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Belated Christmas Present Award

The Indiana Supreme Court waited until December 30 to rule in National Union v. Standard Fusee that the law of the insured’s domicile (Maryland) controls the availability of coverage for multi-site pollution claims, rejecting the insured’s law of the site rule.

The Year’s Dominant Legal Issues

The national debate over whether suits for breach of contract, particularly in the context of construction defect litigation, are covered by CGL policies continued in 2010, with policyholders victorious in Indiana (Sheehan) and Mississippi (Architex v. Scottsdale). Pennsylvania remains a major bulwark for insurers, however.

Should insurers be allowed to recoup defense costs or settlements in cases that they never owed coverage for? A right to recoupment was recognized by the Sixth Circuit under Kentucky law (Travelers Property & Cas. Co. v. Hillerich & Bradsby Co., Inc.) and by the Tenth Circuit for a Colorado matter (Valley Forge Ins. Co. v. Health Care Management Partners) but rejected by the Pennsylvania Supreme Court in In American & Foreign Ins. Co. v. Jerry’s Sports Center.

The Things That Kept Us Awake At Night This Year

Asbestos

Bed bugs

Medicare Secondary Payor issues

States That Begin With A “W”

Claims Trends: Global Warming Cases Heat Up

The U.S. Supreme Court announced on December 6 that it had granted the certiorari petition filed by various electric utilities seeking a reversal of the Second Circuit’s controversial climate change opinion in American Electric Power that allowed states and private parties to pursue public nuisance claims under federal common law. Meanwhile, an electric utility’s appeal of a trial court ruling that the Village of Kivalina failed to allege an “occurrence” is due to be argued before the Virginia Supreme Court in early 2011 in AES Corp. v. Steadfast Ins. Co., Case No. 100764.

Troubling New Coverage Trends:

--The Expanding Drop Down Duties of Excess Insurers

More and more excess insurers are being found to owe coverage without the exhaustion of underlying limits. In Johnson Controls v. London Market,the Wisconsin Supreme Court ruled that a third level excess insurer’s duty to defend was triggered by the refusal of underlying insurers to defend in.   Excess insurers were likewise required to “drop down” by the California Court of Appeal in Legacy Vulcan

--The Return of the “Suit” Issue

Taking a step back from Foster-Gardner, the California Supreme Court ruled in Ameron Int’l Corp. v. Ins. Co. of the State of Pennsylvania, S153852 (Cal. November 18, 2010) that a federal administrative adjudicative proceeding is a “suit.”  Similarly, the Court of Appeal ruled in Clarendon National Ins. Co. v. StarNet that the duty to defend “suits” extends to pre-suit “Calderon Act” proceedings for construction defect claims.

The Shrinking Privilege

The Pennsylvania Supreme Court is now considering Gillard v. AIG. At issue is whether the attorney-client privilege only comprises communications from a client to an attorney or, as the insurer contends, extends to communications from counsel to a client.

In Regence Group v. TIG, a federal district court in Oregon forced an insurer to turn over to the policyholder its internal reports from outside coverage counsel on the grounds that the privilege was waived by disclosure to reinsurers at the order of an arbitration panel unde promises of confidentiality.

Bad Faith: The Good, The Bad and The Ugly

The Colorado Supreme Court ruled in Nunn v. Mid-Century Ins. Co., No. 09SC195 (Colo. November 22, 2010) that a tort claimant could sue a liability insurer based upon an assignment of the insured’s rights, a covenant not to execute and a stipulated judgment in excess of policy limits. 

In Perrera v. USF&G, however, the Florida Supreme Court refused to impose extra-contractual liability on an excess insurer where there was a higher policy that paid for the settlement and no evidence that the insurer’s position affected the outcome.

The Washington Supreme Court ruled in American Best Food, Inc. v. London    that a split in the legal authority concerning the application of the assault and battery exclusion was held not to relieve an insurer of bad faith for failing to defend an assault and battery case.

The Biggest News You Never Heard Of in 2010

The American Law Institute has embarked upon its first ever “Principles of Liability Insurance Law.” The project, which will proceed under the supervision of Professor Tom Baker of the University of Pennsylvania, will consist of three chapters: (1) Principles of Contract Law in the Liability Insurance Context; (2) Principles of Liability Insurance Coverage; and (3) Principles of the Management of Insured Liabilities.

2010 Low Lights:

The Wisconsin Court of Appeals sagely observed in Hirschorn v. Auto-Owners Ins. Co. that a reasonable insured would not understand bat guano was a “pollutant” as, when reading the term “waste,” “poop does not pop into one’s mind.”

A New Yorker sued Bumblebee Foods claiming that he has mercury poisoning as the result of consuming ten cans of tuna fish a week for years. 

A stoned Park Ranger was awarded comp benefits for being mauled while feeding bears after smoking pot: the court concluded that, “It is not as if this attack occurred when Hopkins inexplicably wandered into the grisly pen while searching for the nearest White Castle.”

A Vermont student sued Burger King after finding a condom in his Whopper.  

2010 Tech Developments

Most Annoying: Having to retype security passwords for Blackberry access. 

Runner Up: Having to type in scrambled security verification passwords to accept “Linked In” invitations you didn’t really want in the first place.

Coolest: Apple I-Pod.

Issues To Watch Out For In 2011

 Are Madoff “claw back” claims suits for “damages”? Several courts have recently ruled that equitable remedies are covered if there is a monetary cost to the insured.

Will anti-Montrose wordings survive California? The Ninth Circuit is now considering an appeal of such language in PMA Capital Ins. Co. v. American Safety Ins. Co., 10-15729 (E.D. Cal. April 10, 2010). Meanwhile, these clauses are receiving inconsistent treatment in the state Court of Appeal.

Are “defense within limits” provisions unenforceable? A federal district court in Pennsylvania thought so in NIC Ins. Co. v. PJP Consulting, LLC.

This insurance coverage dispute arose out of dumping activity by Richard Towns between 1972 and 1987. Towns operated a waste hauling business. Over time, he culled some of the debris from his business and used it to fill in a steep embankment at his house. Some of the debris was also used to fill in a swimming hole in front of the property.

Towns sold his home in 1987. Thereafter, the new owners, concerned about the fill, contacted the Vermont Attorney General’s Office which ultimately issued an order to Towns directing him to engage an environmental consultant and clean up the property.

Towns initially sought coverage for the state’s claim from Vermont Mutual, which had insured him after he sold the property in 1987. Ultimately, the Vermont Supreme Court affirmed a lower court’s ruling that the Vermont Mutual policy did not cover the loss. Towns v. Northern Security Ins. Co., 726 A.2d 65, 67 (Vt. 1999).

Thereafter, Towns sued Northern Security, which had insured him between 1983 and 1987. Northern Security disputed its claimed obligations, citing the “business pursuits” exclusion in its homeowners’ policy and contending that the loss in question had “manifested” after its policies had expired. These arguments were for the most part rejected by a state trial court in a 2007 opinion although the court declared that Northern Security was only liable for its “time on the risk” (25%) as its coverage had only been in effect for four of the sixteen years that Towns had lived there.

On appeal, the Vermont Supreme Court agreed with the trial court that the “business pursuits” exclusion did not apply. Although the debris had been generated in the course of the insured’s business, the court held that what was relevant was the dumping activity, which is subject to the non-business exception to the exclusion. This point was contested by Chief Justice Greiber, who argued in a dissenting opinion that the sheer amount and duration of the fill activity was clearly integral to the insured’s waste hauling business.

The Supreme Court also rejected Northern Security’s reliance on the “own property” exclusion. In keeping with the approach followed by most courts, the court held that groundwater contamination was a public resource and not the insured’s “own property.” The court also rejected Northern Security’s argument that because the groundwater contamination was below state action levels, it did not satisfy the policy’s requirement of “property damage.”

The court suggested, however, that the exclusion might yet apply to any costs that were solely related to the insured’s property, as distinguished from the cost of preventing third-party property damage.

The court also rejected Northern’s argument that a manifestation trigger was appropriate, declaring instead that it would follow the majority rule which applies a continuous trigger to claims of this sort where the disposal activity and resulting damage was ongoing over a period of years.
On the other hand, the Supreme Court also sustained the lower court’s decision to limit the insurer’s obligation to that portion of defense and indemnity during its “time on the risk.” The court noted that a “time on the risk” method offers several policy advantages including spreading the risk to the maximum number of carriers, providing a ready means of identifying each insurer’s liability through a relatively simple calculation and avoiding the necessity for subsequent indemnification actions between or among insurers. In cases of this sort, the court held that as the policy was self-insured, it was fair and reasonable to require the insured to bear responsibility for that portion of total defense and indemnity for which he or she chose to assume the risk.

Vermont is an unusual state within which to litigate environmental coverage issues. Unlike states in southern New England, Vermont lacks the type of heavy industry that have historically generated significant numbers of environmental claims in the past. On the other hand, insurers for the most part have been denied the opportunity to include pollution exclusions by reason of regulations followed by Vermont regulators since the early 1970s. Even so, there has been a relative dearth of clear appellate case law construing the availability of insurance coverage for such claims.

The Towns opinion may ultimately be particularly important in two respects.  First, it reenforces the growing consensus in the Northeast and New England that "all sums" has no place in insurance jurisprudence.   Although the Massachusetts SJC has a proud tradition of forging its own path without regard for the views of sister states, it is less likely to view "time on the risk" as a made up argument by insurers where allocation has been approved by the Supreme Courts of Connecticut, New Hampshire, New Jersey, New York and now Vermont.

Second, this is the rare case (Security in Connecticut being another), where a court has explicitly applied  allocation principles to the duty to defend.  As many of these cases (e.g.  ConEd, EnergyNorth) have arisen in the context of excess policies, the focus of most cases has been on insurer's claimed indemnity duties.  Towns rightly affirms that the same analysis applies to the scope of an insurer's duty to pay or reimburse defense costs.

The Supreme Court rejected the insured’s contention that pollution was not the efficient proximate cause of the oil spill, holding that the exclusion in question included not only losses caused by listed events but also losses “consisting” of the listed conditions. The court observed that “although contamination or pollution can be a cause of loss, it is most often an effect of other causes, that is a ‘loss consisting of’ rather than a cause.”

The court also refused to find that the circumstances of the spill could be viewed as an “explosion” so as to trigger the policy’s personal property coverage holding that, “whatever the force of the discharge of the oil, the tank did not rupture because of the internal pressure of the oil” so as to fit within the common case law or dictionary meaning of an “explosion.”

This is hardly the first time that homeowners have sued to get first party coverage for pollution claims.  Indeed, prior to the widespread use of ACC clauses, several courts had ruled that coverage was required, notwithstanding first party pollution exclusions, if the negligence of a third party was a contributing cause.  Thus, in Jussim v. Massachusetts Bay Ins. Co., 415 Mass. 24 (1993), the Supreme Judicial Court of Massachusetts found first party coverage for the cost of cleaning up fuel oil that migrated into the insured's well after a fuel oil dealer negligently delivered a load of oil into a neighbor's basement.  The court ruled that the pollution exclusion did not defeat coverage where the "efficient proximate cause of the loss" was the negligence of a third party, "even though the final form of the property damage, produced by a series of related events, appears to take the loss outside of the terms of the policy."

The Sperling opinion takes a very different approach since the exclusion in question applies not only to loss caused by pollution but damage that "consists" of pollution.