Ninth Circuit Affirms Ruling That Insurer Had No Duty To Defend Insured Against A Sexual Abuse Suit

In Schorno v. State Farm Fire and Casualty Company, 2011 U.S. App. LEXIS 16211 (9th Cir August 3, 2011), the Ninth Circuit Court of Appeals in an unpublished opinion affirmed a ruling of the U.S. District Court for the Western District of Washington granting State Farm Fire & Casualty Co.’s motion for summary judgment that it had no duty to defend its insured, Schorno, against claims of sexual abuse.

The plaintiffs in the underlying case alleged that Schorno engaged in a pattern of intentional, non-accidental conduct, including sexual abuse of a child and intentional infliction of emotional distress, as well as negligent infliction of emotional distress and negligent supervision of a minor.  The insurer denied the tender of Schorno’s defense under Schorno’s homeowner’s policy on the basis that the policy covers only claims for “bodily injury” caused by an “accident” and excludes coverage for “bodily injury” that is “expected or intended by the insured.”  Because Washington courts infer an intent to inflict harm in cases involving sexual abuse, the Ninth Circuit found that the alleged conduct was neither accidental nor unintentional, and the insurer properly denied Schorno’s tender.

The Ninth Circuit determined that the fact that the allegedly abused individual reached the age of majority during the period of alleged sexual contact did not make the claimed abuse any more of an “accident.”  As Schorno’s insurance policy provides that “[r]epeated or continuous exposure to the same general conditions is considered to be one occurrence,” and because the underlying plaintiffs alleged that Schorno engaged in a continuous pattern of abuse from the allegedly abused individual’s childhood to his age of majority, the Ninth Circuit found the abuse must be treated as a single, non-accidental occurrence.

 

Similarly, while the underlying plaintiffs also brought claims against Schorno sounding in negligence, the Ninth Circuit affirmed that these claims are likewise excluded from coverage because Schorno’s insurance policy specifically excludes coverage for claims of “emotional distress,” and also because where “an abuser’s allegedly negligent acts toward a victim are close in space and time, or inextricably linked, to a continuous pattern of sexual abuse of the victim, an intent to injure can be inferred as a matter of law.”  Am. Economy Ins. Co. v. Estate of Wilker, 96 Wn App 87, 977 P2d 677, 681 (1999).  In addition, the Ninth Circuit held that the insurer’s defense of Schorno’s husband against negligence claims brought by the underlying plaintiffs did not create an obligation to defend the intentional misconduct claims against Schorno, stating that an insurance policy can indemnify one insured for negligent conduct while excluding coverage for the intentional conduct of another insured under the same policy.

 

Finally, the Ninth Circuit held that the district court did not abuse its discretion in denying Schorno’s motions to compel discovery from the insurer as Schorno had failed to show how the additional sought-after evidence would be relevant to the issue of the insurer’s duty to defend, and that the purported evidence of bad faith actually existed and was not the object of pure speculation.

Ninth Circuit (Erroneously) Holds That An Insurer Which Breaches The Duty To Defend May Not Contest Indemnity

In Desrosiers v. Hudson Specialty Ins. Co., 2011 U.S. App. LEXIS 12591 (9th Cir. Or. June 21, 2011), the Ninth Circuit found that an insurer had a duty to defend an insured against a complaint alleging negligence and intentional torts. The Ninth Circuit also found that the insurer had a duty to indemnify, stating that “an insurer that breaches its duty to defend may not later argue that it has no duty to indemnify.” 

In the underlying case, the plaintiff allegedly sustained injuries inflicted by an intoxicated patron outside the insured’s bar. The underlying complaint pled alternative theories: first, that the plaintiff’s injuries were sustained by the negligence of the intoxicated patron and the insured; and, second, that the intoxicated patron intentionally attacked the plaintiff. 

The insurer refused to defend the insured because it determined that the plaintiff’s claims fell within the scope of the policy’s exclusion for injuries arising from assaults or batteries. The underlying case reached a settlement, pursuant to which the insured assigned its rights under the policy to the alleged victim.   The alleged victim brought an action against the insurer to enforce these rights, and the district court concluded that the insurer had neither a duty to defend nor a duty to indemnify the insured under the policy. 

 

The Ninth Circuit reversed, finding that the allegation that the plaintiff’s injuries were caused by the intoxicated patron’s negligence fell outside the policy exclusion for intentional acts. To the Ninth Circuit, a rational jury could have found that the intoxicated patron was incapable of forming the requisite intent to commit assault or battery.

 

Based on its determination that there was a duty to defend, the Ninth Circuit held that the insurer also had a duty to indemnify. The Ninth Circuit based this holding on: (1) the insurer’s alleged concession that if it breached its duty to defend then it must indemnify; and (2) Nw. Pump & Equip. Co. v. Am. States Ins. Co., 141 Or. App. 210, 917 P.2d 1025, 1029 (Or. Ct. App. 1996). Specifically, the Ninth Circuit relied on language from Northwest Pump stating that "[w]hen an insurer wrongfully refuses to defend its insured on a claim that could impose liability covered by the policy and the insured, acting in its own defense, reasonably settles the claim, the insurer is liable for the amount of the settlement." The Ninth Circuit “agree[d] that an insurer that breaches its duty to defend may not later argue that it has no duty to indemnify.”

 

The precedential value of the Ninth Circuit’s holding with respect to the duty to indemnify is questionable.  Because the court found that the insurer conceded the point, it is unclear whether the Ninth Circuit would have reached the same decision again had it fully considered the issue. According to the insurer’s counsel, the insurer did not even concede this point; instead, the Ninth Circuit relied on the answer to a question that was misheard during oral argument. Further, the Court relied on a portion of the Northwest Pump decision that is no longer good law. Upon reconsideration, the Northwest Pump Court clarified that “an insurer’s breach of the duty to defend does not give rise to a duty to indemnify unless the underlying claim is covered.” Nw. Pump & Equip. Co. v. Am. States Ins. Co., 144 Or. App. 222, 925 P.2d 1241, 1244 (1996) (emphasis added). The Northwest Pump Court based this clarification on three principles: (1) the duty to defend is a contractual duty, and the measure of contract damages are “the benefit of the bargain”; (2) “the duty to defend is different from the duty to indemnify, and the breach of one does not, in and of itself, establish the breach of the other”; and (3) “the duty to indemnify cannot be extended by estoppel.”  According to the insurer’s counsel in Desosiers, the Ninth Circuit was made aware of this reconsidered opinion in the insurer’s brief. Thus, as the Derosiers decision contradicted both the Northwest Pump Court’s conclusion and the foundational principles, it appears the Ninth Circuit may have misunderstood and misapplied Oregon law.  

Ninth Circuit Affirms Ruling Of No Coverage Under A CGL Policy Based Upon Absence Of Evidence That "Property Damage" To Materials Behind The Insured's Work Took Place During The Policy Period

In Shilo Inn v. Maryland Cas. Co., 2010 U.S. App. LEXIS 24086 (9th Cir. Or. Nov. 23, 2010), an unpublished opinion, the Ninth Circuit Court of Appeals affirmed the decision of an Oregon District Court by ruling that a policy of insurance issued by Maryland Casualty to its insured did not cover the damages claimed by Shilo because the record contained no evidence that “property damage” took place during the policy period as required by the Maryland policy.

Shilo had contracted with Maryland Casualty’s insured, Grant, to install various granite components in its hotel, including granite panel tub surrounds. Shilo determined the granite tub surrounds were poorly installed, and filed a complaint in arbitration against Grant alleging claims for breach of contract and negligence for faulty work. In a Memorandum of Decision, the arbitrator found that much of Grant’s work was defective and faulty, and that, as a result, water intrusion had occurred behind the granite tub surrounds in many rooms. The arbitrator also found that there was little evidence of the extent of water intrusion damage behind the granite. The arbitrator awarded Shilo damages against Grant for the cost to remove improperly installed granite panels and to install new granite tub surrounds, and Shilo’s mitigation cost to hire another contractor to make the panels watertight. Notably, the arbitrator awarded no damages for wall board, or framing or any components behind the panels.

Shilo then filed a Writ of Garnishment against Grant, noticing Maryland Casualty as garnishee, to recover the judgment entered against Grant in state court. Maryland Casualty removed the garnishment action to federal court. Shilo’s claim for coverage for property damage under the policy was based upon its contention that, during the policy period, Grant negligently installed granite that allowed water to intrude into the tub surrounds. In denying Shilo’s summary judgment motion and granting Maryland Casualty’s cross-motion for summary judgment, the District Court focused on the policy’s exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it” (emphasis in opinion), and ruled that the arbitration award of damages to remove and replace defectively installed granite tub surrounds was excluded from coverage.

 

On Shilo’s appeal, the Ninth Circuit’s focus was on whether there was evidence in the record supporting Shilo’s contention that “property damage” had taken place during the policy period.  Noting evidence that the rooms had not been used until after the policy period, and noting that Shilo had presented no evidence that “property damage” had taken place during the policy period, the Ninth Circuit affirmed the District Court’s grant of summary judgment for Maryland Casualty. In doing so, the Ninth Circuit made clear that, under Oregon law, coverage is triggered by the occurrence of property damage, defined in the Maryland Casualty policy as physical injury to tangible property, even if the damage is not discovered until later.  St. Paul Fire & Marine Ins. Co. v. McCormick & Baxter Creosoting Co., 324 Or 184, 923 P.2d 1200, 1211 (1996).  Addressing Shilo’s contention that “property damage” takes place at the moment a defective product is installed, the Ninth Circuit emphasized that McCormick does not hold that “mere installation of a defective product, without resulting physical injury to property during the policy period, triggers coverage.” Also, the Ninth Circuit notably did not address Shilo’s contention that the policy provided coverage for the cost to remove and replace the insured’s defective work in order to see if there was any actual physical injury to materials behind the insured’s work.

Ninth Circuit Confirms Insurers' Apportionment Rights Under Oregon Law

For more than a year, plaintiffs’ and insureds’ attorneys in Oregon have been citing MW Builders, Inc. v. Safeco Ins. Co. of Am., 2009 U.S. Dist. LEXIS 31234 (D. Or., Apr. 9, 2009), for the proposition that if a contractor’s negligence results in any covered property damage, then the insurer must pay for all repair costs attributable to the contractor.  Thus, the Ninth Circuit’s recent reversal of MW Builders represents a substantial victory for insurers embroiled in construction defect disputes.

In MW Builders, Inc. v. Safeco Ins. Co. of Am. 2010 U.S. App. LEXIS 13960 (9th Cir. Or. July 8, 2010), the Ninth Circuit held that “[t]he district court erred in granting MW Builders the entire arbitration award because that award included uncovered repair costs.”  The plaintiff argued that the entire amount of the underlying arbitration award should be covered because the award amount was less than the total, actual cost to repair damage caused by the insured subcontractor’s defective work.  The Ninth Circuit rejected this argument, explaining:

That the actual repair costs, excluding uncovered repairs, ended up exceeding the $620,000 arbitration award does not justify awarding MW Builders the entire award.  MW Builders was never entitled to recover all the repair costs from Safeco.  It was only entitled to recover a portion of the damage to the hotel caused by Safeco’s insured.

 

Although the Ninth Circuit’s opinion is unpublished, it can be cited pursuant to FRAP 32.1.  Unless and until Oregon’s Supreme Court or Court of Appeals issues a contrary decision, the Ninth Circuit’s opinion in MW Builders should provide a sound basis for apportionment arguments in Oregon.

A Oregon District Court Considers Whether A Dissolved Corporation's Liability Policy Constitutes An Undistributed Asset

The issue of whether a liability policy of a dissolved corporation is an undistributed corporate asset capable of being distributed has not been addressed by Oregon’s state appellate courts. In the recent Oregon District Court opinion, Ironwood Homes, Inc. v. Bowen, 2010 U.S. Dist. LEXIS 59933 (D. Or. June 14, 2010), Oregon District Court Judge Anna Brown examined a dissolved corporation’s motion to dismiss claims against it for failure to state a claim based on the plaintiffs’ failure to allege that the dissolved corporation holds any undistributed assets, and thus lacks the capacity to be sued.  The Ironwood court’s opinion is of interest because the court considered the fact that the dissolved corporation’s liability insurer was paying the attorney representing the dissolved corporation as a factor in its denial of the motion.

In Ironwood, the plaintiffs sought partial relief for environmental response costs under CERCLA.  The dissolved corporation, Linke Enterprises, Inc. (“Linke”), apparently represented by an attorney paid by its liability insurer, moved to dismiss the claims against Linke on the ground that the plaintiffs did not allege that Linke holds any undistributed assets and, accordingly, lacks the capacity to be sued.  Linke asserted that it is a “dead and buried” corporation under Oregon law with no undistributed assets and thus not able to be sued or held liable for environmental response costs.  Noting that Fed. R. Civ. P. 17(b) (2) provides that the capacity of a corporation to sue or to be sued is determined by the law under which it was organized, and also noting that the Ninth Circuit has held that FED. R. Civ. P. 17(b) (2) requires the court to apply state law when deciding whether the dissolved corporation may be sued for damages, the Ironwood court looked to apply Oregon law.

Oregon statutes provide that the dissolution of a corporation does not prevent the commencement of a proceeding against it in its corporate name, and also provide that a claim against a dissolved corporation may be enforced to the extent of its undistributed assets unless the corporation complies with specified notice provisions, which, while not addressed in the opinion, Linke likely did not fulfill.  The Ironwood court noted that the parties did not cite, and the court did not find, any Oregon authorities helpful in addressing the issue as to whether a liability policy is a corporate asset capable of being distributed when a corporation is dissolved, but also noted that courts of other jurisdictions have found that liability policies should be listed as assets of a bankruptcy estate.

 

In light of the lack of Oregon law on the central issue, the court found it reasonable to infer that Linke’s liability insurance policies are an asset of the company because an attorney paid by the insurer is representing Linke’s interests in this case.  That inference, together with the court’s finding that the plaintiffs were not required to allege that Linke has undistributed assets to satisfy a judgment, resulted in the court’s denial of Linke’s motion to dismiss.

Ninth Circuit Addresses the Meaning of "Ice" in an All Risk Property Insurance Policy

In Terminal Freezers Inc. v. U.S. Fire Ins., 2009 U.S. App. LEXIS 20321, an unpublished opinion issued on September 11, 2009, the Ninth Circuit Court of Appeals employed Washington law to examine the meaning of the undefined term “ice” as used in an “all risk” property insurance policy. In Terminal Freezers, the plaintiff, who runs a cold storage facility, made a claim for loss under three commercial “all risk” property insurance policies issued by U.S. Fire when areas of the facility were damaged by ice. U.S. Fire denied the claim. See Terminal Freezers, Inc. v. U.S. Fire Ins., 2008 U.S. Dist. LEXIS 48280 (W.D. Wash. June 23, 2008). Terminal Freezers’ claim involved two freezer warehouses, and the parties agreed that their construction was deficient in several respects, including that vapor retarders were not properly installed and caused excessive ice formation. Id. The district court granted U.S. Fire’s summary judgment motion brought on the grounds that the policy’s faulty workmanship exclusion precluded coverage, and that there is no coverage for damage caused by ice. Id.

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

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

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

Ninth Circuit Affirms Application of Exclusion for "Pilot or Crew Member in an Aircraft"

In Woodworth v. Stonebridge Life Ins. Co., 2009 U.S. App. LEXIS 15068 (9th Cir. July 8, 2009), the Ninth Circuit affirmed the district court’s grant of summary judgment based on its interpretation of an exclusion for “Loss caused by or resulting from: . . . an injury while the Covered Person is acting as a pilot or crew member in an aircraft.” The dispute arose out of an airplane accident in which flight instructor Roger Woodworth lost his life. Plaintiff, the deceased’s wife, argued that the exclusion should not apply, since it was unknown whether her husband was actually controlling the aircraft at the time that it crashed. She asserted that, because the insurer bears the burden of showing that an exclusion applies, the exclusion would not apply unless Stonebridge proved that her husband was in control of the plane at the time of the crash.

The Ninth Circuit stated that summary judgment was properly granted in favor of Stonebridge because Mr. Woodworth was at least acting as a “crew member” during the entire flight, whether or not he was controlling the plane at the time of the crash. Although the term “crew member” was not defined, the court noted that a reasonable layperson’s definition of the term comported with the federal regulatory definition under 14 C.F.R. § 1.1, which defines crewmember as “a person assigned to perform duty in an aircraft during flight time.” The court went on to state, “[a]s the flight instructor and the only pilot certified to fly the twin-engine aircraft, Mr. Woodworth had duties related to the operation of the aircraft and was a “crew member” for purposes of the exclusion.” Thus, the insurance company was not required to prove that Mr. Woodworth was actually controlling the airplane at the time of the crash in order to apply the exclusion.

Ambiguous Instructions from the Ninth Circuit Result in a Potentially Problematic Ruling for Insurers in Allocation Cases

 

In MW Builders, Inc. v. Safeco Ins. Co. of America, District Court Judge Haggerty held that an insurance company must bear the burden of establishing which portions of an arbitration award were reasonably allocable to covered claims where “circumstances of the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one.”

 

MW Builders, the general contractor for the construction of the Candlewood Suites Hotel in Hillsboro Oregon, tendered the defense to and sought indemnity from subcontractor Portland Plastering and its insurer, Safeco, for claims for water damage caused by faulty work on the hotel’s exterior siding (EIFS). Safeco denied the tender and refused to defend or indemnify MW Builders. MW Builders settled with the hotel owner for $2 million, then filed a separate demand for arbitration against Portland Plastering. Safeco defended Portland Plastering at the arbitration, where the arbitrator determined that Portland Plastering was 31% at fault for the damages sustained by the hotel, awarding MW Builders $620,000 in damages, plus defense costs and attorney fees.

 

In the subsequent coverage action, the district court initially awarded MW Builders the full $620,000 arbitration award. On appeal, the Ninth Circuit held that Safeco was obligated to provide coverage for damage to the hotel, but not for the costs associated with replacing the EIFS. 267 Fed. Appx. 552, 555 (9th Cir. 2008). Because the arbitration award was not partitioned into costs associated with repair of the EIFS and other damages to the hotel, the Ninth Circuit remanded the issue to the district court for a determination of this issue. Id.

 

On remand, Magistrate Judge Acosta interpreted the Ninth Circuit’s instructions as requiring him to “calculate what portion of the $620,000 award is attributed to the hotel damage claim, excluding the EIFS repair claim.” Based on information submitted by the parties, the Magistrate Judge issued a Findings and Recommendation that MW Builders was entitled to recover 60% of the arbitration award, or $372,000.

 

Reviewing MW Builders’ objections to the Findings and Recommendation, the district court held that the Ninth Circuit’s instructions were ambiguous. Instead of relying on the Magistrate Judge’s interpretation of the instructions, the court adopted MW Builders’ proposed alternative interpretation, “that the Ninth Circuit remanded the case ‘for this court to conduct a factual inquiry into the extent of the covered damages sustained by the hotel to ensure that these damages were equal to or greater than $620,000.’”

 

Relying on this alternative interpretation of the Ninth Circuit’s instructions, the court concluded that the Magistrate Judge’s partition of the arbitration award unfairly rewarded Safeco. While the insured generally bears the burden of establishing what portion of a settlement is reasonably allocable to covered claims, there are exceptions to the rule that will shift the burden to the insurer. Shifting the burden of proof is appropriate where “circumstances in the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one, or the insurer failed to adequately apprise the insured of the importance of apportionment.”

 

The court concluded that this exception applied here, citing Safeco’s refusal to defend MW Builders, which compelled MW Builders to negotiate settlement of the claims against it, and noting, “[d]efendant Safeco subsequently retained counsel to defend Portland Plastering in the subsequent arbitration and neglected to seek an allocation of damages in the resulting Knoll award.”

 

Having placed the burden on Safeco to prove allocation of the arbitration award, the court relied on its alternate interpretation of the Ninth Circuit’s instructions to hold that Safeco could not meet its burden because “such an apportionment at this point in the litigation is unavoidably and unfairly speculative and arbitrary.” Finding no dispute that the total property damaged incurred by the hotel exceeded $620,000, the court awarded MW Builders the full arbitration award amount.

 

The MW Builders decision appears alarming at first glance, but its applicability may be limited. The outcome springs from the district court’s conclusion that the Ninth Circuit’s remand instructions were ambiguous. That conclusion allowed the district court to bypass Safeco’s evidence of how the arbitration award should have been allocated because the court had already concluded that the only remaining question was whether the hotel sustained covered damages greater than $620,000. Because of this, the district court’s foray into the question of burden of proof is puzzling, and may constitute mere dicta.

 

Despite the opinion’s questionable general applicability, the court’s decision does raise questions about burden of proof in allocation cases. The district court’s conclusion that Safeco should bear the burden of proof because it should have sought an allocated verdict or advised the insured of the need for one relies mainly on an unpublished Delaware case, Premier Parks, Inc. v. TIG Ins. Co., C.A. No. 02C-04-126, 2006 Del. Super. LEXIS 383 (September 21, 2006). Assuming that Safeco appeals the decision, the Ninth Circuit could resolve the issue by simply clarifying its instructions and remanding the case again.

 

Ninth Circuit Holds Anti-Assignment Clause Ambiguous

In Alexander Manufacturing, Inc. Employee Stock Ownership Plan and Trust v. Illinois Union Ins. Co., 2009 U.S. App. LEXIS 6396, the Ninth Circuit held that an anti-assignment clause prohibiting assignment of “interest under this Policy” was ambiguous. Plaintiff AMI, an employee stock ownership plan, sued three former AMI directors who were insured under a Directors & Officers policy issued by Illinois Union. Through settlement, AMI received an assignment of the directors’ rights under the Illinois Union policy. As assignee, AMI then filed suit against Illinois Union for breach of contract and breach of the implied covenant of good faith and fair dealing.

The sole question at issue in the parties’ cross-motions for summary judgment was whether the assignment of policy rights was valid in light of the policy’s anti-assignment clause stating: “[a]ssignment of interest under this Policy shall not bind Insurer unless their consent is endorsed hereon.” The district court and the Ninth Circuit both agreed that only three major Oregon Supreme Court cases were relevant to the analysis: Groce v. Fid. Gen. Ins. Co, 252 Or. 296, 448 P.2d 554 (1968); and Holloway v. Republic Indem. Co. of Am., 341 Or. 642, 147 P.3d 329 (2006), which addressed anti-assignment clauses, and Hoffman Const. Co. of Alaska v. Fred S. James & Co., 313 Or. 464, 836 P.2d 703 (1992), which laid out the analytical approach for interpreting insurance contracts.

In Groce, the Oregon Supreme Court held that a virtually identical anti-assignment clause did not prohibit assignment of a cause of action that has accrued under the policy, such as breach of contract. Groce, however, was decided before Hoffman provided the analytical framework for interpreting insurance policies. In Holloway, on the other hand, the Oregon Supreme Court employed the analytical approach set forth in Hoffman to find that an anti-assignment clause that stated: “Your rights or duties under this policy may not be transferred without our written consent,” prevented assignment of both pre- and post-loss rights and duties. Holloway, 341 Or. at 331.

Ultimately, the District Court determined that neither Groce nor Holloway should control, and applied the Hoffman framework to the anti-assignment clause, determining that it was not ambiguous, and applied to bar both pre- and post-loss assignments. The Ninth Circuit reversed, holding that Groce “was not undercut by the Hoffman methodology.” Even if Groce were no longer binding, the Ninth Circuit concluded, the anti-assignment clause at issue was ambiguous under the Hoffman framework because “interest” could plausibly refer to either a purely pre-loss financial stake in the policy, or to both pre- and post-loss rights. The Ninth Circuit observed that the presumption against the drafter applied here “with particular force” in light of the decision in Groce, as Illinois Union “chose a nearly identical anti-assignment clause with constructive knowledge of its meaning.”
 

Ninth Circuit Upholds Punitive Damages Award Reduction, Agrees Evidence Such That Jury Could Have Found Insurer Acted With "Evil Mind"

In Leavey v. Unum Provident Corporation, 2008 U.S. App. LEXIS 2114 (9th Circuit October 6, 2008), the Ninth Circuit in an unpublished decision affirmed an Arizona federal trial court’s reduction of a jury’s $15 million punitive damage award to an insured to $3 million because $15 million was constitutionally excessive.

The court noted the trial court had reduced the insured’s non-economic compensatory damages from $4 million to $1.2 million, and agreed that a $3 million punitive damages award was more in line with Supreme Court precedent on punitive damages. While the Supreme Court has deliberately chosen not to impose a bright line ratio which a punitive damages award cannot exceed (State Farm v. Campbell, 538 U.S. 408, 426 (2003)), it recently held that “few awards exceeding a single digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Exxon Shipping v. Baker, 554 U.S. ___, 128 Ct. 2605 (2008).

Further, the Ninth Circuit found that the jury’s $1 million award for the insured’s emotional distress, while “generous,” did not shock the conscience of the court; nor did the $200,000 awarded for the insured’s self-inflicted hand injury and relapse.

The insured in Leavey, a prescription drug addict attempting to rehabilitate himself, cut his hand to get prescription drugs and otherwise went into a downward spiral after the insurer wrote him terminating his benefits. He testified he was “devastated” upon receiving that letter, and for six months was anxious, confused and depressed, moving to a cheaper apartment to save money and looking without success for a new job. When the insurer said it was reinstating the insured’s benefits, the insured remained anxious because he thought the insurer might once again change its mind.

There was evidence the insurer knew the insured could not perform the duties of his occupation, but still subjected the insured to a roundtable review, for the sole purpose of closing his expensive claim; that the insurer sought to influence the opinions of the independent medical examiners hired to examine the insured; that it misrepresented the opinions of those independent medical examiners when it announced it was closing the insured’s claim; and that it knew the insured was a vulnerable individual who suffered from anxiety and depression and was recovering from a serious drug addiction and was at a high risk of relapse. Knowing all this, the insured still sent a letter to the insured wrongfully terminating his benefits. The court ruled a jury could have found the insurer acted to serve its own interests and consciously disregarded a substantial risk its conduct might significantly affect the rights of the insured, and that it acted not only in bad faith but also with an “evil mind,” such that punitive damages were appropriate.
 

The PlayStation Coverage Wars: Impaired Coverage?

There's a recent opinion from the Ninth Circuit that doesn't seem to be getting the attention that it deserves.  For anyone handling, high tech or IP coverage claims, the court's July 15 opinion in Sony Computer Entertainment v. American Home is a must read.

The case involved efforts by Sony to get coverage under its CGL and media E&O policies for a class action suit brought by disgruntled purchasers of Sony's ubiquitous PlayStation 2 game.  The underlying plaintiffs alleged that CD and DVD video games skipped or froze while being played on the PlayStation or made " banging and clicking" noises.  Sony argued that allegations that it misrepresented the qualities of its product triggered its E&O coverage for the wrongful act of "negligent publication" or that the claims against it were for a "loss of use" triggering its CGL coverage.  The Ninth Circuit disagreed.

As to the media E&O policy issued by AISLIC, the court rejected Sony argument that the AISLIC Multimedia Professional Liability Policy’s coverage for “negligent publication” could be construed to extend to a communication of information to the public lacking or exhibiting proper care or concern so as to encompass the underlying allegations of false advertising or negligent misrepresentations. The court ruled 2-1 that the dictionary definitions pasted together by Sony conflicted with the context in which “negligent publication” was used in the AISLIC policy where the term appears in juxtaposition to incitement and defective advice and that the definition proposed by Sony would be broad enough to subsume virtually all of the other wrongful acts that receive specific definitions in the policy such as defamation, misappropriation, etc.

The court also took note of the fact that a media liability policy is intended to strictly limit coverage to the types of claims normally faced by publishers such as defamation or copyright infringement.  The Ninth Circuit reviewed various tort cases in which publishes had been held liable for the negligent publication of material that had prompted third parties to commit harmful acts and found this constructioni of the term was consistent with the context of coverage.

As to the American Home CGL policy, the Ninth Circuit refused to find that problems that Playstation II owners experienced with skipping and freezing CDs and DVDs accompanied by “banging or clicking noises” set forth a claim for “loss of use” within the policy’s definition of “property damage.” The cour t distinguished its opinion in Anthem Electronics, noting that although t that although the plaintiffs alleged that CDs and DVDs had not properly played on the PlayStation 2, there was no suggestion that they did not function properly on other devices.

In any event, the court ruled that any finding of property damage reflecting a loss of use would be subject to Exclusion M as involving impaired property that had not suffered physical injury. The court rejected Sony’s suggestion that because the complaints alleged that the freezing and locking of the disks can happen at any time, there was the possibility that this loss of use had resulted from a “sudden and accidental” physical injury to the Playstation IIs. Rather, the court found that these allegations suggested that the devices deteriorated over time.

Writing in dissent, Judge Bybee argued that the majority had given an unduly narrow construction to AiSLIC’s “negligent publication” coverage and that a broader scope was warranted by looking at separate dictionary definitions of “negligent” and “publication.”

Nevada Countersignature Law Struck Down

The Ninth Circuit has struck down Nevada’s countersignature law which required out-of-state insurance agents to get a resident agent to sign off on business written in Nevada. The Nevada statute provided that no authorized insurer may make, write, place, or renew any insurance policy on persons, property, or risks in Nevada, “except through its duly appointed and licensed agents resident in [Nevada], any one of whom shall countersign the policy.” The statute further required that the resident agent be paid a 5% commission for all work written in Nevada. The Ninth Circuit found that the statute created “two classes of insurance agents in Nevada, one class of licensed resident agents that can finalize insurance contracts, and a second class of licensed nonresident agents that cannot.” The Ninth Circuit found that the Nevada law violated the Privileges and Immunities Clause of Article IV of the Constitution on the basis that “it discriminates against citizens of other States where there is no substantial reason for the discrimination beyond the mere fact that they are citizens of other States.”

Ninth Circuit Finds Insured's Claim for Diminution in the Sale Value of Contaminated Properties Not Covered under CGL Policy

The Ninth Circuit has ruled that an insured’s claim for the difference between the appraised value of uncontaminated properties and the sale price of the properties in an contaminated state is not recoverable under a commercial general liability policy on the basis that the claim did not constitute “property damage” or “damages” that the “insured shall become legally obligated to pay” because of “property damage” under the terms of the subject policy and Washington State law.



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



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



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



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



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

Ninth Circuit Holds That Claims Aren't "Related" For E&O Purposes

The Ninth Circuit has ruled that a California District Court erred in holding that investors suits against a fund manager were barred from coverage as being “related” to claims that other investors brought against the insured prior to the date that AISLIC’s “claims made” Investment Managers policy. In Financial Managers Advisors, LLC v. American International Specialty Lines Ins. Co., No. 06-55001 (9th Cir. November 5, 2007), the court held that the newer claims involved new claimants and different “wrongful acts.” As a result, even though the new claims involved allegations of fraud and misrepresentation involving the same investment vehicles as was at issue in the earlier case, the court ruled that it did not believe that “the term ‘related’ was intended to bar recovery where two investors are advised to invest in the same fund.”

U.S. Supreme Court To Tackle Punitive Damages Again

The U.S. Supreme Court announced earlier today that it has agreed to accept Exxon’s petition for certiorari from a ruling of the Ninth Circuit holding it liable for $2.5 billion in punitive damages for its claimed misconduct in connection with the Exxon Valdez oil spill.  

It appears from the court’s October 29 cert order, which accepted briefing on issues raised by Exxon's petition concerning the propriety of such an award under federal maritime law but not on grounds of constitutional due process, that any resulting ruling will have narrower application to bad faith claims and other punitive damage suits than the Court’s recent rulings in State Farm v. Campbell and Williams v. Philip Morris.