National Insurance Law Forum

National Insurance Law Forum

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Lessons learned from the Georgia Court of Appeals’ ruling in Hughes concerning an insurer’s good faith settlement obligations.

Posted in Bad Faith/Extra Contractual, Recent Cases

By Stacy Broman and Danielle Dobry on January 16, 2018

The Georgia Court of Appeals recently decided Hughes v. First Acceptance Ins. Co. of Georgia, No. A17A0735, 2017 WL 5013371 (Ga. Ct. App. Nov. 2, 2017), a case involving whether an insurer was liable for negligence or bad faith failure to settle. The Court of Appeals found that genuine issues of material fact precluded summary judgment. The Court reasoned that an insurer may, in good faith and without notification to others, settle part of multiple claims against its insureds even though such settlements deplete or exhaust policy limits. The Court reasoned that under the facts of the case, the possibility of settling other claims within policy limits and an insurer’s knowledge of the possibility were not dispositive of the failure to settle a claim. The Hughes case serves as a reminder to keep an insurer’s good faith settlement obligations in mind when confronted with similar scenarios.

In Hughes, Ronald Jackson caused a five-vehicle collision. The collision resulted in Jackson’s death and injured others, including Julie An and her minor child, Jina Hong. Jackson was insured by First Acceptance of Georgia, Inc. Jackson’s policy had liability limits of $25,000 per person and $50,000 per accident. Following the collision, letters were exchanged between An & Hong’s counsel and First Acceptance’s counsel regarding potential settlement demands and settlement conferences.

On June 2, 2009 An & Hong’s counsel sent two letters which An & Hong would later assert were an offer to settle with a 30-day response deadline. The first letter recognized First Acceptance’s interests in a settlement conference, provided that An & Hong were interested in resolving the matter within the insured’s policy limits and expressed interest in participating in a settlement conference. The second letter requested First Acceptance provide insurance information in 30 days and that any settlement would be conditioned upon receipt of the insurance information.

On July 10, 2009 An & Hong filed a personal injury action against Jackson’s estate. On July 13, 2009, An & Hong withdrew their June 2, 2009 offer to settle. On July 17, 2009 First Acceptance sent a letter to An & Hong’s counsel and asserted that the June 2, 2009 letters had been temporarily lost which resulted in no response. On July 20, 2009, First Acceptance’s counsel responded to An & Hong’s counsel and advised that a settlement conference with all potential claimants would be scheduled within two weeks. On July 30, 2009, First Acceptance’s counsel wrote to all parties that a settlement conference would take place on September 1, 2009. An & Hong’s counsel did not participate in the conference.

On January 18, 2010 First Acceptance offered $25,000 to settle Hong’s claims which was rejected. On October 1, 2010, An & Hong rejected an offer of $50,000 to settle their claims collectively. The personal injury lawsuit went to trial in July 2012 and final judgement was entered in favor of An & Hong. The jury entered an award of $5,334,220 for Hong’s injuries.

In June 2014, the administrator of Jackson’s estate filed an action against First Acceptance. The administrator alleged that First Acceptance either negligently or in bad faith failed to settle Hong’s claim. The administrator requested damages in the amount of the difference of the jury award and First Acceptance’s $25,000 tender as well as punitive damages and attorney’s fees.

Following a hearing on cross-motions for summary judgment, the trial court denied the administrator’s motion and granted First Acceptance’s motion. The Court of Appeals held that there were issues of material fact regarding the failure to settle claim.

First, the Court of Appeals reasoned there was a genuine issue of material fact as to whether An & Hong’s June 2, 2009 letters were offers to settle within the insured’s policy limits and whether the offer included a 30-day response deadline.

Next, the Court of Appeals found that there were issues of fact regarding whether First Acceptance acted reasonably in responding to the offer. While the trial court held that summary judgment for First Acceptance was appropriate because there was no evidence to show it knew or should have known claims against the insured could have been settled within policy limits, the Court of Appeals found this reasoning misplaced. In holding that the trial court erred in granting summary judgment to First Acceptance, the Court of Appeals made clear that an insurer may, in good faith, and without notice to others, settle parts of multiple claims against its insured even though such settlements depleted or exhausted policy limits. Ultimately, under the facts of Hughes, the possibility of settling other claims within policy limits and an insurer’s knowledge of the possibility were not dispositive of the failure to settle claim. The Court of Appeals determined that those are factors a jury could consider to decide whether an insurer acted reasonably in response to an offer to settle within policy limits.

The Court of Appeals additionally held that the trial court did not err in granting summary judgment in favor of First Acceptance on the claim for attorney fees and punitive damages. The Court of Appeals reasoned that the administrator showed no evidence of bad faith or willful or wanton conduct to support those claims. The Court found fact questions regarding whether a time-limited demand existed and whether the insurer acted reasonably in responding to any such demand.

In light of Hughes, it is imperative that insurers understand their settlement obligations. An insurer is obligated to act reasonably in responding to settlement offers. To determine whether an insurer was negligent in failing to settle, Georgia courts, similar to several other jurisdictions, use the ordinarily prudent insurer standard.  The ordinarily prudent insurer standard assesses whether an ordinarily prudent insurer would consider choosing to try the case an unreasonable risk of subjecting the insured to an excess verdict. In responding to a settlement offer, the insurer must give equal consideration to an insured’s interests.

Washington Supreme Court decision raises questions for law firms that both represent insurers and defend the insurer’s policyholders

Posted in Duty to Defend, Liability Coverage, Recent Cases

The Washington Supreme Court recently decided Arden v. Forsberg & Umlauf, P.S., 2017 Wash. LEXIS 911 (September 14, 2017), a case involving the ethical obligations of law firms retained by an insurer to defend the insurer’s policyholder.  While the Court of Appeals had held that a law firm with an insurer for a client may defend that insurer’s policyholder in an unrelated matter without creating a conflict of interest, or even disclosing that it also regularly represents the insurer in coverage matters, the Supreme Court affirmed only on the basis that the plaintiffs had not established damages as a result of any potential failure to disclose.  In dicta, the Supreme Court suggested the seminal case recognizing the duty of good faith owed by insurance defense counsel, Tank v. State Farm Fire and Casualty Co., may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court also suggested that because the law firm provided coverage advice on unrelated cases, it may have needed to disclose that relationship before representing the insurer’s policyholder.  The majority opinion carried a narrow 5-4 margin, with the minority concurring in the result but disagreeing with the dicta regarding application of Tank and defense counsel’s duty to disclose its relationship with the insurer.


In this case, a couple insured under a Hartford homeowners’ policy, the Ardens, shot and killed their neighbors’ puppy.  The neighbors sued the Ardens for willful conversion, malicious injury, intentional or reckless infliction of emotional distress, gross negligence and willful or reckless property damage.  The Ardens sought coverage under the liability portion of their homeowners’ policy.  After initially denying a defense due to the policy’s intentional act exclusion, Hartford agreed to defend  the Ardens after the Ardens retained personal counsel, Jon Cushman, to assist them on coverage matters and monitor their defense.


Hartford retained the Seattle law firm Forsberg Umlauf, which regularly represents Hartford in coverage matters and Hartford’s insureds in unrelated defense matters, to defend the Ardens in a lawsuit by the neighbors.  Forsberg sent the Ardens a letter explaining it was defending them in the suit against them and that it would not provide coverage advice to them or to Hartford.  Hartford did not initially indicate that the defense was subject to a reservation of rights to deny coverage.  Hartford eventually sent a reservation of rights letter after the neighbors issued a settlement demand.


The claimants made a timed settlement demand of $55,000 on the Ardens.  Cushman demanded Forsberg accept the demand and Hartford pay it.  Hartford declined because it needed documentation from pending discovery responses regarding claimed damages and information about case value.  Forsberg explained to Cushman it wanted to wait until it had received claimants’ discovery responses, and requested and received an extension from the claimants.  Cushman did not object to the extension at the time.


After receiving the claimants’ discovery responses, Forsberg prepared a detailed litigation report and case evaluation and shared it with Cushman before sending it to Hartford.  It included a number, $35,000, Forsberg believed the case could be settled for.  It told Cushman it would allow the timed $55,000 demand to expire, then offer $18,000 with the goal of ultimately getting to $35,000.  Neither Cushman nor the Ardens objected.  The claimants then made another timed settlement demand, this time for $40,000.  Hartford told Cushman it would allow this demand to expire then counter at $25,000.  Cushman did not object to this offer at the time but later argued Hartford acted in bad faith by not accepting the $40,000 demand.  The claimants rejected the $25,000 offer.


The Ardens then filed suit against Hartford asserting bad faith and other claims, and the Ardens later added Forsberg as a defendant.  Hartford, the Ardens, and the neighbors ultimately globally settled their claims at mediation a few months later.  The only claims reserved were the Ardens’ claims for breach of fiduciary duty and legal negligence against Forsberg.  The trial court granted Forsberg’s summary judgment motion, dismissing the Ardens’ claims against it.  The Ardens appealed.


The Supreme Court first determined that the requirements of Tank—which outline the duties of insurance defense counsel when the insurer defends under a reservation of rights—may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court explained that Tank may not apply because (1) the insurer did not initially defend under a reservation of rights and (2) the insurer still made settlement offers notwithstanding its reservation to deny coverage and the insured was never asked to contribute toward settlement.  Even if Tank were to apply, the Court reasoned, there was no evidence that Forsberg failed to comply with Tank’s requirements of good faith.  Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and fully informed the Ardens of all settlement activity.


The Court then assessed Forsberg’s alleged duty to disclose its relationship with Hartford.  The Court recognized that Forsberg could be liable if its work for Hartford constituted a “significant risk” of a material limitation on its representation of the Ardens under RPC 1.7, because it did not disclose the relationship and obtain the Ardens’ informed consent.  The Court noted the competing expert opinions about whether Forsberg should have disclosed the relationship and obtained informed consent, and explained that the competing opinions would generally give rise to a genuine issue of fact precluding summary judgment.


The Court held that, even assuming that a breach of duty existed, the Ardens had not established any damages as a result of the alleged breach of duty.  The Court therefore affirmed summary judgment in favor of Forsberg because there was no evidence of recoverable damages.  The concurring justices agreed that lack of evidence of damages supported affirming dismissal of the Ardens’ claims, but they did not join in the dicta suggesting a limited application of Tank or the discussion of Forsberg’s potential breach of duties.


The Court left several questions remaining to be resolved by future decisions, including when the “inherent conflict of interest” in Tank may “fully materialize,” and the type and nature of relationships between law firms and insurers that may require disclosure when defending that insurer’s policyholder.

ALI Reinsurance Restatement Takes Another Step Towards Approval

Posted in Liability Coverage, News

Following last May’s tumultuous decision by the American Law Institute to defer a final vote on its proposed Restatement of Law, Liability Insurance, the Restatement reporters have been busy drafting new text to meet the concerns that were expressed by defense lawyers, state regulators and other groups in the weeks leading up to last May’s meeting.  On August 4, the Reporters released Preliminary Draft No. 4, which was debated yesterday at a meeting in Philadelphia between the project’s Reporters and a hundred lawyers, judges and law professors from the Advisers Group and Members Consultative Group for this project.

Here is a summary of the key changes in this latest draft:

–Principles of Policy Interpretation (Section 3)

The Reporters have made a concerted effort in this new Preliminary Draft to rationalize their novel “presumption of plain meaning” approach to contract interpretation and to minimize the extent to which it diverges from the traditional “plain meaning” view.   They explain that their proposed approach is a compromise between “strict plain meaning” and the “contextual” approach favored by the Restatement of Contracts that construes terms in accordance with the circumstances and context of the contract that because a determination of ambiguity is to be made without regard to extrinsic evidence, this section did not recognize the concept of “ambiguity in context.”  Notably, the Reporters assert that extrinsic evidence may not be used to “manufacture” an alternative meaning.  Rather, a plausible basis must exist for arguing that an alternative meaning exists before courts should allow discovery of extrinsic evidence to determine the relative reasonableness of the proposed latent meaning.

–Liability of Insurer for Conduct of Defense (Section 12)

As revised, Section 12 imposes vicariously liability if counsel is an employee of the insurer (ie. staff counsel) and direct liability if the insurer “has undertaken a duty to select defense counsel and the insurer breaches that duty, including by retaining counsel with inadequate professional liability insurance” or where “the insurer has undertaken a duty to supervise defense counsel and the insurer breaches that duty.”  Confusion persists, however, with respect to what constitutes “supervision.”   The Reporters explained at the September 7 meeting that they are focusing on cases where the insurer somehow controls the conduct of defense counsel and that a mere engagement letter of the issuance of Billing Guidelines would not give rise to liability.   There was also widespread criticism at the September 7 meeting of the vague statement that insurers may be liable if defense counsel does not have adequate malpractice coverage.  While insurers nowadays typically require panel counsel to produce a dec page or other proof of E&O coverage, how much coverage is enough?

–Conditions Under Which Insurers Must Defend (Section 13)

Section 12 requires insurers to defend any cases where facts are alleged that, if proven, would be covered or if there are “facts not alleged in the complaint…that a reasonable insurer would regard as a basis for adding an allegation to the action.”    Insurer advocates at the September 7 meeting argued for an elimination of the “reasonable insurer” language in favor of limiting an insurer’s duty to consider extrinsic facts to those actually known by the insurer.  The Reporters responded that they are worried about insurers that stay “willfully ignorant” by conducting little or no investigation.   Controversy also remains with respect to what it means for an “allegation” to be added to an action.  Are the Reporters referring to new facts concerning existing causes of action or an amendment to the pleadings that adds new theories of liability altogether. The Reporters have clarified Section 13 to make clear that, while “factual uncertainty” gives rise to a duty to defend, “legal uncertainty” that may exist when a jurisdiction does not have settled coverage law does not.  This drew criticism from policyholder advocates at the September 7 meeting, who argued that it would encourage delay and obfuscation by insurers.

–Duty to Make Reasonable Settlement Decisions (Section 24)

The Reporters have added language to Comment d. to Section 24 to state that their conception of a “reasonable insurer” includes not only an average ordinary insurer but also “a more aspirational concept that protects against circumstances at which average conduct is objectively unreasonable.”  They have clarified, however, that the duty to make reasonable settlement decisions only extends to excess judgments that are otherwise covered by the policy, language that was lacking in earlier drafts.

The Reporters continue to equivocate with respect to whether insurers must make an offer of settlement in the absence of a demand from the plaintiff.  Comment f. states that they are adopting a “reasonableness” standard, not a “hard and fast rule” and that whether an insurer owes the duty to make an offer depends on the particular circumstances as where the facts known to the insurer make clear that the policy limits are significantly less than the reasonable settlement value of the underlying case given the severity of the claimant’s damages and the likelihood of liability being found.  They acknowledge, however, that there may be strategic value in not making an offer early on.

Allocation in Long-Tail Losses (Section 42)

Despite policyholder efforts to return Section 42 to an “all sums” approach, the reporters have retained a “pro rata by years” allocation methodology for long tail losses.   Recently, the insureds shifted their emphasis from arguing for “all sums” to arguing instead that equity required that insureds not be required to assume responsibility for “pro rata” shares allocable to years when insurance was “unavailable,” as was largely the case for asbestos losses and, to a lesser extent, pollution claims after 1986.  The Reporters did include a discussion of “unavailability” in a new Comment h. but do not expressly endorse it.

–Known Losses (Section 47)

The Reporters have amended both the black letter rule and Comments for Section 47 to make clear that conventional CGL insurers do not have a duty to defend claims that are already in suit before their policies are issued.  This is in contrast to the text that was in last Spring’s Proposed Final Draft, which found that the liability of insurers whose obligations were subject to large self-insured retentions might still be uncertain in such circumstances.  In this latest draft, the Reporters declare that “the touchstone from whether the doctrine applies is substantially certain is whether, absent the application of the doctrine, the insurer will be required to pay some amount of money on behalf of an insured under the policy that is about to be issued.”

–Fee Shifting (Sections 48-49)

Sections 48 and 49 set forth the remedies available to policyholders and, in particular, the circumstances in which policyholders can recover their fees for litigating coverage disputes.  Section 48 states that insurers that substantial prevail in coverage suits commenced by insurers seeking to terminate a defense obligation may recover their fees, whereas Section 49 allows fees if the insurer has declined to defend and the insured obtains a ruling finding a duty to defend.  At the September 7 meeting, insurer advocates protested that Section 48, while consistent with the Mighty Midgets rule in New York, unfairly penalized insurers for bringing DJs to clarify their obligations, especially in states like Illinois where the failure to bring a DJ may estop the insurer from contesting its indemnity obligations.

It is likely that the Reporters will make a few adjustments to this latest drafting, especially as regards Section 12 but that major changes are unlikely before the draft Restatement is submitted to the ALI Council in January.   While there may be efforts to lobby the Council between now and January, there is danger in such efforts as the ALI is sensitive to efforts by outside interests to influence its deliberations.

Assuming that the ALI Council approves the revised draft, a second Proposed Final Draft will be presented to the ALI membership next Spring for a final vote in May 2018.  This time around, nearly eight years after this project began in 2010, final approval seems likely.

Certain Underwriters v. Mass. Bonding and Ins. Co. Court of Appeals Decision

Posted in Appeals, Recent Cases

The Oregon Court of Appeals delivered a decision in the Certain Underwriters v. Mass. Bonding and Ins Co, 287 Or App 279 (2017).  The trial court’s decision to dismiss London’s contribution claims was affirmed.  The Court of Appeals decided that the trial court properly concluded that there had been “no final judgment after exhaustion of all appeals” entered before the effective date of the 2013 amendments to the Oregon Environmental Cleanup Assistance Act, and therefore the 2013 amendments applied to the claims.  The 2013 amendments applied retroactively, unless there was a final judgment after exhaustion of all appeals regarding the environmental claim.  The Court of Appeals found that since the environmental claim by the common insured against London had not reached the point where all appeals had been exhausted at the time the 2013 amendments were enacted, the retroactivity clause applied and London was barred from seeking contribution.

Noncumulation Clause Results in “All Sums” Allocation for Long-Tail Environmental Liabilities

Posted in Recent Cases

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

Applying the New York Court of Appeal’s landmark Viking Pump decision for the first time, the Second Circuit recently held that an “all sums” allocation applied to policies issued to Olin Corporation by OneBeacon American Insurance Company in a long-tail environmental coverage dispute. Olin Corp. v. OneBeacon A. Ins. Co., 2017 U.S. App. LEXIS 12939 (2d Cir. July 18, 2017). In accordance with Viking Pump, the Second Circuit held that an “all sums” allocation must be applied, because the policies contained the following noncumulation and continuing coverage provisions (“Condition C”):

It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Insured prior to the inception date hereof, the limit of liability hereon . . . shall be reduced by any amounts due to the Insured on account of such loss under such prior  insurance.

Subject to the foregoing paragraph and to all other terms and conditions of this Policy in the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of termination of this Policy, [OneBeacon] will continue to protect the Insured for liability in respect of such personal injury or property damage without payment of additional premium.

Id. at *9. According to the Court, “Condition C permits an insured to pursue full recovery from any insurer in its program whose policy covers the relevant loss and contains Condition C irrespective of whether the insurer’s policy was issued at the beginning, in the middle, or towards the end of the continuing occurrence.” Id. at *45.

The court also held that the noncumulation provision of Condition C also has the effect of reducing the limits of a triggered policy by the amount of coverage afforded under any policy within the same layer of coverage for a prior year. Id. at *46 (“This provision allows the insurer to offset its indemnification obligations by amounts already paid to cover the loss by another insurer in the same coverage tier.”). However, the Court noted that it would be the insurer’s burden to “prove its entitlement under this contractual provision.” Id. at *47.

ALI Restatement Set For Vote on Tuesday

Posted in Uncategorized

The Restatement of the Law of Liability Insurance is scheduled for a debate and vote at the ALI’s Annual Meeting in Washington, D.C. on Tuesday, May 23.  To the surprise of many, however, the ALI announced this morning that any final vote on the project as a whole will be deferred until May 2018 to give the Reporters time to address a multitude of issues that have been raised in recent weeks.

In the days leading up to this year Annual Meeting, the ALI has been bombarded with a surprising number of letters of concern from state regulators, industry trade groups, insurance executives, defense bar associates and outside counsel.  The common theme is that many provisions in this Restatement stray from the common law and that further consideration is required to ensure that it is a useful and accurate source of legal authority.

In addition to the commentary that outsiders have submitted, ALI members have filed over a dozen motions that will be argued in the course of the two hour debate on Tuesday morning.   Nearly all have been submitted by ALI members who are aligned with the insurance industry.

Omnibus motions have been filed by Peter Olmssen of AIG and others asking that the entire project be recommitted with clearer instructions to the Reporter as to whether and when to diverge from majority rules of contract interpretation.   It is now unclear whether these motions will be argued.

Notwithstanding the fact that the entire project is being resubmitted to the Reporters for further consideration, the ALI membership will be asked to debate those provisions of Chapter 3 that have been changed since years meeting (ie.  Sections 13(3) and 24) as well as the new Chapter 4.   If time permits, members will also be permitted to speak further concerning sections that were approved at earlier meetings but remain controversial, particularly the rules of contract interpretation set forth in Sections 3 and 4.

The membership will also hear debate on  the following motions have been filed as to individual sections:

–Section 3:  Vanita Banks of Allstate has moved to restore the “plain meaning” rule for interpreting insurance policies in lieu of the Reporters’ proposed “presumption” of plain meaning.

–Section 4:  Vanita has also moved to eliminate language that would have treated manuscripted provisions as being written by the insurer even if the language was supplied by the policyholder or broker.

–Section 8:  Joanne Locke of Liberty Mutual has moved to amend the treatment of misrepresentations to eliminate the requirement that misstatement not only be “material” but have a “substantial” impact.

–Section 12:  Mary Massaron Ross of Plunkett & Cooney has moved to delete Subsection (2) that would impose liability on an insurer for negligence in hiring defense counsel or for not checking that the firm had adequate malpractice insurance.

–Section 13:  Natasha Nye of Peters & Nye has moved to revised Subsection (2) to make clear that extrinsic facts should only trigger a duty to defend if the insurer has actual knowledge of it, whereas the Reporters would also include such facts as a “reasonable insurer” would have been aware of.

–Section 13:  Bill Barkers of Dentons has moved to restore the Reporters’ earlier language that would have allowed insurers to refuse to defend based on undisputed material facts rather than the few enumerated exceptions that the Reporters adopted in 2016.

–Section 21:  Rich Hodyl has moved to amend Sections 21, 25 and 48 to acknowledge rights of recoupment and restitution for payments made on claims that are not covered.

–Section 24:  Joanne Locke has moved to amend Subsection (1) to make clear that liability for failing to settle only applies where there is a potential for a judgment in excess of limits and the loss is covered under the policy.  Joanne has also filed a separate motion to clearly state that insurer’s do not have a pro-active duty to make a settlement offer.

–Section 24:  Michael Aylward of Morrison Mahoney has moved to delete any consideration of “procedural factors” in assessing whether insurers may be liable for not settling.

–Section 27:  Bill Barker has moved to add language to make clear that an insurer may only be liable for failing to settle within policy limits if an excess judgment enters thereafter.

–Section 35:  Bill also proposes to amend the consent section to require actual consent by an insurer where the policy so provides.

–Section 36:  Michael Aylward has moved to amend Subsection (2) to eliminate language allowing insurers to report claims after policies have expired.

–Section 42:  Larry Stewart of Stewart Tilghman has filed a policyholder motion asking the Reporters to adopt an “unavailability” exception for long tail allocation so that policyholders are not responsible for orphan shares attributable to losses continuing after 1986 when asbestos and pollution coverage was largely deleted from standard CGL forms.

–Section 45:  Joanne Locke has moved to amend this section to confirm its provision to the treatment of “mandatory terms” else in the text.

–Section 47:  Michael Aylward has moved to revise the treatment of “known loss” to preclude coverage in situations where the insured has already been sued or received a written demand for damages.

–Section 47:  Natasha Nye has moved to revised Subsection (2) to eliminate the Reporters’ assertion that the “known loss” doctrine does not apply to “claims made” insurance.

–Section 48:  Victor Schwartz of Shook, Hardy & Bacon has moved to revise Sections 48, 49 and 51 to restore the “American Rule” and eliminate the Reporters’ proposed fee shifting to insurers.

Stay tuned.

Xia v. ProBuilders Specialty

Posted in Bad Faith/Extra Contractual, Liability Coverage, Recent Cases

Insurers should be aware of the recent Washington State Supreme Court decision in Xia v. ProBuilders Specialty, No. 92436-8 ___ Wn.2d ____ (2017) handed down on April 27, 2017. The decision may have significant impacts not only in coverage litigation regarding environmental contamination, but across a broad spectrum of liability claims under CGL policies. In short, the Washington State Supreme Court has unequivocally adopted the “efficient proximate cause rule,” normally reserved for first party policies, in its analysis of coverage under a liability policy.

The case involved a homeowner that moved into a home built by Issaquah Highlands (homebuilder) in May of 2006. Shortly after moving in she began to feel ill. It was eventually discovered that an exhaust vent attached to the hot water heater had not been installed correctly and was discharging carbon monoxide into the basement of the home. The homebuilder’s insurer denied the claim for defense and indemnity under the pollution exclusion and a townhome exclusion.

The injured plaintiff ultimately entered into a $2 million stipulated settlement with the homebuilder with a covenant not to execute against the homebuilder, and an assignment of all plaintiff’s rights against its insurer, ProBuilders. The plaintiff then sued ProBuilders directly for bad faith, violation of Washington statutes related to claims handling, as well as breach of contract. The parties brought cross motions for summary judgment and ProBuilders won on the basis that the townhouse exclusion applied and it had no obligation to defend. On appeal, the Court of Appeals disagreed with the trial court regarding the townhome exclusion, but held that the pollution exclusion barred coverage and that ProBuilders had no duty to defend.

The Supreme Court, however, reversed the Court of Appeals decision by applying the “efficient proximate cause rule” to the duty to defend analysis. This is the first time the Court has applied the efficient proximate cause rule in the third party liability context.  The Court acknowledged that the Pollution exclusion applied to bar coverage for bodily injury caused by a release of contaminants (Carbon Monoxide); however, it held that the negligent installation of the vent on the hot water heater was a potentially covered cause under the policy in the first instance.   Under the efficient proximate cause rule, where “two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss,” the loss is covered.  The court stated: “by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.”

The Court then explained that “the allegations of Xia’s complaint provided a reasonable and conceivable basis to believe that the negligent installation of the hot water heater, itself a covered occurrence under the policy provisions, set in motion a causal chain wherein the venting of exhaust lowered the oxygen content of the room such that a normally nonpolluting appliance began discharging toxic levels of carbon monoxide fumes.”  The Court held that ProBuilders failed to conduct an investigation into Washington law that might have alerted them to the rule of efficient proximate cause, and the court’s unwillingness to permit insurers to draft language to avoid it.  Thus, the insurer wrongfully refused to defend. The Court reversed the trial court decision and granted summary judgment on the breach of contract and bad faith claims in favor of Plaintiff.  The statutory claims regarding the Insurance Fair Conduct Act and Consumer Protection Act were remanded for further proceedings.

The end result is that the insurer was found in bad faith, because it did not consider application of a first-party insurance concept to a third-party liability insurance claim, that had never been done before, and now faces at a minimum the $2 million in stipulated damages for failing to defend.

ALI Restatement: The Arguments Begin

Posted in Bad Faith/Extra Contractual, Legislation, News

Even as the May 23 date for a final vote on the American Law Institute’s Restatement, Law of Liability Insurance draws near, a torrent of criticism from outside parties is raising questions with respect to the fate of this project.

On May 5, the President of DRI, the Voice of the Defense Bar weighed in, arguing that many of the provisions in the Proposed Final Draft do not reflect settled law as required for a Restatement and impose duties on insurers that will impede the ability of defense lawyers to effectively carry out their responsibilities.

May 5 also saw a letter posted from the National Conference of Insurance Legislators, urging reconsideration of the Restatement sections dealing with policy interpretation (Sections 3 and 4), the consequences of failing to defend (Section 19), the duty to settle (Section 24) and fee shifting (Section 48).  The letter seeks a meeting with the ALI Reporters to detail their concerns and threatens a public resolution challenging the legitimacy of this project is a meeting is not granted.

That same day, a senior vice president at broker Guy Carpenter Co. (Malcolm Rowland) also urged delay to allow time for reconsideration.

Earlier in the week, the Property & Casualty Insurance Association of America (PCIAA) expressed concerns about the impact that this project would have on the availability of insurance and the proper interpretation of insurance policies, particularly as regards Section 19 and 24.

As yet only one Motion has been formally filed.  It seems certain that ALI members who favor policyholder and insurer positions will be filing further Motions in the next two weeks, challenging contentious provisions dealing with policy interpretation, exclusions and bad faith.  Meanwhile, policyholders have pulled back with respect to the challenge that they presented to the Restatement’s treatment of allocation issues under long-tail claims, such as environmental contamination and asbestos.   Whereas a Motion that was presented (but not debated) at the 2016 Meeting asked that the Reporters adopt an “all sums” approach, a new Motion filed by Larry Stewart accedes to a “pro rata” approach but urges the Reporters to add an “unavailability” exception that would relieve policyholders of any duty to bear responsibility for orphan shares allocable to years after 1986 when most insurers began including mandatory exclusions for asbestos and pollution liabilities.


New Challenge to the ALI Restatement (Part Two)

Posted in News

In my post earlier today, I referenced the April 5 letter that the ALI has received from the Idaho Insurance Commissioner urging delay so that state regulators can have input concerning the final text of the Restatement of the Law of Liability Insurance.   I neglected to add that the ALI had earlier also posted a lengthy letter from Eric Dinallo, who served as New York’s Superintendent of Insurance from 2007 to 2009, outlining those regulatory concerns.

New Challenge to the ALI Restatement of the Law of Liability Insurance?

Posted in Bad Faith/Extra Contractual, Legislation, Liability Coverage, News

After seven years and countless drafts and revisions, the American Law Institute’s Restatement of the Law of Liability Insurance is scheduled for a final vote at the ALI’s Annual Meeting in Washington, D.C. on May 23, 2017.  Even as the project Reporters (Professors Tom Baker and Kyle Logue) start to contemplate life after this Restatement, a new challenge has surfaced that threatens the future of the project.

On April 5, the ALI posted a letter from Dean L. Cameron, the Director of the Idaho Department of Insurance.   In his letter, which was addressed to the Executive Director of the ALI, Cameron urges the ALI to defer final approval of this Restatement in light of its potential implications for the sale and regulation of liability insurance:

Dear Director Revesz,

The ALI’ s Restatement, Liability Insurance project proposes revisions in insurance law as well as black-letter rules. Not only are the proposed revisions and rules of concern to the insurance industry and policyholders, they may also be of concern to regulators. The proposed changes could significantly alter the course of doing business ergo, its regulation.

The Idaho Department of Insurance respectfully requests that the finalization of the Restatement, Liability Insurance project be delayed to a date later than May 2017, allowing state regulators the opportunity to weigh in on important issues raised by the proposed Restatement. This topic has just now come to the attention of our legal department which requires time to delve into this complicated topic in order to advise and submit an opinion.

Thank you for your attention to this matter and consideration of delaying the finalization of the Restatement, Liability Insurance project.

As yet, it does not appear that a formal response has been issued, nor is it clear whether similar requests have been submitted by other state regulators or may be forthcoming.