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

The district court had earlier ruled the primary insurers owed a duty to defend the insured, reasoning that the plaintiffs' claims "may have had their origin in slander, libel, or disparagement," which fell under the policy definition of advertising injury. The district court explained that while the underlying complaints did not allege libel, slander, or disparagement, the litigation "grew out of various disparaging, defamatory, and libelous statements," such as the insured’s claims that Synthroid was superior to other thyroid drugs and its criticism of the physician’s study questioning the insured’s claims about Synthroid. The primary insurers appealed but settled while the appeal was pending. Relying on its earlier decision, the district court ruled the umbrella insurers owed a duty to defend. Reversing, the Sixth Circuit found the allegations in the underlying complaints insufficient to sketch a claim for the common-law offenses of libel, slander, or disparagement, which in Illinois all required that a false statement be made about the plaintiff. The underlying complaints did not allege the insured made a false statement about the plaintiff class. Instead, the underlying plaintiffs sought economic damages only for the injuries they suffered from the artificially high prices for Synthroid which stemmed from the insured’s monopolization and fraudulent concealment – a paradigmatic antitrust injury. Finally, the Sixth Circuit found it extremely unlikely the parties intended antitrust and racketeering claims to be covered by policy definitions for libel, slander, and disparagement.

The Court of Appeals agreed with the trial court that it was not necessary, under the terms of Great American's policies, that United Capitol, or anyone else, actually pay United Capitol's policy limits in order for Great American's excess coverage to be triggered. The court found that Great American’s policies stated it would be liable for those sums “in excess" of its underlying insurers' policy limits and thus, regardless of the lack of payment of underlying limits, Great American’s policies were triggered.

As to allocation, the court found that the trial court erred in finding that the insurers were required to be allocated the $2 million United Capitol limits in light of its insolvency as Washington law does not impose liability on insurers for losses they have not contracted for and further, that Great American’s policies specifically provided that they would apply as if the underlying policies were valid and collectible rather than outright replacing the primary policies. Finally, the court concluded that the trial court erred by classifying the "litigation costs" portion of the Polygon settlement as "supplementary payments" payable under Assurance Company of America's primary insurance policy. Therefore, the Court reversed and directed the trial court on remand to include in the reallocation of liability among the excess insurers the "litigation costs" that it previously allocated solely to Assurance.

Similar public nuisance allegations have been previously dismissed on the basis that those cases required the courts to make impermissible political decisions. This includes the California Attorney General’s attempt to force car manufacturers to reduce vehicles' emissions of carbon dioxide that was dismissed last September by the federal district court in San Francisco. In Mississippi, property owners similarly filed suit against oil, coal and chemical companies, claiming that their activities contributed to climate change that magnified the effects of Hurricane Katrina. In denying a motion for class certification against the defendants for these global warming claims, Mississippi District Court Judge Senter commented “I foresee daunting evidentiary problems for anyone who undertakes to prove, by a preponderance of the evidence, the degree to which global warming is caused by the emission of greenhouse gasses.” Comer v. Nationwide Mut. Ins. Co., 2006 U.S. Dist. Lexis 33123 (S.D. Miss. 2006). Lawyers for the village of Kivalina have stated that the difference between its action and prior global warming actions is the inclusion of conspiracy claims against the defendant companies. The viability of this claim in the action, whether the defendants have coverage including the application of pollution exclusions, whether the harm is expected or intended and numerous other important and difficult coverage issues have yet to be addressed by the courts. One thing is certain however, this case appears to be far from the last type of action to be filed or addressed by the courts on global warming issues.

In affirming the trial court’s dismissal of the case, the Montana Supreme Court first rejected Lee’s argument that the Great Divide policy was ambiguous as to its general reference to “you” as used in the section of “Who is an insured” and thus officers of the named insured corporate entity should be considered insureds. In rejecting this argument the court noted that the definition of “you” in the policy was the named insured corporation and the policy itself was identified as a “corporate policy.”

The Court also found that the policy expressly required Lee to “promptly send [Great Divide] copies of the legal papers if a 'suit' is brought.’” The court found that in addition to the large amount of time it took for Lee to notify Great Divide of the cases, he omitted the “most significant information of this claim and suit” from his notice which was a material breach of his policy obligations. This information included his failure to provide Great Divide a copy of the initial Complaint alleging UM coverage against American States as well as a copy of his Second Amended Complaint until 2 ½ years after filing his original complaint. Moreover, Lee’s notice to Great Divide failed to disclose that he had obtained a default judgment against the uninsured driver and he would be seeking coverage. Accordingly, the court found the late notice was sufficient to deny coverage to Lee.

In a strongly worded dissent, Justice Cotter raised several points including the fact that Lee had moved for summary judgment at the trial court level and that the court, in addition to denying his motion, sua sponte granted Great Divide summary judgment on coverage issues which, she believed, deprived Lee of his ability to properly raise issues of fact precluding summary judgment.

In making its decision, the court reviewed the “guideposts” recited by the US Supreme Court in BMW of North America, Inc. v. Gore, 517 US 559, 568 (1996) and State Farm Mut. Ins. Co. v. Campbell, 538 US 408 (2003), in analyzing punitive damages awards for excessiveness. Of particular note is the court’s determination that the 4:1 ratio was appropriate in this case as opposed to the recent $79.5 million punitive damages award it upheld several weeks ago which is summarized in our prior post concerning the Williams v. Phillip Morris case. The court specifically stated that an award that exceeds the single-digit ratio may be acceptable in a “few narrow circumstances” including when “extraordinarily reprehensible” conduct is involved such as the conduct in Williams. The court referenced the fact that only economic harm was present in this case and Farmers’ conduct was not comparable to the conduct of Phillip Morris’ “50-year campaign to delude a large part of the population of Oregon about the potentially devastating physical effects of smoking its products.” The court ultimately determined that the 4:1 ratio was constitutionally permissible and directed remand for a new trial unless the plaintiff agreed to remittitur of punitive damages to four times the compensatory damages award. This is not likely to be the court’s last take on what is a constitutionally permissible punitive damages award.

Oregon Rule of Civil Procedure 36B provides, in part, that the scope of discovery is that:

[P]arties may inquire regarding any matter, not privileged, which is relevant to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things, and the identity and location of persons having knowledge of any discoverable matter. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to discovery of admissible evidence.

The court stated that, on its face, this rule “would appear to extend a right to depose or otherwise to obtain discovery from all potential witnesses (whose testimony is not privileged) . . . including expert witnesses.” However, the court noted that it had previously held that “the scope of the rule was not intended to extend to expert witnesses.” However, the court stated that nothing in the wording of the rule “suggests that a witness who has been personally or directly involved in events relevant to a case may not be deposed as to facts of which the witness has personal knowledge, simply because that person will be, as to other matters, an expert witness at trial.” The court stated that counsel for the plaintiff would have every opportunity at the expert’s deposition to object to any questions that sought expert opinions to thus stay within the spirit of the rules and the court’s holding.

Philip Morris appealed and, after a lengthy appeal process, the Oregon Supreme Court concluded the punitive award comported with federal due process and that the proposed jury instruction incorrectly stated the requirements of federal due process and therefore the trial court did not err in refusing to give the instruction. On certiorari, the US Supreme Court concluded that due process prohibits a jury from using a punitive damage verdict to punish a defendant directly for harm to nonparties. Determining that the Oregon Supreme Court had applied the wrong constitutional standard to the proposed jury instruction proffered by Philip Morris, the Court vacated the Oregon Supreme Court’s earlier decision and remanded.

On remand, the Oregon Supreme Court determined that the trial court correctly refused to give the instruction because it contained several other errors completely unrelated to the issues addressed by the US Supreme Court. The Oregon Supreme Court found that the instruction misstated Oregon law in that it incorrectly told the jury that the factors to be used in awarding punitive damages were discretionary when they are mandatory according to state statute and that the instruction mischaracterized this statutory language by referring to a defendant’s “motivation to make illicit profits” as compared to the “profitability of the defendant’s misconduct” as set forth in the statute. The Oregon Supreme Court therefore reaffirmed its prior decision. Shortly after the release of this decision last week, Philip Morris vowed to appeal to the US Supreme Court. A substantive due process issue that the US Supreme Court found unnecessary to address in its decision last year will likely be the subject of the Philip Morris petition.

After the accident, the plaintiff sought to recover her medical expenses and lost income and filed a claim for PIP benefits under her automobile policy with State Farm. State Farm denied the claim on the basis that the accident was not the result of her “use” or “occupancy” of her car and, thus, fell outside the coverage prescribed under the terms of her policy and the Oregon PIP statute. On summary judgment motions of both parties, the trial court found that the facts “show that the injury resulted form the use of the vehicle [and was] a consequence resulting from plaintiff’s use of the vehicle to transport and store items.” The trial court found that it was immaterial that she did not intend to return to her car again after locking it and that she might have taken the dog for a walk after crossing the street had she not been injured and thus, her injuries resulted from her “use” of the car.

The Court of Appeals reversed finding that a causal nexus between the use of the plaintiff’s car and the injury by the cyclist was lacking. The court found that there must be a “consequential nexus between the use and injurious event” for recovery to occur. Accordingly, in this case, there was no nexus as the injured cyclist “was going to be there regardless of plaintiff’s use of the car –and, other than in a pure “but for” sense, nothing about plaintiff’s use of the car enhanced the likelihood that she would suffer an injury because of being struck by a cyclist.”

This insurance coverage case involved environmental contamination of the policyholder’s land and the nearby Willamette River in Oregon where the policyholder operated a vessel scrapping business for many years. The trial court originally found that the all of the subject policies provided coverage for losses arising by “accident” which the court held to mean an “unexpected and unintended event.” In determining whether the insured’s potential liability on an environmental contamination claim was the consequence of an unexpected and unintended event, the trial court placed on the insurer, Lloyd’s, the burden of proving that the event was “expected or intended” rather than requiring the insured, Zidell, to prove that the damage was “unexpected and unintended.”

At oral argument, Lloyd’s argued that “expected or intended” was a part of the coverage grant, therefore, the burden of proof of “unexpected and intended” should be with Zidell. Lloyd’s argued that the burden of proof was on Zidell because this term was part of the coverage grant. Further, the trial court recognized that the unexpected and unintended issue is a condition, rather than exclusion. If the panel accepts Zidell’s interpretation, the insurer argued that any grant of coverage that was less than unconditional and promised to pay any claim, under any condition, for any amount, would engulf the entire policy. Lloyd’s also argued that the burden of proof of unexpected and unintended damage should be on the party who files the declaratory judgment action.

Zidell’s counsel argued that the issue of “unexpected and unintended,” was an exclusion and therefore the burden of proof rested with the insurer. Zidell’s counsel argued that the party seeking the benefit of specific policy language had the burden of proof and because Lloyd’s was attempting to benefit from establishing that Zidell expected or intended that its discharge of waste would cause third party property damage, it therefore should carry the burden of proving the term. Zidell’s counsel further argued that “unexpected or unintended” was an exception to an affirmative grant of coverage and thus an exclusion that Lloyd’s was required to prove.

A decision from the court is anticipated later this year.

The insured owned several rental properties that he insured through a “Landlord Protector Package Policy” with Farmers. The insured obtained these policies through an insurance agent that later sold his entire book of insurance business to a different agent. When the new agent took over the accounts, he did not review the insured’s policies nor did the insured request that any changes be made to the policies. In 2002, a fire broke out at one of the rental properties and a tenant was badly injured. The tenants sued and sought damages far in excess of the liability policy limits. The insured thereafter sued Farmers and the agent alleging that they were “negligent in failing to ensure that he had adequate insurance coverage.” The insured specifically alleged that he attempted to speak to the agent on several occasions and sought clarification on his coverage on several occasions but that the agent never returned his calls. Farmers and the agent moved for summary judgment arguing that there was no “special relationship” between the insured and broker that required the agent to ensure there was adequate coverage on the properties.

The Washington Court of Appeals affirmed the trial court’s grant of summary judgment to Farmers and the broker on the basis that there was no special relationship between the parties. The court found that there was no evidence in the record that the broker held himself out as an expert or received extra compensation nor was there any evidence that there was a long-standing relationship between the parties or that they actually discussed the adequacy of the policy limits. While the court acknowledged that the insured attempted to contact the agent on numerous occasions to no avail, these contacts concerned only the insured’s request for copies of his policies and not a specific question on coverage. The court specifically noted that there was no evidence that the insured was told by the agent that he had adequate coverage rather the evidence only showed that the insured asked to verify his current limits. Accordingly, the court affirmed the trial court’s original dismissal of the matter on summary judgment.

The case involved the sale of two properties by Robert Goodstein, a receiver appointed by the King County Superior Court to wind up the dissolved partnerships of the owners of the properties. The owners operated a scrap metal salvage yard for forty-five years at one of the properties which caused ground pollution. At the other site the owners recycled scrap metal and electrical equipment for approximately twenty years resulting in hazardous waste byproducts containing high concentrations of soluble lead. In 1996 and 1998 Goldstein sold the properties. The sales agreements for both properties disclosed the lands were polluted and required that the purchasers take over the responsibility for any cleanup required by the government. The agreements did not however require the purchasers to remediate the property on their own.

Industrial issued primary and excess policies to the owners between 1980 and 1986. On September 28, 1990 Goodstein wrote Industrial advising that the Washington State Department of Energy had identified both properties as contaminated. The letter stated, “We write to notify you that [the owners] may make a claim for cleanup and related costs under the insurance policies you issued” and that Goodstein “may make a more formal claim for coverage and cleanup costs.” In a letter dated October 22, 1990 replying to Industrial’s acknowledgment that it had received the September 28, 1990 letter, Goodstein wrote “we are not presently making any claims under these policies.” Industrial heard nothing more about the claim and closed its file in December 1992. Some eight years later Goodstein wrote Industrial indicating that the properties had been sold and demanded Industrial pay the difference between the appraised contaminated value of the properties and the value of the sites in an uncontaminated state which he calculated as totaling about $5.3 million. Industrial denied coverage and, four years later, Goodstein filed suit seeking a declaration that Industrial breached both its duties to defend and indemnify under the subject policies.

The Ninth Circuit first determined that the district court did not abuse its discretion by declining to consider additional evidence submitted at the summary judgment level by Goodstein that he had entered into an oral agreement with the purchaser of one of the properties to cross-assign rights to insurance coverage that created a damages claim “since [the buyer] paid the costs to remediate the property.” Finding the evidence Goodstein submitted concerning this issue did not indicate a definitive agreement had been reached, the Ninth Circuit found that it was insufficient to prove the existence of an enforceable contract under Washington law.

As to the duty to indemnify, the Ninth Circuit found that Industrial did not have a duty to indemnify Goodstein for several reasons. First, it found that while Goodstein likely received a significantly reduced price for the sale of the properties, a Washington court would not find that loss covered under the policy as Goodstein failed to ensure that the polluted properties would be cleaned up promptly as the purchase agreements contained no cleanup condition. Thus, Goodstein was essentially seeking compensation from Industrial when he had not taken any action to ensure “either by procuring cleanup services himself or by requiring the buyer of the contaminated land to do so” that the harm caused by the owners polluting activities had been remedied. Indeed, the court pointed out that one of the properties had been cleaned up by the purchaser while the other property remained polluted “almost ten years after the sale and over fifteen years after the government first identified the land as containing hazardous waste.” Second, the policy language did not support a finding that the claim for diminution in value constituted “property damage” as Washington State courts had previously found that diminution in property value does not constitute “physical injury to tangible property” under language identical to that of the Industrial policy. The court similarly found that diminution in value did not fall within the realm of “damages” that the “insured shall become legally obligated to pay” because of “property damage” as Goodstein did not expend, constructively or otherwise, any money for remediation because “the sale was not conditioned on remediation that the buyer would perform with the money saved from the reduced purchase price.”

As to the duty to defend, the court reversed the district court’s grant of summary judgment to Industrial rejecting Industrial’s argument that Goodstein never invoked the duty to defend. The court found that under Washington law, the “filing of a lawsuit itself constitutes a request for payment of defense costs under the policy” and thus Goodstein invoked the duty to defend by filing the lawsuit. Because Industrial failed to demonstrate actual and substantial prejudice, it failed to support any finding of late notice under Washington law.

The Sixth Circuit first affirmed the district court’s grant of summary judgment to PMA as to the 1967 to 1972 policies, finding that the policyholder failed to establish by clear and convincing evidence the existence and terms of the lost policies under Pennsylvania law. Relying only on a document filed with the district court by PMA which indicated the policyholder had coverage in 1967 (which PMA disputed as a typo in its filings), PMA’s computer records which indicate the 1972 policy was a "renewal" and the testimony of a former PMA employee that stated the pollution exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, the court found the policyholder failed to meet its burden of proving the terms and conditions of the policies under Pennsylvania law.

As to the 1972 to 1978 policies, the policyholder argued that the underlying lawsuit fell within the “sudden and accidental” exception to the pollution exclusion. Agreeing with PMA that under Pennsylvania law “sudden and accidental” encompasses discharges which are both unexpected and "abrupt in time," the court affirmed the district court’s grant of summary judgment to PMA as the evidence produced by the policyholder could only be interpreted by a reasonable jury that discharges were “frequent, continuous and highly predictable.” As to the bad faith claim, the Sixth Circuit similarly affirmed the district court judgment finding that, under Pennsylvania law a bad faith claim may not be stated unless the “insurer lacked a reasonable basis for denying benefits.” Because the court affirmed the finding that the underlying lawsuit did not fall within the scope of the policies, PMA had a reasonable basis for denying benefits and did not act in bad faith. 

The eight-year old insured, Daniel Egan, was covered under a homeowners’ policy issued by Safeco.  The policy indemnified Daniel against liability for “damages because of bodily injury or property damage caused by an occurrence.”  The policy defined “occurrence” as “an accident, including conditions which result in: bodily injury; or property damage.”  Daniel testified that he intended to hit the injured claimant, Caleb, on the shoulder pad with his hockey stick after Caleb made fun of Daniel’s “inferior” hockey skills and that he had no intention of actually hurting Caleb.  The Supreme Court, in reversing the district court’s grant of summary judgment to Safeco, found that Daniel’s age was relevant in determining if Caleb’s injury was an “accident” under Utah law as “eight-year-old children lack the experience, maturity and reasoning skills of adults.”  The court found that focusing on the accidental nature of the injury and taking Daniel’s age into consideration, an average eight-year-old would not have expected to inflict substantial injury by swinging a hockey stick into the upper body of another child that was wearing hockey pads.  Accordingly, the court reversed the district court finding that an issue of material fact existed as to Daniel’s actual intent to cause nontrivial injury to Caleb. 

So far, only one decision has been released applying the Twombly standard in an insurance coverage case.  In State Auto Prop. & Cas. Ins. Co. v. Loehr, No. 4:06CV01427 FRB, 2007 U.S. Dist. LEXIS 69449 (E.D. Mo. Sept. 19, 2007), the Eastern District of Missouri found that a plaintiff insured met the “plausible” standard under Twombly as his complaint adequately alleged that State Auto's refusal to pay benefits was vexatious and without reasonable cause or excuse and cited the appropriate Missouri statute providing for vexatious refusal for payment of claims.  According to the opinion, it did not appear that any separate specific facts related to the basis for the “vexatious” allegation was plead other than an allegation regarding the nonpayment of policy proceeds.  However, the court found that the insured sufficiently met the Twombly standard as the general facts alleged concerning nonpayment of policy proceeds demonstrated "a reasonable expectation that discovery will reveal evidence of defendant's claim for vexatious refusal to pay.”  

In this case, MOE defended its insured, Dan Paulson Construction, Inc. (“DPCI”) under a reservation of rights against construction defect claims brought by the Martinellis related to damages to their personal residence that DPCI constructed. DPCI and the Martinellis proceeded to arbitration on the claims. Shortly before the arbitration hearing, MOE filed a declaratory judgment action in the state court against both DPCI and the Martinellis seeking a declaration that it had no duty to defend or indemnify on the basis of the “Your Work” exclusion. MOE did not serve this action on either DPCI or the Martinellis. 

On December 30, 2003, MOE issued a subpoena duces tecum in the un-served state court declaratory judgment action on the arbitrator seeking documents and the arbitrator’s thoughts regarding the arbitration. With the subpoena, MOE sent the arbitrator an ex parte cover letter explaining its coverage issues with DPCI.  Both DPCI and the Martinellis received the subpoena two business days prior to the arbitration hearing. MOE did not serve the cover letter to the arbitrator on either DPCI or the Martinellis. MOE then sent a second letter to the arbitrator slightly narrowing its original requests and further explaining its coverage dispute with DPCI. Subsequently MOE struck the subpoena and dismissed its first declaratory judgment action. The parties thereafter negotiated a settlement and entered into a stipulated settlement agreement which provided in part that DPCI would assign its coverage and bad faith claims against MOE to the Martinellis. 

MOE subsequently filed the subject coverage action against DPCI and the Martinellis.  On several motions for summary judgment, the trial court found that MOE acted in bad faith but that MOE had successfully rebutted the presumption of harm. The Court of Appeals reversed holding that MOE did not act in bad faith. The Washington Supreme Court reinstated the trial court’s decision that MOE acted in bad faith and further found that MOE failed in rebutting the presumption of harm.  As to bad faith, the court found that through its subpoena and two ex parte letters to the arbitrator, MOE “clearly showed great concern for its monetary interest in establishing which of the Martinellis’ claims were excluded from coverage under DPCI’s policy [while displaying] little to no concern for how its conduct might affect DPCI’s financial risk, which was then being litigated in the arbitration hearing.” The court found that MOE’s actions therefore “conclusively” demonstrated that it had a greater concern for its monetary interest than for DPCI’s financial risk.

The court then determined that MOE did not rebut the presumption of harm arising from its bad faith conduct as it failed to show that its subpoena and ex parte communications did not harm or prejudice DPCI. To the contrary, the court found that the record supported a finding that MOE’s conduct caused significant uncertainly and increased risk for DPCI’s defense. The court rejected the trial court’s initial conclusion that DPCI’s decision to proceed with the arbitration coupled with a subsequent settlement within policy limits effectively rebutted the presumption that MOE’s bad faith harmed DPCI. The court stated that “loss of control of the case is in itself prejudicial to the insured.” 

The court specifically stated that it was not expanding its prior rulings on the presumption of harm to conduct that occurs in connection with an insurer’s coverage duties. Rather, the finding of harm in this case was directly related to conduct during the defense case as, despite the fact that the bad faith conduct was perpetrated by coverage counsel, MOE’s conduct was associated with its underlying defense of DPCI and could not be “reasonably segregated from that defense [as it] interfered directly in that defense.”  

The Wall Street Journal article focuses primarily on the background of the race to get “friend of the court” briefs prepared and filed with the Court by numerous prominent names in politics and the economy. The plaintiffs have obtained support from “two House committee chairmen, 18 pension funds, 32 state attorneys general, and the SEC itself. Backing big business: the U.S. Chamber of Commerce; the Nasdaq and NYSE Euronext exchanges; seven high-profile New York lawyers; and the Justice Department's solicitor general, who represents the views of the White House.”  

According to the SCOTUS blog summary of the oral argument, despite the plaintiffs’ rush to obtain support by amicus, it does not appear that the Court was receptive to the possibility of providing investors with a broad new category of liability to investors. A decision on this case is expected by the spring. 

The IFCA became law on May 15, 2007 and was set to go into effect on July 22, 2007. However, a petition was filed on May 16, 2007 for a voter referendum to approve the Act, now referred to as Referendum 67. The IFCA is therefore essentially stayed until the November 2007 election. Should the IFCA survive the referendum, it is unknown whether it will be applied retroactively. 

Alberts eventually sued Dr. Woo for outrage, battery, nonpayment of overtime wages, and negligent infliction of emotional distress. Woo tendered the claim to his insurance carrier, Fireman’s Fund, who provided professional liability, employment practices liability, and general liability insurance. Fireman’s Fund refused to defend, among other reasons, on the basis that the acts alleged in the underlying complaint did not arise out of the provision of dental services. 

Construing the duty to defend broadly, the Washington Supreme Court held that Fireman’s Fund owed a duty to defend Dr. Woo under its professional liability coverage because inserting fake boar tusks in a patient’s mouth during a dental procedure “conceivably fell within” both the state dental statute’s and policy’s broad definition of the practice of dentistry.