that applies to the intentional acts of "an" insured bars coverage for claims by "any" insured, including the claims of parents whose negligent supervision allegedly failed to prevent their son from sexually assaulting a neighbor's child.  In Villa v. Short, A-7-07 (N.J. June 10, 2008), the court ruled 4-2 that an exclusion for the criminal or intentional acts of an insured "plainly excludes coverage for all insureds when any insured commits an intentional or criminal act."  The court declined to find ambiguity in the policy based on the effect of a severability of interests clause Iwhich requires that each insured's rights be considered separately by the insurer).

Two dissenting justices argued that the insured's interpretation of the exclusion was reasonable, as evidenced by courts in other states that have held such exclusions not to apply to claims against "innocent insureds," and that the language must therefore be deemed ambiguous and should be interpreted in favor of coverage for the insured.

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Our readers will forigive a Massachusetts lawyer for questioning the counting skills of  the Florida Supreme Court.  In a recent opinion, however, the state Supreme Court has again discounted the value of precedent, throwing a certified issue Auto Owners Ins. Co. v. Pozzi Window Co., No. SCO6-779 (Fla. June 12, 2008)back to the U.S. Court of Appeals for the Eleventh Circuit due to a factual dispute that somehow eluded the Supreme Court in its original opinion last December.

Oon  December 20, 2007 opinion, , the Florida Supreme Court had ruled that claims brought against a contractor for water damage caused by the defective installation of windows were not covered since CGL policies do not cover the cost of repair and replacement of defective work.   The court contrasted its opinion with its December 20, 2008 opinion in JSUB , in which it held that  there would be coverage for CD losses.

On June 12, however, the Florida Supreme Court econsidered its earlier opinon and  ruled  thatt it was unable to answer the Eleventh Circuit’s certified question owing to the fact that the court had failed to clarify whether the water damage resulted from defective installation, for which there would not be coverage, or defects in the installed windows themselves. In keeping with its earlier opinion in JSUB, the Supreme Court noted that if the windows were not defective prior to their installation, coverage would exist for the cost of repair or replacement of the windows because there was physical injury to tangible property (the windows) caused by their defective installation by a subcontractor. However, a different result would follow if the windows were in a defective condition before being installed and the damage to the completed project was therefore caused by defective windows rather than faulty installation alone.

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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.

The legislation has two principal parts:

The first part would amend Insurance Law Section 3420(a) to allow third-party claimants to bring claims for declaratory relief to determine the availability of coverage for their claim against policyholders. It appears from the legislation that this right is limited to disputes involving the unavailability of coverage due to late notice. It remains to be seen whether or how courts would allow third-party claimants to bring such actions in cases that involve multiple coverage issues, including late notice. Furthermore, the bill creates a safe harbor that eliminates the right of third-party claimants to bring such actions if, within 60 days of the denial on the grounds of late notice, the insurer itself brings a declaratory judgment action (thereby causing the insurer to subject itself to a claim for attorney’s fees under Mighty Midgets if it loses!)

The second part of the bill deals with the issue of late notice. New York is among the dwindling number of states that have not required notice. Indeed, despite expectations to the contrary, the New York Court of Appeals upheld this traditional view of notice requirements as recently as 2005.  As proposed, this bill would amend Insurance Law Section 3420 to include a requirement of prejudice. Furthermore, it will be the insurer’s burden to prove prejudice for any delay up to two years. Thereafter, however, the burden shifts to the insured, injured person or other claimant. Furthermore, there will be an irrebuttable presumption of prejudice if the insured’s liability has been determined or it has settled the case in the interim.

The explanatory memorandum accompanying this legislation states that the bill would prevent insurers from denying coverage based on a technicality and “eliminates the extreme hardship placed on those who paid for their premiums timely only to find in a time of need that their policy is not available.” The legislation expressly states, however, that it does not apply to the “claims made” and reporting provisions in “claims made” policies.

Of particular note is the fact that this new legislation would have prospective effect only. Section 8 of the bill states that it only applies to policies issued six months after the date that the bill becomes law. Accordingly, there will remain a vast body of pre-2008 policies, including “long-tail” claims concerning asbestos, pollution and other mass tort injuries, that will be governed by traditional common law requirements pertaining to prejudice.

Although nothing is certain in Albany these days, it does appear likely that this bill will be signed into law, thus bringing to a close New York’s role as the last large commercial lines state to follow traditional late notice rules. In doing so, however, New York is taking the intermediate approach that has been pioneered by states such as Wisconsin. Thus, rather than simply adopting the “notice prejudice” standard that has been followed in most states, New York is treating certain types of cases as qualitatively different. Thus, the burden of proof with respect to prejudice, which is often the most difficult aspect of such cases, is placed on the policyholder where notice is more than two years old. Furthermore, prejudice is presumed as a matter of law in certain cases, as where the insured has settled or has received a judgment.

Unfortunately, the legislation is vague with respect to certain important aspects of such cases. For instance, current general liability forms contain three separate events that trigger an insured’s notice obligations: (1) accident or occurrence; (2) the insured’s receipt of a claim; and (3) the insured’s receipt of a lawsuit. However, although the legislation appears to apply to all three requirements, it fails to address the problems that may arise where an insured gives timely notice of an accident but is late with respect to the notice of a claim or suit or the reverse.

Such problems were addressed by the Court of Appeals three years ago in  Argo Corp.. v. Greater New York Mut. Ins. Co., 4 N.Y.3d 332, 827 N.E.2d 762 (2005). In that case, the Court of Appeals had ruled that the notice of suit requirement was more significant than notice of an accident as it allowed insurers to “take an active, early role in the litigation process and in any settlement discussions and to set reserves.” As a result, the court ruled in Argo that late notice of a suit created a rebuttable presumption of prejudice that the insured must overcome. In Argo, the insured had failed to give notice of the accident and the suit. In its companion opinion in Rekemeyer v. State Farm Mut. Auto Ins. Co., however, the insured had given timely notice of the accident but was late with respect to the suit. As a result, the court had held that the insurer was required to prove prejudice as a result of the delay.

In contrast to this more nuanced approach, it appears that the proposed legislation would require that the issue of prejudice be considered in the overall context of the claim such that prejudice would be more likely to exist if the insured had failed to give notice of the original accident and less likely to exist if the insurer had had the opportunity to investigate the accident but did not receive timely notice of the suit.

It appears that this legislation would also resolve any question with respect to whether notice of a claim must be received from the policyholder. Plainly, actual notice from any source is sufficient under the legislation.

Finally, we note the inequity that this legislation fails to address in Insurance Law Section 3420(d). Under current New York law, an insurer may be estopped to raise coverage defenses for claims for bodily injury under policies issued in New York if it waits more than a reasonable period of time to deny coverage. Despite the harsh effect of Section 3420(d), it did not seem inequitable to place this requirement on insurers when policyholders were held to a similarly strict standard with respect to their notice obligations. Insofar as a much looser standard now applies with respect to the notice obligations of insurers, it would have seemed fair to similarly loosen the estoppel provisions of Section 3420(d) so that an insurer would only be precluded from raising coverage defenses insofar as its delay had prejudiced the policyholder. Unfortunately, although it is believed that there was some discussion of this issue, it was not included in the final proposed legislation.

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

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

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.

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

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

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

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

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.

Earlier this month, the Illinois Appellate Court affirmed the absence of coverage for the spoliation claims. Keeley had argued that as the claims against him were because of lost property, they should fall within the policy’s definition of “property damage.” The Appellate Court disagreed.

The Appellate Court conceded that a spoliation claim may be considered to constitute two different claims for damage to property. The first would involve the damage to and loss of use of the I-beam itself. In this case, however, the court observed that the I-beam was at all times within the care, custody and control of the insured and was therefore subject to Exclusion J(4) in the CGL policy.

Alternatively, the court recognized that the lost use of the I-beam had damaged the value of the plaintiff’s lawsuit against Keeley. The court observed, however, that characterizing the claim in this manner took it out of the insuring agreement of the policy itself since coverage only applies to injury to tangible property whereas damage to a cause of action is not damage to “tangible property.” Accordingly, the court affirmed the lower court’s declaration that Keeley’s claims were not covered by his CGL carrier.

This Illinois ruling is in general accord with such limited case law as exists on this issue. Several years ago, the Florida Supreme Court ruled in Humana Worker’s Compensation Services v. Home Emergency Services, 842 So.2d 778 (Fla. 2003) that spoliation claims did not give rise to coverage under an employer’s liability policy whose coverage was limited to “bodily injury by accident.” The court ruled that even though the spoliation claim would not have risen but for the fact that a bodily injury occurred giving rise to a lawsuit against the employer, the employer’s destruction of evidence did not itself result in bodily injury. Thus, the court ruled that, “The accident did not result in bodily injury but rather in the latter not being available as evidence in the bodily injury claim.”

Keeley is in accord with Fremont Cas. Ins. Co. v. Ace-Chicago Great Dane Corp., (Ill. App. 2000) in which the Appellate Court held that a CGL carrier had no obligation to defend a product manufacturer for having lost a ladder that injured the plaintiff. The First District of the Appellate Court ruled that, “The inability to prove the cause of action against a third party does not fall within the plain and ordinary meaning of the term ‘bodily injury.’”

 

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

 

 

 

 

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.

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

 

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.

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Only weeks after its opinion in Williams v. Philip Morris upholding a punitive damage award that was nearly 100 times the amount of punitive damages (and largely ignoring the U.S. Supreme Court's directions through its application of state law to jury instructions),  the Oregon Supreme Court issued a new opinion discussing the constitutionallity of punitive damages yesterday in the context of a bad faith claim against an insurer.

 

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.

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Not one to get left behind while the Fifth Circuit and other Gulf Coast states make all the first party law on concurrent causation, the New Hampshire  Supreme Court has issued a new opinion upholding a flood exclusion in a homeowner's policy.

 

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).

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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.

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.

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

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

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

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

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

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

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

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

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

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

 

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.

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

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

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.

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The Illinois Supreme Court has ruled that targeted tenders do not trump the rule of horizontal exhaustion in construction defect cases.  As a result, additional named insureds must now  exhaust their own primary insurance before they can reach the excess layer of additional insured coverage. The court declared that “extending the targeted tender rule to require an excess insurer to pay before a primary policy would eviscerate the distinction between primary and excess insurance.” The court ruled, therefore, that despite Kajima’s targeted tender to St. Paul after the sub’s primary exhausted, Kajima was required to exhaust its own primary insurance before St. Paul paid.

In Kajima Construction Services, Inc. v. St. Paul Fire & Marine Ins. Co., No. 103588 (Ill. November 29, 2007), a general contractor and its own insurer (Tokio Marine) sued St. Paul to recover $1 million that Tokio had contributed to a $3 million personal injury settlement.  St. Paul, which had issued primary and umbrella coverage to a subcontractor that named Kajima as an additional insured, paid its $2 million primary limit but stated that its umbrella policy was excess of Kajima's own primary insurance and need therefore not contribute.

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.

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The Appellate Division of the New York Supreme Court has ruled in International Flavors and Fragrances, Inc. v. Royal Ins. Co. of America,  (App. Div. October 30, 2007) that claims by toxic tort claims presented by workers in a microwave packaging plant who suffered respiratory injuries as the result of exposure to a popcorn butter flavoring additive were separate “occurrences” and therefore required the insured to pay separate “occurrence” deductibles for each claim. In keeping with the Court of Appeals’ recent GE decision, the court ruled that these claims could not be grouped as a single “occurrence” since they involved exposures that occurred in different places over a period of many years.

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Over the years, insurers and tort lawyers have engaged in a cold war over whether homeowner's policies should cover intentional or criminal acts.   In the face of threshold contentions that such offenses were not "accidents" or "occurrences," plaintiffs learned to plead their claims under theories of neglligent hiring or supervision in the hopes of creating coverage.  Enough courts have come to accept coverage for these "negligence" theories that insurers have added new exclusions specifically directed at certain types of offenses that give rise to them, notably assault and battery and sexual molestation.

In the latest skirmish over these new wordings, the Supreme Court of New Hampshire (which has been very busy lately on the coverage front) ruled last week in Philbrick v. Liberty Mutual Ins. Co. that a trial court erred in refusing to apply a homeowner's exclusion for "bodily injury...arising out of sexual molestation" to negligent supervision claims against the parents of a teenage baby-sitter who had molested the plaintiff's children.  The court rejected the plaintiffs' argument that it was the parents' negligence that cause their injuries, holding instead that all of these claims clearly arose out of excluded molestation since, but for the molestation, there would not have been any claim of negligent supervision against the parents.  Writing for the court, Justice Duggan declared that "where, as here, the language of the exclusion explicitly ties the exclusion to the nature of the injury, the analysis should be directed towards the injuries suffered rather than the causes of action in the complaint."

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.

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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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A surprising new opinion from the Tenth Circuit suggests that umbrella carriers may be liable for those sums that an insured pays to satisfy its deductible or self-insured retention for a large loss even if, as a result, the primary insurer never exhausts its limits.

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.

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Score it Insurers 8-Policyholders 6 as casualty insurers won a round today in the on-going battle over whether insureds must allocate long-tail losses in accordance with the duration of the loss or can "spike" their claims to a single year of coverage to trigger higher layer policies and avoid those nasty orphan shares and gaps in coverage.

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.

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