Ninth Circuit Holds Extrinsic Facts Triggered Duty to Defend

In its recent decision in Burlington Ins. Co. v. CHWC, Inc., 2014 U.S. App. LEXIS 3941 (9^th Cir. Mar. 3, 2014), the United States Court of Appeals for the Ninth Circuit, applying California law, had occasion to consider an insured’s obligation to consider extrinsic facts in determining a duty to defend.

The underlying incident in Burlington involved injuries allegedly suffered by the plaintiff when forcibly removed by bouncers from the insured nightclub, Crazy Horse.  Claimant’s original lawsuit contained a cause of action for assault and battery for the alleged incident, as well as causes of action for negligent hiring and premises liability.  Crazy Horse’s insurer, Burlington, was provided copies of the pleadings as well as police reports concerning the incident.  The initial police reports were consistent with an assault and battery.  A supplemental report, however, indicated that while claimant was being removed from the club, he became defiant and began to resist removal.   One of the witnesses interviewed in the supplemental report stated that during this period of heightened tension, the claimant backed into a stool and fell down and that this is what may have caused his injuries.

Based on these facts, in particular the allegations in the complaint alleging that plaintiff’s injuries resulted solely from an assault and battery, Burlington denied coverage to Crazy Horse pursuant to its policy’s assault and battery exclusion.  Burlington later received summary judgment in its favor from a California federal district court.  The lower court held that due to the assault and battery exclusion, and the allegations in the underlying complaint, “there was never a possibility of coverage.”

On appeal, however, the Ninth Circuit held that the reference in the police report to the claimant falling on a stool raised the possibility that his injuries were not solely the result of an assault and battery.  Citing to the seminal California decision in Gray v. Zurich Ins. Co., 419 P.2d 168, 176 (Cal. 1966) concerning an insurer’s duty to consider extrinsic facts in determining the duty to defend, the court noted that while some aspects of the police reports substantiated an assault and battery, “some of the witness statements provided to Burlington stated that [claimant] was injured when he tried to sit down on a stool, lost his footing, and hit his head on the wall.”  This version of event, explained the court, if truly the cause of claimant’s injuries, would not fall within the assault and battery exclusion. 

Thus, explained the court, notwithstanding the actual allegations in the pleadings, and notwithstanding the witness statements in the police reports suggesting that claimant was injured solely as a result of force applied by the Crazy Horse bouncers, the extrinsic facts at least raised the possibility of coverage, which was sufficient to trigger a duty to defend.  As the court explained:

Although as originally pleaded [claimant’s] negligence claim was predicated on the theory that he had been assaulted, the extrinsic facts available to Burlington revealed the possibility that [claimant] could amend his negligence claim to allege theories of liability that would fall outside the assault-or-battery exclusion. Under well-settled California law, that possibility was enough to trigger Burlington's duty to defend.

California Court Denies Summary Judgment on Known Conditions Exclusion

In its recent decision in Lennar Mare Island v. Steadfast Ins. Co., 2014 U.S. Dist. LEXIS 26405 (E.D. Cal. Feb. 28, 2014), the United States District Court for the Eastern District of California had occasion to consider the relationship between a fixed site pollution liability policy and a remediation cost containment policy.

The Lennar decision concerns environmental liabilities at a former Naval base on Mare Island in Vallejo, California.  The site was transferred to the City of Vallejo in 2002.  The City agreed to undertake an environmental remediation of the site that would be funded by the Navy.  The City later transferred the property to Lennar Mare Island, LLC (“LMI”).  LMI, in turn, contracted with CH2M Hill Constructors, Inc. (“CCI”) to perform the required environmental remediation.

Steadfast Insurance Company issued two policies relevant to the site.  First, it issued a Remediation Stop Loss policy to CCI (the “RSL Policy”), providing cost overrun protection with respect to CCI’s remediation efforts.  Second, Steadfast issued an Environmental Liability Insurance policy (the “ELI Policy”) to LMI that insured against cleanup costs resulting from a pollution condition not known to LMI prior to the policy period, but instead first discovered during the policy period. 

The Steadfast policies referenced each other in an effort to ensure that they did not provide overlapping coverage.  Thus, the ELI Policy defined “Known Pollution Conditions” as:

… all conditions specifically described in the Scope of Work Endorsement to the Remediation Stop Loss Policy . . . and which require or  may ultimately require any form of remedial investigation or action . . .

The Scope of Work Endorsement in the RSL Policy, in turn, made reference to the conditions and activities specifically outlined in that policy and certain attachments thereto.  The RSL Policy also contained the term Known Pollution Conditions, which it defined as being limited to the conditions described in the Scope of Work Endorsement requiring any form of remedial investigation or action. 

At issue in the Lennar decision was LMI’s right to insurance coverage for PCB contamination in Building 116 of the site.  The RSL Policy’s Scope of Work Endorsement, and certain attachments thereto, made reference to PCB contamination in concrete floor slabs in Building 116.  The endorsement also referred to PCB contamination in transformer pads in Building 116.  The RSL Policy did not, however, make reference to PCB contamination in the wood floor of Building 116.  Thus, when CCI encountered PCB contamination in the building’s wood floor during the policy period, a question was raised as to whether LMI was entitled to remediation cost coverage for this contamination under the ELI Policy. 

LMI filed a declaratory judgment action and promptly moved for summary judgment.  Steadfast stated in opposition to the motion that it had obtained several documents suggesting that LMI and/or CCI was aware of the PCB contamination in the wood floor prior to the inception date of the ELI Policy, and thus it may be a Known Pollution Condition for which coverage was unavailable.  Steadfast argued, therefore, that at a minimum, it should be entitled to further discovery on the issue.  Steadfast, in fact, had been pursuing such additional discovery but was mired in several non-party discovery disputes at the time LMI filed for summary judgment.  LMI countered that any such discovery was irrelevant, since the ELI Policy defined the term Known Pollution Conditions as anything identified in the RSL Policy’s Scope of Work Endorsement, and that as such, anything not identified in the Scope of Work Endorsement was not a Known Pollution Condition.  In other words, because the Scope of Work Endorsement did not specifically identify PCB contamination in the wood floor of Building 116, it necessarily followed that this could not be a Known Pollution Condition for the purpose of the ELI Policy, regardless of when LMI first became aware of or discovered this condition.

The court disagreed with LMI’s reading of the two policies.  While the RSL Policy stated that only those conditions specifically identified could be considered Known Pollution Conditions for the purpose of the RSL Policy, the definition of Known Pollution Conditions in the ELI Policy contained no similar restriction.  In other words, an area of contamination could be considered a Known Pollution Condition for the purpose of the ELI Policy even if not specifically identified in the RSL Policy’s Scope of Work.  In any event, the ELI Policy’s insuring agreement made clear that coverage was unavailable for any pollution condition discovered outside of the policy period.  The court reasoned that LMI’s interpretation of the ELI Policy “that anything not listed as a known condition in the RSL Policy necessarily was discovered during the policy period – would collapse the two provisions of the ELI Policy [i.e., the discovery requirement and the known conditions prohibition] into one.”  Thus, the court denied LMI’s motion for summary judgment without prejudice, and permitted Steadfast additional time to take discovery into the known conditions issue.

Maryland Court Holds Prejudice Rule Applies to Claims Made and Reported Policy

In its recent decision in Navigators Specialty Ins. Co. v. Med. Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb. 21, 2014), the United States District Court for the District of Maryland had occasion to consider whether Maryland Code § 19-110, which establishes a prejudice requirement for late notice disclaimers, applies to claims made and reported policies.

Navigators insured Medical Benefits Administrators of Maryland (“MBA”) under successive claims made and reported professional liability policies for periods October 31, 2009 to October 31, 2010 and October 31, 2010 to October 31, 2011.  MBA was a claims administrator for Brit Insurance with respect to employer benefit plans.  A dispute arose between Brit and MBA concerning funds that MBA allegedly failed to repay or reconcile, and litigation ultimately followed.

While the parties disputed when Brit first asserted its claim against MBA – prior to the first of the two policies or during the term of one of the policies – the court ultimately determined that the claim was first made while the 09-10 Navigators’ policy was in effect.  MBA, however, did not report the claim to Navigators until July 2011.  Navigators thus contended that MBA’s failure to have reported the claim prior to the October 31, 2010 expiration of the 09-10 policy vitiated any right that MBA had to coverage under that policy.  MBA countered that under Maryland law, its failure to have reported the claim while the 09-10 policy was still in effect would only serve as a bar to coverage if Navigators was actually prejudiced as a result.

In support of its assertion, MBA relied on Maryland Code § 19-110, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.    

While this rule has been applied routinely to occurrence-based policies, the court noted that there were only a handful of Maryland cases that considered it in the context of claims made and reported policies.  In Sherwood Brands, Inc. v. Great Am. Ins. Co., 13 A.3d 1268 (Md. 2011), Maryland’s Supreme Court applied in the rule in the context of a claims-made policy.  Two subsequent Maryland federal district courts distinguished the holding in Sherwood when considering claims made and reported policies.  The court also noted the recent decision in McDowell Bldg., LLC v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 132854 (D. Md. Sept. 17, 2013), where Maryland’s federal district court applied the rule in the context of a claims made and reported policy.

In considering these cases, the court focused heavily on the reasoning in Sherwood, in particular the Sherwood Court’s determination that the purpose of § 19-110 was to make “policy provisions requiring notice to, and cooperation with, the insurer covenants and not conditions.”  Accordingly, the court agreed that the rule articulated in Sherwood applies to all policies, including claims made and reported policies.  As such, the court determined that Navigators was required to demonstrate actual prejudice, by a preponderance of the evidence, in order to disclaim coverage under the 09-10 policy.

New York Court Holds Claimants Had No Standing to Sue Professional Liability Insurer

In its recent decision in Commonwealth Land Title Ins Co. v. American Signature Services, Inc., 2014 U.S. Dist. LEXIS 22172 (E.D.N.Y. Feb. 20, 2014), the United States District Court for the Eastern District of New York had occasion to consider when and under what circumstances a claimant can bring a direct action against an insurer.

Alterra insured American Signature, a title insurance agency, under a professional liability policy.  While the policy was in effect, American Signature was named as a defendant in a lawsuit brought by two title insurance companies for whom American Signature had been an agent.  Plaintiffs named Alterra as a direct defendant in their suit on the theory that they were third-party beneficiaries of the policy, and that as such, they were entitled to seek indemnification from Alterra directly.  In the alternative, plaintiffs sought a ruling that Alterra had a duty to defend and indemnify American Safety in connection with their lawsuit, as Alterra had denied any such obligation to American Signature, and in fact, had commenced its own coverage action against American Signature seeking a rescission of the policy or, in the alternative, a declaration that it had no coverage obligations in connection with the underlying suit.

Citing to Lang v. Hanover, 3 N.Y.3d 350 (N.Y. 2004), Alterra argued that under New York common law, an injured party has no direct cause of action against the insurer of a tortfeasor.  The Lang decision acknowledged that New York Insurance Law §3420(a) creates a limited exception to this rule by allowing claimants to bring a direct action against a tortfeasor’s insurer only after obtaining a judgment against the tortfeasor, and only then when the judgment “remains unsatisfied at the expiration of thirty days from the serving of notice of entry of judgment upon the attorney for the insured, or upon the insured, and upon the insurer … .”  In summarizing the Lang decision, the Eastern District explained that the New York Court of Appeals “determined that compliance with the requirements of Section 3420(a)(2) is a condition precedent to any direct action against the insurance company,” and that as such, “an injured third party has no cause of action against an insurer at common law, but may bring such an action under Section 3420 so long as the plaintiff has met the conditions set forth in Section 3420(a)(2).”

While plaintiffs conceded that they did not yet have a judgment against American Signature, they nevertheless argued that a direct action was permissible because the Alterra policy was not governed by New York Insurance Law §3420, which by its terms applies to policies “insuring against liability for injury to person … or against liability for injury to, or destruction of, property.”  Plaintiffs argued that as a professional liability policy, the Alterra policy was not one insuring bodily injury or property damage, and that as such, a direct action should be permitted.  The court rejected this argument, explaining that §3420 is not a limitation on direct actions, but rather an exception to the common law rule prohibiting such an action.  As the court explained:

… the New York Court of Appeals in Lang rejected this ap-proach, observing that New York common law does not recognize a third party's claim against an insurer because of the lack of privity between them, and that Section 3420 grants a limited statutory cause of action where one does not exist under the common law.

This common law rule, explained the court, is not limited to claims for bodily injury or property damage, but instead applies to any direct actions by claimants against the insurer of a tortfeasor, regardless of the nature of the underlying claim.  As such, the court concluded that it need not reach the issue of whether §3420 applied to the Alterra policy, since even if it did, a direct action could only proceed after a judgment.  In passing, the court noted that if §3420 did not govern the Alterra policy, then plaintiffs could never have a direct cause of action against Alterra under New York common law.   In passing, however, the court pointed to several New York decisions holding that the statute applies broadly to any policy issued or delivered in New York, not just ones insuring against bodily injury or property damage.

New York’s Highest Court Vacates Its Decision in K2

In its February 18, 2014 decision in K2 Investment Group, LLP v. American Guarantee & Liability Ins. Co., New York’s Court of Appeals – New York’s highest court – had occasion to revisit its prior ruling concerning the effect of an insurer’s breach of the duty to defend.

By decision dated June 11, 2013, the Court of Appeals seemingly articulated a new rule regarding the consequences of an insurer’s breach of the duty to defend.  K2 Inv. Group, LLC v. American Guar. & Liab. Ins. Co., 21 N.Y.3d 384 (NY 2013).  Specifically, the Court held that by having wrongfully denied a defense to its insured under a professional liability policy, American Guarantee “lost its right” to rely on certain policy exclusions for indemnity purposes.  Relying on its decision in Lang v. Hanover Ins. Co., 3 N.Y.3d 350 (NY 2004) – a case involving the insurer’s right to contest the insured’s liability for an underlying loss after breaching the duty to defend – the Court explained the new rule as follows:

… we now make clear that Lang, at least as it applies to such situations, means what it says: an insurance company that has disclaimed its duty to defend "may litigate only the validity of its disclaimer." If the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions would otherwise have negated the duty to indemnify.

The Court justified this rule on fairness grounds, explaining that:

This rule will give insurers an incentive to defend the cases they are bound by law to defend, and thus to give insureds the full benefit of their bargain. It would be unfair to insureds, and would promote unnecessary and wasteful litigation, if an insurer, having wrongfully abandoned its insured's defense, could then require the insured to litigate the effect of policy exclusions on the duty to indemnify. 

In so ruling, the K2 Court notably did not cite to its prior decision in Servidone Construction Corp. v. Security Ins. Co., 64 N.Y.2d 419 (NY 1985), wherein the Court held that an insurer’s breach of the duty to defend cannot operate to enlarge a policy’s coverage.  Thus, the decision in K2 stood in direct conflict with Servidone. 

Following the Court’s June 11, 2013 decision, American Guarantee moved for reargument, primarily on the basis that the Court failed to address the decision in Servidone, and thus created an inconsistency in the case law.  The Court granted American Guarantee’s motion for reargument – a relief afforded by the Court of Appeals on only rare occasions – and a second round of oral argument was held on January 7, 2014.

In its February 18, 2014 decision, Judge Robert Smith, writing for a four-judge majority (two judges dissented and one judge abstained) acknowledged that the Court’s June 11, 2013 holding was irreconcilable with its prior decision in Servidone.  While the Court reaffirmed its prior holding in Lang that an insurer is not permitted to relitigate issues in the underlying case if it breaches its duty to defend, the Court recognized that this issue is distinct from whether an insurer is permitted to litigate its indemnity obligation subsequent to a wrongful denial of its duty to defend.

In so holding, the Court noted that “[t]here is much to be said for the rule” it articulated in its initial June 11^th decision.  The Court nevertheless acknowledged that the majority of jurisdictions follow the Servidone rule – the principle exceptions being Illinois and Connecticut.  The Court further observed that K2 failed to present “any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985.”  Under the circumstances, the Court found it preferable to follow its prior holding in Servidone, explaining:

When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.

With this in mind, the Court turned to the application of the policy exclusions, and concluded that these exclusions presented a sufficient question of fact to defeat K2’s underlying motion for summary judgment.

Writing for a two-judge dissent, Judge Victoria Graffeo expressed her belief that an insurer should be penalized for breaching the duty to defend.  In her opinion, Servidone should be limited to questions of coverage “in the first instance,” i.e., whether a loss falls within a policy’s insuring agreement.  While she agreed that an insurer that breaches a duty to defend should not be made to indemnify a loss not falling within the scope of a policy’s insuring agreement (i.e., “a homeowner's policy would not provide malpractice liability coverage”), she reasoned that this rule should not apply to policy exclusions. As she explained, “[p]rohibiting exclusions from being collaterally invoked provides an insurer with an incentive to appear on behalf of the policyholder in the underlying lawsuit, as it agreed to do in return for the payment of premiums.”

With the Court of Appeals’ decision to vacate its earlier ruling in K2, New York now returns comfortably to the majority rule that acknowledges an insurer's right to contest its indemnity obligation is separate and apart from any issue of its duty to defend.

New York’s Highest Court Holds Limitation on Suit Provision Unreasonable

In its recent decision in Executive Plaza, LLC v. Peerless Ins. Co., 2014 NY Slip Op 898, 2014 N.Y. LEXIS 165 (N.Y. Feb. 13, 2014), the Court of Appeals of New York, New York’s highest court, on a question certified from the United States Court of Appeals for the Second Circuit, had occasion to consider the enforceability of a policy provision restricting the time in which an insured could bring suit against the insurer.

Peerless insured Executive Plaza under a fire loss policy that provided $1 million in coverage for “actual cash value” or “replacement cost.”  The policy conditioned coverage on the lost or damaged property first being repaired or replaced, and that such repairs and replacements be made “as soon as reasonably possible after the loss or damage.”  The policy also contained a clause titled “Legal Action Against Us,” which stated, in pertinent part, that no suit could be brought under the policy unless the “action is brought within 2 years after the date on which the direct physical loss or damage occurred.”

Following a fire loss, Peerless paid Executive Plaza approximately $758,000 in actual cash value.  Executive Plaza subsequently notified Peerless that it would be seeking the balance of the policy’s limits in replacement costs.  In response, Peerless advised Executive Plaza that to be entitled to reimbursement for any replacement costs, it would need to submit documentation verifying completion of the repairs.  Executive Plaza claims that it undertook reasonable efforts to perform such repairs, but that it was not able to do so within two years of the fire that caused the loss.  In fact, Executive Plaza was not able to complete the repairs until nearly three years and eight months after the fire.  At that time, Executive Plaza sought reimbursement for the replacement costs under the policy.  Peerless denied coverage for the costs on the ground that the two-year limitation period had expired. 

In the ensuing coverage litigation, the United States District Court for the Eastern District of New York granted Peerless’ motion to dismiss on the basis of the “Legal Action Against Us” clause, noting “that the two-year limitation period in the Policy is reasonable, as New York Courts have consistently upheld two-year limitations periods in insurance contracts as reasonable.”  The matter was appealed to the Second Circuit, which in turn certified the question:

If a fire insurance policy contains

(1) a provision allowing reimbursement of replacement costs only after the property was replaced and requiring the property to be replaced ‘as soon as reasonably possible after the loss’; and

(2) a provision requiring an insured to bring suit within two years after the loss;

is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?

In considering the issue, the Court of Appeals noted its own prior case law allowing for a contractual modification of a statute of limitations.  In fact, the Court had previously upheld “time to sue” periods in insurance policies of even shorter durations.  The guiding principle in these cases, explained the court, is whether the limited time period is reasonable under the circumstances.  With this in mind, the court focused on the issue of whether it was reasonable to expect that an insured, within two years of  a fire, could be able to repair and replace all damaged property.  The Court concluded that the two-year period was not necessarily unreasonable, but that the accrual date for the two-year period was.  As the Court explained:

It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit — in this case, completion of replacement of the property — that cannot be met within that two-year period. A "limitation period" that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a "limitation period" that renders the coverage valueless when the repairs are time-consuming.

10th Circuit Certifies Late Notice and Reporting Questions to Colorado Supreme Court

In its recent decision in Craft v. Philadelphia Indem. Ins. Co., 2014 U.S. App. LEXIS 2680 (Feb. 11, 2014), the United States Court of Appeals for the Tenth Circuit, applying Colorado law, had occasion to consider whether Colorado’s notice-prejudice rule applies to claims made and reported policies, or is limited to occurrence-based policies.

Philadelphia insured Campbell’s C-Ment Contracting under a directors and officers policy for the period November 2009 to November 2010.  While the policy was in effect, one of the insured’s officers, Craft, was sued for alleged misrepresentations he made in connection with a corporate merger.  Craft, apparently, was unaware of the policy at the time and thus undertook his own defense.  He did not learn of the policy’s existence until March 2012, at which time he tendered his defense.  Craft later settled the underlying suit before Philadelphia issued a formal coverage position.

Craft later sued Philadelphia, seeking reimbursement of defense costs and the settlement amount.  Philadelphia moved to dismiss on the grounds that Craft had failed to comply with the policy’s notice provision, which required notice of claim as soon as practicable, and that he also failed to comply with the policy’s reporting provision, which required that the claim be reported to Philadelphia within sixty days of the policy’s expiration.  Relying on the Colorado Supreme Court decision in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005), Craft argued that Philadelphia could only sustain its late notice disclaimer if it could demonstrate prejudice as a result of his non-compliance with the notice and reporting provisions.

In considering the issue, the 10^th Circuit noted a clear distinction in Colorado law between claims made and occurrence-based policies.  Whether the Friedland decision applied in both contexts, however, was an issue for which the court could find no guidance.  The court nevertheless observed that if it determined that the notice-prejudice rule applied to claims-made policies, such a decision “would render Colorado law an outlier on this issue,” since the majority of jurisdictions agree that prejudice is not a consideration for claims-made policies.  The court also recognized that applying a prejudice rule to claims-made policies could greatly impact the insurance market in Colorado, since insurers typically can offer claims-made policies at a lower premium precisely because of the limited notice period.  Finally, the court acknowledged that imposing a prejudice requirement on a claims-made policy would, in essence, effect a rewrite of the policy language, something Colorado courts are loathe to do. 

Given these significant concerns, the court certified to the Colorado Supreme Court the question of whether the notice-prejudice rule applies to claims made and reported policies.  The court also certified the related question of whether a prejudice requirement applies to the provision requiring notice of claim as soon as practicable; in other words, claims for which notice is given within the policy period, but still late under the circumstances.

Florida Court Holds Notice After Default Not Necessarily Prejudicial

In its recent decision in Indemnity Ins. Co. v. Caylao, Case No. 1D12-5733 (Fla. 1st DCA. Feb. 4, 2014) the First District Court of Appeals for the state of Florida had occasion to consider whether an insurer who receives notice of a lawsuit against its insured after a default judgment is entered against the insured can disclaim coverage under a notice of suit condition in its policy.

Lelilani Caylao alleged that an employee of Coast Entertainment, LLC (“Coast”) injured her in an altercation at a club that Coast owned. Caylao’s counsel wrote a letter to Coast about her assault and battery claim and Coast’s insurance agent forwarded the letter to Indemnity Insurance Company (“Indemnity”), Coast’s commercial general liability insurer. Indemnity investigated the pre-suit claim and concluded that Coast had no liability and denied the claim. Caylao subsequently filed suit without notifying Indemnity or its counsel. Coast did not answer or otherwise respond to the complaint and ultimately a final default judgment was entered against Coast.

Caylao subsequently initiated a garnishment proceeding against Indemnity as Coast’s insurer. Indemnity asserted that Coast forfeited coverage because it had breached a policy condition requiring Coast to notify Indemnity of lawsuits and to forward suit papers “as soon as practicable.”  Thus, electing not to represent Coast in its effort to set the judgment aside, Indemnity wrote a letter to Coast denying coverage and disclaiming any obligation to pay Caylao. The trial court nevertheless held that Indemnity was not relieved of its obligation to pay Caylao, reasoning that Indemnity failed to demonstrate that it exercised due diligence and good faith in trying to bring about the insured’s cooperation once the insured notified it of the claim. The trial court entered a judgment in favor of Caylao and Indemnity appealed.

The Florida Court of Appeals remanded for a determination as to whether Indemnity was prejudiced by the late notice provided by Coast.  The court held that Indemnity’s duty to defend extended to moving to set aside Caylao’s judgment against Coast in the garnishment proceeding, if such a motion was feasible and grounds to set aside the default existed.   As the trial court took no evidence on the question, the Court reversed and remanded the matter to the trial court for an evidentiary hearing as to whether Indemnity demonstrated prejudice as a result of the breach of the notice condition.

Third Circuit Holds Interrelated Claims Provision Is An Exclusion to Coverage

In its recent decision in Borough of Moosic v. Darwin National Assurance Co., 2014 U.S. Ap. LEXIS 2118 (3d Cir. Feb. 4, 2014), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, had occasion to consider whether an interrelated claims provision in claims made policy should be considered a condition precedent to coverage or an exclusion of coverage.

Darwin insured the Borough of Moosic under a public officials professional liability policy, providing coverage for the period August 1, 2010 to August 1, 2011.  During the policy period, Moosic was named as a defendant in a suit alleging that Moosic had committed a civil rights violation in connection with a land use dispute.  Upon learning that the underlying claimants had brought other suits against Moosic prior to the policy’s date of inception, Darwin denied coverage.  Specifically, Darwin asserted that the civil rights lawsuit was related to a mandamus suit brought against Moosic in 2006 for a dispute pertaining to the same land use issue.  Darwin relied on the following provision in its policy’s Conditions section, stating:

All Related Claims will be treated as a single Claim made when the earliest of such Related Claims was first made, . . .

The Policy defined the term Related Claims as:

… all Claims for Wrongful Acts based upon, arising out of, resulting from, or in any way involving the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances situations, transactions or events, whether related logically, causally or in any other way.

On motion to dismiss, the district court agreed with Darwin that the Related Claims provision constituted a condition precedent to coverage, and that as such, Moosic bore the burden of demonstrating that the lawsuit filed in 2010 should not be considered a Related Claim to the 2006 mandamus suit.  Concluding that Moosic failed to sustain this burden, the lower court granted Darwin’s motion to dismiss.

On appeal, Moosic argued that the Related Claims provision should be treated as a policy exclusion rather than a condition precedent to coverage, and that as such, Darwin should have the burden of proving the various suits were Related Claims.  In considering this issue, the Third Circuit observed that a condition precedent is “an act of a party that must be performed or a certain event that must happen before a contractual right occurs … .”  An exclusion, on the other hand, is a limitation of coverage applicable to certain types of loss to which the policy does not apply.  With this in mind, the court concluded that the Related Claims provision served as a limitation of coverage, explaining:

The Related Claims provision here acts to limit coverage under the policy. If a claim is related to previous claims, all of the claims will be treated as one claim that was made at the same time as the oldest claim. As a result, a claim like the one at issue here that meets the requirements listed in the insuring agreement may still be denied coverage because the Related Claims provision operates to change the date the claim was first made from a date within the policy period to a date before the policy period began. The Related Claims provision thus carves out certain types of loss - those related to claims made before the inception of the policy - from the protection provided by the policy.

The court further concluded that the Related Claims provision did not qualify as a condition precedent to coverage since it did not specify an act Moosic was required to perform in order for coverage to attach.  In so concluding, the court rejected Darwin’s argument that the placement of the provision in the Policy’s conditions section, rather than the exclusions section, required a different outcome, noting that the placement of a policy provision is not determinative of whether it is a condition or exclusion.

Thus, concluding that the provision was an exclusion rather than a condition precedent to coverage, the court held that the district court erred in holding that it was Moosic’s burden to demonstrate that the two prior claims were not Related Claims.  Rather, the court held that it was Darwin’s burden to demonstrate that the claims were related for the purpose of the exclusion.

Illinois Court Holds Junk Fax Claim Not Within Products Coverage

In its recent decision in Windmill Nursing Pavilion v. Cincinnati Ins. Co., 2013 IL. App. (1st) 122431, the Appellate Court of Illinois, First District, had occasion to consider the scope of products-completed operations coverage as it relates to a Telephone Consumer Protection Act violation.

In an underlying lawsuit, Windmill Nursing Pavilion (“Windmill”) brought a class action against Unitherm, Inc. for sending unsolicited faxed advertisements to Windmill and the class members. Cincinnati Insurance Company insured Unitherm under consecutive commercial general liability and umbrella liability policies.  The renewal policies contained a modification that barred coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any action or omission” that violated the Telephone Consumer Protection Act of 1991 (“TCPA”).

Windmill, Unitherm, and Cincinnati eventually settled the class action lawsuit for $7 million. Cincinnati agreed to provide a $3 million settlement fund (the combined general aggregate and umbrella limits under the first general liability and umbrella policies issued to Unitherm), but denied coverage under its renewal policies with the TCPA exclusion.  Windmill brought a declaratory judgment action against Cincinnati seeking recovery of the remaining amount. Windmill argued that the TCPA exclusion in the renewal policies was invalid, as Cincinnati failed to provide proper notice at the time of renewal.  Windmill argued that in the alternative, it was entitled to coverage under the initial policies’ products/completed operations aggregate limits, in addition to the general aggregate limits, as its faxes should be considered its “work” or “product.”

Cincinnati countered that the “products-completed operations hazard” did not apply because fax advertisements did not constitute Unitherm’s “work” or “product.” Cincinnati further took the position that the “products-completed operations hazard” was not an independent and supplemental limit of the available coverage for Windmill’s claims because the general limit of the policy meant the “sum total” of available coverage. The circuit court granted judgment in favor of Cincinnati and Windmill appealed.

On appeal, the court first analyzed whether the TCPA exclusion in the renewal policy was valid. The court applied Ohio law, stating that modifications in the terms of a renewal policy are valid only if the insurer provided adequate notice of the modifications to the insured. The court found that Cincinnati indeed provided sufficient notice to Unitherm since forms containing the exclusion were separately attached in the quote and binder materials, on individual pages, and the exclusion was clearly worded in large, bold, capital letters. Thus, the court agreed that there was no coverage under the renewal policies.

 The court next analyzed whether there was separate coverage available under the original policies pursuant to the “products-completed operations hazard” coverage.  The court agreed with the circuit court’s determination, concluding that the faxed advertisements did not constitute Unitherm’s “products,” “goods,” or “work” under the policy because Unitherm was not in the business of selling the advertisements themselves.  Among other things, the court agreed that the faxes did not pertain to any representations or warranties made by Unitherm with respect to its products. Thus, the court held that the faxed advertisements did not come within the products-completed operations hazard coverage such that additional policy limits were triggered.

California Court Holds Food Truck Constitutes Mobile Equipment

In American States Insurance Company v. Travelers Property Casualty Company of America, 2014 Cal. App. LEXIS 74 (January 27, 2014), California’s Second Appellate District had occasion to consider whether a food truck constituted mobile equipment under a general liability policy.

The underlying injury in American States involved a food truck that collided with another truck.  At the time, one of the food truck workers was standing in the back of the truck, nearby the on-board deep fryer.  The worker was burned by oil that splashed out of the deep fryer as a result of the collision.  The worker was standing at the rear of the truck while it was moving because a non-employee guest was occupying the truck’s passenger seat at the time.  All three persons brought suit against the company (“Royal”) that leased the truck to the food truck operator (“Gomez”).

At the time of the accident, Royal was insured under a primary and excess auto liability policy issued by American States Insurance Company (“American States”).  Royal also had primary and excess general liability coverage through Travelers.  American States agreed to defend Royal, but Travelers declined.  The underlying matter proceeded to binding arbitration, and Royal was found 40% liability based on a theory of products liability; namely, its defective deep fryer. A stipulated judgment against Royal for $2,428.577.34 was entered into based on the arbitration award.

American States subsequently brought an action against Travelers, and Travelers cross-complained back against American States, each seeking to establish coverage for Royal under the other’s policy.  Each filed motions for summary judgment, with the trial court granting Traveler’s motion, finding that the truck was an “auto” and not “mobile equipment,” and not within the exception to the Traveler’s policy’s auto exclusion.

The appellate court looked at that part of the Traveler’s policy’s definition of “mobile equipment” that included vehicles “maintained primarily for purposes other than transportation of persons or cargo.”  The appellate court concluded that under a plain reading of the Traveler’s policy, the food truck was “mobile equipment” as its primary purpose was to serve as a mobile kitchen and not to transport persons or cargo.  The court also noted that the omission of a food truck from the list of special use vehicles with permanently attached equipment considered “autos” under the definition of “mobile equipment,” supported this finding.  The court further concluded that coverage was unavailable under the American States’ policy as a result of a “completed operations” exclusion. 

Florida Court Holds Insurer Not Estopped From Denying Pre-Tender Costs

In its recent decision in Embroidme.Com, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 7715 (S.D. Fla. Jan. 23, 2014), the United States District Court for the Southern District of Florida had occasion to consider an insurer’s obligation to reimburse its insured for pre-tender defense costs under Florida law, and whether its disclaimer of such costs is governed by Florida Claims Administration Statute, Fla. Stat. § 627.426(2).

Travelers insured Embroidme.com under a general liability policy with web site injury protection.  Embroidme.com was named as a defendant in an underlying copyright infringement lawsuit in April 2010.  On June 28, 2010, Embroidme.com retained counsel to defend it in the lawsuit.  Embroidme.com, however, did not tender the matter to Travelers until October 2011.  Travelers subsequently agreed to provide its insured with a defense, but disclaimed any coverage obligation with respect to Embroidme.com’s pre-tender defense costs.  Embroidme.com challenged Travelers’ disclaimer of coverage on the basis that the policy did not expressly bar coverage for pre-tender costs and that Travelers’ disclaimer of coverage for such amounts was untimely and thus in violation of Florida Claims Administration Statute, § 627.426(2).

Florida Claims Administration Statute, § 627.426(2) states, in relevant part, that an insurer is estopped from denying coverage unless “(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery.”  The statute also discusses the insurer’s obligation to disclaim coverage or provide an insured with a defense within sixty (60) days of filing of suit.  For the purpose of the statute, a “coverage defense” is defined as “a defense to coverage that otherwise exists.”

In considering the statute, the court found that Traveler’s coverage correspondence to Embroidme.com was late under the statute: its initial reservation of rights letter was issued forty-two (42) days after Embroidme.com’s initial tender, and Travelers did not actually retain counsel until another ninety-one (91) days later.  Thus, reasoned the court, if coverage for pre-tender defense costs could be considered a “coverage defense” for the purpose of the statute, then Travelers’ failure to issue its letters in a timely fashion would result in an estoppel of its right with respect to this defense.

The court nevertheless concluded that the pre-tender defense issue was not a “coverage defense,” but instead a policy condition.  In particular, the policy precluded the insured from “voluntarily assuming any obligation or incurring any expense without Travelers' consent.”  Thus, reasoned the court, “under the plain language of the Policy there is no coverage for the defense costs incurred without Travelers' knowledge and not at Travelers' request.”  This was not a “coverage defense,” but instead a precondition to coverage not subject to statutory estoppel under § 627.426(2).  As such, the court held in Travelers’ favor, concluding that its denial of coverage for pre-tender defense costs was appropriate and that Travelers’ delay in issuing coverage correspondence did not result in statutory estoppel.

Texas Supreme Court Holds Exclusion Inapplicable to Construction Defect Claim

In its recent decision in Ewing Constr. Co. v. Amerisure Ins. Co., 2014 Tex. LEXIS 39 (Tex. Feb. 27, 2013), the Supreme Court of Texas addressed certified questions from the United States Court of Appeals for the Fifth Circuit regarding the scope of the Contractual Liability exclusion in the context of a construction defect claim.  The court was asked to determine whether a general contractor that enters into a contract agreeing to perform its work in a good and workmanlike manner “assumes liability” for damages arising out of the contractor’s defective work, thereby triggering the Contractual Liability exclusion.

Ewing Construction Company (“Ewing”) entered into a contract with Tuluso-Midway Independent School district (“TMISD”) to serve as the general contractor for a construction project at a school in Corpus Christi, Texas. Among other things, Ewing was to renovate and build additions to a tennis court, which Ewing did through its subcontractors.  The contract required Ewing to perform that work in a “good and workmanlike manner.”  Not long after construction was complete, cracking and flaking problems began and TMISD filed suit against Ewing asserting claims for breach of contract and negligence.

Amerisure Insurance Company issued a commercial general liability policy to Ewing for the time period at issue.  Ewing tendered its defense of the TMISD suit to Amerisure, which it denied based on the Contractual Liability exclusion. The Contractual Liability exclusion of the Policy stated in relevant part:

2.   Exclusions

      This insurance does not apply to:

                                    …

b.   Contractual Liability

“bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:

(1) That the insured would have in the absence of the contract or agreement; or

(2) Assumed in a contract or agreement that is an “insured contract”

Ewing filed suit against Amerisure in the U.S. District Court for the Southern District of Texas, seeking a declaration that Amerisure breached its duties to defend and indemnify Ewing for any damages awarded to TMISD. Amerisure counterclaimed, seeking a declaration that it owed Ewing neither a duty to defend nor a duty to indemnify. Although Amerisure conceded that Ewing established coverage under the policy’s insuring agreements, it took the position that policy exclusions, in particular the Contractual Liability exclusion, precluded coverage and negated its duties to defend and indemnify.

The district court relied on Gilbert Texas Constr. Co. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) in holding that no coverage was owed under the policy. The district court determined that Gilbert stood for the proposition that the Contractual Liability exclusion applies when an insured enters into a contract and assumes liability for its own performance under that contract. The district court concluded that TMISD’s pleadings established that pursuant to the contract between TMISD and Ewing, Ewing agreed to be liable for failing to perform under the contract if the work was deficient. The district court therefore concluded that the Contractual Liability exclusion applied to preclude coverage.

On appeal, the Fifth Circuit initially affirmed the district court’s judgment on the duty to defend, but later vacated and remanded the case with respect to the duty to indemnify to await the results of the underlying suit. Ewing petitioned for rehearing. The Fifth Circuit withdrew its opinion and certified two questions to the Supreme Court of Texas:

1.   Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good an workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.

2.   If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Texas Supreme Court carefully examined Gilbert and concluded that “assumption of liability” in the context of the exclusion meant that the insured had assumed a liability for damages that exceeded the liability it would have under general law. The Court defined “good and workmanlike” and “negligence” as having the same substantive meaning. The Court acknowledged that Ewing had a common law duty to perform its contract with skill and care.  Reasoning that the claims asserted by TMISD did not seek recovery for damages that exceeded the liability Ewing would have under general law, the Court concluded that the exclusion did not apply to preclude coverage.

The Court also rejected the notion that its holding would have the effect of transforming CGL policies into performance bonds. The Court observed that because the policy contained other exclusions that may apply to bar coverage in a case for breach of contract due to faulty workmanship, its ruling was consistent with the view that CGL policies are not performance bonds.

California Court Addresses Additional Insured’s Reasonable Expectations

In its recent decision in Transport Insurance Company v. Superior Court of Los Angeles County, No. B249470, slip op. (2nd Dist. Cal. Jan. 13, 2014), the California Court of Appeal for the Second District had occasion to consider whether the reasonable expectations of coverage of an insured under an excess or umbrella general liability policy is relevant to whether it is entitled to a defense.

Transport Insurance Company (“TIC”) issued a commercial excess and umbrella liability insurance policy to Vulcan Materials Company (“Vulcan”), under which R.R. Street & Co., Inc. (“Street”) was named as an additional insured.  The TIC policy agreed to defend the insured if “the limits of liability of the underlying insurance are exhausted … .” The underlying action alleged that Vulcan manufactured perchloroethylene (“PCE”) which was sold by Street to dry cleaners, and ultimately resulted environmental contamination.

TIC had previously sought a declaratory order in a related case, Legacy Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677, that “underlying insurance” referred to all primary policies issued to Vulcan as opposed to only those listed in the TIC policy’s Schedule of Underlying Insurance.  The court in that related case concluded that the term “underlying insurance” as used in the TIC policy was ambiguous, and therefore had to be interpreted to mean only those policies specifically identified in the Schedule.  Central to the court’s reasoning was Vulcan’s reasonable expectations to coverage. 

TIC subsequently brought suit against Street and Vulcan’s primary general liability insurer, National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), seeking a declaration regarding its duty to defend Street, as an additional insured, in various underlying actions.  National Union and Street moved for summary judgment, arguing that TIC was collaterally estopped by the related decision from arguing that “underlying insurance” referred to anything other than the policies identified in the Schedule of Underlying Insurance. The trial court granted the summary judgment motion, and a petition for writ of mandate followed.

TIC argued that the trial court erred when it based its ruling on Vulcan’s “objectively reasonable expectations of coverage” and not those of Street, the party seeking coverage.  The Court of Appeals agreed, holding that since it was Street - the additional insured – ratherVulcan – the policy’s named insured – that was seeking coverage, Vulcan’s reasonable expectations were not relevant.  The appellate court agreed that since the issue of Street’s reasonable expectations were not addressed in the earlier decision, the earlier decision did not collaterally estop TIC from making its arguments concerning underlying insurance.