Friday, April 27, 2012

Oregon Court Holds General Contractor Not Performing Professional Services

In its recent decision in State Farm and Casualty Co. v. Lorrick Pacific, LLC, 2012 U.S. Dist. LEXIS 57922 (D. Ore. Apr. 24, 2012), the United States District Court for the District of Oregon had occasion to consider whether a general contractor’s coordination and management of subcontractors constituted “professional services” for the purpose of an exclusion in a general liability policy.

The insured, Lorrick, was named as a defendant in a construction defect lawsuit involving an apartment complex for which it had been the general contractor.  The complaint alleged, among other things, that Lorrick failed to properly supervise and coordinate the construction of the various subcontractors.  Lorrick’s insurer, State Farm, sought a judicial declartion that it had no duty to indemnify Lorrick in connection with the underlying suit on the basis of a policy exclusion applicable to:

… bodily injury, property damage or personal injury due to rendering or failure to render any professional services or treatments.  This includes but is not limited to:

a.     legal, accounting or advertising services;
b.     engineering, drafting, surveying or architectural services, including preparing, approving, or failing to prepare or approve maps, drawings, opinions, reports, surveys, change orders, designs or specifications;
c.     supervisory or inspection services;
d.     medical, dental, x-ray, anesthetical or nurisng services or treatments, but this exclusion only applies to an insured who is engaged in the business or occupation of providing any of these services or treatments;

                                          *          *          *

While the exclusion did not specify management, oversight or coordination of subcontractors, State Farm argued that based on the Oregon Supreme Court’s decision in Multnomah County v. Oregon Automobile Ins. Co., 256 Or. 24 (Ore. 1970), the term “professional services” must be interpreted to include such activities.  In Multnomah, the Oregon Supreme Court considered whether a medical technician’s administration of insulin shots constituted a professional service.   The court interpreted the phrase to mean service “arising out of a vocation, calling, occupation or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual rather than physical or manual.”  The court also observed that it is the insured’s act that must be considered rather than the insured’s title at the time of performing the act.

Relying on the Multnomah court’s reasoning, the Lorrick court rejected State Farm’s argument that coordination of contractors constitutes a “professional service,” explaining:

I do not read the Oregon Supreme Court's decision in Multnomah County as holding that under the facts here, the term "professional services" in the Policy excludes from coverage managing, coordinating, and overseeing the work of subcontractors. Nothing in Multnomah County demonstrates that managing, coordinating, and overseeing the work of subcontractors involves "specialized knowledge" or labor that is "predominantly mental or intellectual" akin to a medical technician's ability to determine whether a patient's condition requires the injection of a medical drug.

Ultimately, the court held that there was a question of fact as to whether Lorrick’s coordination and management of subcontractors requires a “specialized knowledge.”  This question of fact precluded a finding of summary judgment in State Farm’s favor.

State Farm also argued that the exclusion applied based on subparagraph c. of the exclusion, which included “supervisory” services as an example of professional services.   State Farm contended that the plain meaning of “supervisory” necessarily includes work such as coordination and oversight of subcontractors.  The court rejected this argument as well, explaining that in the context of a professional services exclusion, the term “supervisory” has a more specific meaning than commonly ascribed it in a standard dictionary.  As such, and given the holding in Multnomah, the court concluded that supervisory services must mean something beyond merely overseeing the work of subcontractors, explaining:

Here, the Professional Services Exclusion provides explicit examples of the types of services qualifying as "professional services." Such examples include legal, accounting, engineering, architectural, "supervisory or inspection," medical, and veterinary services. It is noteworthy that although the Policy states that "supervisory" services fall under the term "professional services," it makes no mention of coordinating services, including coordinating the work of subcontractors.

The court found this lack of a specific reference to work performed by general contractors to be fatal to State Farm’s argument. 

Monday, April 23, 2012

Supreme Court of Virginia Reaffirms No Coverage for Global Warming Lawsuit

In its recent decision in AES Corporation v. Steadfast Ins. Co., 2012 Va. LEXIS 81 (Va. Apr. 20, 2012), the Supreme Court of Virginia revisited its 2011 ruling concerning whether a general liability carrier had a duty to defend an underlying lawsuit pertaining to its insured’s alleged responsibilities for climate change.

The insured, AES, was named as one of several defendants in the suit brought by the Native Village of Kivalina, alleging that defendants’ direct and indirect emissions of greenhouse gases contributed to climate change.  Plaintiffs allege that climate change will result in the melting of polar ice caps, which will cause sea levels to rise and ultimately cause their lands to be permanently flooded.  While the underlying suit was dismissed by the United States District Court for the Northern District of California (and while the viability of climate change was called into serious doubt as a result of the United States Supreme Court’s decision in AEP v. Connecticut, 131 S. Ct. 2527 (2011)), a coverage question nevertheless was raised as to whether AES was entitled to a defense in the Kivalina lawsuit.  The Supreme Court of Virginia initially ruled in the insurer’s favor in a September 2011 decision.  See, AES Corporation v. Steadfast Ins. Co., 715 S.E.2d 28 (Va. 2011).  In January 2012, however, the Supreme Court of Virginia, in a surprising move, withdrew its 2011 decision and agreed to have further argument on the issue.

In its decision on rehearing, the Virginia Court essentially adopted its earlier ruling, holding that the underlying complaint, alleging causes of action for nuisance and concert of action, did not trigger a duty to defend.  The court’s reasoning hinged on the fact that the complaint alleged that AES intentionally released tons of greenhouse gases into the atmosphere.  Intentional conduct, explained the court, cannot be an occurrence and “[i]f a result is the natural or probable consequence of an insured’s intentional act, it is not an accident.”  The court nevertheless acknowledged that in some situations, when intentional acts give rise to a harm so far outside the ordinary expectations of a reasonable person, coverage may be triggered.  As such, the question for the court was “whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that were not natural or probable consequences of AES’s deliberate act of emitting carbon dioxide and greenhouse gases.”

AES argued that this “alternative” was satisfied in light of the allegation in Kivalina’s complaint that defendants “intentionally or negligently” created the conditions for global warming.   AES further relied on the allegation that defendants “knew or should have known” of the consequences of greenhouse gas emissions, thus raising the possibility that defendants did not intend these consequences.  The court rejected these arguments, reasoning:

In the Complaint, Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities.  Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequences of such emissions is global warming and damages such as Kivalina suffered.  Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.

Thus, it was not enough that Kivalina alleged negligence in the alternative, since under Virginia law, an allegation of negligence is not synonymous with an allegation of an accident.  Because the Kivalina suit alleged that plaintiffs’ damages were the “natural and probable consequences” of AES’ “intentional emissions,” it necessarily followed that the Kivalina suit did not allege an accident.  In addressing this point, the court was careful to explain that its holding was limited to the unique facts pled:

The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury or property damage is the relevant intentional or negligent act alleged in the complaint.  Kivalina does not allege that AES’s intentional acts were done negligently.  The complaint alleges that AES was “negligent” only in the sense that it “knew or should have known” that its actions would cause injury no matter how they were performed.

Thus, the court concluded, regardless of AES’ ignorance, because the harms of its intentional emissions were the natural or probable consequences of such conduct, no occurrence was alleged and Steadfast owed no defense.

Thursday, April 19, 2012

2d Circuit Holds No Duty to Defend Intellectual Property Claim

In its recent decision titled Feldman Law Group v. Liberty Mut. Ins. Co., 2012 U.S. App. LEXIS 7787 (2d Cir. Apr. 18, 2012), the United States Court of Appeals for the Second Circuit, applying Pennsylvania law, had occasion to consider whether a claim for copyright and trade dress infringement involving designer jewelry triggered coverage under a general liability policy as an advertising injury.

Feldman Law Group (“FLG”), as the assignee of the insured, The Hyman Companies, sued Liberty to recover its costs in defending Hyman in a suit brought by Van Cleef & Arpels Logistics, S.A.  The suit alleged that Hyman violated Van Cleef’s copyright and trade dress, specifically with respect to the design of certain jewelry.  Liberty had denied a duty to defend or indemnify Hyman on the basis that Van Cleef’s suit did not allege an advertising injury, since the complaint made no reference to “advertising,” defined by the Liberty policy as a “paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The Southern District of New York held in Liberty’s favor on motion to dismiss.

On appeal, the Second Circuit agreed that the underlying suit contained no allegations that would qualify as an advertising injury offense, or that would even qualify as advertising in the first instance.  Rather, the suit related to Hyman’s efforts to reproduce, copy and imitate Van Cleef intellectual property, i.e., its jewelry designs.  The court specifically rejected FLG’s argument that the generic allegation in the complaint alleging that Hyman “offered [the jewelry] for sale and/or distributed copies of the [protected intellectual property]” constituted an advertising injury offense.  As the court explained:

FLG urges us to infer that the references to reproduction and distribution "by sale and other means" could refer to the placement of a "paid announcement" in the public media. Such references, however, are far too general to support the conclusion that Van Cleef's complaint encompassed an injury resulting from any paid advertisement by Hyman, when the complaint specifically and repeatedly refers only to Hyman's conduct in "designing" jewelry "that is confusingly similar" to Van Cleef's design, and "reproducing such design without authorization and distributing copies thereof," thus infringing its trade dress and copyright.  The factual allegations of the complaint thus specifically invoke Hyman's design, manufacture and sale of infringing goods, but nowhere discuss, allege or allude to any advertisement of those goods.

The court went on to note that even if the complaint could be construed as alleging advertisement, advertisement of misappropriated goods, in and of itself, does not constitute an advertising injury offense as defined by the Liberty policy.  For instance, Van Cleef did not allege that its intellectual property was misappropriated as a result of Hyman’s advertising.  Citing to the seminal Pennsylvania decision in Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 20 F. Supp. 2d 798, 803 (M.D. Pa. 1998), aff’d, 193 F.3d 742 (3d Cir. 1999), the court noted that “the advertisement, and not the product being advertised, must itself infringe the underlying plaintiff's rights.”  The court further rejected FLG’s argument that Hyman’s possible use of catalogues and circulars to advertise its jewelry constituted “advertising” as defined by the Liberty policy, which required a paid announcement in public media.  Circulars and catalogues, explained the court, did not fall within this definition.

Friday, April 13, 2012

7th Circuit Holds No Coverage for Restitution Claim Under D&O Policy

In its recent decision in Ryerson Inc. v. Federal Ins. Co., 2102 U.S. App. LEXIS 7372 (Apr. 12, 2012), the United States Court of Appeals for the Seventh Circuit, applying Illinois law, had occasion to consider whether an underlying suit seeking rescission of a fraudulent transaction triggered coverage under a directors and officers liability policy.

The underlying facts in Ryerson involved the insured’s allegedly fraudulent sale of a number of subsidiaries to EMC Group.  EMC later sued Ryerson, seeking rescission of the sale and restitution of the purchase price on the theory that Ryerson withheld certain material information concerning one of the subsidiaries.  EMC claimed that Ryerson fraudulently concealed this information in an effort to induce the sale.  EMC also alleged causes of action for breach of contract and breach of warranty.  Federal Insurance Company denied coverage to Ryerson, and Ryerson subsequently settled the matter with EMC for $8.5 million.

Federal’s policy provided coverage for “all LOSS for which [the insured] becomes legally obligated to pay on account of any CLAIM … for a WRONGFUL ACT … .”  Federal argued that “loss” does not and cannot include restitution.  The court agreed, stating that allowing coverage for such claims would, in essence, encourage fraud.  Citing to a number of cases, including its seminal decision in Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001), the court explained that:

If disgorging [the proceeds of ill-gotten gains] is included within the policy’s definition of “loss,” thieves could buy insurance against having to return money they stole.  No one writes such insurance.

The court further explained that regardless of whether the for restitution claim is based on fraud or an innocent mistake is of no consequence.  Rather, the key determination is whether the claim is for compensatory damages or for return of “something that belongs of right not to [the defendant] but to the plaintiff.”  As such, the court noted, it was not a relevant consideration that EMC styled its complaint as one for damages:

EMC was seeking to recover a profit made at its expense by Ryerson’s fraud, which means that if the insurance company were liable to Ryerson, Ryerson would get to keep profits of fraud.  Having to surrender those profits was not a “loss” to Ryerson within the meaning of the insurance policy … .

The court acknowledged that in some instances, a judgment or settlement in a fraud case can include a combination of restitution and damages, the latter of which may be covered.  For instance, the EMC complaint initially sought recovery “transaction costs,” which the court agreed “would not be restitution because Ryerson gained nothing from the money that EMC paid its lawyers and accountants to handle the acquisition [of the subsidiary group].”  The court nevertheless concluded that because the underlying settlement made no effort to allocate as between restitution and such transaction costs, Ryerson forfeited any right it may have had for such amounts.

Tuesday, April 10, 2012

Delaware Court Rejects Extrinsic Facts In Determining Duty to Defend Additional Insured

In its recent decision in The Premcor Refining Group v. National Fire Insurance Co. of Hartford, 2012 U.S. Dist. LEXIS 49097 (D. Del. Apr. 6, 2012), the United States District Court for the District of Delaware considered what allegations and extrinsic evidence can be considered in the context of determining a duty to defend a putative additional insured.

National Fire’s insured, Griffith Roofing, had contracted with Premcor to perform construction work.  One of Griffith’s employees was hurt while performing this work, and brought suit against Premcor, alleging that his injuries were caused by Premcor’s sole negligence.  Premcor tendered its defense as an additional insured under Griffith’s policy with National Fire.  While the National Fire policy had an endorsement providing coverage for additional insureds, where required by contract, the endorsement excluded liability resulting from the putative additional insured’s “sole negligence.”

Notwithstanding this exclusion, and the fact that the complaint alleged liability resulting from Premcor’s sole negligence, Premcor argued that it was entitled to a full defense under Griffith’s policy.  Premcor first argued that a certificate of liability insurance issued by Griffith’s broker modified the policy’s additional insured coverage because it stated that Premcor was an additional insured and the certificate did since it did not contain any language limiting the scope of coverage.  The court rejected this argument, pointing out that the certificate expressly stated that it was for informational purposes only and did not amend the coverage actually afforded by express terms of the policy.  In any event, explained the court, Griffith’s broker did not have actual or apparent authority to amend the terms of the National Fire policy.

More significant for the court was Premcor’s argument that the court should look beyond the pleadings in the underlying suit, since the facts established through discovery indicated that the underlying accident was not the result of Premcor’s sole negligence.  In other words, Premcor argued that the duty to defend, at least in the context of additional insured coverage, should not be limited to the four corners of the complaint. 

The Premcor court acknowledged, but ultimately distinguished, two decisions by the Delaware Supreme Court in which extrinsic facts were considered in determining a duty to defend.  In Pike Creek Chiropractic Center, P.A. v. Robinson, 637 A.2d 418 (Del. 1994), the court considered extrinsic evidence from the underlying case, where discovery had already been completed, to determine whether the insured’s contractual duty to defend was triggered.  Likewise, in American Ins. Group v. Risk Enterprise Management, Ltd., 761 A.2d 826 (Del. 2000), the court held that notwithstanding the general rule that a duty to defend is based on the four corners of the complaint, consideration of extrinsic facts was allowed in determining a duty to defend a third-party action where discovery was completed in the first party action and, in fact, the first party action had already settled. 

The Premcor court noted that Pike Creek and American Ins. Group were exceptions to the rule and limited to situations where “a complete discovery record had been developed and the underlying litigation was resolved.”  In fact, National Fire cited to a case involving Premcor where it cited to these very two cases, unsuccessfully, for the proposition that extrinsic evidence could be used in determining a duty to defend a putative additional insured.  See, Premcor Refining Group, Inc. v. Matrix Service Industries, 2009 WL 960567 (Del. Super. 2009).  The court therefore rejected Premcor’s argument, explaining that:

Absent completion of discovery and resolution of the underlying case, Delaware law is inclined against looking beyond the pleadings to determine whether a duty to defend exists. 

Thus, concluding that the underlying lawsuit alleged injuries as a result of Premcor’s sole negligence, the court held that National Fire had no duty to defend or indemnify Premcor at the present time. 

Tuesday, April 3, 2012

Pennsylvania Court Holds Pollution Exclusion Applies to Pig Farm Odor Claim

In its recent decision in Travelers Property Casualty Company of America v. Chubb Custom Insurance Co., 2012 U.S. Dist. LEXIS 44756 (E.D. Pa. Mar. 30, 2012), the United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, had occasion to consider whether noxious odor emanating from a pig farm constituted a pollutant for the purpose of a total pollution exclusion.

The insured operated commercial pig farms in several states, including a facility in Indiana that contained some 2,800 sows and their babies.  The facility collected the pig excrement into a large, cement pit that eventually drained through a drag line.  The drag line, in turn, deposited the waste onto nearby fields for use as fertilizer.  The insured and other entities were sued by several neighbors who alleged that the facility produced “harmful and ill-smelling odors, hazardous substances and contaminated wastewater” that resulted in personal injury and property damage.  Among other things, the complaint alleged that the “offensive and noxious odors” impaired plaintiffs’ use and enjoyment of their properties and caused “sudden onset” ailments, including nausea, vomiting, headaches, respiratory problems, irritation and aggravation of existing medical conditions.

Travelers and Zurich, which issued successive years of primary general liability coverage, denied coverage based on their policies’ respective total pollution exclusions, which in pertinent part applied to the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” After engaging in a lengthy choice of law analysis in which the court determined that the policies were governed by Pennsylvania rather than Indiana law, the court addressed the issue of whether noxious odors fell within the policies’ definitions of “pollutants,” defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” 

The court conceded that the issue of whether odors emitted from a large livestock facility are a pollutant was a matter of first impression under Pennsylvania law.  The court therefore relied on several Pennsylvania cases applying standard dictionary definitions to the terms used in the definition of “pollutant.”  Thus, for example, contaminant is generally defined as  “something that renders another thing impure” and waste is generally defined as “superfluous material produced during or left over from a manufacturing process or industrial operation.”  The court also looked to Pennsylvania cases holding that fumes can qualify as pollutants for the purpose of pollution exclusions.  See, e.g., Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100 (Pa. 1999) (fumes from cement curing agent); Matcon Diamond, Inc. v. Penn National Ins. Co., 815 A.2d 1109 (Pa. Super. Ct. 2003) (carbon monoxide fumes).  Relying on these definitions and cases, the court determined that:

… noxious odors produced by pig excrement (or waste) that cause bodily injury and property damage appear to fit squarely within the definition of pollutant under the policies.  The fact that pig waste is spread over fields as fertilizer is of no moment, as “waste” includes materials left over from a production operation, and the policies’ definition of pollutant expressly includes waste that is to be reused.

In reaching its holding, the court considered the insured’s argument that “simple odors cannot be pollutants.”  Specifically, the insured argued that “because odors can be unpleasant or sweet, harmful or innocuous, the allegation of foul odors is too ambiguous to be construed as a pollutant barring coverage.”  The court, however, rejected such a bright line rule.  Instead, the court held that it is the nature of the alleged odors, in relation to the alleged harm, that determines whether it is a pollutant.  Thus, explained the court, noxious odors emanating from a pig farm that allegedly resulted in harms beyond mere nuisance, but actual bodily injury (i.e., nausea, vomiting, breathing difficulties, etc.), unambiguously fell within the definition of “pollutant.”  The court also rejected the insured’s argument that the exclusion did not apply because manure odors are commonplace in rural areas.