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

In Metropolitan Casualty Ins. Co. v. Birmingham, Case No., C09-726RAJ, 2010 U.S. Dist. LEXIS 82838 (W.D. Wash., August 13, 2010), the court found that the insurer had no duty to defend the insured because there were no allegations of property damage or personal injury. In the underlying case Birmingham requested a declaration regarding a property boundary. The defendant in that case brought a counterclaim asserting a right to an order to quite title, injunctive relief, breach of contract, trespass and interference with property rights. Birmingham tendered the defense of the counterclaims to its insurer. Metropolitan denied it had a duty to defend because there was no allegation of covered damage.

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Many thanks to our readers and the folks at the Insurance Law Center for recognizing the Forum as among the Top 50 Insurance Law Blogs for 2009!

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Restitution awarded pursuant to California’s Business & Professions Code (“BPC”) § 17200, et seq., cannot then be increased pursuant to a trebling provision that specifies it pertains to statutes that impose fines and penalties (which the BPC does not do), according to a unanimous California Supreme Court.  In Clark v. Sup. Ct. (National Western Life Ins. Co.), __ Cal.4th __ (2010), the only monetary award to which a plaintiffs/private citizens are entitled under the BPC is restitution and injunction, not a fine or penalty.

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As we complete our third year of blogging, we're pleased to report that the National Insurance Law Forum has been selected as a candidate for the LexisNexis Top 50 Insurance Blogs of 2009.  The Top 50 will be selected in mid-July, when Insurance Law Center readers will be asked to vote for the Top Blog of the Year.  The insurance community is invited to comment on and support nominees at the Insurance Law Center site through July 9, 2010.  We look forward to reading your comments, and many more years of blogging.  Thanks for your continued interest and support.

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And so we bid farewell to the decade that was.  Hasta la vista, AIG, ATLA, “earwigging,” Bernie Law, contingent commissions, Dick Scruggs, Eliot Spitzer, Eric Dinallo, the FAIR Act, GilbertHeinz; Hank Greenberg, John Garamendi, junk faxes, Mel Weiss, PHICO, Ramani Ayer, Reliance, Royal, Sears Tower, 70 Pine Street, the Sopranos, “wardrobe malfunctions,” W.R. Grace and Y2K

2009:  The Year of The Ox

Top New Claim Threat:                    Chinese Dry Wall
Furthest Fall from Grace:                 Tiger Woods
Athletic Achievement:                      Tim Tebow
Coolest New Gadget:                        I Phones
Hottest Coverage Issue:                   Allocation

The 10 Most Important Coverage Rulings of 2009

Addison Ins. Co. v. Fay, 905 N.E.2d 747 (Ill. 2009).

In a case of first impression, the Illinois Supreme Court has ruled that a liability insurer had the burden of proving that separate injuries arose out of a single “occurrence.”  The court ruled that although an insured has the burden of proving that a loss is covered in the first instance, the issue of limits was more of a limitation on coverage for which the insurer had the burden of proof.  In keeping with Nicor, the court declared that the losses would be viewed as separate “occurrences” if they were the result of separate and intervening human acts or each act increased the insured’s exposure to liability.  The case involved the death of two boys who died of hypothermia after getting trapped outdoors in wet sand on a neighbor’s property but were not discovered until days later.  While stating that the two deaths might well have involved a single “occurrence” if the injuries had occurred closely together in time and space, the court found that it was impossible to prove how the boys died.  As the insurer had failed in its burden of proof, the court held that the claims must be treated as involving separate “occurrences.”

Comment:   This case introduced a novel issue to the evolving body of case law construing whether multiple injuries could be grouped together under a single “occurrence” limit.  Prior to Fay, no court had considered the effect of the burden of proof on such issues and to whom the burden should be assigned.  It is hard to escape the conclusion that the court stretched to reach a conclusion that maximized coverage in a case with such sad facts but that may have unimagined consequences in the years to come in less sympathetic cases.

Boston Gas Company v. Century Ind. Co., 454 Mass. 337, 910 N.E.2d 290 (2009)

In a startling decision of significant consequence to the future of environmental and mass tort claim disputes in Massachusetts, the Supreme Judicial Court has ruled that a federal district court erred in assigning the cost of cleaning up pollution from a former MGP to a single policy issued in the 1960s.  On the threshold question of “all sums v. pro rata,” the court held that allocation was consistent with the policy wordings and public policy considerations.  Further, in considering what type of allocation formula should be applied, the court adopted a pure “time on the risk” approach, rejecting suggestions that it should use an Owens-Illinois approach that would take total limits into account, or an “unavailability” analysis that eliminated certain years from the denominator for calculating these percentages.  Finally, in cases such as this where the first layer of coverage was written through policies with self-insured retentions, the court declared that the insured need only pay a proportional share of the SIR for each triggered policy.

Comment:   Boston Gas not only transformed the playing field for allocation disputes in Massachusetts, it marks an important milestone in arguing against “unavailability” as a basis for limiting the period within which losses must be allocated.   It also now creates an odd claims environment in which insureds may argue for a narrow definition of “trigger of coverage,” whereas insurers may claim that periods of time are triggered that in the past might have been disputed as involving losses in progress and the like.

Corban v. U.S.A.A., No. 2008-IA-00645 (Miss. October 8, 2009)

While agreeing that damage from a “storm surge” is subject to a water damage exclusion in a homeowner’s policy, the Mississippi Supreme Court ruled in this case that a lower court had erred in declaring that wind and water claims are necessarily excluded pursuant to the policy’s anti-concurrent causation language. The Mississippi Supreme Court ruled that the anti-concurrent causation language should only apply in cases where excluded and covered perils act in conjunction at the same time to cause direct physical damage resulting in loss whereas, in this case, wind and flood had occurred in sequence causing different damage and resulting in separate losses.  Whereas the trial court had interpreted the “in any sequence” language in the clause broadly to mean “sequentially,” the Supreme Court declared that this interpretation was in conflict with other provisions in the policy and thus gave rise to an ambiguity.  Accordingly, the court concluded that the anti-concurrent causation clause had no application for losses caused by wind peril and that an insurer may not abrogate its coverage obligations for such losses by the occurrence of a subsequent excluded cause or event, such as wind.  As a result, the court found that the insured was entitled to coverage for any wind damage that occurred prior to the storm surge and that the storm surge itself could not be a cause, directly or indirectly, of wind damage that occurred before or after the storm surge.   In such cases, the court ruled that the policyholder must prove that its property has suffered a direct physical loss, at which point in time the burden of proof shifts to the insurer to prove, by a preponderance of the evidence, that the causes of losses are excluded.  . 

Comment:  Corban represented something of a set back for first party insurers after numerous successes on the “wind v. water” issue in the Fifth Circuit.  At the same time, the Mississippi Supreme Court did not go as far as policyholders would have preferred and has left in place significant evidentiary burdens that must be satisfied in order to gain coverage for such losses.

Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, 47 Cal.4^th 302 (2009)

The California Supreme Court ruled that an unreasonable belief on the part of a policyholder that he was acting in self-defense when he assaulted a third party did not give rise to an “accident” triggering the insurer’s duty to defend.  Whereas the Court of Appeal had ruled that a duty to defend arose on the basis that an unreasonable belief in self-defense described conduct that was properly characterized as “non-intentional tortious conduct,” the court rejected the insured’s argument that whether there was an “accident” should be determined from the perspective of the injured party.  The court ruled that language in the insuring agreement defining “accident” as an event “which takes place without the foresight or expectation of the person acted upon or affected by the event” should not be read in isolation and must be interpreted in accordance with the policy’s definition of “accident,” which makes no reference to the perspective of the injured party.  A contrary interpretation, as the court pointed out, would result in even acts such as child molestation being treated as an “accident” since the child neither expected nor intended the molestation to occur.  The court distinguished its 1966 opinion in Gray as interpreting the scope of a policy exclusion for intentional injuries as distinguished form the policy’s insuring agreement noting that the issue in this case was whether the unreasonable self-defense fell within the policy’s coverage for an “accident” not whether it fell within a particular exclusion.  The court also rejected the insured’s argument that an assault could be an accident because of a provocative act by the injured party was unforeseen and unexpected. 

Comment:   This is an enormously significant opinion for California practicioners, albeit one whose importance does not appear to have been recognized by many.   In the five decades since Gray, California courts have steadily expanded the circumstances in which insurers are presumed to owe a duty to defend.  Indeed, the law had progressed to the point where the Court of Appeal had actually ruled in an earlier phase of this case that the insurer’s refusal to defend was bad faith.  The opinion will also do much to stem the tide of cases around the country in which courts have found a duty to defend, notwithstanding intentional act exclusions, based on self-serving claims by policyholders that the assault was undertaking in self-defense.

Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267 (Ind. 2009).

Rejecting a policyholder’s argument that a 3 year delay in tendering the defense of an environmental liability claim did not prejudice the insurer and should therefore be reimbursable, the Indiana Supreme Court has ruled that issues of prejudice are irrelevant to the right of an insured to recover pre-tender costs.  As the insurer could not defend a case of which it was unaware, its duty to defend did not arise until it was finally put on notice.  The court emphasized the limitations of its holding, pointing out that the case did not involve an effort by an insurer to avoid its defense obligation altogether, nor was it a question of the adequacy of notice or whether the insured had some reasonable basis for having failed to give notice at an earlier date.

Comment:  Dreaded not only confirms the Indiana Supreme Court’s recent drift back towards the center but sets forth a helpful analysis of the pre-tender issue that would well be emulated by courts around the country.  Far to many courts (often with the assistance of over-eager insurer counsel0, have confused the principle of “tender” as a pre-requisite to the contractual duty to defend arising with the rules governing timely notice.   A failure to tender a claim on time may also preclude coverage on the grounds of late notice, depending on the rules concerning proof of prejudice in a given state, but prejudice has nothing to do with the insurer’s retrospective obligation to reimburse for defense costs incurred in the interim.

Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399 (1st Cir. 2009).

The First Circuit has ruled in this Massachusetts case that a federal district court erred in granting summary judgment to a liability insurer for claims arising out of the discharge of fumes from defectively-installed carpet tile and related materials throughout the plaintiff’s building.  The court ruled that the resulting “locker room” smell had resulted in physical injury to tangible property, rejecting the insurer’s contention that there must be tangible injury to the building structure itself.  Having found “property damage,” the First Circuit declared that its finding of physical injury to tangible property precluded the application of the “impaired property” exclusion apart from the fact that it was not clear that the property in question could be restored to use merely by repairing, replacing, adjusting or removing its product or work.  Nor did the “your product” exclusion apply given the allegations of property damage beyond the carpeting installed by the insured.  The court ruled that the concrete sub-floor over which the carpet had been installed was “real property” and thus excluded from the definition of “product” in Exclusion K.  Treating the sub-floor as part of the insured’s product, as the District Court has found, would, in the First Circuit’s view “stretch too far the contours of what an insured might reasonably understand.”

Comment:   This is a very dangerous case. The First Circuit, which heretofore has taken a relatively conservative approach to the scope of “business risk” claims, went out of its way to find “property damage” and narrow the scope of such exclusions    This is also one of the first federal appellate cases to find “property damage” in the context of a liability policy based on the presence of fumes and unpleasant odors in a home.  Insurers may expect to see the case widely-cited in the future in sick building and mold cases.

Lexington Ins. Co. v. AGF Ins., Ltd.,  UKHL 40 (July 30, 2009)

In its final act before becoming the British Supreme Court, the House of Lords declared in this case that just as British reinsurers would not have understood in 1977 when they agreed to facultatively reinsure a portion of Lexington’s first party DIC insurance of Alco that the Washington Supreme Court would one day rule that Lexington was “jointly and severally” liable under Pennsylvania law for the cost of cleaning up pollution at Alcoa’s facilities, neither should  “follow the settlements” clauses in the certificates require reinsurers to pay for loss occurring outside the reinsured period.  While declaring that the law of Washington is not “perverse” (ha!), the High Court declared that not only was the Washington court’s decision to apply the law of Pennsylvania instead of Massachusetts wrong but that the reinsurance agreements were not merely agreements to indemnify Lexington for all of its liabilities but rather separate contracts subject to English law and the understanding of the parties at the time, which therefore limits the reinsurers’ duties to losses solely occurring during the policy period and not extending to principles of “joint and several liability.”

Comment:  Only time will tell how much of an impact this ruling had in undermining the relationship of trust that had developed between domestic insurers and the London Market in the century since the San Francisco Earthquake.   While resting on substantial legal authority, the decision of the House of Lords struck most U.S. insurers as inconsistent with the principles underlying the follow the settlements doctrine, at least as the doctrine had evolved in the U.S. during the past decade.

Plastics Engineering Co. v. Liberty Mutual Ins. Co., 759 N.W.2d 613 (Wis. 2009)

On certified questions from the Seventh Circuit, the Wisconsin Supreme Court ruled in this case that an insured has no duty to pay for orphan shares and may assign its entire loss to a single insurer on an “all sums” basis.  Further, the court ruled that each individual claimant’s exposure to asbestos constituted a new “occurrence” rejecting the insurer’s argument that it was the insured’s manufacture and sale of asbestos-containing products without warning that was the “cause” of these losses.  On the other hand, the court agreed with Liberty Mutual that its “non-cumulation” clause was not in violation of Wisconsin Statute Section 631.43(1) as it is not an “other insurance” clause and as the disputed question involves successive policies  rather than the concurrent coverages to which the statute applies.  Justice Gableman dissented on the allocation issue, arguing that the policy itself limited coverage to losses occurring during the policy period and required pro rata allocation on a “time on the risk” basis.  He also disagreed with the majority’s conclusion that the duty to defend could not be pro-rated, arguing instead that Plenco had chosen to be self-insured for certain periods and must therefore bear a proportional share of its own defense costs.  He also argued that joint and several liability had no application in these circumstances since there were no other insurers for Liberty Mutual to be jointly liable with or seek contribution from.

Comment:  With this opinion, the Wisconsin Supreme Court gave new hope to policyholders, who had up until then lost a series of significant “all sums” appeals around the country.  At the same time, Wisconsin joined the majority view that individual claimants may not be grouped together as a single “occurrence.”   What is left unstated in the opinion is whether insureds may stack separate policy limits or, as in Keene, are limited to the single “occurrence” limit in the policy year to which each separate “occurrence” is assigned.

Safeco Ins. Co. of America v. White, No. 2009-Ohio-3718 (Ohio August 4, 2009),

The Ohio Supreme Court has ruled that allegations of negligent supervision may trigger coverage even where the actual injuries result from an excluded illegal or intentional act.  The court ruled that exclusions that preclude coverage for injuries that are expected or intended by an insured or that arise out of an insured’s intentional or illegal acts do not preclude coverage for independent theories of negligence, even where they are predicated on the commission of those intentional or illegal acts.

Comment:  This is a disappointing opinion, especially as changes within the composition of the Ohio Supreme Court in recent years had suggested that it might be less aggressively pro-policyholder in its approach to coverage disputes than its opinions in cases such as Vanliner and B.F.Goodrich might have foretold.   The opinion also runs against the trend in most states, wherein courts have declined to find coverage for the parents and supervisors of violent individuals.

Tri-Etch, Inc. v. Cincinnati Ins. Co., 49 SO2-09-01-CV-8 (Ind. July 21, 2009).

The Indiana Supreme Court has ruled that the negligent failure of an alarm company to carry out its contractual responsibilities, leading to the kidnapping and death of a store employee, failed to seek recovery for an “occurrence.”  The court ruled that claims like this that are based on the insured’s negligent performance of commercial or professional services should be covered, if at all, under E&O policies but were not covered by the CGL.  Nor was the fact that the liability action was tried on a tort theory rather than a claim for breach of contract dispositive.   The Court separately ruled that Cincinnati was entitled to assert late notice as a defense to coverage, notwithstanding the fact that it had denied coverage on other grounds, observing that “there is no reason why an insurer should be required to forego a notice merely requirement merely because it has other valid defenses to coverage.”

Comment: A surprising and encouraging opinion, not least because it comes from the court once thought lost to insurers.  As with Kvaerner in Pennsylvania, this opinion sketches out broad rules limiting the scope of liability insurance coverage for disputes that are best left to the contractual dealings between the parties.

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2007:  The Year of The Pig

New Nasty Claim Threat:                 Contingent Commissions    

Athletic Achievement:                      Tiger Woods

Furthest Fall from Grace:                 Dickie Scruggs          

Coolest New Gadget:                        Streaming Video

Hottest Coverage Issue:                   “Occurrence”

The 7 Most Important Coverage Rulings of 2007

Cinergy Corp. v. St. Paul Surplus Lines Ins. Co., 865 N.E.2d 571 (Ind. 2007). 

In this case, the Indiana Supreme Court held that a liability insurer has no obligation to pay for the cost of implementing new technology to prevent future environmental harm.  In holding that AEGIS did not owe coverage for a lawsuit in which the federal government sought to compel Duke Energy and other utilities to comply with the federal Clean Air Act and implement new clean air technologies to prevent widespread harm to public health and the environment, the Supreme Court agreed with other jurisdictions that a distinction should be drawn between remedial and prophylactic remedies and that coverage was not required here where the federal lawsuit was directed at preventing future harm to the public not obtaining control, mitigation or compensation for past or existing environmentally hazardous emissions.  The court ruled that the policy’s requirement that injury be “caused by an accident” precluded coverage for cases such as this where the complaint sought to prevent an occurrence from happening. 

Comment:  Notwithstanding broad language in its 2001 opinion in Hartford v. Dana that damages covered under a general liability policy might include costs “to prevent further releases of hazardous substances,” the Indiana Supreme Court ruled in Cinergy that coverage only extends to existing harm and does not insure against costs that a policyholder must undertake to prevent future injuries.  The opinion has since been widely cited by insurers as proof against claims that they should be liable for the cost of limiting greenhouse gas emissions that are claimed to contribute to global warming.

Donegal Mut. Ins. v. Baumhammers, 938 A.2d 286 (Pa. 2007).

After the Pennsylvania Superior Court ruled 5-3 that a shooting spree in which the insured’s son fatally shot five people and wounding another involved six separate “occurrences, a nearly equally divided Supreme Court tilted the opposite way, ruling that the claims involved a single ‘occurrence.”  ), the Supreme Court held that the appropriate focus of a “cause” analysis was on the act of the insured that gave rise to his or her liability rather than the “immediate injury-producing act.”  The court held that, “Determining the number of occurrences by looking to the underlying negligence of the insured recognizes that the question of the extent of coverage rests upon the contractual obligation of the insurer to the insured.  Since the policy was intended to insure [policyholders] for their liabilities, the occurrence should be an event over which [policyholders] had some control.”  Justice Baldwin’s opinion was joined by Justices Castille, Saylor and Eakin.  Justices Cappy and Baer filed separate concurrences joining the majority’s analysis with respect to whether the underlying claims alleged an “accident” but dissenting with respect to the analysis of the “occurrences” issue.  Chief Justice Cappy argued that the majority had been inconsistent in finding that the definition of “occurrence” focused on the violent acts of Richard Baumhammers in shooting his victims whereas its analysis of “occurrences” had focused on the negligent acts of the parents and that the majority should have adopted the “cause” approach proposed by the Florida Supreme Court in Koikos v. Travelers Ins. Co., 849 So.2d 263 (Fla. 2003) wherein “cause” was the immediate act causing bodily injury.  Justice Baer took a somewhat different approach arguing that the number of occurrences should be determined not based on the negligent acts of the insured or the events directly causing each individual’s injury or death. 

Comment:  A depressing number of appellate rulings in this decade addressed serial crimes.  With this ruling, the Pennsylvania Supreme Court, despite its deep divisions, took a relatively pragmatic approach, finding coverage for the innocent defendants whose conduct may have contributed to the perpetrator’s violence while reining in the nearly unlimited amounts of coverage that other courts had allowed in such cases.

In Re: Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007)

Rejecting a District Court’s distinction between floods that result from natural and manmade causes, the Fifth Circuit has held that property policies do not cover Katrina claims.  Mere weeks after hearing oral argument, the panel ruled that the policies’ flood exclusions were not ambiguous, nor should ambiguity be inferred merely because they could have been worded more explicitly to make their intent clearer as was the case with similar water damage exclusions. Further, the court held that numerous dictionary definitions failed to apply the distinction that the District Court had relied on and, indeed, in certain cases had included the inundation of land from burst levies as an example of a “flood.”  Nor was the court persuaded that other terms in these exclusions implied an intent on the part of underwriters to limit the scope of the exclusion to natural events.  The court declined to reach the issue of whether anti-concurrent causation language applied here, declaring that the efficient proximate cause doctrine would only arise in cases where there were two distinct perils, one covered and one excluded, that resulted in a loss whereas here the plaintiffs’ loss was solely attributable to a flood.  The court declared that negligent design, construction or maintenance of the levies may have contributed to the plaintiffs’ losses but was only one factor in bringing about the flood; “the peril of negligence did not act, apart from flood, to bring about damage to the insureds’ property.”  For similar reasons, the court precluded any argument on the part of the policyholders that sought to recharacterize their flood damage as actually resulting from negligent design, holding that the flood exclusions were meant to apply regardless of what other factors contributed to the development of the flood.

Comment:   Hurricane Katrina brought on a flood of coverage litigation against property insurers along the Gulf Coast in Louisiana and Mississippi, along with a political firestorm orchestrated by Dickie Scruggs and his political allies in Mississippi.  Central to many of these disputes was the debate over whether the plaintiffs’ homes were damaged by wind (covered) or water (not) and the efficacy of anti-concurrent causation language that insurers contended barred coverage where covered causes of loss contributed to damage resulting from excluded causes.  This crucial Fifth Circuit opinion proved to be a tipping point in this struggle.   Despite vast amounts of unfavorable publicity and the formidable political forces arrayed against State Farm and other insurers, state and federal appellate courts did a remarkably rational job throughout in giving effect to plain policy wordings.  

Lamar Homes Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)

A year and a half after hearing oral argument, a bitterly divided Texas Supreme Court has ruled that construction defect claims can be an “occurrence.”  In keeping with recent opinions from states such as Wisconsin, the majority declared that whether faulty workmanship claims are covered should be a function of policy exclusions, not insuring agreement elements such as “occurrence” or “property damage.” The court further refused to find that the “economic loss” doctrine precluded coverage.  The Texas Supreme Court took note of the fact that certain policy exclusions, notably Exclusion J(6) were clearly directed to the consequences of faulty workmanship causing property damage and preclude coverage for such claims except in circumstances where they result from the work of a subcontractor.  The Texas Supreme Court ruled that, “The proper inquiry is whether an occurrence has caused property damage, not whether the ultimate remedy of that claim was in contract or tort.”  Three dissenting judges took issue with this conclusion, arguing that “selling damaged property is not the same as damaging property,” and arguing instead that the economic loss doctrine should preclude any coverage for such claims.  Three dissenting justices argued that claims for breach of contract due to faulty workmanship are a mere “economic loss” and thus not covered.

Comment:  Lamar Homes concluded the coverage cycle that began with cases such as Vandenberg in California and American Girl in Wisconsin.  It also came during a period when an extraordinary number of major appeals and certified questions were pending before the Texas Supreme Court.  When the logjam finally broke in 2007-2008, insurers learned to rue the day that they had complained about how long it was taking the Supreme Court to answer these questions.

Philip Morris, USA v. Williams, 549 U.S. 346 (2007)

Returning to the issue of the constitutionality of punitive damage awards only four years after its landmark opinion in State Farm v. Campbell,  a narrowly divided court ruled 5-4 that awards based on a jury's desire to punish a defendant for harming those who are not parties to the lawsuit amounted to a taking of property from the defendant in violation of the defendant’s constitutional due process rights.  The court therefore set aside a $97 million punitive damages award that had been upheld by the Oregon Supreme Court. Justices Stevens, Ginsberg, Scalia and Thomas issued three separate dissents arguing that the court should not impose limits on the right of the courts to impose damages in such cases.

Comment:  In Williams, the U.S. Supreme Court  made explicit what it had previously suggested in State Farm v. Campbell, namely that juries may not punish civil defendants for injury to parties who are not parties to the litigation.  Although widely-hailed at the time, the court’s opinion proved to be of little benefit to Philip Morris.  On remand, the Oregon Supreme Court reinstated the $97 million award on the basis of a state law jury instruction.  Although the U.S. Supreme Court took the unusual step of accepting the case again in 2008, it dismissed the petitioner’s cert claim following oral argument, apparently due to frustration at the confusing factual record.  Williams does, however, signal a shift in punitive damages jurisprudence from disputes over ratios to a renewed focus on jury instructions.

Wilson v. 21st Century Ins. Co., 42 Cal.4^th 713, 723-24 (2007)

Despite an auto insurer’s contention that it was insulated against any claim that it could not have acted in bad faith when it denied the insured’s UIM claim, as there was a genuine dispute with respect to whether the plaintiff’s spinal injuries had been caused by the accident or were the result of a pre-existing condition, the California Supreme Court ruled 5-2 that the trial court had not erred in refusing summary judgment to the insurer, as the insured had established triable issues of fact with respect to whether the insurer had undertaken an adequate investigation, particularly as it appears that the denial was not supported by the medical evidence.  The court ruled that the “genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim” and that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.  By contrast, the court declared that a dispute is not “legitimate” unless it is founded on a basis that is reasonable under all the circumstances.  Writing in dissent, Justices Chin and Baxter argued that the insurer’s denial was reasonable in light of x-rays that were taken immediately after the accident showing no fracture or degenerative change as well as the fact that the plaintiff thereafter went on an extended backpacking trip in Europe.

Comment:  With this opinion, the California Supreme Court made clear just how thin a defense to bad faith claims the “genuine dispute” doctrine could be.  Wilson is the culmination of a trend that started at the beginning of the decade, when the Ninth Circuit ruled 2-1 in Guebara v. Allstate Ins. Co., 237 F.3d 987 (9^th Cir. 2001), that expert testimony did not automatically insulate an insurer from bad faith claims based on biased investigations, but could, as in this case, create a genuine issue of coverage sufficient to preclude a finding of bad faith.  Following Guebara, several California courts have refused to grant summary judgment to insurers in bad faith cases based on the insurer’s inadequate investigation of the insured’s claim.  See Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1072 (2007) and Chateau Chamberay Homeowner’s Assn. v. Associated International Ins. Co., 90 Cal. App.4th 335 (2001). 

Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007)

In what may well be a low point (and one of the most gruesome fact patterns) in Washington insurance jurisprudence, the state Supreme Court has ruled that a lower court erred in refusing to find GL and E&O coverage for emotional distress claims by a dentist’s employee after a bizarre practical joke in which the insured posed the plaintiff with boar’s tusks in her mouth while under anesthesia and took photos of her.  Whereas the Court of Appeals had declared that no reasonable patient would construe such misconduct as involving the rendering of professional dentistry services, the Supreme Court held that E&O coverage applies as the act occurred in the course of preparing the patient for surgery and was “integrated into and inseparable from the overall procedure” and that the insertion of the boar tusk “flipper,” however oddly shaped, conceivably fell within the policy’s broad definition of the practice of dentistry.  The Supreme Court observed that an obligation to defend existed if the law was in doubt, observing that Fireman’s Fund’s decision not to defend was based upon an outside opinion from counsel that was somewhat equivocal.  The Supreme Court also held that the dentist could obtain coverage through his general liability policy, despite the fact that the plaintiff only alleged emotional distress, in light of allegations of depression, panic attacks, nightmares and suicidal impulses.  Further, the court found that the practical joke, despite its intentional nature, was a covered “fortuitous circumstance, event or happening” since the policy required not only that the act be intended but the resulting injuries also be expected or intended by the insured.  In this case, the court found that although the dentist’s conduct was intentional, it was conceivable that he had not intended his conduct to result in the plaintiff’s injuries.  Four justices dissented, arguing that the claims clearly involved intentional conduct none of which involved professional services and that no reasonable person would have understood that such claims would be covered.  The Supreme Court did rule, however, that Fireman’s Fund had no obligation to provide EPL coverage.

Comment:  The Washington Supreme Court is something of a puzzle palace.  Its opinions are often deeply divided, regularly generating more dissents and concurring opinions than any other appellate court in the country.  Even so, a majority of the court seemed determined to stake out the broadest territory that it could in compelling coverage for an incredibly dubious claim.

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In our opinion, the most significant insurance ruling in Oregon over the past ten years is the Oregon Supreme Court’s decision in Holloway v. Republic Indemnity Co. of America, 341 Or. 642 (2006). The “central issue” in that case was “whether an anti-assignment clause providing that ‘[y]our rights or duties under this policy may not be transferred without our written consent[]’ is ambiguous and thus should be construed against its drafter.” 341 Or. at 644. The Court’s ruling – that the clause was unambiguous and, therefore, an attempted assignment was void – is significant because it sets Oregon apart from the majority of other states which hold that anti-assignment clauses “prohibit the assignment of only pre-loss rights or duties.” Id. at 652.
 

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2006:  The Year of The Dog

Top New Claim Threat:                    Dick Cheney 

Athletic Achievement:                      Barbaro

Furthest Fall from Grace:                 Duke Lacrosse

Coolest New Gadget:                        WiFi

Hottest Coverage Issue                    524(g) Plans

The 6 Most Important Rulings of 2006

Fuller-Austin Insulation Co. v. Fireman’s Fund Ins. Co., 135 Cal. App.4^th 958, 38 Cal. Rptr.3d 716 (2d Dist. 2006), review denied (Cal. April 19, 2006). 

Between the 1940’s and the 1980’s, Houston-based Fuller-Austin was involved in the installation and removal of building materials containing asbestos.  Over time, thousands of asbestos suits were brought against Fuller-Austin that were defended by its primary insurers.  In 1997, Fuller-Austin advised its insurers that it was considering entering into a 524(g) pre-packaged bankruptcy.  After a nine-week trial, a Los Angeles jury ruled in May 2003 that Fuller Austin’s insurers were obligated to contribute over $200 million to a trust fund that the insured had entered into with the underlying asbestos claimants.  The jury held that the allowed asbestos claims was $108,175,000; the value of pending but unresolved claims was $108 million, and the value of future claims was $750 million.  These findings were largely set aside by the Second Appellate District on January 19, 2006.  In keeping with the California Supreme Court’s ruling in Hamilton v. Maryland Casualty, the Court of Appeal held that the bankruptcy confirmation proceedings had none of the attributes of an actual trial as it was not a contested evidentiary hearing, did not provide for the presentation of evidence concerning the debtor/insured’s liability and involved a process of negotiation, not fact finding.  The Court of Appeal also rejected Fuller-Austin’s contention that this was a settlement binding on the insurers.  Although it agreed that the plan was a settlement, it noted that Fuller-Austin had not obtained the insurers’ consent.  The court refused to find that the mere issuance of a reservation of rights letter by an excess insurer waived their right to require consent to a settlement before implicating their indemnity duties.  The Court of Appeal found that allowing Fuller-Austin to enter into a global settlement in the bankruptcy court without the insurers’ participation while permitting the insurers to challenge the plan for fairness, reasonableness and lack of fraud or collusion did no violence to the language in the policies requiring their consent.  While agreeing that insurers should not be permitted to “hover in the background at critical settlement negotiations” resisting all responsibility on the basis of lack of consent, the Court of Appeal held that the bankruptcy court’s confirmation of the Section 524(g) plan could not be read to preclude the right of the carriers to subsequently litigate the issue of whether the plan was unfair, unreasonable or the product of fraud or collusion.

Comment:  Following on the heels of the Third Circuit’s opinion in Congoleum, this decision helped to put a stake through the heart of a legal strategy that posed a critical and unforeseen exposure to excess carriers and that was breeding a terrible culture of corruption among counsel representing some policyholders and asbestos plaintiffs (or both).

Glidden Co. v. Lumbermen’s Mut. Cas. Co., 861 N.E.2d 109 (Ohio 2006)
Pilkington North American, Inc. v. Travelers Cas. Ins. Co., 861 N.E.2d 121 (Ohio 2006).

The Ohio Supreme Court issued a pair of opinions on December 20, 2006 that seemed at the time to reflect a deep division within the court with respect to whether and when corporate successors are entitled to claim coverage under a predecessor’s policies for long-tail liabilities arising out of the manufacture, sale or distribution of the predecessor’s products.  In Pilkington, a plurality of the court seemed to hold that, although the terms of a policy might allow a successor to obtain rights to indemnification, coverage was not transferred by “operation of law.”  The court also held, however, that any such rights were not barred by the policies’ anti-assignment clause, as the “chose in action” was fixed as of the date of the underlying injuries triggering coverage.   A concurring opinion by Chief Justice Moyer and Justice O’Connor argued that an insurer’s defense obligation was not assignable, particularly where, as here, multiple parties might be seeking a defense such that the assignment had materially changed or increased the risk faced by the insurer.  A different view was taken by Justices Pfeiffer and Resnick, who concurred in part and dissented in part, arguing that defense costs were likewise assignable.  Finally, Justice Lanzinger filed his own concurring and dissenting opinion declaring that Pilkington’s demand for a defense and indemnification was not a chose in action and therefore should not have been assignable at all.  On the same date, the court ruled that Glidden was not entitled to coverage by “operation of law” for lead paint claims involving policies issued between the 1960s and 1974 to a predecessor entity that manufactured the leaded paint giving rise to Glidden’s present tort liabilities.  Four of the justices found that the underlying corporate transactions that ultimately resulted in the creation of Glidden in 1986 had explicitly excluded insurance policies from the liquidation and distribution of assets of certain entitles.  Nor did the corporate transactions in any way suggest an intent to convey rights under the policies.  However, Judge Lanzinger concurred in the judgment.  Justices Resnick and Pfeiffer dissented, arguing that even though the corporate history in this case was more “tangled” than was the case in Pilkington, the successor entity should still be entitled to obtain the benefits of the predecessor’s policies.

Comment:  Despite the confusion engendered by these various plurality opinions, Glidden and Pilkington helped to “decalifornicate” the California Supreme Court’s Henkel analysis and gave mainstream credibility to insurer arguments that successor entities were not entitled to coverage under their predecessors’ policies “by operation of law.”

Kvaerner Metals  v. Commercial Union Ins., Inc., 908 A.2d 888 (Pa. 2006)

In this case, the Pennsylvania Supreme Court ruled that claims for breach of contract and breach of warranty with respect to the design and construction of a coke oven battery failed to seek recovery for an accident” or “occurrence.”  Although these terms were undefined in the subject polices, their ordinary meaning contained an element of fortuity that cannot be present where a claim is for faulty workmanship.  The Supreme Court found that any contrary interpretation of the policies would allow insurers to convert CGL policies into performance bonds that guarantee the insured’s work, rather than the accidental results thereof.   Having found that the underlying claim fell outside the scope of the policy’s insuring agreement, the court elected not to proceed to the issue of the applicability of various business risk exclusions to the underlying claims.

Comment:  The Pennsylvania Supreme Court has long defied easy analysis when it comes to insurance issues.  With Kvaerner, the Supreme Court held to a traditional view of the limitations of liability insurance that was recently followed in Nationwide Mut. Ins. Co. v. CPB International, Inc., 562 F.3d 591 (3d Cir. 2009), in which the Third Circuit ruled that allegations that the insured breached its contract with a domestic manufacturer by providing substandard goods imported from China were “contractual in nature” and therefore failed to allege an “occurrence” under Pennsylvania law.

Lee Builders, Inc. v. Farm Bureau Mutual Ins. Co., 137 P.3d  486 (Kan. 2006)

The Kansas Supreme Court ruled that moisture problems due to the insured’s defective materials or workmanship in a construction project constitute an “occurrence” for purposes of liability insurance coverage so long as the insured did not expect or intend the damage to occur.  The Supreme Court observed that it would make little sense for a CGL policy to include an exclusion for property damage to the insured’s own work and that of its subcontractors if such property damage was never meant to be an “occurrence” in the first place.  If the insurer had wanted to distinguish between claims for breach of contract and tort, it should have included language to this effect.

Comment:  Although Kansas is not a bellwether jurisdiction, the willingness of a relatively conservative state supreme court to follow the Wisconsin Supreme Court’s American Girl analysis contribute to a general groundswell that swept before it many of the traditional distinctions that had limited coverage for contractual disputes, especially in the construction defect context.

Wilkinson v. Citation Ins. Co., 447 Mass. 663, 856 N.E.2d 829 (2006).

 In the decade after 1997, the Supreme Judicial Court steadily expanded exceptions to the “American Rule” in insurance disputes, ruling in a series of cases that insureds were entitled to recover DJ fees in cases involving homeowner’s policies, then all cases involving the duty to defend and finally even cases where the insurer was defending under a reservation of rights but sought to cut off any continuing defense duty.  In Wilkinson, however, the SJC ruled that a Superior Court judge had erred in holding a property insurer that had disputed a first party claim in good faith nonetheless owed the legal fees incurred by its policyholder in pursuing the claim.  While maintaining its earlier-stated view that fees are recoverable for disputes involving a liability insurer’s duty to defend or where the insurer has acted in bad faith, the Supreme Judicial Court found that, short of abandoning the American Rule altogether, there was no principled basis in this case for distinguishing disputes involving insurance policies from other types of contractual disputes. 

Comment:  Few issues influence the willingness of parties to sue or be sued as the rules governing the right of the prevailing party to recover its attorneys fees.  This is particularly so in recent years, where the hourly rates charged by large policyholder-oriented law firms have dramatically outstripped the rates that insurers are used to paying panel counsel.  With this case, the SJC was given an opportunity to rule that policyholders could recover attorneys in all coverage disputes, whatever the policy form or issue.  The refusal of the court to do so, signaled an important leveling off in the court’s swing to the left that was echoed a year later by the Connecticut Supreme Court’s opinion in ACMAT Corp, v. Greater New York Mutual Ins. Co., 282 Conn. 576 (2007). 

Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006)

In this case, the Minnesota Supreme Court substantially trimmed back the rights of insurers to allocate defense costs and indemnity in construction defect cases.  The Court of Appeals ruled in a construction defect case that defense costs and indemnity should both be allocated based on “time on the risk,” rejecting the trial court’s “equal shares” approach for defense costs.  The court also ruled that the period of allocation should run through the date that the problems were remediated and should not be cut off, as the trial court ruled, when the insured general contractor received complaints from property owners concerning construction defects.   On further review, however, the Minnesota Supreme Court ruled that continuing injury claims resulting from construction defects should be allocated on a “time on the risk” basis from the start of the policy in which the closing date occurred through the end of the policy year in which the insured received notice of claim.  The court declared that the insured need not bear responsibility for any period of time for which insurance was unavailable for claims of this sort, so that the period of allocation period ends as of the year in which the insured received notice of claim or with the end of the last period of insurance coverage, whichever is earlier.  The Supreme Court held that “strict application” of its Northern States Power “actual injury” rule appropriate because any other result (1) would leave the policyholder uninsured with respect to damages allocated to the period between notice of the claim and the end of remediation and (2) would put a burden on insureds to prove not only that damage was the result of a single discrete occurrence, but during which particular policy period the occurrence took place, thus further increasing the costs of coverage litigation.  The Supreme Court rejected various insurers’ argument that the allocation period should be co-extensive with the period of injury, thus extending up until the property damage from water intrusion in the homes had been fully remediated, despite the fact that Wooddale has apparently been unable to buy coverage for water intrusion exclusions after 2002.  Also, in light of the “known loss” doctrine, the court ruled that coverage cannot be triggered under policies issued after the insured has received a claim, even if remediation is not yet complete.  The court also ruled that if a policy is triggered, an entire policy year applies, even if the closing date or date of notice occurred midway through the policy.   Finally, the Supreme Court held that the Appeals Court had erred in allocating defense costs in the same percentages as applied to indemnity, holding instead that in light of precedents such as Jostens, each insurer should pay an equal share of defense costs and that an “equal shares” approach would minimize or avoid inter-carrier squabbling over how to apportion defense costs.   In a cryptic footnote, the court questioned whether such losses should be apportioned to multiple policies at all, but didn’t pursue the question further since all parties to this case had stipulated that water intrusion claims were subject to a “time on the risk” analysis.

Comment:  Despite cases such as Domtar and NSP, the Minnesota Supreme Court seems to have an ambivalent attitude to trigger and allocation issues.  In 3M, the Supreme Court refused to apply a continuous trigger in a case where the cause of loss was a specific, identifiable event.  Here, the court adopted a continuous trigger but substantially limited the allocation period.  Upon information and belief, this is the first state supreme court decision that has adopted ‘unavailability” as an exception to allocation outside the environmental/toxic tort context.

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2002: The Year of the Horse

Top New Claim Threat:       Terrorism

Athletic Achievement:           New England Patriots          

Furthest Fall from Grace: Salt Lake City Winter Olympics

Coolest New Gadget:            GPS

Hottest Coverage Issue:        Vanishing Premiums

The Five Biggest Rulings of 2002

Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 149 (9^th Cir. 2002),

The Ninth Circuit ruled that liability insurers had a duty to defend allegations that the insured's defective circuit boards had caused the plaintiffs' computer scanners to crash. In the court held that claims for breach of contract are an "occurrence" under California law and that the plaintiffs' claims alleged a "loss of use" of the scanners. Further, the Ninth Circuit ruled that the underlying suits left open the possibility that the defective circuit boards had caused "sudden and accidental physical injury to the insured's product or the insured's work after it had been put to its intended use" so as to fall within the exception to the "impaired property" exclusion. The court also took note of a consultant's investigative report which had concluded that "thermal stressing" had caused foil layers to separate, commenting that this suggested that the damage may have occurred "suddenly."

Comment: Despite earlier pro-insurer rulings such as Wisconsin Label, this Ninth Circuit opinion re-opened the door to forcing CGL insurers to pay for contract disputes involving defective electronic components at the same time as computers are assuming a ubiquitous position in our lives.

Consolidated Edison Co. of NY  v. Allstate Ins. Co., 98 N.Y.2d 208, 774 N.E.2d 687 (2002)

In a landmark victory for insurers, the New York Court of Appeals declared that a trial court did not err in adopting a "time on the risk" approach to long-tail pollution cleanup claims. The Court of Appeals ruled that an "all sums" or joint and several approach that would have permitted the policyholder to allocate its entire loss to any single year of coverage was inconsistent with the provisions of such policies limiting coverage to property damage during each year, particularly in cases where the amount of damage in any given year is uncertain. The court declined to adopt a specific theory of pro-ration, however, noting that its ruling was not the "last word" with respect to questions such as whether allocation should be based on the total period of injury, the limits of available insurance coverage or the amount of injury in each year much less as to how allocation should apply to diverse factual circumstances, such as those involving self-insured period, periods when the insured failed to purchase insurance, or periods for which insurance was unavailable for such losses. In another significant ruling, the court concluded that policyholders have the burden of proving an "accident" or "occurrence" in order to trigger coverage, rejecting the insured's contention that such terms are "exclusionary" in effect.

Comment: In recent years, New York has rarely led the way. At the same time, however, opinions of the New York Court of Appeals have a way of consolidating trends that have emerged elsewhere.   This opinion largely stemmed the tide of “all sums” rulings in other states and paved the way for the evolution of “time on the risk” case law in the region as state supreme courts in Connecticut, Massachusetts, New Hampshire and Vermont followed suit.

Friedline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002)

While affirming the Court of Appeals' ruling that personal injuries suffered by a building occupant who inhaled carpet glue fumes was outside the scope of an absolute pollution exclusion, the Indiana Supreme Court overturned the lower court's ruling that the assertion of the exclusion is per se bad faith in Indiana. The court ruled in that the Freidlines had failed to establish by clear and convincing evidence that Shelby Insurance lacked a reasonable basis for its coverage position, particularly as it had been adopted by several out-of-state courts.

Comment: Starting around 1996, when the Indiana Supreme Court eviscerated pollution exclusions in Kiger and Seymour, insurance jurisprudence in Indiana went into free fall. Things were so bad that, by 2002, an intermediate appellate court had ruled that an insurer had acted in bad faith by even contending that an absolute pollution exclusion might preclude coverage for indoor chemical exposures.   In this 2002 opinion, the state Supreme Court began to right the ship. While continuing to hold to a limited view of the exclusion, the court acknowledged the right of insurers to contest coverage where legitimate grounds existed for their positions. It was the first (but not the last) major defeat for George Plews, who until them seemed to own the keys to the courthouse.

King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002

The Texas Supreme Court ruled in this case that allegations that an employer was negligent in its hiring, training or supervision of an employee who attacked the plaintiff have been held to set forth a separate claim for an "occurrence" under Texas law. The court declared that the question of whether an "occurrence" exists must be determined independently from the viewpoint of the insured seeking coverage. Although the Fifth Circuit had previously ruled on several occasions that employers are not entitled to coverage in such circumstances inasmuch as their liability is "related to and interdependent" on the intentional acts of the employee who causes the plaintiff's damage, the Texas Supreme Court concluded that this was an erroneous reading of Texas law since, "whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally."

Comment: In King, the Texas Supreme Court rejected an earlier line of cases in which the Fifth Circuit had held that employers are not entitled to coverage in such circumstances inasmuch as their liability is “related to and interdependent” on the intentional acts of the employee who causes the plaintiff’s damage. The Texas Supreme Court declared in King that this was an erroneous reading of Texas law since, “whether one who contributes to an injury is negligent is an inquiry independent from whether another who directly causes the injury acted intentionally.”

Port of Seattle v. Lexington Ins. Co., 48 P.3d 884 (Wash. App. 2002)

In one of the first Y2K first party coverage rulings,  the Washington Court of Appeals held that millions of dollars that the Port of Seattle had spent to prevent system failures that might otherwise have resulted from the inability of its computer software to distinguish the year 1900 from 2000 fell outside the scope of its 1997 and 1998 first party property policies. The Court of Appeals declared that the Y2K problem was an "inherent vice" and therefore excluded. Further, the court refused to find that the insurers had an independent obligation to pay based on "sue and labor" provisions in their policies inasmuch as the loss that the insured sought to prevent could not have occurred before 2000 and therefore would not have been insurable in any event under these 1997 and 1998 policies.

Comment: Despite the smaller than expected incidence of Y2K-related failures after 2000, first party insurers still received millions of dollars in claims for costs that insureds claimed to have spent to mitigate against the risk of such losses occurring. As one of the first Y2K opinions, Port of Seattle set a tone that ultimately sealed the fate of such claims.

NEXT UP:  2003

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2001.    For those of us of a certain age it was, like 1984, a year in which remembered symmetries clashed with current realities.  For many, it was the year in which the new century finally began.  By the fall, it was clear to all that we had entered a new era.

2001: The Year of the Snake
Top New Claim Threat: Y2K
Furthest Fall from Grace: Enron
Athletic Achievement: Barry Bonds
Coolest New Gadget: Noise cancelling headphones
Hottest Coverage Issue: Attorney-Client Privilege

The Five Most Important Insurance Coverage Rulings of 2001

Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489, 22 P.3d 313 (2001)

In the most important allocation/recoupment case to be decided since Buss, the California Supreme Court ruled that where an insurer has defended a lawsuit under a reservation of rights and settles the claim over the objections of its insured, it is entitled to full reimbursement for all reasonable settlement payments in the event that it is later determined that the claims were not covered under its policy. The insurer had only settled after first warning the policyholder that it would seek recoupment and after giving the insured the right to take over its own defense if it so chose. The court distinguished the Texas Supreme Court’s 2000 opinion in Matagorda, noting that insurers are not free in California to immediately pursue a DJ to resolve coverage issues where, as here, the coverage issue conflicts with the underlying tort suit. The court also emphasized the fact that the insured had been offered the right to take over its own defense.

 Comment: At the time, Jacobsen seemed like an entirely equitable and reasonable outcome to the dilemma that insurers face when insureds demand that they pay to settle cases that insurers do not believe are covered. Ironically, the case has since had the unforeseen outcome of placing insurers in the default position of having to fund settlements for insureds, even in cases where coverage likely does not exist.

Boone v. Vanliner Ins. Co., 744 N.E.2d 154 (Ohio 2001)

The Ohio Supreme Court ruled 4-3 that correspondence between an insurance company and its outside coverage counsel evaluating a policyholder’s claim for coverage is discoverable in a bad faith case, concluding that “claims file materials that show an insurer’s lack of good faith in denying coverage are unworthy of protection” much like the claim fraud exception to the attorney/client privilege. Three dissenting justices criticized the “unworthy of protection rationale” as being even broader than the claimed fraud exception, which only waives the attorney/client privilege in the event of proof whereas the majority’s analysis permits all such documents to be discovered in any case where bad faith is merely alleged.”

 Comment: Vanliner sent a shiver through the insurance industry. Apart from the Arizona Supreme Court’s Lee opinion, no other court had ruled that a mere allegation of bad faith was enough to vitiate the privilege. In the event, these concerns proved somewhat exaggerated. Since 2001, however, no other state court has taken this view. Even in Ohio, the state legislature approved a measure in 2007 ameliorates Vanliner by now requiring in camera review by a court before privileged communications needed be disclosed.

Certain Underwriters at Lloyd’s v. Superior Court, 24 Cal.4th 945, 16 P.3d 94 (2001)

The California Supreme Court on February 1, 2001 that general liability policies that insure sums that the insured is “legally obligated as damages” only extend coverage to sums that the insured is ordered to pay by a court judgment and, consistently with its ruling in Foster-Gardner, specifically do not encompass “expenses required by an administrative agency pursuant to an environmental statute.” The Supreme Court refused to find that the insuring agreement extended to damages that existed apart from any order by a court. Further, the court refused to read “damages” outside of the insuring agreement or to find that it was redundant with the language requiring the insurer to pay sums for which the policyholder was “legally obligated.”

Comment: Powerine was followed by similar Supreme Court rulings in 2005 that extended its holding to excess policies.  Together, these decisions have largely blunted the effect of the court’s earlier holding in Foster-Gardner that environmental claims are a “suit” and have since significantly reduced the number of environmental claims being litigated in California.

Paradigm Ins. Co. v. Langerman Law Offices, P.A., 24 P.3d 593 (Ariz. 2001)

In this case, the Arizona Supreme Court broke new ground, holding that a cause of action for malpractice existed, even if the insurer was not a client per se. Even if the insurer is not the lawyer’s client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications. Further, the court declared that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured “but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith.”

 Comment: Much of the “dual client” case law, a pivotal premise underlying the tripartite relationship, has been decided in the unlikely context of efforts by insurers to sue defense counsel for malpractice. In this case, the Arizona Supreme Court found a way to avoid finding an express client relationship but still acknowledging the right of insurers to sue for malpractice.
 

Sunbeam Corp. v. Liberty Mutual Ins. Co., 781 A.2d 1189 (Pa. 2001)

After nearly two decades of pro-insurer rulings from state and federal courts, the future of the pollution exclusion was cast into doubt by the Pennsylvania Supreme Court when it ruled in this case that the exclusion was ambiguous or that coverage was mandated on a Morton-style theory of regulatory estoppel. While stopping short of formally adopting regulatory estoppel, the Supreme Court remanded the question back to the trial court for further finding and further suggested that such evidence might be relevant to establish a “custom and usage” within the insurance industry that mandates an interpretation of “sudden and accidental” that is contrary to the understanding of the general public. Justices Saylor and Castille argued that the lower court’s ruling should have been affirmed as the plain and ordinary meaning of “sudden and accidental” precludes coverage in a case where contamination occurred gradually over an extended period of time.

Comment: Despite initial concerns that Sunbeam might transform Pennsylvania into “West Jersey,” Pennsylvania’s courts have been slow to embrace the “regulatory estoppel” ‘theory. On the other hand, Sunbeam has made it far more difficult for insurers to obtain summary judgment in old pollution cases in the Keystone state and have opened the door for policyholder to pick and choose 1970-86 years under J.H. France.
 

Next up 2002

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The Five Most Important Insurance Coverage Rulings of 2000:

Commercial Union Ins. Co. v. Seven Provinces Ins. Co., 217 F;.3 33 (1st Cir. 2000).

The First Circuit ruled that a reinsurer could be sued for unfair claims handling and bad faith based upon a pattern of evasive claims handling in which it had raised a series of constantly shifting defenses and objections in an effort to delay or avoid paying Commercial Union’s ceded environmental settlement. The First Circuit ruled that Seven Province’s bad faith tactics “were wholly alien to the usual course of dealings between an insurer and a reinsurer.”

Comment: In a decade in which an unprecedented increase in reinsurance disputes largely tore away the “gentleman’s agreement” veneer of relations between reinsurers and ceding companies, the First Circuit set the tone early on with this bad faith opinion.

In re Rules of Professional Conduct, 299 Mont. 321, 2 P.3d 806, 814 (2000).

Efforts by insurers to impose strict litigation guidelines on defense counsel met their Waterloo when the Montana Supreme Court declared that lawyers could not ethically disclose bills to third party auditors for fear that disclosure would waive the privileged content of such documents, since auditors are not part of the “magic circle.” The court also ruled that The rules of professional conduct are not superseded by the terms governing the duty to defend in an insurance policy, nor do they only apply in cases where a conflict of interest between insured and insurer is apparent from the outset. In particular, the court ruled that guidelines requiring the insurer’s prior approval threatened defense counsel’s ethical ability to exercise independent professional judgment on behalf of the insured client.

Comment: Following this opinion, insurers and defense counsel pulled back from a nascent civil war that threatened to tear apart the tripartite relationship. Insurers have since largely revised their guidelines and reached out to defense counsel to find ways to manage litigation in a more nuanced way. Even so, by the end of the decade, many individual practioners and law firms had given up insurance defense work for more lucrative pursuits.

Matagorda County v. Texas Association of Counties Risk Management Pool, 52 S.W.3d 128 (Tex. 2000).

Efforts by the industry to extend Buss beyond California met a 10 gallon pothole when the Texas Supreme Court ruled on December 21 that liability insurers do not have a contractual or implied right to obtain reimbursements for sums that they pay to settle claims on behalf of their insureds that are later found not to be covered. Two dissenting judges argued that the Texas Supreme Court should have followed the California Supreme Court’s lead in Buss in finding an implied obligation to reimburse where the insurer’s payment would otherwise confer a windfall on the policyholder.

Comment: Years later, the Texas Supreme Court would again rule in Frank’s Casing that insurers have no similar right of recoupment. To a large extent, the refusal of Texas courts to imply rights that California courts have recognized is a product of the fact that Texas courts are, in general, much more conservative in imposing such obligations on insurers in the first instance, particularly with respect to claims of bad faith.

Travelers Ins. Co. of Illinois v. Eljer Manufacturing, Inc., 757 N.E.2d 481 (Ill. 2000)

Whereas the Seventh Circuit had ruled in Eljer Manufacturing Co. v. Liberty Mutual Ins. Co., 972 F.2d 805 (7th Cir. 1992) that the presence of a defective component caused “property damage” even if it had not yet caused damage to the product as a whole, the Illinois Supreme Court took a different view in cases involving the same claims under excess policies, declaring that that the installation of a defective product does not result in physical injury to tangible property until it actually fails and causes third party property damage.

Comment: Eljer had consequences well beyond its facts, particularly in the context of asbestos building claims. It was also not the last time in which the Illinois’ two leading course took divergent views on insurance issues. Ironically, the next time that the courts took such conflicting views of the law, it was the Seventh Circuit that held for insurers in refusing to find “personal injury” coverage for junk fax claims, whereas the Illinois Supreme Court took the opposing view, finding CGL coverage for TCPA claims in Swiderski Electronics in 2006.

Wisconsin Label Corp. v. Northbrook P&C Ins. Co., 607 N.E.2d 276 (Wis. 2000)'

In a case that pre-figured many disputes that emerged later in the decade concerning problems involving defective computer software and electronic components, the Wisconsin Supreme Court held that lost profits suffered by a retailer due to the application of incorrect bar codes were not “physical injury to tangible property” or other claim for loss of use that might constitute “property damage.” The Wisconsin Supreme Court ruled in that economic loss suffered by the plaintiff due to the mislabeling of UPC codes on the insured’s product did not result in any physical injury that would constitute “property damage” under the policies. The also court concluded that diminution in value caused by incorporation of a defective product does not constitute “property damage” under post-1973 policies unless it is the result of “physical injury” or “loss of use” and is not a separate basis for claiming coverage.

Comment: In retrospect, Wisconsin Label would prove to be the high water mark of insurance jurisprudence in Wisconsin. In the years to come, the Wisconsin Supreme Court, which had up until then generally been viewed as a reasonable arbiter of insurance disputes, fell under the sway of justices who were willing to find coverage for claims under increasingly improbable circumstances.
 

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A Look Back:  The Decade That Was In Insurance

It was the decade with no name.  Ten years that turned the world upside down.

The decade began with concern over the millennial impact of a mathematical oddity but was ultimately dominated by two iconic events—one natural and one spawned by evil men—that spawned hundreds of insurance coverage law suits and changed our view of catastrophes.

An insurer that began the decade as one of the world’s largest ended the decade on the verge of financial catastrophe, forced to suffer the indignity of federal bail-out.

It was a decade in which new types of liability claims came and went like fashion trends (remember when obesity litigation was going to be “the next asbestos”?).

Some of our most cherished pre-conceptions vanished along with our 401K savings.

A decade that began with an electoral debacle ended with a revolution in our politics that created the promise of hope but has yet to achieve it.

A decade when insurance coverage precedents proved short-lived and where insurers struggled to stay ahead of burgeoning new areas of the law.

A decade that saw enough lawyers, insurance regulators and claims executives go to jail that “captives” took on a whole new meaning.

A decade in which personal communications devices went from obscurity to deafening ubiquity.

We saw changes that will forever changes how claims are presented and litigated:

--the plaintiff’s bar set aside their competitive instincts and demonstrated an unexpected ability to use the Internet and new technologies to quickly marshal and share information and tactics.

--the federal government went from a reluctant by-standard to a front-line player in the  insurance marketplace.

--national boundaries became increasingly irrelevant as more foreign companies purchased domestic insurers and more and more U.S. claims originated overseas.

So much has happened in the past ten years that much of what did happened is now obscured in the cross-currents of history.  Over the next few weeks, as the first decade of the Twenty-First Century comes to a close, we will voyage back through the past ten years, exploring the insurance highlights, low-lights and quirks of the years that were.

Next up:  2000---was it the end of the century or start of a new one?

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In Fairbanks v. Superior Court of Los Angeles County (Farmers New World Life Insurance Co.) 46 Cal.4th 56 [2009 WL 1035264] (2009), the California Supreme Court held life insurance is not a service subject to the protections of California’s Consumer Legal Remedies Act (“CLRA”). The decision provides life insurance companies with a solid defense against CLRA lawsuits alleging unfair or deceptive acts and practices in the marketing or sale of life insurance policies.

The CLRA (Calif. Civ. Code § 1750 et seq.) provides a nonexclusive statutory remedy for unfair methods of competition and unfair or deceptive acts undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer.  The Act provided a means to recover damages, punitive damages, and attorneys fees.

Absence of this remedy does not preclude other causes of action, namely under California’s Business & Professions Code Section 17200 for unfair competition (limited to injunctive relief and restitution), or a “bad faith” claim (if there has been a breach of contract).

In reaching its decision in Fairbanks, the California Court rejected decisions from other jurisdictions (namely Texas and Colorado), which held life insurance does come within the meaning of services under similar consumer protection statutes. The California Court determined that, unlike the broadly worded statutes in other states, the CLRA “contains a restrictive definition of ‘services’ that excludes life insurance.”

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In a wide ranging opinion with significant negative implications for the ability of insurers to contest construction defect claims in Massachusetts, the First Circuit has ruled in Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750 (1st Cir. April 16, 2009), that a federal district court erred in granting summary judgment to a liability insurer for claims arising out of the discharge of fumes from defectively-installed carpet tile and related materials throughout the plaintiff’s building.
 

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In Lifestar Response of Alabama, Inc. v. Admiral Ins. Co., 2009 Ala. Lexis 39, Lifestar Response of Alabama, Inc. (“Lifestar”) brought a legal malpractice action against its defense lawyers and its insurer, Admiral Insurance Company (“Admiral”), for failing to have a default judgment set aside in the underlying action. Admiral had agreed to defend Lifestar under a reservation of rights. The primary question before the Court was whether Admiral could be held vicariously liable for the alleged negligence of defense counsel. Lifestar alleged Admiral had a duty to defend Lifestar in the underlying action and that Admiral retained defense counsel as Admiral’s agent to perform the defense obligation. (There was some dispute over whether Admiral first retained defense counsel or if Lifestar retained them and Admiral then agreed to pay their fees, but that did not appear relevant to the Court’s ultimate decision.) Lifestar essentially argued that Admiral breached its insurance contract by providing a substandard defense and that because defense counsel were agents of Admiral, defense counsel’s negligence and/or wantonness should be imputed to Admiral.

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It didn’t take long for the first bad faith suits arising from Hurricane Ike to be filed in Texas.  Last week, the first two Ike bad faith lawsuits that I am aware of were filed in Galveston and Ft. Bend Counties. In Fort Bend County, a breach of contract suit was filed last week titled Gatesco Inc. v. Steadfast Insurance Company in which plaintiffs claim the insurer failed to pay policy benefits after its property sustained damages during Ike. On November 7th, an Ike bad faith lawsuit was filed in Galveston County titled Williamson v. Brown & Brown Insurance Services of Texas and Chubb Lloyds Insurance Company of Texas for alleged failures to pay Ike-related damages.  These are first of several thousand Ike lawsuits expected to be filed across Southeast Texas over the next several years. There doesn’t appear to be anything uniquely significant about them other than their apparently quick filing so soon after the storm.  The big question being asked by carriers across the country is whether Hurricane Ike will generate the type and volume of litigation generated by Hurricane Katrina. 

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For insurance companies reminiscent of the surge in environmental pollution claims in the early 1980s and now wondering if they will be the ones “left holding the bag” with respect to the still unfolding mortgage crisis, the First Circuit’s recent decision in New Fed Mortgage Corporation v. National Union Fire Insurance Company of Pittsburgh, PA, 2008 U.S. App. LEXIS 20695 (1st Cir. Mass., September 30, 2008), should provide some reassurance.

During a four month period in early 2006, a commissioned mortgage broker for New Fed Mortgage arranged fifteen mortgages through the use of altered credit reports. The result was that the lender incurred greater risk than it had bargained for and, consequentially, faced a loss on resale of the loans. After the lender discovered discrepancies between credit reports submitted by New Fed and credit reports obtained independently, the lender demanded indemnification from New Fed. Following an internal investigation, New Fed concluded that one of its brokers had scanned legitimate credit reports into an outside computer system, altered those reports and then printed the fraudulent reports for submission to lenders. New Fed followed its investigation with a claim to its insurance company, National Union.

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

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In Los Angeles Unified School District v. Great American Insurance Company (2008) __ Cal.App.4^th __ (08 CDOS 6885), the Second District (Los Angeles) appellate court reiterated California law that in order to determine whether a contract is ambiguous, the court must consider on a provisional basis extrinsic evidence to determine if there is more than one reasonable interpretation of the contract. Although this case was in the context of a construction contract, these same rules apply to interpretation of insurance contracts.

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

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Blue Shield still faces a possible class action on “post claims underwriting.” California’s Court of Appeal, Second District (Los Angeles), issued a slightly modified opinion after rehearing against Blue Shield. The appellate decisions reverses the Los Angeles County Superior Court’s order denying a motion to certify a class under Proposition 64.  In sum, the appellate court held that equitable defenses cannot be used to defeat a claim under California’s Unfair Competition Law (Bus. & Prof. Code, § 17200 [the “UCL”]) and Blue Shield could not raise as a defense fraud based on statements the insured made in an application for insurance because the application was neither attached to nor endorsed on to the policy when issued. 

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

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

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