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

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.

On appeal, the Ninth Circuit, considered two questions in determining whether the insurance contract should cover the loss: first, which single act or event is the efficient proximate cause of the loss; and second whether the efficient proximate cause of the loss is a covered peril, noting that the efficient proximate cause is the predominant cause which sets into motion the chain of events producing the loss. The Ninth Circuit agreed with the district court’s conclusion that, based on an expert’s undisputed finding that “the excessive ice formation . . . [was] the result of a poorly installed vapor retarder,” and the policy, which precluded coverage for “loss or damage caused by or resulting from . . . [f]aulty, inadequate or defective . . . workmanship,” the faulty workmanship was the efficient proximate cause of the facility’s excessive ice formation, and that faulty workmanship is not a “covered peril” under the policy.

The policy did provide coverage, however, if faulty workmanship led to a “covered cause of loss.” Thus, even though the efficient proximate cause of Terminal Freezers’ loss was a poorly installed vapor retarder, Terminal Freezers could recover if the policy covered whatever resulted from the faulty vapor retarder--in this case, ice. While the policy specifically excludes ice as a covered cause of loss, it does not define the term. Terminal Freezers argued, relying on the canon of noscitur a sociis, a rule of interpretation that states that the meaning of unclear language in a contract or other legal document should be construed in light of the language surrounding it, that the policy only precludes ice in its “natural” form because the words surrounding “ice” in the policy - rain, snow, sleet, sand, and dust - are “natural” elements.

Following Washington’s rules to interpret the terms of an insurance contract, the Ninth Circuit declined to resort to canons of construction when the language of a contract is clear. If a term is undefined, Washington courts rely on the term’s ordinary meaning, and may look to dictionary definitions to determine that ordinary meaning. The Ninth Circuit determined that, as commonly used, and as defined in a dictionary, ice is “water reduced to the solid state by cooling . . . .” Apparently finding no support for Terminal Freezers’ contention, the Ninth Circuit noted that “[t]hat is the end of the inquiry.” Declining to modify the insurance contract to create ambiguity where none exists, the Ninth Circuit affirmed the district court’s finding of no coverage and grant of summary judgment to U.S. Fire.
 

The case arose after the insureds noticed a musty odor and a “mushy” floor in a bathroom of their home. The insureds hired a contractor to remodel the bathroom who later testified at trial that a leak had occurred in the bathroom shower that permitted water to penetrate the area under the shower, causing the sub-floor to sustain dry rot. The insureds made a claim under their homeowners’ policy to recover the cost of repairs to the bathroom; the insurer denied the claim on the basis that the damage was not covered under the terms of the policy. The insureds then filed an action against the insurer for breach of the policy.

Relying on evidence that the structure under the shower membrane had deteriorated to the point that it did not provide structural support, the trial court concluded that the damage caused to the structure was so severe that it constituted a “collapse” covered under the terms of the Supplementary Coverages – Section I of the policy. Having made that finding, the trial court then determined that a provision of the “Losses Not Covered” section for “continuous or repeated seepage or leakage of water” excluded coverage. However, the trial court determined that there was coverage under an endorsement regarding fungi, wet or dry rot, or bacteria that was not subject to any exclusion, but limited the insureds’ recovery under the coverage to $5,000 in accordance with the supplemental coverage limits.

After addressing the relevant policy terms, and employing Oregon’s rules to interpret the terms of an insurance contract, the appellate court held that the trial court, based on the circumstances that it found, correctly ruled that the exclusion for “continuous or repeated seepage or leakage of water” excluded coverage under Section I of the policy. The appellate court also held, however, that the trial court had ruled incorrectly in finding coverage under the endorsement.

The appellate court found that language in the Endorsement - Supplemental Coverage section of the policy predicates coverage on whether the loss covered by the supplemental coverage is a “covered cause of loss.” The appellate court held that the cause of loss in this case was not a covered cause but an excluded cause, and reversed the trial court’s ruling by holding that the endorsement regarding fungi, etc., was also subject to the exclusion for “continuous or repeated seepage or leakage of water.”
 

Shilo had contracted with the insured, James Grant, to install various granite components in its hotel. However, Shilo initiated arbitration proceedings after it determined that the granite tub surrounds had not been properly installed. The arbitrator agreed that much of Grant’s work was “defective and faulty” and that water intrusion had occurred, but he also found the evidence insufficient with respect to the scope of water intrusion. The arbitrator awarded Shilo damages for the cost to remove and replace the improperly installed granite.

After converting the arbitration award into a judgment, Shilo filed a Writ of Garnishment in an attempt to collect insurance proceeds from Maryland Casualty Company, which had insured Grant. However, upon Maryland Casualty’s Motion for Summary Judgment, the Court agreed that the only damages awarded to Shilo in the arbitration fit within the exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.”

Although Shilo has filed a notice of appeal to the Ninth Circuit and, therefore, the ultimate result in this case could change, the District Court’s decision serves as a reminder of the importance of distinguishing between mere construction defects on one hand and actual damage caused by construction defects on the other. Where no resulting damage is proven, the coverage terms and exclusions of many general liability policies may be sufficient to defeat coverage. Moreover, even when resulting damage is proven, coverage may be limited to the cost to repair the resulting damages. Because correcting defects is often more expensive than repairing damages, this limitation can be significant and should not be overlooked.

In Campbell v. Ticor Title Ins. Co., 2009 Wash. Lexis 624 (Supreme Court of Washington, June 18, 2009), a parcel of land was divided into three lots, designated lots A, B, and C. In 1996, a pedestrian easement was granted, benefiting Lot C and burdening Lot B, for access to a lake. In 2001, the Campbells purchased Lot A. A 2002 survey revealed that the easement for lot C actually ran through a house on Lot B. When Edwards purchased Lot C in 2004 or 2005, the problem was discovered, and Edwards initiated a suit against the Campbells seeking a reformation re-drawing the easement so as to burden Lot A and be usable. The Campbells tendered defense of the Edwards suit to Ticor Title Insurance Company (“Ticor”), and Ticor denied coverage. The Court ruled that two exclusions, one for easements not disclosed by the public records, and another for “[d]efects, liens, encumbrances, adverse claims or other matters . . . attaching or created subsequent to Date of Policy,” clearly excluded coverage and there was no duty to defend.

What we find interesting about this case is not so much the unanimous decision on no duty to defend, as unusual as that might be, but the Court’s analysis and use of evidence apparently outside the complaint in reaching its conclusion. It is further interesting that the Court would accept review of an obscure title insurance case to reinforce or restate its duty to defend analysis, including the seemingly more stringent standard established in Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 164 P.3d 454 (2007): “’[T]he duty to defend is triggered if the insurance policy conceivably covers the allegations in the complaint, whereas the duty to indemnify exists only if the policy actually covers the insured’s liability.’ Id. at 53. An insurer must defend unless it is clear from the face of the complaint that the claim is not covered by the applicable policy. Id. ‘[I]f it is not clear from the face of the complaint that the policy provides coverage, but coverage could exist, the insurer must investigate and give the insured the benefit of the doubt that the insurer has a duty to defend.’ Id.” (Emphasis in original.)

Curiously, the Court does not reference much of the language of the complaint itself, and it seems to rely on matters determined by further investigation to deny the duty to defend. Regarding the first exclusion at issue, the Court states: “Reading the plain language of the title policy’s exclusions, the fact that no record here showed any easement affecting Lot A undermines the Campbells’s duty to defend claim.” The Court then states that the second exclusion is “relevant because the easement dispute arose after the date of the policy, once a survey revealed that the property line between lots A and B ran through the Gromo house and the easement was intended to run along that property line.”

The rule in Washington is essentially that if the complaint is ambiguous, the insurer is required to investigate further to determine whether there is a duty to defend. It also appears clear, however, e.g., Truck Ins. Exch. v. VanPort Homes, Inc. 147 Wn.2d 751, 58 P.3d 276 (2002), that an insurer is not allowed to use further investigation to deny the duty to defend. It appears when a complaint is ambiguous, and further investigation establishes no coverage, under this case analysis, an insurer should be able to deny the duty to defend. That is not, however, explicitly stated.

Using New Jersey as an example of a state that might interpret the insurance policy before it differently due to that state’s rules favoring “broad reading of coverage provisions,” the Dewsnup Court wrote that “the Oregon rules of interpretation, of course, are different, requiring construction against the insurer only in the case of unresolvable ambiguity.” While this statement is helpful because it clarifies that ambiguity, by itself, does not require interpretation against the insured, the Dewsnup case is even more helpful for the fact that the court did not even reach an ambiguity analysis. Instead, the Court held that the undefined policy term “roof” is unambiguous in the first place.

In relevant part, the policy at issue in Dewsnup excluded from coverage water damage to the interior of a dwelling or personal property unless the water damage occurred as a result of damage to the “roof” caused by a windstorm or a falling object. As part of a roof repair, the insureds had removed the roof’s wood shakes and physically attached to the roof several sheets of plastic as a temporary cover. After a storm ripped off one sheet of plastic, the insured went on the roof to replace it. However, the insured “lost his footing and fell off the roof, ripping off all the sheets of plastic as he fell.” As a result, the rain from the storm entered the home through the joints in the plywood sheathing “causing considerable damage to the interior of the house and to plaintiffs’ personal property.”

The insureds argued that their loss should be covered because the plastic sheets, which were a part of the roof, were damaged by a windstorm and/or a falling object (the insured). The Court consulted a dictionary and rejected this argument, concluding “that the term ‘roof’ has an unambiguous meaning, and that it does not include the tarps that plaintiffs placed over the house while the shakes were being replaced.” Most refreshing was the Court’s resort to old-fashioned common-sense, writing: “If someone attempted to sell a house that was covered by such a plastic sheet, we doubt that any reasonable buyer would believe that he or she was buying a house that had a ‘roof.’ Most likely, the buyer would say, ‘Where’s the roof?’” The Court’s use of common-sense reasoning should lend some support to insurers using the same tactic in face of insureds’ arguments that undefined policy terms are unambiguous.

While some may criticize Hennessy as a liberal interpretation of “collapse” coverage, see dissenting opinion by Judge Landau (“I respectfully disagree with the majority that what is essentially a crack between a piece of stucco and the building to which it is adhered is a ‘collapse’ of that stucco”), the decision also represents a substantial victory for insurers with respect to the scope of coverage. Specifically, whereas the trial court had awarded the insured $98,859.03 to entirely replace the failed stucco system, the Court of Appeals reduced the award to $2,469.68 to reflect only those costs directly associated with repairing the “collapsed” portion of the stucco. Even though the parties had agreed that it was “reasonable and prudent” to replace all of the stucco that “was no longer attached to the underlying walls,” the court found that no “collapse” had occurred where the stucco was no longer properly adhered to the building but “had not moved or fallen.” Thus, repairs to those areas of the building were not necessitated by any “collapse” but by the hysteresis (grout decay) that had caused the adhesion to fail.

Prior to the Hennessy decision, insureds repeatedly argued in Oregon that once coverage is found the insurer must pay for all work that is necessary to complete the repair job in a “good and workmanlike fashion.” Thus, if, as the parties agreed in Hennessy, it was “reasonable and prudent” to repair all stucco while repairing the portion that had actually separated from the building, the insured would argue that the entire repair project should be covered. Hennessy stands for the proposition that although a broad scope of work may be “reasonable and prudent,” or even required in order for a contractor to complete the job in a workmanlike manner, coverage only extends to those repairs actually necessitated by a covered event. "Logically, this rule should not be limited to "collapse" claims but should extend to all first-party property claims, and potentially even to third-party liability claims. In most cases, a reasoned expert opinion will likely be helpful to properly limit an insured’s recovery pursuant to the Hennessy standard.
 

Because the lawsuit did not allege that Mt. Hood was a board member or subsidiary of the HOA, Travelers argued that Mt. Hood did not qualify as an insured. Mt. Hood claimed that since the complaint alleged that Mt. Hood controlled the board and the HOA for a period of time, Mt. Hood was effectively on the board. The court rejected this argument. Following Oregon law, the court determined that it could only consider the complaint and the policy when analyzing the duty to defend. The court found that in reviewing the complaint, it was clear that there was no allegation that Mt. Hood itself was a member of the board, even if it did control the actions of the board. The court focused on the allegation in the complaint that Hanna had been elected as the sole board member. The court granted Travelers motion to dismiss as to Mt. Hood’s claims.

With respect to Hanna, Travelers argued he was not an insured because the claims were filed against Hanna outside the policy period as required by the policy. Travelers argued that because the suit was not brought within the policy period, there was no coverage. The court found, however, that because the policy only required that a “claim” for monetary damages be brought against the board member within the policy period, the demand for money damages prior to the complaint qualified as a “claim” under the policy. Travelers also argued that an exclusion for damages arising out of construction defects applied. The court found that the policy’s coverage for “breach of duty,” and the allegations in the complaint, were broad enough, such that claims for damages other than solely construction defects could be recovered. The court, therefore, rejected Travelers motion to dismiss the claim for breach of the duty to defend Hanna.
 

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.

National Union denied coverage under an express exclusion for any claim “… alleging fraud, dishonesty, or criminal acts or omissions …”. New Fed responded with an argument that in order to rely on the fraud exclusion, the insurer must first prove that the insured intended to harm the injured party. The First Circuit rejected this argument, finding there was no legal basis for New Fed’s proposed rule and, moreover, found that even if there were such a requirement “it would likely be satisfied here” because the broker who falsified the credit reports “had to know that a false credit report was likely to lead to overpayment and loss.” The final conclusion: New Fed’s claim fit squarely within the fraud and dishonesty exclusion, so the insurer had no duty to defend or indemnify New Fed.
 

In remanding for a new trial, the Court of Appeals also commented on several other issues, including that the definition of “fixed and moveable things” in a protection and indemnity policy does not include soil and river sediment.  The Court declined, however, to comment on allocation.  On cross-appeal, Zidell argued that the court applied the wrong allocation method based on Oregon statute and the Court’s decision in Cascade Corp. v. American Home Ins. Co., 206 Or. App. 1 (2006). The Court of Appeals declined to address the argument, waiting to see if it returned after remand. The Court of Appeals also reversed the trial court’s decision that led to the award of declaratory judgment attorney fees to Zidell.

The insurers argued as a threshold matter they could not be held liable for bad faith because their policies did not cover the claims against the general contractor. While acknowledging the insurers’ coverage position was correct, the court disagreed with their position on bad faith. Citing to Coventry v. American States, 136 Wn.2d 269 (1998) which holds that an insured may maintain a bad faith claim against an insurer even if the insurer owes no duty to defend or indemnify against the claim, the court held Aecon could maintain its bad faith claim against the insurers even in the absence of coverage. 

Aecon tendered to the first insurer on May 3, 2006. That insurer requested and reviewed information from the insured and denied the claim seven weeks later on the grounds that its subcontractor insured’s work at the project, and the project itself, was complete before any property damage occurred. The court pointed out that the insurer knew there was water intrusion at the project but assumed it happened after the subcontractor completed its work on the project and did not attempt to determine whether the subcontractor may have performed deficient work that led to water intrusion while it was still working at the site. A year after this insurer denied another claim handler reviewed the file and determined Aecon was potentially covered as an additional insured. The insurer did not notify Aecon of the second claim handler’s conclusion.

Aecon also tendered to the second insurer, who denied coverage six months later. The second insurer denied coverage because (1) its subcontractor insured finished work on the project after its policy ended so the claim was barred under the “products completed operations hazard” and (2) the units were not turned over to Quinault during the policy period so Quinault had no claim damage during the policy period. This insurer’s denial letter did not explain how the “products completed operations hazard” applied to the claim or its position that Quinalt did not own the property during the policy period and so had no standing to make the claim.

Before denying coverage this insurer’s claim handler requested and received information from the insured and the broker, reviewed the claim file and hired an independent adjuster to determine certificates of occupancy dates for the project. He had a certificate of occupancy dated October 14, 2000 as well as a notation in his claim file showing the project was completed instead in June 2000. In his deposition the claim handler could not identify where he got the June 2000 date or whether it referred to the subcontractor or Aecon’s completion of work. Other than requesting pleadings from Aecon, this insurer did not investigate when property damage attributable to its subcontractor first occurred.

The court held the first insurer’s investigation before denying coverage was not adequate, but declined to rule on whether it had also acted in bad faith by failing to tell Aecon that a second claim handler had determined there was potential coverage. The court found the second insurer failed to establish why, even if its subcontractor’s work was completed after the policy ended and Quinalt did not own the property during the policy period, those facts precluded coverage. Because the insurers acted in bad faith and did not rebut the presumption of harm, the court applied the remedy of coverage by estoppel. The court also found the insurers violated the state Consumer Protection Act by failing to conduct the reasonable investigation required by Wash. Admin. Code § 284-30-330(4) before denying Aecon’s tender.
 

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.