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

In Harris, the plaintiff brought an action for breach of contract and for declaratory relief against its insurer for the insurer’s failure to undertake Harris’ defense in a claim against it under a claims-made and claims-reported policy. The parties filed cross-motions for summary judgment on the coverage issue, which resulted in Judge Papak’s opinion.  After determining that Oregon law applied to the dispute, the District Court determined that Oregon’s appellate courts have not considered whether the “eight-corners” rule must be properly applied to a claims-made, as opposed to occurrence-based, policy.  The District Court noted that with claims-made policies, but not occurrence-based policies, the date that a claimant advises the insured that a claim is being made is material to determining whether there is coverage for the claim.  The District Court found persuasive analysis on this issue from an opinion from the First Circuit, and quoted from that opinion: “the [eight-corners] rule cannot be rigidly applied in the context of claims-made policies where the determinative event is the timing of the claim, a fact that likely will be . . . irrelevant to the merits of the underlying tort suit, and therefore absent from the pleadings.” Edwards v. Lexington Ins. Co., 507 F3d 35, 40-41 (1st Cir 2007).

The District Court held that to bar extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy would improperly subvert the purpose and terms of the agreement between the insured and its claims-made insurer by requiring the insurer to undertake the insured’s defense under circumstances where it did not agree to do so and where the insured had no contractual right to expect it. The District Court went on to state that the rigid application of the broadest formulation of the “eight-corners” rule to claims-made policies would create circumstances in which the party alleging claims against the insured could, by choosing whether or not to allege the date a claim was first made against the insured, control whether the claims-made insurer would be required to undertake its insured’s defense.  As Oregon acknowledges that “[t]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties,” Totten v. New York Life Ins. Co., 298 Or 765, 770 (1985), and because rigid application of the “eight-corners” rule would systematically subvert intentions of the parties to a claims-made insurance contract and distort the terms of their agreement, the District Court predicted that, if presented with the issue, the Oregon Supreme Court would not apply the “eight-corners” rule to bar consideration of extrinsic evidence of the date a claim was noticed to an insured when analyzing an insurer’s duty to defend under a claims-made policy.

In Sealed Air Corp. v. Royal Indemnity Co., No. A-5951-06T3 (App. Div. August 15, 2008), the corporation sought coverage under its Directors & Officers policy for suits by shareholders who complained that the insured had failed to disclose its liability for environmental problems facing a corporate subsidiary. The Appellate Division of the New Jersey Superior Court ruled that a pollution exclusion in Royal’s D&O policy did not apply because the insured’s liability was the result of allegedly misleading financial statements, not as the result of airborne asbestos or other pollutants. The court declared that, “The gravamen of the securities holders’ complaint has its roots in securities fraud and misrepresentation, not pollution.”
The Appellate Division declined to adopt the insured’s argument that the New Jersey Supreme Court’s analysis of pollution exclusions in Navits was not limited to CGL policies and should bar such an expansive interpretation of a pollution exclusion in a D&O policy. The court held that it need not reach the applicability of Navits to D&O policies because it found that the wording in the policy at issue precluded Royal from disclaiming.

Although the Appellate Division refused to disregard the wording of the policy as a whole, as the insured had proposed based upon the Navits regulatory estoppel paradigm, it held that in this case “arising out of” should not be given the broad meaning proposed by Royal as in this case the words “arising out of” were included with a series of limiting clauses such as “based on” or “in any way involving” that required that there be a more direct causal relationship between the pollution and the excluded harm. In a case such as this, where the injuries were far too attenuated, the court held that giving effect to the exclusion would be unfair and contrary to the reasonably expectations of the insured.

In contrast to the New Jersey court’s approach, the Eleventh Circuit has recently declared in James River Ins. Co. v. Ground Down Engineering, Inc., No. 07-13207 (11th Cir. August 20, 2008) that such exclusions do apply to non-polluters. Ground Down Engineering sought coverage for a lawsuit brought against it by a client for its alleged negligence in failing to discover construction debris and fuel tanks during an environmental site assessment. Although its professional liability insurer disputed coverage on the basis of an absolute pollution exclusion in the policy, the Florida district court declared in 2007 that the customer’s claims arose out of the insured’s failure to carry out professional responsibilities, not out of pollution and that it would be “unconscionable at best” to interpret the policy as excluding from coverage claims relating to any form of pollution, regardless of causation. Since the insured had not caused the pollution, the district court found that the exclusion should not apply and that James River had therefore erred in failing to provide a defense.

This finding was reversed on appeal by the Eleventh Circuit on August 20, 2008. Unlike the District Court, the Eleventh Circuit held that the application of the exclusion did not depend on whether the insured itself had negligently caused pollution but rather applied to all losses arising out of pollution. In this case, the Eleventh Circuit observed that the Florida Supreme Court had given the term “arising out of” a broad and unambiguous meaning as applying to all losses that have some causal connection or relationship to something such that “arising out of” contemplates a more attenuated link than the phrase “because of.” Finally, the Eleventh Circuit rejected the insured’s contention that construction debris was not an excluded “pollutant.” In this case, the Eleventh Circuit found that the underlying complaint alleged that the construction debris had caused “environmental contamination.” Furthermore, the court ruled that the exclusion was not limited to “irritants” or “contaminants” but also included “waste which clearly encompassed construction debris.

The key distinction in these cases is the manner in which the courts interpreted the phrase “arising out of.” The Eleventh Circuit adopted the traditional view that “arising out of” has a far broader meaning than “because” or “caused by” and merely requires that a loss be connected to or somehow related to pollution in order to be excluded. Contrariwise, the New Jersey Appellate Division held that policies need not be given a literal reading if to do so would result in something “unfair and contrary to the reasonable expectations of the insured.”

As these opinions make clear, courts continue to be sharply divided on the crucial issue of whether an insured’s expectations (or hopes?) of coverage should trump otherwise clear and unambiguous policy exclusions.