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

The dispute in Keeley arose out of a construction defect accident involving three of Keeley’s employees who fell from an I-beam and were injured. In addition to the claims for personal injury that the plaintiffs brought against Keeley, they claimed that he had subsequently destroyed or disposed of the I-beam, thwarting their ability to investigate and confirm its allegedly defective nature. Keeley’s insurer (United) denied coverage and brought a declaratory judgment action.

The claims in Bates v. Phenix Mut'l Ins. Co.,  2007-177 (N.H. February 18, 2008) involved damage to the insured's real and personal property after a culvert above the insured's house gave way following a period of extremely heavy rain, deluging the insured's property.  Phenix Mutual denied coverage on the basis of the flood exclusion in its policy, a position that was upheld by a state trial court in the ensuing coverage liltigation.

On appeal to the New Hampshire Supreme Court, Bates argued that the failure of the culvert and the resulting collapse of the roadway was a covered "explosion" under the policy because it was caused by a "sudden release of energy in the form of movement of water."  The trial court had rejected this argument but further found that any resulting coverage was defeated by the water exclusion in the policy.  The Supreme Court agreed.

Exclusion G to the policy stated that the policy excluded "loss or damage caused directly or indirectly" by water "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."   Since the insured conceded that water was at least an indirect cause of this loss, the Supreme Court declared that Exclusion G barred coverage.

Further, the court refused to find that the release of water caused an explosion within the ensuing loss provision of the exclusion.   The Supreme Court agreed with the trial court that applying "the ensuing loss provision to provide coverage for what is essentially a flood would subvert the intent of the parties."  In any event, the court observed that the actual damage complained of by the insured was not for damage due to an explosion (e.g.  flying rocks or debris).

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

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

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

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

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

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

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

The case of The Yaffe Companies v. Great American Ins. Co.,  arose out of an explosion at Yaffe’s scrap yard in Muskogee, Illinois which caused significant property damage and bodily harm.  Ultimately, Yaffe paid $1.8 million to settle the various claims brought against it.  It sought coverage from Ace, which had issued a CGL policy to it with a $1 million per occurrence limit but a deductible of $10,000 per claim.  Owing to the numerous underlying claims, Ace ultimately paid only half a million dollars for the losses with the Yaffe Companies absorbing the rest. 

Yaffe sued Great American contending that its umbrella liability policy, which was issued excess of the Ace $1 million policy was responsible for the difference between its total loss and $1 million.  Great American denied the claim arguing that it was only liable for that portion of the loss that remained after the underlying insurer had exhausted its limits. 

An Oklahoma district court granted summary judgment for Great American but the Tenth Circuit reversed.  Construing the various provisions of the umbrella policy together, the court found ambiguity and declared that the fortuity that the insured had chosen to purchase primary insurance on a “per claim” basis was irrelevant to the construction of the language of the Great American policy.  Since Yaffe had clearly paid more than $1 million, the court ruled that Great American was responsible for the remaining $800,000 in loss.

A dissenting judge argued that the language was, in fact, unambiguous and was keyed to the underlying limits of coverage, not the amount of the insured’s loss.  Judge Briscoe rejected the majority’s conclusion that the umbrella language referring to the “applicable limits of the underlying policies” merely set a dollar threshold at which point the excess carrier should pay, declaring instead that the language was clear that it was only intended to imply in excess of the retained limit, being the greater of the total amount of the limits of the underlying policies or the self-insured retention.

This case illustrates the trouble that excess underwriters can get into when their policies are not written on all fours with the primary coverage.  In this case, the underwriting file merely stated that the primary policy had a $10,000 deductible.  It is unclear whether the underwriter was aware that this was a “per claim” deductible that could have profound consequences in the event of mass tort incidents such as the Muskogee plant explosion giving rise to these claims. 

At the same time, it appears that the majority’s analysis did considerable violence to the manner in which umbrella carriers are conventionally called upon to pay and contorted the language of the policy in an effort to contrive coverage for the unfortunate and expensive consequence of the bargain that The Yaffe Companies had struck with its primary insurer.  Without saying so, the majority has in effect created a third form of umbrella coverage.  Whereas the policy itself only provides coverage for payments in excess of the primary limits or for cases outside the scope of the primary insurance, the Tenth Circuit’s analysis now creates an intermediate form of coverage requiring the umbrella carrier to also pay for that portion of an otherwise insured loss that is not owed by the primary insurer by reason of features such as deductibles or self-insured retentions.

The insurers' latest win came this morning in the New Hampshire Supreme Court.  On a certified question from the U.S. District Court, the court held in EnergyNorth Natural Gas, Inc. v. Certain Underwriters that indemnity claims arising out of the clean up of the insured's former gas site cannot be spiked in a single year to trigger a third layer excess policy issued by American Re in 1972.  Having adopted a "continuous trigger" 3 years ago in another EnergyNorth MGP case, the court this time held that the insured must bear the consequences of this extended period of property damage, as insurers are only responsible for that portion of the loss corresponding to the duration of their coverage. 

In a lengthy (for this court) opinion, the court concluded that pro rata allocation was (1) more consistent with its trigger of coverage analysis than "joint and several" liability; (2) gives insured's incentives to buy insurance and avoid environmental carelessness and (3) that joint and several is based on an untenable assumption, namely that at every point in a progressive, developing loss, the injury will be substantially the same.  Further, the court found that joint and several didn't resolve the issue of allocation, it merely postponed it by spawning another round of contribution litigation between the spiked carrier and other potentially triggered insurers that had avoided the insured's initial embrace.  

As any means of allocation spread the risk too thinly to reach AmRe's layer, the New Hampshire court (much like the NY Court of Appeals in ConEd) chose not to be much more specific about the details of allocation, although it expressed a strong preference for the "years times limit" approach pioneered by the New Jersey Supreme Court in Owens-Illinois.  Should that approach prove unfeasible, however, the court opined that lower courts should feel free to pro rate by years.

Owing to the fact that three justices were conflicted, only Justices Dalianis and Duggan (who wrote the opinion) sat, with the assistance of retired Justice Sherman Horton.  Fans of NHSC history will recall that it was Sherm Horton who, shortly before retiring, handed gas utilities their first appellate defeat by ruling in Concord Gas that the intentional discharge of tar waste into a body of water could not be an "occurrence."   How the wheel turns...

As is the case with many similar opinions, there are a host of details that remain to be worked out.  Notably, the court did not specify what denominator should be used.  Insofar as the court sought to align its trigger and allocation analyses, it would seem that this period should run from the date that the site was placed in operation (1852--which was the year that Franklin Pierce--New Hampshire's native son--became President of the United States).  The court's reference to OI suggests, however, that this period must take into account the amount of insurance a reasonable business would have bought and thus the question of whether insurance could have been purchased for casualty risks for some of that time.

While the court's statement that loss continued through manifestation implied that the denominator should extend until 2000, when this pollution was first documented, the Court's reference to OI again raises the possibility that later years containing pollution exclusions should be cut off, as policyholders in Minnesota have argument since Wooddale.