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

Great American’s coverage lawsuit arose out of an underlying environmental pollution case.  Great American and several other insurers agreed to defend the insureds.  Great American filed its declaratory relief action for a determination that its policy limits were exhausted and therefore there was no further duty to defend.  The legal issues presented by this claim were two fold: (1) whether there was only $500,000 per occurrence available in applicable limits; and (2) whether there was an additional annual limit available because the insured had paid for an additional couple of months of coverage.  The insured argued the policy limits question necessitated determination of facts in the underlying case, including whether there was more than one occurrence and what caused the pollution.  The insured also argued it might assert a bad faith claim which would create factual issues that should be stayed.

The appellate court made short shrift of these arguments.  The possible bad faith claim was speculative.  No proposed claim had been presented to the court and, therefore, none could be considered.  On the issue of the amount of policy limits available, the court concluded these were contract interpretation issues that did not require discovery of or determination of the facts in the underlying case.  So a stay was not appropriate on those grounds.

However, the appellate court held another factor had to be considered - the prejudice of the insured being compelled to fight a “two-front war.”  The court indicated this factor must be considered “every time an insured seeks to stay a declaratory relief action while the underlying action is still pending.”  Thus, the trial court was instructed to balance the insured’s interests in not fighting a two-front war against the insurer’s interest in not being required to continue to pay for the defense where it may not owe a defense and may not be able to recoup that money.  The appellate court noted this issue is “circumstance-specific” and suggested it could depend on factors such as:

• the anticipated duration of the underlying litigation,
• whether the insured has separate counsel in the two actions, and
• availability of other insurance to cover the costs of defense.

Certainly the appellate court’s consideration of the relative burdens/prejudice is based in part on that, in California, an insurer has a right to reimbursement from the insured and contribution from other insurers if the insurer defends or indemnifies and later is found to have had no obligation to defend or indemnify.  See Buss v. Sup. Ct.(1997) 16 Cal.4th 35, 48-49.

The appellate court directed the trial court, on remand, to balance “the prejudice to the insureds if they are required to litigate both cases at once against the prejudice that Great American will sustain if it is forced to continue to provide a defense until the underlying action is resolved.”  What may help Great American in this particular case is that there are other solvent insurers defending.  This certainly is not always the case.  The court also indicated the trial court should consider alternative methods to achieve a fair balance of the interests of insurer and insured – suggesting there may be legal issues that could be determined on demurrer or motion for summary judgment at no great expense to either party.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

The claim arose in 1995/1996 after the insured (Griffin Dewatering) fixed a manhole connection to the District’s main sewer line. Following the repair, sewage backed up into the a residence resulting in extensive damage. Griffin notified its insurer, who denied the claim on the basis of the policy’s Total Pollution Exclusion. During a meeting in May 1997, the insurer orally promised Griffin, in order to get the renewal business on the policy, that it would cover any “future” liability claims based on the release of sewage, even though the policy’s pollution exclusion excluded coverage for such claims.  

In 1999, the District settled the homeowners’ claim and sued Griffin and its insurer. The insurer again denied coverage for the claim. In 2000, the insured filed a bad faith complaint against the insurer based on breach of the insurance contract, but not breach of any oral promise. Shortly thereafter, the insurer agreed to defend its insured against the District’s lawsuit and settled the District’s claim against the insured. The insurer advised Griffin that the insurer would relinquish its right to seek reimbursement and would pay what the insured had incurred to date in seeking coverage, roughly $9,000.

In the meantime, there was little law on application of the pollution exclusion to incidents like this. That changed in August 2003, when the California Supreme Court issued MacKinnon v. Truck Ins. Exchg. (2003) 31 Cal.4th 635, in which the court held the pollution exclusion in a commercial general liability policy was limited to “conventional environmental pollution.” In MacKinnon, a landlord’s spraying of pesticide was found to not be excluded by the policy’s absolute pollution exclusion.

In Griffin’s bad faith case, in October 2005, the trial court concluded the pollution exclusion did not apply, the insurer had breached the contract, and the insurer’s denial was unreasonable as a matter of law because the scope of the total pollution exclusion was “unsettled” when coverage was denied. The case went to the jury which found for Griffin in the amount of $1 million in “Brandt” fees and costs incurred obtaining benefits due under the policy, and $10 million in punitive damages.

On appeal, the court candidly stated it had struggled with the case but ultimately determined the insurer had acted reasonably under the circumstances, and that the insured in any event had not been damaged as its defense costs and the District’s claim had been paid by the insurers.

As to whether the insurer’s conduct was in bad faith, the court noted there is the question of whether the insurer objectively acted reasonably, and the question of whether there was a genuine dispute (which the court did not address). The court dismissed the suggest that the rule of bad faith differed in first and third party context, holding that reasonableness is the standard in both. The court further explained that an insurer can take a position that benefits its own interest, as long as that position is not unreasonable.

The appellate court gave no weight to the May 1997 oral promise as a basis for recovery because Griffin had never alleged a cause of action based on breach of an oral promise although it had several opportunities to do so.

Interinsurance Exchange of the Automobile Club of Southern California issued a homeowners policy to Craig Reid providing liability coverage of $100,000 per occurrence.  The policy covered damages for bodily injury caused by an occurrence. An occurrence was defined as “an accident . . . which, during the policy period, results in bodily injury . . .”

During the policy period, Reid repeatedly hit and kicked Jonathan Delgado (a 17 year old), causing serious and permanent injury. Delgado sued Reid claiming in the alternative that the physical attack was unprovoked and without justification, and that the conduct was a negligent and unreasonable act of self defense. Interinsurance Exchange denied coverage and refused to defend Reid on the basis that there was no occurrence.

Reid and Delgado dismissed the intentional tort cause of action and settled. They stipulated that Reid negligently believed he was acting in self defense. They stipulated to judgment of $150,000. Reid paid $25,000 and assigned his claims against Interinsurance Exchange for a covenant not to execute on the rest of the judgment. Delgado then sued Reid’s insurer.

At the trial court level, the insurer successfully demurred.  Delgado filed a first amended complaint which alleged Reid’s actions were not willful or malicious, but overreactions to a threat of harm to him and his family, and thus an accident under the policy. The insurer again successfully demurred. No further leave to amend was granted as the court found the stipulation between the settled parties to be “contrived” to expose the insurer to liability and “disingenuous at best.” Delgado appealed. California’s appellate court reversed, holding the amended complaint alleged “nonintentional tortuous conduct” that were potentially an accident covered by the policy.

Before the California Supreme Court, Delgado argued that Reid’s actions were an accident because the actions were unexpected from the perspective of the injured party. The court rejected this argument, explaining that the injured party’s perspective is not taken into account when determining whether an event qualifies as an accident. If Delgado’s argument were accepted, any intentional act (even child molestation) would be rendered an accident simply because it was not foreseen by the injured party. 

The court also rejected Delgado’s argument that the insurer could have included language clarifying that accident was to be defined from the perspective of the insured, like when policies included in the occurrence definition “neither expected nor intended from the standpoint of the insured.” However, the court clarified that accident refers to the insured’s liability-causing conduct, and not the resulting damage or injury, the latter which was to be neither expected or intended by the insured.

Delgado argued the insured’s unreasonable, subjective belief in the need for self defense transformed an intentional act into an accident. The court also rejected this argument, holding that an insured’s mistake of fact or law does not transform a knowing and purposeful act into an accident. And the court rejected the suggestion that a provocative act by the injured party could convert the insured’s intentional physical response into an accident.

California’s highest court’s decision provides clarification to an issue that had been muddied by some recent decisions, including the appellate court’s decision in this case.

Request and Production of Electronically Stored Information. A party must specifically request the production of ESI and may specify the form in which it is produced. Consistent with the requirements applicable to other document requests, the Act requires the requesting party to specify what categories of information it is seeking when requesting production of ESI and may request to copy, test, or sample the responding party's ESI.  A party responding to a request for ESI should produce it in the form requested or, if the responding party objects or there is no form of production specified, produce the ESI in the form in which it is ordinarily maintained or in a reasonably usable form.

Inaccessible ESI. A party objecting to the production of ESI on the grounds that it is not reasonably accessible and would cause an undue burden must set forth a specific objection rather than boilerplate language. This requires a party to identify the types of ESI that are not reasonably accessible. On a motion to compel, the burden is on the responding party to demonstrate the undue burden or expense.

Cost Shifting. Generally, the party producing ESI must bear the costs of production. However, if a party objects and demonstrates that data is not reasonably accessible because of undue expense, a court may order production "for good cause" and shift the costs to the demanding party.

Safe Harbor for Destruction of ESI. There is a safe harbor provision.  The court "shall not impose sanctions on a party" for the destruction of ESI pursuant to a "routine, good faith" operation of a document/electronic information destruction policy. The provision does not alter a party's obligation to preserve ESI when it is on notice of litigation.

Claims of Privilege and Work Product. If a party producing ESI notifies the other parties that ESI subject to a claim of privilege or work product was inadvertently produced, the other parties shall either return the privileged information or present it to the court under seal for a determination of the privilege claim. A party challenging the assertion of a claim of privilege or work product cannot use or disclose the privileged information until the challenge is resolved.

Differences between the California and Federal Rules include that:

• In the federal system, the parties must meet at the beginning of the case to discuss discovery issues, including the preservation and production of ESI. The new California rules do not mandate these early meet and confer requirements or the related federal initial disclosure requirements. (However, many Judges require parties to meet and confer on discovery, especially prior to requesting court intervention.)
• California’s safe harbor is potentially broader (at least in theory) than its federal counterpart, which only mentions "lost" information. 

Michelle’s parents were divorced. She lived with her father, Charles, and grandmother, Evelyn. Her mother lived with a man (Barnett) that had a homeowners policy with Safeco. The claim by the injured boyfriend was tendered under Barnett’s policy.  Safeco denied, was sued, and was ultimately (years and a court decision later) found to be correct.  See Safeco Ins. Co. v. Parks (2004)122 Cal.App.4th 779 (“Safeco I”).

During that bad faith case, discovery was sought of other policies issued by Safeco “providing coverage for the nature and extent of the damages alleged.”  Safeco objected to the discovery. Parks did not move to compel.

Behind the scenes (the Safeco II court tells us), Safeco knew Miller lived with her father. Safeco’s unit manager had apparently instructed the adjuster to determine whether Michelle had other applicable insurance. The court noted that Safeco’s claim file did not show it searched for policies for the adults with whom Michelle resided “nor did Safeco interview Michelle’s father or grandmother to determine whether they had Safeco policies that might cover her claim.”  No mention is made of whether the claimant’s lawyer deposed the father or grandmother or conducted any discovery for policies other than sending the request to Safeco, which the lawyer failed to pursue.

As it turns out the grandmother owned the home in which Michelle lived and had a homeowners policy with Safeco. Once this came to Safeco’s attention, Safeco acted promptly and paid policy limits.  But too much water was already under the bridge. There had been a policy limits demand and an excess judgment.

The lesson in all of this? Follow the claim supervisor’s instructions.  Search for logical sources of insurance coverage for a claim. Document any search conducted. Hindsight is always 20/20.

(1) Does application of the sudden and accidental pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site?

The trial court ruled the relevant discharge was the discharge to the landfill, not the later discharge from the facility, following Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882. The appellate court reversed, and the Supremes agreed, holding that on these facts, relevant was the release of pollutants from containment not to the containment. This was because the State was being held liable, as the entity that sited, designed, built, and operated the facility with its evaporation ponds, for failing to contain the pollutants; it was not being held liable for pollluting the evaporation ponds.

The Supreme Court found the earlier landfill case (Standum) consistent because, there, the liability of the insured (a manufacturer of liquid wastes deposited on the soil at the landfill) was being held liable for disposing wastes at the landfill. The crucial issue for application of the coverage question, according to California’s highest court, was examining the basis for the insured’s liability.

(2) If pollution is caused by both non-covered events and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is not covered?

The Supreme Court agreed with the appellate court on this issue as well and disapproved of Golden Eagle Refinery Co. v. Associated Int. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184, to the extent those earlier decisions are incompatible.

In Stringfellow, there were many claimed causes of the pollution, including underground leaking, and two major overflow incidents, the latter which the State claimed were sudden and accidental. The State admitted it could not differentiate the damage caused by the different sources of contamination, nor could it differentiate the different work that had been necessitated by the pollution based on its cause.

Under the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94, where there is indivisible harm from both a covered and non-covered cause, the insured is entitled to full coverage. This is a unwelcome decision for insurers who argued, consistent with Golden Eagle, that the insured should have the burden of proving what part of the damage was caused by a covered event. Even so, the insured still has to prove there is a covered cause of the damage, and that the covered cause was a substantial factor in the property damage. The covered cause cannot be speculative or have only contributed trivially to the property damage. Furthermore, the Supreme Court explained, the insurer can counter the insured’s evidence of a covered cause that is a substantial factor in causing indivisible harm, by evidence that damages are divisible and that only a limited portion of those damages resulted from covered causes.

(3) If the insured takes remedial steps to prevent harm that might have been an accident and covered, is the remedial action covered?

In what may be the most surprising aspect of this decision, the Court ruled that there could be coverage for damage caused not by an accident but by deliberate preventative steps taken by the insured to avoid an accident (here, another flooding) to happen. Whether the action taken in fact avoided a covered event was a factual issue still to be tried.

The Court reasoned that policies cover costs to prevent harm, and that this result would be consistent with an insured’s reasonable expectations., and would encourage measures to mitigate and prevent damage. The Court cites no policy language in support of its holding which appears to emphasize public policy over contract interpretation.

The WCAB awarded death and workers’ compensation benefits to the claimants covered by Travelers’ policy. Travelers petitioned the WCAB pursuant to Section 3600(b) for a credit in the amount of the settlement against any future benefits Travelers would have to pay. The WCAB denied the petition because Tosco had waived Travelers’ right to the credit under Section 3600(b). Travelers filed a lawsuit alleging Tosco breached the policy by waiving Travelers’ right to the statutory credit without its consent. The district court ruled for Tosco and against Travelers on cross-motions for summary judgment.

Travelers, which had paid $1.4 million in benefits and anticipated paying $2.1 million more in future benefits, argued Tosco breached the policy’s excess payments and voluntary payments clauses. The excess payments clause provided Tosco was “responsible for any payments in excess of the benefits regularly provided by the workers compensation law….” Travelers argued Tosco’s waiver of the credit provided by Section 3600(b) and failure to reimburse Travelers for the amount of the credit was a breach of the excess payments clause because benefits “regularly provided” by the workers compensation law would be offset by the right to a credit under Section 3600(b). Tosco’s waiver forced Travelers to make “excess” payments since the workers’ compensation benefits Travelers was paying and would continue to pay would have been reduced by the amount of the settlement but for Tosco’s waiver.

The Ninth Circuit disagreed, holding Travelers was not making “excess” payments since the payments were “regularly provided” workers’ compensation benefits. The court reasoned that while the amount of the benefits might have been reduced due by the settlement had the credit not been waived, the waiver did not increase the workers’ compensation benefits beyond those “regularly provided” by law. Noting that the WCAB held an employer has the authority to waive a compensation carrier’s right to a credit under Section 3600(b), such credits are not always included when calculating “regular” benefits.

Travelers also argued Tosco’s waiver breached the policy’s “voluntary payments” clause which provided the insured could not “voluntarily make payments, assume obligations or incur expenses, except at [Tosco’s] own cost.” Travelers argued Tosco’s waiver was a voluntary act that assumed an obligation to pay workers’ compensation benefits despite the statutory right to a credit for the settlement. The court disagreed and held the voluntary payments provision did not apply to a “non-monetary requirement simply to refrain from doing something.” Thus, the court found the policy did not require Tosco to refrain from waiving Travelers’ right to a credit under Section 3600(b) and, thus, Tosco’s waiver did not breach the policy.

According to the tentative, the court is leaning towards confirming California follows an “all sums” approach to an individual insurer’s liability (once its policy is proven to provide cover) for property damage that continues over many years. The court is also inclined to rule the insured can “stack” the insurance policies. That is, the insured is permitted to stack policies across policy periods. The appellate court opined that FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4^th 1132(which held multiple policies’ occurrence limits could not be stacked) was not well-reasoned. While not criticizing the trial court for feeling it was bound by the FMC decision, the appellate court intends (unless persuaded otherwise) to hold FMC was wrong.

On other issues, the appellate court appears inclined to rule for the insurers. The court’s tentative indicates it agrees with the trial court’s finding of only one occurrence and that policy limits for multi-year policies were per occurrence not annual.

Meanwhile, briefing has been completed on other important pollution-coverage issues pending before the California Supreme Court in the Stringfellow case. Before the Supremes are the following issues: (1) Does application of the pollution exclusion clause turn on when waste material was discharged from the Stringfellow Acid Pits waste disposal site or when the waste was initially deposited into the site? (2) If pollution is caused by both uncovered intentional actions and covered accidents, does the insured have the burden at trial to prove that all of the damages it seeks to recover were caused by a covered event, or is there a duty to indemnify when two concurrent causes are responsible for an injury even if one of the causes is an uncovered act?

The Court of Appeal had rejected the insurers' contention, based on Standun, Inc. v. Fireman's Fund Ins. Co. (1998) 62 Cal.App.4th 882, that the relevant release for purposes of applying the "sudden and accidental" pollution exclusion was the deposit of waste into the site. The Court distinguished Standun because the insured in Standun was held strictly liable as a waste generator that purposefully and regularly disposed of waste at the site.  Here, the court held, the State's liability for the negligent design, construction and operation of the Stringfellow Site shifted the focus from the initial deposit to subsequent releases from the site.

The Court of Appeal also concluded Golden Eagle Refinery Co. v. Associated Internat. Ins. Co. (2001) 85 Cal.App.4th 1300 and Lockheed Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 184 are incompatible with the California Supreme Court's decision in State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94. The court held, applying Partridge, that the State would be entitled to full coverage even if damage was partially caused by an excluded event and the damage was indivisible.

We will report further as these courts issue final rulings on the various aspects of the case.

The dispute between the LA Unified School District (the “District”) and general contractor Hayward Construction Company and Hayward’s bonding company Great American was over the scope of an emergency contract Hayward entered to finish construction of an elementary school. Most of the appellate court’s opinion addresses whether Hayward plead enough to pursue claims against the District for rescission and breach of contract for misrepresentation or nondisclosure of material facts, and the impact of the trial court’s rulings on Great American. The trial court’s rulings dismissing Hayward’s claims were reversed in all respects.

On the issue of interpretation of the “completion contract” between Hayward and the District, the trial court had ruled the contract was not ambiguous.  Hayward submitted extrinsic evidence for the court to consider on a provisional basis, including documents to which the contract referred and the parties’ discussions about the scope of the work contemplated by the contract, to show the contract was ambiguous and could be interpreted as Hayward advocated. The trial court ruled the parole evidence rule precluded such evidence because the evidence was being offered to alter, vary or add to the terms of an integrated contract.

The appellate court disagreed, finding the record did not indicate the court had considered the extrinsic evidence. Plus, “the contract itself is not so clear and explicit that it is unambiguous on its face.” The court reviewed the two step process the trial court should have employed:

• First, the court should have provisionally received the evidence of the parties’ intentions to determine if the contract could be reasonably susceptible to an interpretation urged by that party. 
• Second, if the contract was reasonably susceptible to that interpretation, then the evidence should be admitted.

The case was reversed and remanded for such a determination.

Thorpe Insulation Company was a distributor and installer of asbestos insulation products. Thorpe was sued in thousands of personal injury lawsuits. Thorpe’s insurance policies covered both products/completed operations claims (“products claims”) and non-products claims (“operations claims”). All of its policies’ aggregate limits applied to products claims, but not to operations claims.

In 1978, Thorpe began tendering the asbestos lawsuits to its primary insurers. In 1984, Thorpe and ten of its primary insurers entered into a Claim Handling and Settlement Agreement (the “1984 Agreement”). The stated purpose of the 1984 Agreement was to “clarify among” the parties to the agreement “the apportionment of defense and indemnification of Thorpe[.]” The 1984 Agreement provided, among other things, that it should not be construed “as a policy interpretation, and shall not be used in any Court … to interpret the obligations under general liability or other policies” and was “without prejudice to later assertion by any such parties of claims against each other … pursuant to the several reservations of rights … contained in this Agreement.” 

Thorpe’s primary insurers charged all settlement payments against the policies’ aggregate limits, treating the claims as products claims. As the primary policies exhausted, Thorpe began tendering claims to its first level excess insurers. In 1998, seven of Thorpe’s first level excess insurers entered into an Interim Excess Insurance Claims Handling Agreement (the “1998 Agreement”). The stated purpose and terms of the 1998 Agreement were similar to those of the 1984 Agreement. The 1998 Agreement also considered an excess insurer’s policy to be implicated when the underlying primary policy is “contend[ed to] have been exhausted.” Thorpe was not a party to the 1998 Agreement, but received a copy and advised its first level excess layer insurers that it reserved all rights under their policies.  

Thorpe’s first level (and upper level) excess insurers charged payments under their policies against aggregate limits, again treating all claims as products claims. When Thorpe had nearly exhausted all of its $180 million in aggregate limits, it sued its insurers seeking a declaration that the insurers still owed defense and indemnity in connection with claims that Thorpe now contended were operations claims and not subject to aggregate limits.

The insurers argued that by accepting payment of the policies’ aggregate limits on a layer-by-layer basis over several decades, Thorpe understood that all of the underlying claims were products claims under the terms of the policies. Thorpe filed a motion in limine to exclude evidence of the parties’ post-policy course of performance. The trial court granted the motion on two grounds: (1) course of performance evidence is only relevant if it predates a controversy and the 1984 Agreement indicated the existence of a controversy, and (2) such evidence is relevant only if it sheds light on the intent of the parties at the time of contracting and the individuals who negotiated the subject policies were not the same as those who performed under the policies.

The insurers filed a petition for writ of mandate. The court of appeal issued an order to show cause to consider whether the trial court erred in concluding the policies’ claims handling history was irrelevant to the issue of policy interpretation.  

Preliminarily, the appellate court concluded that course of performance evidence is generally admissible to interpret insurance policies, even standard form insurance policies. The court also concluded the admissibility of course of performance evidence does not require the individual performing under the contract to be the individual who negotiated the contract. 

However, the appellate court held course of performance evidence is only relevant to the issue of contract interpretation when the performance is attributable to the parties’ understanding of the contract. The court determined that in the case before it, the 1984 and 1998 Agreements, not the policies, governed the bulk of the parties’ performance. Among other things, the court found particularly relevant the fact that Thorpe obtained excess coverage proceeds because the insurers to the 1998 Agreement had agreed among themselves to make those payments while reserving rights to subsequently contend the payments were not, in fact, due under their policies. 

The court concluded the trial court did not err in excluding evidence of performance following the 1984 Agreement. But the court left open the possibility that pre-1984 course of performance evidence and course of performance evidence as to excess insurers not parties to the 1998 Agreement could still be admissible.

Qualcomm was sued in class actions relating to asserted rights to unvested company stock options. Qualcomm incurred in excess of $25 million defending against and resolving the lawsuits. Qualcomm tendered the claim under its director and officers insurance. Its primary insurer had $20 million in limits for loss, defined as including damages, judgments, settlements and defense costs. The primary insurer disputed coverage. Qualcomm and its primary insurer mediated and settled for $16 million. Qualcomm then sued London, its excess insurer, for declaratory relief and breach of contract for the remaining $9 million.

On demurrer, London moved to dismiss Qualcomm’s complaint for failure to state a cause of action on the basis of the excess policy’s “maintenance of underlying limits” and “exhaustion” clauses. Qualcomm argued in response that: (1) the maintenance of underlying limits clause was ambiguous; (2) the issue had been decided by a 1928 decision out of New York and a 1967 California case (which London was “chargeable” with knowing about) which cases held that when a primary insurer settles for less than policy limits, the excess insurer has to pay the losses that exceed the primary’s limits, and (3) it would be against public policy to rule otherwise because it would discourage settlements and result in a windfall for an excess insurer. The trial court sustained the demurrer.

On appeal, the court found no ambiguity in the exhaustion clause, as the appellate court referred to the “have paid or have been held liable to pay” language in the policy [also often called the attachment clause]. Excess insurance is understood to be secondary insurance, the court explained. Insurance policies should be interpreted according to their language. The court cannot rewrite the policy. The appellate court found the phrase “have paid … the full amount” of underlying limits could mean only actual payment of the $20 million of primary limits. The “have been held liable” language had to mean something different than actual payment or it would be redundant. Even interpreting that language in Qualcomm’s favor, as including a situation where the insurer agrees to pay policy limits as part of a settlement (rather than requiring an adjudication), the language still required full payment of policy limits.

Earlier decisions upon which Qualcomm relied, Home Indem. Co. v. Mission Ins. Co., 251 Cal.App.2d 942 (1967) and Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928), were neither precedent nor persuasive. The appellate court disagreed with the Zieg court’s willingness to put public policy considerations before policy language and its strained interpretation of the word “payment.” Both California and out of state authority disagree with the Zeig approach to contract interpretation. Home, the appellate court held,was consistent with the appellate court’s reasoning but the case’s result was based on disparate facts and circumstances.

The appellate court also ruled that public policy considerations, including those favoring settlements, could not supersede plain and unambiguous policy language. The court was “bound” by the policy’s language.

The appellate court did not address the maintenance of underlying limits requirement in the excess policy, which was another basis upon which the trial court had found in London’s favor.

Plaintiff Augusto Ticconi alleged he applied for a policy of short term health and accidental death insurance from Blue Shield of California Life and Health Insurance Company and truthfully answered all health questions on the policy application. Blue Shield issued the policy to Ticconi effective January 1, 2004 with a one year duration. Ticconi’s application was not attached to or endorsed onto the Policy when issued. Thereafter, Ticconi required “significant health care services” totaling over $100,000. After Ticconi submitted his bills for payment, Blue Shield rescinded the Policy on the basis that Ticconi has made material misrepresentations in his application for insurance.

In his class action lawsuit against Blue Shield, Ticconi alleged Blue Shield had a practice of issuing policies without attaching or endorsing a copy his application in violation of Insurance Code §§ 10113 and 10381.5, and rescinding policies in violation of those statutes, which conduct constituted an unfair and unlawful business practice in violation of the UCL.

Ticconi moved for certification of a class defined as all California residents issued health insurance since May 2001 by Blue Shield and who thereafter had the policy rescinded by Blue Shield based upon alleged misrepresentations contained in the policy application.  Blue Shield opposed the motion on the basis, among others, that there was a lack of community-of-interest required for class certification. The trial court denied Ticconi’s motion for class certification on the basis that Blue Shield’s defenses of fraud and unclean hands to Ticconi’s and other insureds’ claims raised individual factual issues  and would require separate trials on the merits of each individual’s case based on its unique facts.

In reversing the trial court’s decision, the court of appeal noted that the unlawful conduct alleged by Ticconi was “postclaims underwriting.” The court found such practice to be “categorically prohibited” by Insurance Code § 10384. The court also stated that the consequence for failing to comply with Insurance Code §  10113 and 10381.5 is that the insured is not bound by statements made in the application and the insurer claim misrepresentation or omission based on the unattached and unendorsed application. The court further held that conduct in contravention of Insurance Code §§ 10113, 10381.5 and 10384, constitutes a predicate unlawful practice sufficient for a UCL cause of action. 

The court of appeal found Ticconi’s defined class raised factual and legal issues relevant to Blue Shield’s liability and universal to class members, thus common issues of law and fact would predominate.  The court found that equitable defenses of unclean hands were not available in a UCL action based on violation of a statute, because allowing such a defense would “sanction the defendant for engaging in an act declared by statute to be void or against public policy.” Fraud was not available to Blue Shield as a defense to the UCL cause of action because Blue Shield failed to attach or endorse the insureds’ application to the policy.  Thus, it was error for the trial court to weigh the legal and factual issues associated with such defenses in denying Ticconi’s motion for class certification.

The case was remanded to the district court with instructions. The appellate court noted there were other issues to consider as to whether the class should be certified, including whether Ticconi’s claims were typical and whether he could adequately represent the class, especially since Ticconi’s policy had been reinstated and medical bills paid.  

The California Supreme Court denied review (3/26/08).

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.

Qualcomm v. Broadcom was a patent infringement case tried in the U.S. District Court in 2007. Broadcom filed a counterclaim alleging Qualcomm's patents were not enforceable due to waiver.  The waiver defense was predicated on Qualcomm's participation in a Joint Video Team ("JVT") in 2002 and early 2003 when the JVT was setting standards for the technology at issue. Qualcomm's participation in setting the standards would have required it to disclose certain patents and prohibited Qualcomm from suing for infringement of those patents.

Broadcom sent discovery seeking information about Qualcomm's participation in the JVT.  Qualcomm's written responses did not raise any issues.  However, witnesses produced for deposition as most knowledgeable about Qualcomm's participation in the JVT were not adequately prepared by Qualcomm for their depositions and Qualcomm did not search their computers for relevant emails or documents in preparation for the depositions (or to respond to the written discovery requests).  Consequently, the witnesses testified falsely about Qualcomm's involvement in the JVT. One denied any involvement and the other asserted Qualcomm participated only in late 2003 and after.

At Trial, Qualcomm aggressively advocated the position it did not participate in the JVT during a critical period.  While preparing one of Qualcomm's witnesses for Trial, a junior associate found 21 emails on the witness' computer that had not previously been produced.  Some of the emails were sent to JVT email groups and dated back to 2002.  Qualcomm's Trial team discounted the impact these emails, concluding the emails were not responsive to Broadcom's discovery requests, and decided not to produce them.  Counsel did not investigate further to determine if other emails had not been produced.

In seeking to avoid admission of certain evidence, Qualcomm's attorneys affirmatively argued there were no emails sent to the JVT email groups. Trial counsel did not elicit from witnesses information that might have revealed the emails. However, during Broadcom’s cross-examination, the witness disclosed the existence of the emails.  Thereafter, Qualcomm produced the emails during a lunch break after the witness testified.

During post-Trial proceedings, the Judge found Qualcomm and its counsel had acted inequitably by concealing its patents from the JVT and later concealing its involvement in the JVT from Broadcom, the Court, jury and opposing counsel during litigation. Finding the case was “exceptional” within the meaning of the patent laws, the Trial Judge granted Broadcom's motion for attorneys' fees and court costs, awarding Broadcom $8.5 million in fees and costs, plus interest.

Qualcomm's attorneys continued to argue post-Trial that the 21 emails were not responsive to Broadcom’s discovery requests. However, eventually, Qualcomm agreed to search the current and archived emails of five Trial witnesses, and thereafter admitted there were thousands of responsive documents that had not been produced. Qualcomm conceded some of the documents contained facts inconsistent with Qualcomm's position at Trial and in the post-Trial proceedings.   Qualcomm later expanded its search to the email accounts of 21 employees and found a total of 46,000 emails (over 300,000 pages) that had been requested by Broadcom but not produced.

Broadcom brought a motion for discovery sanctions against Qualcomm and its attorneys that was referred to Magistrate Judge Major. Judge Major concluded there was "clear and convincing" evidence Qualcomm "intentionally" engaged in conduct designed to prevent Broadcom from learning about Qualcomm’s participation in the JVT. Judge Major imposed over $8.5 million in attorneys fees and costs as sanctions on Qualcomm, subject to a credit for amounts paid on the attorneys fee award issued by the trial court. Judge Major sanctioned six attorneys.  In sanctioning a junior attorney, the Judge suggested that a junior attorney with concerns about a client’s search for responsive documents should take his or her concerns to a more senior attorney who, in turn, would ultimately be obligated to withdraw if the client refused to conduct an adequate search for responsive documents. The Judge also noted that junior attorneys need to be properly supervised and trained for the tasks to which they are assigned.

The California Court of Appeal (Second Appellate District [Los Angeles]) in 2007 ruled that Truck Insurance Exchange was wrong in asserting that its payment of claims had exhausted its policies’ occurrence limits because, the court held, the occurrence under Truck’s policies was the injurious exposure to asbestos, not the manufacture and distribution of products containing asbestos. London Market Insurers v. Superior Court (Truck Ins. Exchg.) (2007) 146 Cal.App.4th 648 (review denied). Truck’s position had been that all asbestos-related claims in any given year arose from a single occurrence because all the claims had the same underlying cause, i.e., “the design, manufacture and distribution by Kaiser and its subsidiaries of asbestos-bearing products.” The appellate court also concluded that, given its ruling, it could not make a decision on the number of occurrences based on the record before it and remanded the case to the trial court for further proceedings.

On remand, the trial court held that, based on the policies’ language and in light of the stipulated facts, Truck failed to prove the claims could be aggregated and, thus, each claim of asbestos bodily injury was a separate and distinct occurrence under Truck's 19 policies.

Truck’s policies had two different occurrence definitions and aggregating clauses. From 1964 to 1974 the policies had a “one lot” clause which provided that “all damages arising out of one prepared or acquired lot of goods or products” arose out of one occurrence. Truck argued that under this provision, claims from exposure to products produced at the same manufacturing facility should be deemed one occurrence. Based on the appellate court’s decision, the trial court held the focus had to be on the exposure rather than the manufacturing process. Truck had stipulated that the number of product lines was not known and that individual claims could not be connected with particular product lines. Therefore, Truck failed to meet its burden to demonstrate that the “one lot” clause aggregated particular claims.

From 1974 to 1983, the Truck policies had a “premises deemer” clause which provided that exposure to substantially the same general conditions “at or emanating from each premises location” was one occurrence. Truck argued all claims were one occurrence as they arose from exposure to products produced at the same Kaiser manufacturing facility or, alternatively, because them were due to the same corporate decision (or multiple corporate decisions from the same location) to place asbestos in products.  The trial court was not persuaded. Relying on Judge Ira Brown’s decisions from the coordinated asbestos proceedings in 1990, the court held that the premises location in a deemer clause could not refer to the plant from which the products were shipped or distributed since that is not where the exposure to asbestos occurred. Furthermore, Truck stipulated that it could not connect the claimant’s injuries to a particular plant. As to the corporate decision argument, the appellate court already decided that was not the correct focus, since it was not the exposure to asbestos. Besides, there was no evidence of one decision to incorporate asbestos into all Kaiser products.

In De Bruyn, the California appellate court (Second Appellate District [Los Angeles]) ruled that a water damage exclusion that excepted out coverage for sudden and accidental release of water, did not cover the resulting mold. That is because the exclusion “plainly and precisely” indicated that: “We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot, even if resulting from exceptions . . .” In addition, the policy had a specific exclusion for rust, mold, fungus, or wet or dry rot.

The court held that Fire Insurance Exchange’s exclusion of coverage for mold did not violate Insurance Code § 530 or the efficient proximate cause doctrine in California. The efficient cause doctrine provides that if there is both a covered and non-covered cause of the loss for which the insured seeks coverage, there is coverage for the claim. Calif. Ins. Code § 530; Garvey v. State Farm Fire & Cas. Co. (1989) 48 Cal.3d 395, 403. In California, insurers are not permitted to “contract around” this rule. See, e.g., Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446. In other states, courts recognize that an insurer can, if it does so clearly and explicitly, contract that despite the fact that one cause of the loss may be covered, if the other cause is not covered, there is no coverage. See, e.g., Arizona: Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. Ct. App. 1991), review denied, 811 P.2d 1081 (Ariz. 1991); Utah: Alf v. State Farmer Fire & Cas. Co., 850 P.2d 1272 (Utah 1993).) See, also, the De Bruyn court’s footnote 3.

In De Bruyn, the California appellate court again confirms that an insurance company is permitted to provide coverage for some but not all manifestations of a loss, as long as the company does so in manner that communicates the information and does not violate public policy. Accord, Julian v. Hartford Und. Ins. Co. (2005) 35 Cal.4^th 747 (insurer can exclude coverage for certain perils, i.e., weather conditions and landslides, even if the policy provides that it will cover the results of other weather conditions; the policy clearly communicated that the insurer intended to exclude coverage for rain that induced a landslide).

In De Bruyn, the California appellate court (Second Appellate District [Los Angeles]) ruled that a water damage exclusion that excepted out coverage for sudden and accidental release of water, did not cover the resulting mold. That is because the exclusion “plainly and precisely” indicated that: “We never, under any circumstances, cover rust, mold, fungus, or wet or dry rot, even if resulting from exceptions . . .” In addition, the policy had a specific exclusion for rust, mold, fungus, or wet or dry rot.

The court held that Fire Insurance Exchange’s exclusion of coverage for mold did not violate Insurance Code § 530 or the efficient proximate cause doctrine in California. The efficient cause doctrine provides that if there is both a covered and non-covered cause of the loss for which the insured seeks coverage, there is coverage for the claim. Calif. Ins. Code § 530; Garvey v. State Farm Fire & Cas. Co. (1989) 48 Cal.3d 395, 403. In California, insurers are not permitted to “contract around” this rule. See, e.g., Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446. In other states, courts recognize that an insurer can, if it does so clearly and explicitly, contract that despite the fact that one cause of the loss may be covered, if the other cause is not covered, there is no coverage. See, e.g., Arizona: Millar v. State Farm Fire & Cas. Co., 804 P.2d 822 (Ariz. Ct. App. 1991), review denied, 811 P.2d 1081 (Ariz. 1991); Utah: Alf v. State Farmer Fire & Cas. Co., 850 P.2d 1272 (Utah 1993).) See, also, the De Bruyn court’s footnote 3.

In De Bruyn, the California appellate court again confirms that an insurance company is permitted to provide coverage for some but not all manifestations of a loss, as long as the company does so in manner that communicates the information and does not violate public policy. Accord, Julian v. Hartford Und. Ins. Co. (2005) 35 Cal.4^th 747 (insurer can exclude coverage for certain perils, i.e., weather conditions and landslides, even if the policy provides that it will cover the results of other weather conditions; the policy clearly communicated that the insurer intended to exclude coverage for rain that induced a landslide).

The insureds were LA Sound, an audio equipment company, and its two officers and directors. At the time of renewing their insurance policy with St. Paul, the insureds (through their broker) answered an application indicating they were not involved in any joint ventures or in a labor interchange with any other business or subsidiary. In fact, the insureds had been involved for six months in a joint venture with Hollywood Sound to produce, market and sell audio and speaker products. The joint venture was a new corporation by the name of LSY Trading Development, Inc.

The joint venture stalled and Hollywood Sound sued the insureds and LSY for unfair competition (trademark infringement).

St. Paul agreed to defend LA Sound and its officers/directors, but only in their capacity as such, under a full reservation of rights. St. Paul specifically disclaimed any obligation to defend LSY and its (same) officers and directors. St. Paul agreed to pay the portion of the defense costs being incurred by LA Sound. St. Paul reserved the right to get the money back.  Thereafter, St. Paul settled the claim against LA Sound and its officers/directors, and the case proceeded against LSY and its (same) officers/directors until resolved.

Following conclusion of that lawsuit, LA Sound sued St. Paul for breach of contract and bad faith and St. Paul counterclaimed for rescission and reimbursement of amounts paid on LA Sound’s behalf. Trial resulted in a decision for St. Paul in all respects. The appellate court on review agreed there were grounds for rescission of the policy. Misrepresentations had been made to St. Paul about whether there was a joint venture or labor agreement. The omitted information was material to St. Paul’s assessment of the risk, underwriting, and determination of the premium to charge.

The appellate court also found St. Paul was entitled under Buss v. Sup. Ct. [16 Cal.4^th 35 (1997)] to be reimbursed for defense costs and the settlement paid on LA Sound’s behalf. However, the appellate court found St. Paul had not met its burden of showing by a preponderance of the evidence an allocation as between LA Sound and its two officers/directors. It was not fair, according to the court, to allocate all amounts to the insureds jointly and severally as there was no showing each faced the same liability and received the same benefit from the payments. As the court explained:

"[I]n the absence of proof, we decline to assume that every dollar St. Paul spent on the underlying action benefited all three insureds. Whether this is true depends on a detailed analysis of how the defense costs were spent – did any discovery or motion practice benefit one insured alone, or did all litigation costs benefit all insureds equally? It also depends on a detailed analysis of how the indemnity costs were spent – did the insureds face the same amount of liability , and was the liability settled on identical terms?" *15.

Under Buss the burden was on the insurer to prove the right to reimbursement and allocation, which the court found appropriate since the insurers were in the "best position to monitor the underlying litigation, track expenses, and allocate policy benefits among insureds.” Id.

Thus, the case was remanded for further determination on the proper allocation of restitution based upon the “respective benefits received by each” of the insureds under the rescinded policy.

However, the Second District of the California Court of Appeal has since declared that the Superior Court erred in failing to apply the law of California, which takes a broader view of the duty to defend than Texas. Writing for the court, Justice Croskey declared that Civil Code Section 1646, which requires that a contract be interpreted according to the law and usage of the place where the contract is to be performed, compelled the application of California law, as California was the state where RLI would be obligated to perform its defense obligations under the policies and that the contracting parties knew this at the time that the policy was issued as the RLI policy includes several endorsements reflecting the existence of a covered risk located in California. The court then went on to hold that RLI’s duty to defend was triggered under California law.

This focus on the place of performance is not unheard of. For instance, New Jersey courts have applied different choice of law rules in pollution cases depending on the nature of the underlying issue and have adopted the current domicile of the insured as applying to issues involving the obligation to give timely notice since the insured was located in that jurisdiction at the time that the notice obligation arose. See . Unisys Corp. v. INA, 154 N.J. 217, 712 A.2d 649 (1998). On the other hand, the California court’s approach seems more of a fig leaf for adopting a place of the tort approach since construing the “place of performance” as the jurisdiction where the insurer is required to provide a defense necessarily means that the jurisdiction where the underlying litigation is pending will be the state whose law controls. As far as the author knows, this approach is unprecedented (although hardly the first time that California courts have leaped into the abyss).

The opinion is also worthy of note in that it was written by Justice Croskey, whose views on insurance are often viewed as being close to gospel in California. Of late, however, Croskey has authored several opinions that are far from mainstream.