Traub Lieberman Insurance Law Blog

New York’s Highest Court Addresses Coverage Under Fiduciary Liability Policy

2012-02-23T06:28:00.002-05:00

In its recent decision in Federal Ins. Co. v International Bus. Machs. Corp., 2012 NY Slip Op 1320 (N.Y. Feb. 21, 2012), the New York Court of Appeals - New York’s highest court - had occasion to consider whether an underlying ERISA lawsuit fell within the scope of coverage afforded under an excess fiduciary liability policy, and in particular, what it means to be acting in one’s capacity as a fiduciary.

Federal issued to IBM an Executive Protection Excess Insurance Policy, providing follow-form excess coverage over a fiduciary liability policy issued by Zurich. IBM and the IBM Personal Pension Plan were named as defendants in a class action lawsuit alleging that various amendments made to its employees’ benefit plans violated ERISA laws pertaining to age discrimination. IBM settled the underlying suit, which settlement included a payment to plaintiffs of their attorneys’ fees in prosecuting the lawsuit. IBM, in turn, sought coverage for the payment of these fees under the Federal policy, claiming that the primary Zurich policy, with limits of liability of $25 million, had exhausted.

Federal sought a judicial declaration that coverage was unavailable for the underlying suit as it did not fall within the Zurich policy’s definition of “wrongful act,” which was amended by endorsement to include:

1. any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of a Benefit Program by the Employee Retirement Income Security Act of 1974, as amended, or by the common or statutory law of the United States, or ERISA equivalent laws in any jurisdiction anywhere in the world;

2. any other matter claimed against an Insured solely because of such Insured's service as a fiduciary of any Benefit Program;

3. any negligent act, error or omission in the administration of any Benefit Program.

Federal argued that the underlying ERISA class action did not fall within this definition of “wrongful act” because the suit was not brought against IBM in its capacity as a fiduciary but rather in its capacity as a plan settlor or sponsor. While the trial court rejected Federal’s argument, this ruling was reversed on appeal by a New York intermediate court, which agreed that “[t]he age discrimination provisions of ERISA, which IBM allegedly violated by enacting the amendments, are not responsibilities, obligations, or duties imposed upon a fiduciary of a Benefit Program by ERISA. Rather, they are obligations imposed on settlors of ERISA benefit plans.”

On further appeal, the Court of Appeals agreed with the Appellate Division that the changes IBM made to the benefit plans were made in its capacity as a plan settlor rather than in a fiduciary capacity. The Court further agreed that the definition of “wrongful act” limited coverage to instances where the insured is acting in a fiduciary capacity. As the Court explained, “[w]e conclude that the average insured would reasonably interpret the disputed language in the definition of ‘Wrongful Act’ to mean that coverage is limited to acts of an insured undertaken in its capacity as an ERISA fiduciary.”

In reaching its conclusion, the Court rejected several arguments asserted by IBM. Most notably, IBM argued that because the term “fiduciary” was not defined in the Zurich policy, it must be given a “plain, ordinary meaning” that the average policyholder would understand rather than the definition contained in the ERISA statute. Specifically, IBM argued that the term “fiduciary” should be construed as one who acts for the benefit of another and owes that party the duties of good faith – duties that IBM owed to underlying plaintiffs as the plan sponsor. Under this interpretation of the term “fiduciary,” explained the Court, “IBM's actions would be covered by virtue of the fact that it was an insured and a plan fiduciary that allegedly violated certain ERISA provisions, regardless of the fact that, if the allegations are correct, it undoubtedly did so in its capacity as a plan settlor and not in its capacity as an ERISA fiduciary.” The Court rejected this broad construction of the term “fiduciary,” explaining that it would result in a “strained and implausible” interpretation of the policy. As the Court explained, because “the first prong of the ‘Wrongful Act’ definition refers not only to duties imposed by ERISA (or foreign equivalents) but also to duties imposed by common law and statutory law,” IBM’s proposed definition of fiduciary would result in the policy extending coverage to “almost every lawsuit imaginable, a result we find to be unreasonable.”

The Court also considered IBM’s argument that under Federal’s interpretation of the policy, the first and second prongs of the definition of “Wrongful Act” would have an identical meaning. The Court rejected this argument, explaining that the first prong related to violations of ERISA or other common or statutory law, whereas the second prong related to any fiduciary breach. As the Court explained, “[p]rong two would extend coverage to an insured's claims arising from liability incurred solely due to the insured's position as a fiduciary. For instance, if the insured is named in an action solely due to its status as a fiduciary, even where the action does not allege that the insured actually breached any fiduciary duties, and the action results in a settlement or a judgment against the insured, it is possible that Zurich and Federal would be liable for funds spent to settle the suit or pay the judgment.”

Finally, the Court rejected IBM’s reliance on the fact that Federal subsequently revised its own policies to make more explicit the concept that coverage is limited to instances where insureds are acting in their capacities as fiduciaries. The Court rejected IBM’s reliance on other language contained in subsequently issued policies, explaining:

It is simply not the case that because the challenged provision could have been worded differently, it is ambiguous and must be construed in IBM's favor. There are often many ways of effectively conveying the same meaning and the question is not simply whether the insurer could have phrased the provision differently. Rather, the issue is, in light of the reasonable expectations of the average policy holder, whether the provision, as written, is sufficiently clear and precise such that there is no room for reasonable disagreement about the scope of coverage.

The Court agreed that the Zurich policy was sufficiently clear and precise in its scope. Thus, the Court of Appeals affirmed the decision of the Appellate Division, concluding that IBM was not entitled to coverage under Federal’s policy since the underlying suit did not allege a “wrongful act” as that term was defined by the Zurich policy.

Fifth Circuit Addresses Contractual Liability Exclusion

2012-02-22T05:52:00.002-05:00

In its recent decision in Colony Nat'l Ins. Co. v. Manitex, L.L.C., 2012 U.S. App. LEXIS 3311 (5^th Cir. Feb. 20, 2012), the United States Court of Appeals for the Fifth Circuit, applying Texas law, considered what constituted an “insured contract” for the purpose of a contractual liability exclusion in a general liability policy.

Manitex involved two asset purchase agreements effecting a transfer of the assets and certain liabilities of an initial product manufacturer. JLG manufactured and sold a line of boom truck cranes. Powerscreen purchased JLG’s assets and liabilities, including JLG’s liabilities associated with the cranes. Powerscreen, in turn, was sold to Manitex, which assumed Powerscreen’s liabilities associated with the cranes. Manitex was insured under a general liability policy issued by Colony. During the Colony policy period, an individual was injured while using of the JLG manufactured cranes. That individual later filed suit against JLG, and Manitex provided JLG with a defense in the suit. Colony sought a judicial declaration that it did not have an obligation under its policy to indemnify Manitex for its own indemnity obligations vis-à-vis JLG. The United States District Court for the Western District of Texas ruled on motion for summary judgment that Colony at least had a duty to reimburse Manitex for costs incurred in defending JLG. On interlocutory appeal, however, the Fifth Circuit reversed the lower court.

The exclusion at issue in Manitex was a contractual liability exclusion barring coverage for “bodily injury” or “property damage” for which Manitex became obligated to pay “by the reason of the assumption of liability in a contract or agreement.” The exclusion contained a typical exception for liability “assumed in an ‘insured contract,’” but only if the “bodily injury” or “property damage” occurred subsequent to the execution of the contract or agreement. “Insured contract,” in turn, was defined as:

f. That part of any other contract or agreement pertaining to your business (including indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

At issue for the court was whether Manitex’s purchase agreement constituted an “insured contract,” and more specifically, whether Manitex assumed JLG’s tort liability pursuant to the agreement it entered into with Powerscreen.

Colony argued that the “insured contract” exception did not apply because the purchase agreements did not effect a transfer of JLG’s tort liabilities to Manitex. The court summarized Colony’s argument as follows:

[Colony] contends that JLG is the only entity that has any "tort liability" as the policy defines that term because only JLG's liability would be imposed by law in the absence of any contract or agreement. Manitex's liability, argues Colony, can only be imposed by operation of the Powerscreen–Manitex Purchase Agreement. Therefore, that liability is not "tort liability," but contractual liability, and as a result, the Powerscreen–Manitex Purchase Agreement is not an insured contract, and Manitex's liability falls within the contractual liability exclusion and outside of coverage by the policy.

The lower court rejected this very argument, concluding among other things, that Manitex assumed JLG’s tort liabilities, and that “"[a]n insurance policy that specifically covered contractually-assumed tort liability, yet removed from coverage any agreement involving more than a single contractual link, seems unlikely to have been intended by the parties.”

The Fifth Circuit, however, took a much more narrow view of the “insured contract” exception, concluding that Manitex did not contractually assume JLG’s tort liabilities, but instead assumed only the liabilities of Powerscreen. The court found a significant distinction to be critical:

Powerscreen's liability arose strictly from a contract, namely, its purchase agreement with JLG. If that contract did not exist, then Powerscreen would have had no liability related to the [underlying] claims. Powerscreen's liability, therefore, was not one that “would be imposed by law in the absence of any contract or agreement.” Therefore, it was not “tort liability.”

Thus, the court concluded, because the Manitex agreement with Powerscreen did not effect a transfer of Powerscreen’s tort liabilities, it did not constitute an “insured contract,” and the contractually liability exclusion, therefore, barred coverage for Manitex’s costs in defending JLG.

Texas Court Considers Prior Knowledge Condition In D&O Policy

2012-02-17T09:31:00.002-05:00

In the recent decision in Deer Oaks Office Park Owners Ass'n v. State Farm Lloyds, 2012 U.S. Dist. LEXIS 19240 (W.D. Tex. Feb. 15, 2012), the United States District Court for the Western District of Texas had occasion to consider a prior knowledge condition in a directors and officers liability policy.

The insured, Office Park, was “an office park condo association which owns, maintains and regulates the 'common areas' between fifteen unconnected office condos” in San Antonio, Texas. In 2007, it sold one of the condominium units to a doctor who intended to convert the unit for use in his medical practice. The doctor advised that being able to install an elevator into the unit was an important aspect and condition of his purchase. After the sale, however, the doctor was unable to obtain a permission from building maintenance to install the elevator. He subsequently complained to Office Park, and later commenced a lawsuit in Texas state court.

Office Park sought coverage for the suit under the directors and officers coverage of its policy with State Farm Lloyds, effective for claims first made during the period January 30, 2010 to January 30, 2011, which encompassed the period in which the doctor commenced suit. The policy’s insuring agreement stated that coverage “applies to 'wrongful acts' committed before this optional coverage became effective if the insured had no knowledge of a claim or suit at the effective date of this option and there is no other applicable insurance.” State Farm Lloyds denied coverage for the suit on the basis that Office Park had knowledge of the doctor’s claim prior to the policy’s inception. Specifically, State Farm Lloyds relied on a September 23, 2009 letter from the doctor’s attorney that “traced [the doctor’s] multiple complaints about Office Park and attributed monetary losses to Office Park.”

Office Park argued that the doctor’s letter did not constitute a “claim” or notice of a “claim,” because the letter did not specifically demand any monetary relief. In support of its position, Office Park pointed out that the State Farm Lloyds policy did not contain a definition of the term “claim,” and that as such, under the Fifth Circuit decision in Int'l Ins. Co. v. RSR Corp., 426 F.3d 281 (5th Cir. 2005), the term “claim” must be narrowly construed as “a demand for money, property, or legal remedy.” Office Park contended that because the doctor’s September 23, 2009 letter did not actually seek monetary relief, it could not constitute a “claim” for the purpose of the policy’s “knowledge of a claim or suit” condition to coverage.

The court disagreed with Office Park’s restrictive reading of RSR Corp., finding that the term “claim” is not limited solely to demands for monetary relief, but instead encompasses any assertion of a legal right. Such an interpretation, the court explained, ordinarily is favorable to the insured, rather than the insurer, “because the construction gives the insured the right to seek coverage without waiting for the filing of a lawsuit.” The court went on to conclude that the doctor’s letter qualified as a “claim” because it clearly stated a legal demand for relief and advised of the potential for litigation should an accommodation not be made. As the court explained:

The only reasonable interpretation of the letter is that [the doctor] asserted a right to hold Office Park liable for all of the costs [he] had spent and lost because of Office Park's acts. The letter's bottom line was: If you do not comply with my demands, I will sue you. Under any construction, the letter constituted a claim.

As such, the court concluded that State Farm Lloyd’s denial of coverage was correct and that it had no duty to defend or indemnify the doctor in connection with the underlying matter.

Massachusetts High Court Awards $22 Million In Bad Faith Damages

2012-02-13T05:38:00.001-05:00

In its recent decision in Rhodes v. AIG Domestic Claims, et al., 2012 Mass. LEXIS 28 (Mass. Feb. 10, 2012), the Supreme Judicial Court of Massachusetts, Massachusetts’ highest court, addressed how damages are to be awarded under Massachusetts’ General Law 93A, § 9 (Massachusetts’ consumer protection statute) for an insurer’s failure to effectuate a prompt, fair and equitable settlement with a claimant, both prior to and following a verdict in an underlying lawsuit.

The underlying matter in Rhodes involved an accident between a tractor-trailer leased and operated by the insured, GAF, and a passenger vehicle, causing catastrophic injuries to plaintiff and rendering her a paraplegic. GAF had $2 million in primary coverage through Zurich and $50 million in excess umbrella coverage through National Union. AIG Domestic Claims (“AIGDC”) was the entity tasked with handling the claim on behalf of National Union. Following an initial investigation, GAF’s third-party administrator advised Zurich and AIGDC in writing that liability was clear. After suit was filed, the same third-party administrator estimated the value of the case to be between $5 million and $10 million. A year later, after the driver of the truck plead guilty to a criminal charge relating to his operation of the vehicle, plaintiff made a settlement demand of $18.5 million, which was later reduced to $16.5 million.

Zurich tendered its $2 million limit to AIGDC. Six months prior to trial, AIGDC attended a meeting with defense counsel at which time it was advised that the average settlement value for comparable cases was $6.6 million and the average jury verdict was $9.6 million. Notwithstanding, just weeks later, an initial settlement offer was made to plaintiffs in the amount of $2 million, representing the value of the Zurich policy. The Rhodes court noted that following this initial settlement offer, AIGDC engaged in delay tactics to avoid mediating the case until just one month prior to trial. At the mediation, AIGDC offered $2.75 million, and later offered $3.5 million after plaintiffs countered at $15 million. The court noted that the AIGDC representative attended the mediation with authority to settle up to $3.75 million, but elected not to make such an offer, even as the damages analysis changed for the worse at the mediation. Instead, the AIGDC representative left the mediation one hour after making his offer of $3.5 million. The matter ultimately went to trial, on damages alone (GAF had stipulated to liability), and the jury returned with a verdict, which when combined with interest, totaled $11.3 million.

GAF immediately moved for a new trial and for an appeal. Shortly thereafter, plaintiffs sent demand letters to Zurich and AIGDC pursuant to G.L. c. 93A, alleging that the insurers had failed to effect a prompt and equitable settlement. This statute authorizes an individual to prosecute an action for unfair business practices, including violation of c. 176D, which is Massachusetts’ unfair insurance practices statute. C. 176D, § 3(9)(f) defines unfair claim settlement practices to include “[f]ailing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.” AIGDC responded to plaintiffs’ demand letter one month later by offering to settle both the underlying matter and the c. 93A claim for $7 million, which included Zurich’s $2 million. Zurich separately responded to the plaintiffs by paying an amount just in excess of $2 million. Plaintiffs and AIGDC thereafter settled the underlying negligence claim for $8.965 million, but with plaintiffs maintaining their right to prosecute their c. 93A claim.

In a subsequent bench trial on the issue, a Massachusetts trial court found that AIGDC willfully and knowingly breached its duty to make a fair and reasonable offer prior to trial once liability and damages became reasonably clear, but that the evidence established that plaintiffs would not have accepted any such offer, and as such, damages were not available under c. 93A for AIGDC’s preverdict conduct. The court went on, however, to find that AIGDC engaged in postverdict misconduct by failing to effectuate a prompt and fair settlement after the verdict was returned. The court specifically found that AIGDC’s offer of $7 million was “not only unreasonable, but insulting.” The judge awarded plaintiffs loss of use damages for this violation in the amount of $448,250, calculated as the lost interest on the $8.965 million settlement from the date the matter should have settled to the date that it actually did settle.

The case was appealed to the Massachusetts Appeals Court, which held that plaintiffs should have been awarded damages for AIGDC’s preverdict conduct. On further appellate review, the Massachusetts Supreme Judicial Court (“SJC”) agreed that plaintiffs established a violation of c. 93A with respect to AIGDC’s pretrial conduct by showing that they suffered a loss due to AIGDC’s failure to make a timely, reasonable offer. Moreover, the SJC held that the lower court erred in considering whether plaintiffs would have accepted such an offer, since such is not a relevant consideration in finding a violation of the statute. Notwithstanding, the SJC held that it was not necessary to determine plaintiffs’ damages as a result of AIGDC’s pretrial conduct, since plaintiffs could not recover twice for AIGDC’s failure to effectuate a prompt and reasonable settlement. As such, the SJC focused solely on what damages were available to plaintiffs as a result of AIGDC’s postverdict conduct.

Toward this end, the SJC looked to the language of c. 93A § 9(3), which states that in the event of a violation, the “recovery shall be in the amount of actual damages or twenty-five dollars, whichever is greater; up to three but not less than two time such amount if the court finds that the use of employment of the act or practice was a willful or knowing violation … .” This language, reasoned the SJC, dictated that the damages available to plaintiffs were the actual value of the verdict, multiplied by no less than two since the lower court concluded that AIGDC’s conduct was willful and knowing. In other words, the lower court’s “loss of use” analysis, which awarded damages based on lost interest, was not an appropriate methodology for calculating c. 93A damages. Instead, the SJC concluded that plaintiffs should have been awarded $22 million, representing the underlying $11 million verdict multiplied by two.

In reaching its holding, the SJC rejected AIGDC’s arguments that damages under c. 93A should not be awarded since plaintiffs’ underlying tort injuries did not arise out of AIGDC’s claims handling conduct. In particular, the SJC rejected AIGDC’s arguments that the statute only applies in the first-party insurance context, or that the judgment against GAF did not arise out of the same transaction or occurrence as the c. 93A claim. The latter argument, explained the SJC, was a matter of form over substance and not relevant to recovery under the statute. The SJC further rejected AIGDC’s contention that the multiplied damages aspect of c. 93A was “grossly excessive” and thus violative of the Fourteenth Amendment. Such an argument, explained the court, ignored the fact that AIGDC’s conduct in failing to effect a prompt settlement despite the clear evidence of liability and damages was “sufficiently reprehensible” and that in any event, the ratio between compensatory damages and punitive damages was not excessive. The SJC, in passing, acknowledged that “$22 million in c. 93A damages is an enormous sum,” but that “the language and history of … c. 93A leave no option but to calculate the double damages award against AIGDC based on the amount of the underlying tort judgment.”

Texas Court Considers Prior Acts Condition in Professional Liability Policy

2012-02-10T05:52:00.002-05:00

In its recent decision in Darwin Select Ins. Co. v. Laminack, 2012 U.S. Dist. LEXIS 15712 (S.D. Tex. Feb. 8, 2012), the United States District Court for the Southern District of Texas had occasion to consider the scope of a prior acts condition in a lawyers’ professional liability policy.

The insured law firm of Laminack, Pirtle & Martines, L.L.P., and in particular two individual attorneys of the firm, were named as defendants in an underlying legal malpractice action filed in October 2010 arising out of the attorneys’ representation of the plaintiff in an antitrust lawsuit years earlier. Plaintiff claimed that the attorneys advised him on several occasions that he was not in danger of missing the statute of limitations to file his antitrust lawsuit. This, however, proved not to be the case. In 2008, a Texas federal district court dismissed the antitrust action based on the statute of limitations having expired prior to the time suit was filed. This holding was affirmed by the Fifth Circuit Court of Appeals in 2009.

The claims made errors and omissions policy at issue incepted in June 2010, some four months prior to the filing of the malpractice action. The policy stated that coverage was unavailable for any “‘wrongful act’ occurring before the inception date of the Policy if, prior to the inception date, any Insured had a basis to foresee that the Wrongful Act might reasonably be expected to be the basis of a Claim against any Insured.” The insurer, Darwin, denied coverage to its insureds on the basis that prior to the policy’s June 2010 inception date, the insureds had a reasonable basis to expect that they would be sued as a result of their alleged malpractice.

The court determined, as an initial matter, that there was no question that the insureds were aware of the unfavorable statute of limitations rulings concerning their representation of plaintiff. The court further determined that applying an objective standard, as required by the language of the prior acts condition (i.e., “reasonably be expected”), as a matter of law, the insureds knew or should have known that they would the subject of a malpractice claim. As the court explained, “it is inconceivable that two experienced, accomplished attorneys, having received notice that a federal district judge had determined that they filed a lawsuit outside the statute of limitations, would not have a basis to foresee that missing the filing deadline might reasonably be expected to be the subject of a malpractice claim against them.” As such, the court held as a matter of law that the insureds did not satisfy the policy’s prior acts condition, and as a consequence, the insurer had no duty to defend or indemnify.

4th Circuit Applies Pro Rata Allocation

2012-02-07T05:54:00.002-05:00

In its recent decision in Pennsylvania National Mutual Cas. Ins. Co. v. Roberts, 2012 U.S. App. LEXIS 2084 (4^th Cir. Feb. 3, 2012), the United States Court of Appeals for the Fourth Circuit, applying Maryland law, had occasion to consider allocation of loss arising out of a lead paint bodily injury lawsuit.

Plaintiff in the underlying matter was diagnosed with elevated blood lead levels in September 1992, when she was twenty (20) months old. She continued to exhibit elevated blood levels through August 1995. Plaintiff’s suit named as a defendant Attsgood, which owned and managed the property where plaintiff lived from the time of her birth through November 1, 1993. Plaintiff’s complaint also named as a defendant the subsequent property owner, who defaulted. Attsgood was insured through Penn National under consecutive general liability policies covering the period January 13, 1992 (subsequent to plaintiff’s birth) through January 13, 1994. The underlying suit eventually resulted in an award to plaintiff in the amount of $850,000, and a finding that Attsgood and the subsequent property manager were jointly and severally liable for the amount.

Following the verdict, Penn National sought a declaratory judgment against Attsgood and the plaintiff, arguing that it was responsible only for 22 months of the entire period in which plaintiff was exposed to lead, that period being from January 13, 1992 through November 1993 when Attsgood sold the property. While Attsgood defaulted in the declaratory judgment action, plaintiff contested Penn National’s allocation theory, arguing that in light of the joint and several finding as to both defendants, Penn National should be responsible for paying the entirety of the $850,000 award. The Maryland federal district court rejected plaintiff’s argument. Instead, applying a continuous trigger theory, the lower court held Penn National was responsible for 24 months (i.e., the full two years of the policies) of the 55 months that plaintiff was exposed to lead conditions (from her January 1991 birth through August 1995 when her blood lead levels normalized). Thus, the court concluded, Penn National was responsible for 24/55 of the underlying award, or $370,600.

On appeal, the Fourth Circuit affirmed the lower court’s ruling that Penn National should not be responsible for paying the entirety of the underlying judgment. Any other outcome, noted the court, would be contrary to the plain language of Penn National’s policies, which applied to “bodily injury” happening during the respective policy periods. As the court explained, “the contract does not cover damages Attsgood became legally obligated to pay for injuries that occurred outside of the policy period.” (Emphasis supplied.) Moreover, plaintiff’s argument ran contrary to well-established Maryland law applying a pro rata by time on the risk allocation of liability in lead paint liability matters. Plaintiff argued that these cases should not apply because they did not involve multi-defendant cases. The Fourth Circuit found this distinction “entirely unpersuasive,” concluding that the pro rata methodology stems from the language of the insurance policy, not from the number of defendants involved. Finally, the court found that as a matter of public policy, it would simply be unfair to saddle Penn National with losses that happened outside the periods of its policies.

While the court agreed that pro rata allocation was proper, it nevertheless concluded that the lower court erred in determining Penn National’s allocated share of the loss. The court agreed that the trigger period was 55 months, running from plaintiff’s date of birth through the date that her blood lead levels normalized. The Fourth Circuit held, however, that the proper numerator was not 24 months, but instead 22 months, representing the period of time in which the Attsgood owned the property at which plaintiff resided. Thus, the court found Penn National responsible for 22/55 of the underlying loss rather than 24/55.

New York Court Addresses Impact of Allowing Insured to Default

2012-02-03T05:23:00.000-05:00

In its recent decision in Sunnyside Dev. Co., LLC v. Chartis Specialty Ins. Co., 2012 U.S. Dist. LEXIS 9392 (S.D.N.Y. Jan. 26, 2012), the United States District Court for the Southern District of New York demonstrated the consequences that an insurer faces when allowing an insured to default.

Chartis insured Opsys under a pollution legal liability policy that provided first and third party liability coverage for a property that Opsys leased from Sunnyside in Fremont, California. Opsys used the premises for research and development in the organic light emitting diode industry. During the policy term, Opsys filed for Chapter 7 bankruptcy, which triggered a regulatory inspection of Opsys’ facility, which in turn resulted in a Notice of Violation based on “a condition dangerous to human health, property, and the environment by abandoning hazardous materials and hazardous waste.” As a result, Sunnyside was advised that the property could not be re-occupied until a Closure Order was issued.

Chartis paid certain costs under the policy relating to pollution caused as a result of leaking or ruptured drums within the facility. Sunnyside nevertheless received permission from the bankruptcy court to commence suit against Opsys, to obtain benefits under the Chartis policy, primarily relating to lost rent resulting from its inability to lease the facility while undergoing remediation. Sunnyside thereafter commenced suit against Opsys in California, and advised Chartis that it intended to take a default against Opsys if the action was not defended. For reasons not clear, Chartis did not provide a defense, and Sunnyside eventually obtained a default judgment against Opsys for the $1 million limit of the Chartis policy.

After determining that Chartis received proper notice of the pending default, and had an opportunity to defend the suit, and even had an opportunity to attempt to vacate the default after it had been entered, the court considered the effect of Chartis’ inaction. Chartis argued that Sunnyside failed to demonstrate that its damages were caused as a result of a “pollution condition,” a term defined in pertinent part as a “leak” or a “release,” but instead were caused as a result of an abandonment or the mere presence of pollutants. While court agreed that Chartis could raise defenses to its policy’s coverage, since coverage was not technically at issue in Sunnyside’s suit against Opsys, the court nevertheless held that Chartis could not relitigate facts that were decided in Sunnyside’s suit against Opsys. Thus, the California court’s judgment that there was property damage at the premises resulting from leaking or ruptured drums, and that there was a release of hazardous materials, even if inaccurate, was nevertheless binding on Chartis for the purpose of determining coverage. As the court explained, “if Chartis wanted to litigate the proximate cause of Sunnyside's damages, it should have intervened in the California Action or moved to set aside the Default Judgment.”

Missouri Court Addresses Owned Property Exclusion

2012-01-25T06:32:00.000-05:00

In its recent decision in Clarinet v. Essex Ins. Co., 2012 U.S. Dist. LEXIS 7300 (E.D. Mo. Jan. 23, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether a general liability policy afforded coverage for an insured’s obligation to stabilize and later demolish its own building so as to prevent damage to third-party property.

The insured, Clarinet, was the owner of a historic building located in St. Louis, Missouri. The building partially collapsed as a result of a severe windstorm. The insured undertook efforts to stabilize the building, but it ultimately was determined that the entire building needed to be razed in order to prevent harm to persons and to an adjacent bridge. It was not until after the demolition was complete that the insured gave notice to Essex that it had incurred costs to stabilize and demolish the building and that it was seeking coverage under its liability policy for such costs.

Essex denied coverage for Clarinet’s stabilization and demolition costs on the basis that there was no property damage resulting from an occurrence. Specifically, Essex took the position that to constitute an “occurrence,” there must be injury resulting from the insured’s own negligent conduct. As such, Essex contended, a windstorm cannot qualify as an occurrence. Essex also denied coverage based on an “owned property exclusion” and an exclusion applicable to vacant buildings. Finally, it denied coverage based on Clarinet’s failure to have provided notice of occurrence prior to undertaking the stabilization and demolition efforts.

The court only briefly addressed whether a windstorm can constitute an “occurrence,” noting that there was no guidance under Missouri law as to whether an occurrence must result from the insured’s negligent conduct. Ultimately, the court resolved coverage on the basis of the policy’s owned property exclusion, applicable to property damage to:

(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property; (Emphasis supplied.)

Acknowledging a lack of Missouri case law on the issue, the court surveyed case law from throughout the country as to whether the exclusion applies to bar coverage for costs necessary to prevent damage to third-party property. In Castle Village Owners Corp. v. Greater New York Mutual Ins. Co., 878 N.Y.S.2d 311 (N.Y. 1^st Dep’t 2009), a New York appellate court held that the exclusion may not be enforceable when the insured has a legal obligation to prevent damage to another’s property. The test in New York, as explained by the court, is whether there is a “nexus between the condition of the insured’s property and the existence of ongoing and immediate harm to the property of others.” Courts in Michigan and Maryland, on the other hand, apply a more lenient standard, holding that the exclusion does not apply when the insured acts to prevent “imminent harm” to third-party property. See, Aetna Cas. & Sur. Co. v. Dow Chem. Co., 28 F. Supp. 2d 448 (E.D. Mich. 1998); Aetna Ins. Co. v. Aaron, 685 A.2d 858 (Md. Ct. App. 1996). Wisconsin courts, however, do not recognize an exception to the exclusion, holding it applicable even when there is imminent risk of damage to third-party property. See, Watertown Tire Recycles, LLC v. Nortman, 788 N.W.2d 384 (Wis. Ct. App. 2010). The Clarinet court ultimately decide concluded that Missouri courts, similar to those in Wisconsin, “would likely enforce the ‘owned property’ exclusion according to its plain terms, thereby excluding from coverage costs incurred to mitigate damage to third parties.” In other words, there is no exception to the exclusion, even if the insured is acting so as to prevent third-party property damage that might otherwise be covered under a general liability policy.

The court found additional support for its conclusion on the basis of the policy’s exclusion applicable to any claims involving vacant buildings. The policy specifically identified the building at issue as a vacant building. The court further noted that the insured’s failure to have given notice to Essex of its stabilization and demolition efforts before incurring such costs necessarily prejudiced Essex and constituted an additional basis for noncoverage.

Mississippi Court Addresses Coverage for Conversion Claim

2012-01-23T06:26:00.002-05:00

In its recent decision in Markel American Insurance Company v. Tri-Miss Services, Inc., 2012 U.S. Dist. LEXIS 5850 (S.D. Miss. Jan. 19, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider whether an insured was entitled to a defense under a general liability policy for a lawsuit alleging conversion.

The insured, Tri-Miss, was sued for allegedly purchasing over 13,000 pounds of copper and aluminum that it knew, or should have known, was stolen from plaintiff. The complaint specifically alleged that Tri-Miss demonstrated an intent to exercise dominion over the stolen metals, even after learning that the goods were stolen, thus giving rise to the intentional tort of conversion. Markel denied coverage to Tri-Miss, and subsequently brought suit, seeking a declaration that the underlying matter did not allege and “occurrence” and that coverage was otherwise precluded on the basis of the policy’s “care, custody or control” exclusion.

Tri-State argued that the underlying suit could allege an occurrence if it was determined that its purchase of the stolen property was accidental. The court disagreed, noting that under Mississippi law, conversion is an intentional tort that occurs when “the title of the lawful owner is made known and resisted, or the purchaser exercises dominion and control over the property by use, sale, or possession,” which is what plaintiff alleged in the underlying suit. These elements, explained the court, required intentional conduct from the standpoint of the insured. As such, and because the underlying plaintiff did otherwise not plead any conduct that could be construed as accidental, the court concluded that the suit did not allege an occurrence triggering a duty to defend.

The court also considered the policy exclusion applicable to property damage to “personal property in the care, custody or control of the insured.” The insured argued that the exclusion was ambiguous because the phrase “personal property” was not defined in the policy. Citing to various Mississippi case law and a dictionary definition, however, the court concluded that the phrase should be afforded a broad interpretation as any property other than real property. As such, the court held that the phrase “unambiguously includes the property at the heart” of the underlying suit, and that the exclusion therefore served as a secondary basis for noncoverage.

Illinois Court Addresses Liquor Liability Exclusion

2012-01-20T06:04:00.000-05:00

In its recent decision in Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 U.S. Dist. LEXIS 5222 (N.D. Ill. Jan. 17, 2012), the United States District Court for the Northern District of Illinois had occasion to consider the application of liquor liability exclusion.

The insured, Phusion Projects, produced and sold an alcoholic beverage that also contained significant quantities of “stimulants” such as caffeine, wormwood and taurine. Phusion was named as a defendant in several product liability suits brought by individuals claiming injuries as a result of having consumed the beverage. While the nature of plaintiffs’ injuries differed, all suits alleged, in pertinent part, that the combination of alcohol and stimulants in the Phusion beverage enabled plaintiffs to consume more alcohol without passing out, thus causing them to behave more erratically while intoxicated and/or causing them to suffer negative health effects.

Phusion’s primary and umbrella liability insurers denied coverage for the underlying suits on the basis of a liquor liability exclusion applicable to:

c. Liquor Liability

"Bodily injury" or "property damage" for which any insured may be held liable by reason of:

(1) Causing or contributing to the intoxication of any person;

(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or

(3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.

Phusion argued that the exclusion should not apply since the policies were purchased specifically to insure Phusion’s products, which the insurers knew were alcoholic, thus rendering coverage virtually nonexistent. The court rejected this argument, explaining that the policies provided coverage for other risks arising from Phusion’s products, such as “if Phusion sold tainted products and injured its customers in a manner unrelated to intoxication.” Phusion also argued that the exclusion applied only to “Dram shop” claims, i.e., liability against bars for their sale of alcohol to individuals who then cause injuries to others. The court rejected this argument as well, citing to the express language of the exclusion that broadly applied to any insured in the business of manufacturing, distributing and selling alcoholic beverages, not just those in the business of serving or furnishing such beverages.

Thus, finding the exclusion clear and unambiguous, the court concluded that the exclusion applied to four of the underlying suits alleging injuries as a result of plaintiffs being intoxicated, including a DUI-related suit and a suit alleging that an individual accidentally killed himself after his consumption of the Phusion beverage caused him to be awake, in an intoxicated state, for over thirty hours. The court did, however, conclude that the exclusion did not apply to an underlying suit alleging that plaintiff developed a heart condition as a result of consuming the Phusion product since the his claim was based on the dangerous nature of the product rather than its intoxicating nature.

California Court Holds Professional Services Exclusion Ambiguous

2012-01-13T05:58:00.000-05:00

In its recent decision in Corky McMillin Construction Services, Inc. v. U.S. Specialty Ins. Co., 2012 U.S. Dist. LEXIS 3438 (S.D. Cal. Jan. 11, 2012), the United States District Court for the Southern District of California considered the application of an errors and omissions exclusion contained in a directors and officers insurance policy.

At issue in Corky McMillin was the insured’s right to coverage for an underlying class action. Plaintiffs in the suit alleged that the insured, Corky McMillin, made various misrepresentations and omissions regarding the nature, value and desirability of certain residential neighborhoods. The policy provided coverage for “Insured Organization Loss arising from Claims first made against [the insured] during the Policy Period or Discovery Period (if applicable) for Wrongful Acts.” By endorsement, however, the policy contained an errors and omissions exclusion, stating in relevant part that:

… the Insurer will not be liable to make any payment of Loss in connection with any Claim against the Insured Organization arising out of, based upon or attributable to the rendering or failure to render services for others, including without limitation services performed for or on behalf of customers or clients of the Insured Organization … .

U.S. Specialty denied coverage on the basis of this E&O exclusion. Corky McMillin argued that the exclusion was ambiguous since the term “services” was not defined in the policy. U.S. Specialty countered, and the court agreed, that the term “services” should be interpreted based on its common dictionary definition, meaning “the work performed by one that serves.” The court further agreed with U.S. Specialty that while this definition of “services” was broad, the mere breadth of the term did not otherwise render it ambiguous.

The court nevertheless found the exclusion as a whole to be ambiguous when considered in the context of the policy’s insuring agreement, which provided coverage for “wrongful acts,” defined in pertinent part as “any other actual or alleged act, error, misstatement, misleading statement, omission or breach of duty (a) by the Insured Organization … .” The court noted that while the intent of the E&O exclusion was to bar coverage for liability arising out of the insured’s services, it was not clear whether “services,” with its broad meaning, encompassed, and therefore excluded, the same “wrongful acts” covered under the policy’s insuring agreement. For instance, explained the court, while the definition of “wrongful act” included misstatements, misleading statements and omissions, the exclusion, on its face, would operate to bar coverage for misstatements, misleading statements and omissions contained in the insured’s marketing materials – the very basis on which the insured was sued in the underlying suit. Given the “canons of construction” that insuring agreements are to be interpreted broadly in favor of the insured and that exclusions are to be interpreted narrowly against the insurer, the court concluded that “there is, at a minimum, ambiguity about the meaning of the term ‘services’ as used in the E&O Endorsement.”

Supreme Court of Utah Addresses Allocation of Defense Costs Among Insurers

2012-01-10T05:16:00.002-05:00

In a question certified by the United States Court of Appeals for the Tenth Circuit, the Supreme Court of Utah in The Ohio Casualty Ins. Co. v. Unigard Ins. Co., 2102 Utah LEXIS 1 (Utah Jan. 6, 2012) recently addressed the issue of whether allocation among successive insurers is determined by the insurers’ respective “other insurance” clauses or by a time-on-the-risk methodology.

The insured, Cloud Nine, had general liability coverage from Ohio Casualty for a one-year period, and then from Unigard for the next three years. Cloud Nine was sued for an alleged advertising injury which allegedly took place during the last three months of the Ohio Casualty policy, continued throughout the entire period of the Unigard policy, and extended into a period of time in which Cloud Nine was not insured. Ohio Casualty denied coverage and commenced a declaratory action in which Unigard eventually was a party. The Utah federal district court held that Ohio Casualty indeed had a duty to defend Cloud Nine and that defense costs must be shared equally with Unigard as a result of their policies’ respective “other insurance” clauses. Ohio Casualty appealed the question of allocation to the Tenth Circuit, which in turn certified the question to the Supreme Court of Utah.

Ohio Casualty argued on appeal that pursuant to the decision by the Supreme Court of Utah in Sharon Steel Corp v. Aetna Casualty & Surety Co., 931 P.2d 127 (Utah 1997), defense costs should be allocated based on a time-on-the risk methodology, and that Cloud Nine should be allocated a percentage of defense costs for its uninsured period. Unigard, on the other hand, argued that allocation should be determined by the policies’ other insurance clauses, both of which stated that in the event of other insurance, the policies provide primary coverage on an equal shares basis.

The court rejected Unigard’s argument, concluding that “other insurance” clauses do not apply to successive insurers, but only to concurrent insurers. As such, the court explained, the matter was governed by its prior holding in Sharon Steel, which applied a time-on-the-risk methodology in the context of an environmental claim, rather than an equal shares methodology. In explaining the basis for its prior holding, the court noted that such an allocation scheme “was the most equitable because it fairly related both to the time each insurer spent on the risk and the degree of risk each insurer contracted to assume.” Thus, while the court agreed with Unigard that Ohio Casualty had an absolute duty to defend Cloud Nine, it noted that the “duty to defend and the apportionment of defense costs between two insurers that have an equal duty to defend are distinct issues.” As such, the court concluded that defense costs should be apportioned based on time-on-the risk, subject to policy limits.

The court did, however, reject Ohio Casualty’s argument that Cloud Nine should be made to participate in its own defense. The basis for the court’s reasoning was that both Ohio Casualty and Unigard, pursuant to their respective policies, assumed complete control over Cloud Nine’s defense. As a result, the court concluded, “it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit.” Thus, the court held that defense costs would be divided between Ohio Casualty and Unigard based on their respective times on the risk and that “the portion of defense costs attributable to periods during which the insured lacked coverage” would be divided among the two insurers “in the same proportions.”

California Court Addresses Payment of Self-Insured Retention

2012-01-08T20:20:00.002-05:00

In its recent decision in National Fire Ins. Co. of Hartford v. Federal Ins. Co., 2012 U.S. Dist. LEXIS 641 (N.D. Cal. Jan. 4, 2012), the United States District Court for the Northern District of California had occasion to consider the issue of whether an insured was required to satisfy a self-insured retention with its own funds, or whether the retention could be paid by other insurance.

The insured in National was a restaurant located within a hotel. The restaurant hosted a graduation party at which a three-year old girl fell to her death from a balcony. The girl’s family brought a wrongful death suit, initially against the hotel only, which was insured by Federal Insurance Company. The hotel tendered its defense to National, the primary insurer for the restaurant, on the basis that the hotel qualified as an additional insured under the restaurant’s policy. While National initially denied coverage to the hotel, it later paid its policy limit to plaintiffs in order to secure a settlement on behalf of the restaurant and the hotel. National then brought a contribution claim against Federal.

After finding that the hotel was, in fact, entitled to additional insured coverage under the policy National issued to the restaurant, the court addressed the issue of priority of coverage as between the National and Federal policies, and the related issue of whether payments made by National on behalf of the hotel satisfied the Federal policy’s self-insured retention. The Federal policy had a $250,000 self-insured retention and the policy provision concerning payment of the retention stated that “[w]e have no obligation or liability under such Coverages unless and until the applicable Self-Insured Retentions … are exhausted by payments you make … You must pay all self-insured retention expenses.” Thus, from the face of this provision, only the insured could pay the retention.

Citing to the 2010 California state court decision in Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4^th 1466 (Cal. App. 2010), Federal argued that this policy language required the hotel to pay the retention with its own funds, and that the retention could not be insured. The court rejected this argument, however, noting that in Forecast Homes, the provision concerning payment of the self-insured retention expressly stated that “Payment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” By contrast, the Federal policy contained a “Bankruptcy Within the Self-Insured Retention” provision stating that the bankruptcy of any insurer, or any other person, would not relieve the hotel of its obligation to satisfy the retention. This language, explained the court, implied that the retention could be paid by other insurers, or other persons, and at the very least, did not “clearly require the hotel to satisfy the SIR out of its own pocket.” In other words, the bankruptcy provision negated the otherwise clear policy provision stating that the retention must be paid by “you.”

This aspect of the National Fire decision adds to the body of California case law dating back to General Star Nat. Ins. Corp. v. World Oil Co., 973 F. Supp. 943 (C.D. Cal. 1997) and Vons Cos. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (Cal. App. 2000), and more recently in cases such as Forecast Homes, Mt. McKinley Ins. Co. v. Swiss Reinsurance Am. Corp., 757 F. Supp. 2d 952 (N.D. Cal. 2010); Travelers Indem. Co. v. Arena Group 2000, L.P., 2007 U.S. Dist. LEXIS 17931 (S.D. Cal. 2007). These cases establish the general rule that absent express and unambiguous language restricting payment of a retention to the insured, California courts will allow retentions to be satisfied by secondary sources, including other insurance.

New York Court Addresses Impact of Allowing Insured to Default

2012-01-05T05:51:00.000-05:00

The recent decision by New York’s Appellate Division, First Department, in K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., 2012 N.Y. App. Div. LEXIS 16 (Jan. 3, 2012) illustrates the dangers under New York law in denying a duty to defend, and allowing an insured to default, when coverage is questionable.

The underlying matter in K2 involved a convoluted factual scenario, complicated by the insured’s default. Plaintiffs, K2, were a group of limited liability companies that made a series of loans to non-party Goldan, LLC. Goldan’s principal was Jeffrey Daniels. Mr. Daniels also happened to be an attorney, and in this capacity, he represented K2 in connection with the loan to Goldan. How or why K2 agreed to be represented by Mr. Daniels despite the apparently obvious conflict of interest was not explained by the court. After the loans were made, Goldan became insolvent and defaulted on the loans, whereupon K2 learned that Mr. Daniels had failed to properly secure the loans with mortgages and had failed to obtain title insurance.

K2 subsequently brought a malpractice action against Mr. Daniels and demanded $450,000 to settle their claims, which was within the $2 million limit of liability on Mr. Daniels’ legal malpractice policy issued by American Guarantee. American Guarantee nevertheless denied coverage to Mr. Daniels based on two policy exclusions: one applicable to claims based upon or arising out of the insured’s capacity as an officer or director of a business enterprise and the other applicable to acts or omissions of the insured for any business enterprise in which the insured had a controlling interest. American Guarantee’s argument, therefore, was that the exclusions applied because Mr. Daniels represented K2 in connection with loans made to a company in which he was a principal. Mr. Daniels failed to appear in K2’s lawsuit, resulting in a default judgment in the amount of $688,716. Following entry of the judgment, Mr. Daniels assigned his rights under the policy to K2, including bad faith claims. K2 thereafter brought a direct action against American Guarantee.

The court explained that having allowed its insured to default, American Guarantee could litigate the application of the exclusions, but could not otherwise challenge the underlying or damages determination, citing to Lang v. Hanover Ins. Co., 787 N.Y.S.2d 211 (N.Y. 2004) and Rucaj v. Progressive Ins. Co., 797 N.Y.S.2d 79 (N.Y. 1^st Dep’t 2005). The court nevertheless concluded that the exclusions relied on by American Guarantee did not apply since K2’s suit related to Mr. Daniels’ capacity as their own lawyer rather than his capacity as a director or officer of Goldan. The court noted that by having failed to defend its insured, American Guarantee “cannot at this juncture assert defenses that would have defeated the legal malpractice claims (for example, that Daniels was not performing legal services for plaintiffs but instead was representing Goldan) or would have established the applicability of the exclusions … .” In other words, the court suggested that there were facts that would have either refuted K2’s malpractice claim, or that could have supported application of the policy exclusions, but by having allowed its insured to default, American Gurantee could not rely on or seek to discover such facts, and instead was limited to the allegations in the complaint in support of its policy exclusions.

In passing, the court rejected K2’s claim for bad faith, holding that under Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445 (N.Y. 1993), K2 failed to demonstrate American Guarantee’s “gross disregard” of its insured’s interests under the policy.

New York Court Holds Disgorgement Payment Not Covered Under Professional Liability Policies

2011-12-16T05:46:00.000-05:00

In its recent decision in J.P. Morgan Securities, Inc. v. Vigilant Ins. Co., 2011 N.Y. App. Div. 8829 (N.Y. 1^st Dep’t Dec. 13, 2011), the New York Appellate Division for the First Judicial Department considered whether a disgorgement payment made pursuant to a settlement with the SEC qualified for coverage as compensatory damages under the insureds’ professional liability coverage program.

The insureds, various Bear Stearns entities, had been the subject of an SEC investigation in connection with its alleged practices of facilitating late trading and engaging in deceptive market timing for certain favored customers. While Bear Stearns did not admit to liability, it ultimately settled with the SEC by agreeing to a disgorgement payment in the amount of $160 million and a civil penalty payment in the amount of $90 million.

Bear Stearns sought indemnification for the settlement amount under its primary and excess layer professional liability policies that provided coverage for “Loss which the insured shall become legally obligated to pay as a result of any Claim … for any Wrongful Act on its part.” “Loss” was defined by the policies as including compensatory damages and costs associated with defending an governmental investigation, but expressly carved out “(i) fines or penalties imposed by law; or … (v) matters which are uninsurable under the law pursuant to which this policy shall be construed.” The policies also excluded coverage for claims “based upon or arising out of any deliberate, dishonest, fraudulent or criminal act or omission.” Bear Stearns insurers disclaimed coverage for the disgorgement payment on the basis that it did not fall within the definition of “Loss” and that it was otherwise excluded.

Bear Stearns subsequently commenced coverage litigation against its insurers, and the trial court denied the insurers’ motion to dismiss. Bear Stearns argued that while the $160 million payment to the SEC was labeled a “disgorgement payment,” it nevertheless should be considered compensatory damages for the purpose of the policies’ definition of Loss. The court held that a question of fact existed as to whether the disgorgement payment was exclusively linked to improperly acquired funds. Specifically, the lower court found that there was nothing in the SEC Order or the related documents from which to conclude that Bear Stearns directly profited from the alleged violations, or that it earned $160 million as a result of its conduct.

On appeal, the Appellate Division reversed, concluding that the facts established that Bear Stearns’ offer of settlement, the corresponding SEC Order, and various other documents, established that Bear Stearns “knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.” Among other things, the SEC Order demonstrated Bear Stearns’ falsification of order tickets and its use of dummy account and trader numbers to conceal late trades. The Order also determined that Bear Stearns “willfully violated, willfully aided and abetted and caused” numerous securities violations. As such, the Appellate Division concluded that it “cannot be seriously argued that Bear Stearns was merely found guilty of inadequate supervision and a failure to place adequate controls on its electronic entry system.”

The Appellate Division also rejected Bear Stearns contention that an issue of fact was raised as to whether the entirety of the $160 million disgorgement payment related to ill-gotten gains. While the SEC Order did not specifically itemize how the $160 million disgorgement figure was determined, explained the court, it also did not raise a possibility that the amount, or at least a portion of it, was compensatory in nature. A disgorgement payment need not be specifically calculated, noted the court, but need only be a “reasonable approximation of profits casually connected to the violation.”

4th Circuit Holds No Duty to Defend Insurance Broker In Bodily Injury Suit

2011-12-12T06:19:00.000-05:00

In its recent decision in Houston Cas. Co. v. St. Paul Fire & Marine Ins. Co., 2011 U.S. App. LEXIS 24157 (4^th Cir. Dec. 6, 2011), the United States Court of Appeals for the Fourth Circuit, applying South Carolina law, considered whether a general liability insurer had a duty to defend its insured, an insurance broker, in connection with an underlying construction site injury lawsuit.

The insured, McGriff, Seibels & Williams, Inc. (“McGriff”), was the broker of record for an owner-controlled insurance program (“OCIP”) issued to provide coverage for claims arising out of dam construction project. As part of its services, McGriff distributed a document called “Manual of Insurance Procedures” to the various contractors covered under the OCIP policy. The Manual expressly stated that McGriff, in conjunction with the project’s general contractor, would have various safety-related responsibilities in connection with the project.

McGriff was named as a defendant in a suit brought by an individual who suffered catastrophic injuries while working on the project. Plaintiff alleged causes of action for negligence and breach of contract against McGriff on the basis that it had assumed responsibiliy for performing inspections at the work site to ensure that it was reasonably safe, but failed to perform these inspections. McGriff’s professional liability carrier, Houston Casualty Company, undertook McGriff’s defense. St. Paul, however, which was McGriff’s general liability carrier denied coverage on the basis of an “Insurance and Related Work” endorsement, stating:

We won't cover injury or damage or medical expenses for which the protected person may be held liable because of:

• any obligation assumed by any protected person in connection with an insurance contract or treaty; [or]

• any failure to carry out, or improper carrying out of, any contractual or other duty or obligation in connection with an insurance contract or treaty.

Houston brought a contribution action against St. Paul, alleging that St. Paul had a duty to defend and McGriff in the underlying suit. The trial court granted summary judgment in St. Paul’s favor, agreeing that the exclusion applied because McGriff was sued “in connection with an insurance contract.” On appeal, Houston argued that McGriff’s safety-related duties in connection with the project existed independent of the insurance contract, and thus did not fall within the scope of the exclusion. More specifically, Houston argued that plaintiff’s negligence claim against McGriff was based upon a common law duty arising from a voluntary undertaking of various safety-related duties, and that plaintiff’s breach of contract claim did not allege breach of an insurance contract.

The court rejected Houston’s broad reading of the complaint, pointing out that the exclusion applied to any failure to carry out any contractual or other duty in connection with an insurance contract. As such, the court explained, the exclusion would apply to a breach of any contract claim, even one other than the insurance policy itself, so long as the additional contractual obligation arose “in connection with” an insurance contract. The court further explained that as long as McGriff’s common law obligations would fall within the exclusion as long as those obligations arose “in connection with” an insurance contract.

Looking to the complaint, as well as the Manual, the court concluded that McGriff’s contractual and common law obligations were related to and stemmed from its efforts to issue the OCIP. While McGriff assumed various obligations outside of the OCIP, it did so as part of its efforts to broker the program, and thus arose “in connection with” the policy. As such, the Fourth Circuit affirmed the grant of summary judgment, finding persuasive the lower court’s statement that “there is no allegation or suggestion in the complaint that McGriff assumed any safety-related duties except in this role [i.e., as the broker of record].”

Pennsylvania Federal Court Addresses Insolvency Exclusion

2011-12-01T06:42:00.002-05:00

In its recent decision ACE Capital Ltd. v. Morgan Waldon Ins. Mgmt., LLC, 2011 U.S. Dist. LEXIS 135902 (W.D. Pa. Nov. 28, 2011), the United States District Court for the Western District of Pennsylvania had occasion to consider the scope of an insolvency exclusion in a professional liability policy.

ACE provided errors and omissions coverage to Morgan Waldon Insurance Management, LLC (“MWIN”), an insurance agency that created and administered employee health benefit plans. MWIN was named as a defendant in two lawsuits brought by union clients alleging that MWIN had wrongfully created their health care benefit plans as self-insured plans funded by trusts established and controlled by MWIN. The unions alleged that they did not know that their employers were paying health care benefits into the trust rather than directly to a health care insurer. The unions claimed that MWIN negligently failed to calculate the monthly contributions necessary to fund the benefits offered, and as a result, the trusts were grossly underfunded and many health care claims subsequently went unpaid.

Although ACE defended MWIN in the suits, subject to a reservation of rights, it subsequently sought a declaratory judgment on several grounds, including the application of its policy’s insolvency exclusion, which stated that:

We will not defend any Claim or pay any Damages or Claim Expenses based upon, arising out of, directly or indirectly relating to or in any way involving:

* * *

3. Insolvency, bankruptcy, liquidation, receivership, rehabilitation or financial inability of the following, including but not limited to the failure, inability or unwillingness to pay Claims, losses or benefits due to the insolvency, liquidation or bankruptcy of:

a. Any insurance company; or

b. Any reinsurer; or

c. Employee benefit plan; or

d. Any self-insured program; or

e. Any trust; or

f. Any risk retention group; or

g. Any risk purchasing group.

ACE argued that the exclusion applied because the underlying suits were premised on the theory that the self-insured plans were insufficiently funded, i.e., the plans were insolvent. MWIN argued that the exclusion was ambiguous as applied, and that its application would defeat MWIN’s reasonable expectations of coverage and would otherwise render coverage under the policy illusory.

The MWIN court acknowledged that in the context of an insurance broker’s professional liability policy, an insolvency exclusion is most often applied in situations in which the broker places a client’s coverage with a carrier that subsequently becomes insolvent. The court did find, however, a line of cases extending the exclusion to situations in which investment advisors place their clients’ funds in investments that subsequently become insolvent. MWIN argued that these cases were inapplicable since they concerned situations in which third parties became insolvent whereas the underlying suits alleged that MWIN’s own negligence resulted in the insolvency of the plans. The court held that this was a distinction without a difference, explaining:

… the Policy exclusion is broadly worded: it precludes coverage for any claim "based upon, arising out of, directly or indirectly relating to or in any way involving" the insolvency, bankruptcy, liquidation, receivership, rehabilitation or financial inability of" a number of entities, including an "employee benefit plan," a "self-insured program" or a "trust." … Defendants cannot and do not dispute that the [the underlying suits] allege that the self-insured programs and/or employee benefit plans set up by MWIM to pay the plan members' benefit claims, which were funded through trusts … were unable to satisfy those claims because the plans were insufficiently funded by MWIM. Even if the claims cannot be said to "arise from" the plans' insolvencies, it cannot be argued that the claims do not "relate to" these insolvencies, irrespective of the fact that the mistakes made by MWIM occurred prior to the insolvencies.

The court further rejected MWIN’s arguments concerning reasonable expectations and illusory coverage. The court held that as a sophisticated, commercial enterprise, MWIN could not rely on the reasonable expectations doctrine to defeat an otherwise clear and unambiguous exclusion. Moreover, because the exclusion would only apply to a limited category of claims, the court concluded that the exclusion did not render coverage under the policy illusory.

New Jersey Federal Court Addresses Related Wrongful Acts

2011-11-18T07:10:00.000-05:00

In its recent decision Gladstone v. Westport Insurance Corporation, 2011 U.S. Dist. LEXIS 132100 (D.N.J. Nov. 16, 2011), the United States District Court for the District of New Jersey addressed the concept of related wrongful acts in the context of a lawyers malpractice insurance policy.

The issue presented to the Gladstone court was whether a malpractice lawsuit filed against Westport’s insured, Robert Gladstone, during the policy period was related to a claim first made against Mr. Gladstone prior to the policy’s issuance. Both claims arose out of a suit in which Mr. Gladstone unsuccessfully represented numerous parties in a zoning ordinance matter. Sometime after the suit ended, Mr. Gladstone brought a collection action against eleven of his former clients. In 2006, one of the former clients, Merrick Wilson, filed an answer in which he asserted the affirmative defense that Mr. Gladstone’s work had not met the standards of professional conduct. In 2007, another of the defendants in the collection action asserted a counterclaim, alleging that Mr. Gladstone committed malpractice in connection with his prosecution of the zoning matter. Ultimately, Mr. Gladstone settled the collection action, as well as the counterclaim, and obtained releases from each of the defendants, with the exception of Merrick Wilson, who for reasons not clear to the court, was never advised of the settlements or that Mr. Gladstone’s suit was dismissed.

In 2007, Mr. Gladstone joined the New Jersey firm of Szaferman, Lakind, Blumstein & Blader, P.C. (“SLBB”), and SLBB’s malpractice policy, issued by Westport, was endorsed to include coverage for Mr. Gladstone’s work prior to joining the firm. Westport renewed the policy, with a similar endorsement, for the period July 4, 2008 to July 4, 2009. In May 2009, Merrick Wilson commenced a malpractice action against Mr. Gladstone for the same zoning ordinance matter. Westport denied coverage to Mr. Gladstone on the basis that the 2009 claim related back to the counterclaim originally asserted in 2007, and thus constituted a claim first made prior to the inception of the 2008-009 policy. In doing so, Westport relied on the following policy provision:

Two or more CLAIMS arising out of a single WRONGFUL ACT, as defined in each of the attached COVERAGE UNITS, or a series of related or continuing WRONGFUL ACTS, shall be a single CLAIM. All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM was first made arising out of such WRONGFUL ACT …

The court agreed that, at a minimum, the counterclaim asserted in 2007 constituted a “claim” that was first asserted prior to the 2008-2009 policy period. Thus, the questions for the court were: (a) whether the related acts provision was enforceable and (b) was whether Mr. Merrick’s 2009 lawsuit was sufficiently related to the earlier counterclaim such that it should be deemed first made prior to the policy’s date of inception.

The insured argued that the related wrongful act provision was ambiguous and unenforceable under New Jersey law. In considering the issue, the Gladstone court observed that New Jersey’s Supreme Court had not yet addressed the issue of related claims in a professional liability policy. This concept had been addressed, however, by the United States District Court for the District of New Jersey in G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19069 (D.N.J., Mar. 16, 2007), aff’d, 586 F.3d 247 (3d Cir. 2009) and by a New Jersey state appellate level court in Passaic Valley Sewerage Commissioner v. St. Paul Fire and Marine Ins. Co., 2010 N.J. Super. Unpub. LEXIS 475 (N.J. Super. Ct. App. Div. Mar. 8, 2010), aff’d, 2011 N.J. LEXIS 686 (N.J., June 21, 2011). In both cases, the courts held that related wrongful act provisions were unambiguous and enforceable under New Jersey law. From these cases, the Gladstone court concluded that the provision in the Westport policy should be enforced. As the court explained, the provision:

… is not unclear. It does not include any undefined terms and is not so lengthy or convoluted that the average insured (especially the average lawyer!) would be unable to predict its effect in cases such as this one.

After determining that the provision was enforceable, the court considered whether it should be. The standard for determining “relatedness,” explained the court, is whether “there is a logical connection between [the claims], even if different plaintiffs brought them.” Thus, finding that the malpractice alleged in the 2007 counterclaim was identical to that alleged in Merrick Wilson’s 2009 malpractice suit, the court held that “[n]o reasonable jury could stray from the conclusion that the … [c]ounterclaim and the 2009 Wilson Malpractice Complaint arose from the same related wrongful acts – Mr. Gladstone’s alleged negligence during his work on the Hopewell Zoning Matter.” Accordingly, the court concluded that Westport properly denied coverage for the Merrick suit on the basis that it was properly deemed a claim first made prior to the policy period.

Third Circuit Finds Additional Insured Coverage Based on Peculiar Risk Doctrine

2011-11-15T21:33:00.002-05:00

In its recent decision Lafayette College v. Selective Insurance Company, 2001 U.S. App. LEXIS 22721 (3d Cir. Nov. 10, 2011), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, addressed under what circumstances additional insured coverage may be triggered.

The underlying suit in Lafayette arose out of a construction site injury at Lafayette College in Easton, Pennsylvania. Lafayette had hired Telesis Construction, Inc. as the general contractor to renovate a portion of the campus. Telesis was insured under a general liability policy issued by U.S. Fire. Telesis, in turn, subcontracted out a portion of the work to Alan Kunsman Roofing & Siding, Inc. During the course of the renovation work, an employee of Kunsman fell from a scaffold and sustained severe injuries. That employee later sued Lafayette and Telesis, among others.

The primary coverage dispute in Lafayette was whether the college qualified for additional insured coverage under Telesis’ policy. That policy’s additional insured endorsement stated that an entity such as Lafayette “is only an additional insured with respect to liability caused by your negligent acts or omissions at or from your ongoing operations performed for the additional insured at the job indicated by written contract or written agreement.” In other words, the additional insured coverage was limited to vicarious liability imposed on Lafayette as a result of Telesis’ work.

U.S. Fire argued that it did not have a coverage obligation to Lafayette because the underlying suit alleged that Lafayette was jointly and severally liable rather than vicariously liable for plaintiff’s injuries. The court noted that while true, such was not fatal to Lafayette’s claim for coverage, as it is not the legal theories advanced, but rather the underlying facts that are dispositive of coverage issues. With this in mind, the court addressed Lafayette’s contention that the underlying suit asserted liability based on the “peculiar risk doctrine,” which imposes liability on employers of independent contractors when: (1) a risk is foreseeable to the employer at the time of contract and (2) the risk is different “from the usual and ordinary risk associated with the general type of work done.” The court explained that if the underlying complaint could be read to assert such a claim against Lafayette, such would be tantamount to an assertion of vicarious liability for the purpose of the additional insured endorsement in the U.S. Fire policy.

Looking to the underlying complaint, the court found sufficient allegations to substantiate Lafayette’s claim, notwithstanding the fact that plaintiff did not expressly assert a theory of legal liability based on the peculiar risk doctrine. Among other things, the complaint alleged that defendants, including Lafayette, “knew or should have known that falls are one of the leading causes of fatalities and injuries at construction sites” and that defendants exposed plaintiff “to peculiar and unreasonable danger by refusing to permit workers to use the elevator and/or stairs inside the college to gain access to the roof and requiring workers … to climb more than 40 feet in the air on a vertically mounted scaffolding ladder without any adequate protection.” These allegations, explained the court, established the foreseeability of the plaintiff’s injuries and that the risk involved was, in fact, different than ordinary risks associated with construction work. As such, the court concluded that the two elements of a peculiar risk claim were satisfied by the underlying complaint, and U.S. Fire had a duty to defend Lafayette.

Illinois Court Holds No Duty to Defend Water Intrusion Claim

2011-11-11T05:14:00.000-05:00

In its recent decision Lagestee-Mulder, Inc. v. Consol. Ins. Co., 2011 U.S. Dist. LEXIS 129308 (N.D. Ill. Nov. 8, 2011), the United States District Court for the Northern District of Illinois addressed what allegations must be made in a construction defect lawsuit in order to trigger coverage under a general liability policy.

Lagestee, the general contractor on a construction project, was named as a defendant in a construction defect suit. It sought coverage as additional insured under a commercial general liability policy issued to one of its subcontractors by Consolidated Insurance Company. Consolidated denied coverage to Lagestee on the basis that the underlying suit did not allege property damage, but instead was limited to seeking a remedy of the alleged construction defects. Notably, the suit did not allege any particular third-party property damage, although it did allege that as a result of certain of the defects, water was allowed to infiltrate the building. The suit did not, however, identify any particular damage resulting from the water instrusion.

The court began its analysis by noting that Illinois court have long recognized the rule that “[w]here the underlying suit alleges damage to the construction project itself due to a construction defect, there is no coverage; by contrast, where the underlying suit alleges that the construction defect damaged something other than the project itself, there is coverage.” As such, explained the court, the absence of any allegation of specific third-party property damage resulting from the alleged would be fatal to Lagestee’s claim for coverage. Lagestee acknowledged that the underlying suit did not allege third-party property damage per se, as the suit related primarily to use of defective construction materials and faulty workmanship. Lagestee nevertheless argued that a duty to defend was triggered by the water intrusion allegations, since the presence of water at the building raised the potential for resulting property damage.

The court disagreed, concluding that while “[i]t is true that the underlying complaint does not disavow the proposition that the water infiltration damaged something other than the building itself … the mere possibility that such damage occurred does not trigger a duty to defend under Illinois law.” In other words, a court is not permitted under Illinois law to speculate as to what damages might have result from alleged water infiltration. Rather, the duty to defend is determined based solely on the damages actually alleged. Because the underlying suit did not identify any particular damage resulting from the water infiltration, but instead alleged only that the defective construction allowed for water infiltration, it was not permissible for the court to speculate that such infiltration could result in covered property damage. Thus, concluded the court, Consolidated did not have a duty to defend Lagestee in the underlying suit.

Second Circuit Agrees that Pollution Exclusion Does Not Apply to Restaurant Odors

2011-11-07T21:58:00.002-05:00

In 2010, the United States District Court for the Southern District of New York issued its decision in Barney Greengrass, Inc. v. Lumbermans Mut. Cas. Co., 2010 U.S. Dist. LEXIS 76781 (S.D.N.Y. July 27, 2010), a case addressing whether the pollution exclusion applied to restaurant odors. The insured, Barney Greengrass (also known as the Sturgeon King), is a well-known delicatessen and fish purveyor located on New York’s Upper West Side. It was sued by a residential tenant in the same building who claimed that the odors emanating from the restaurant were a nuisance. Barney Greengrass’ commercial general liability insurer denied coverage on the basis of its policy’s pollution exclusion.

In a particularly cheeky written opinion, the district court rejected the insurer’s contention that restaurant odors constitute a pollutant for the purpose of the exclusion, explaining that:

To read "pollution" as encompassing "restaurant odors," as defendant urges here, would contradict "common speech" and the "reasonable expectations of a businessperson," who has come to understand standard pollution exclusions as addressing environmental-type harms … Defendant's suggested interpretation of the exclusion is unreasonable because it would mean that plaintiff, the "Sturgeon King," procured liability insurance for its business while at the same time agreeing to exclude coverage for all "losses" caused by a byproduct integral to that business: the aromas which many people (other than Mr. Bohn, of course) apparently find quite pleasant. See Curt Gathje & Carol Diuguid, eds., ZAGAT: NEW YORK CITY RESTAURANTS 2009, Barney Greengrass, at 49 ("The smells alone are worth the price of admission."). We reject that interpretation, which "would infinitely enlarge the scope of the term 'pollutants.'" … Indeed, while the quality of plaintiff's restaurant smells may be in the nose of the beholder, ⁹ defendant's "pollution" argument -- as addressed to the odors here -- is malodorous to this Court.

In reaching its decision, the court distinguished other New York cases holding that odors can constitute a pollutant for the purpose of the pollution exclusion (Town of Harrison v. Nat'l Union Fire Ins. Co. of Pittsburgh, 653 N.Y.S.2d 75 (N.Y. 1996); Tri-Municipal Sewer Commission v. Continental Ins. Co., 636 N.Y.S.2d 856, 857 (N.Y. 2d Dep't 1996), explaining that those cases concerned odors from industrial facilities and thus involved traditional environmental pollution. By contrast, noted the court, restaurant odors cannot be considered traditional environmental pollution.

In an opinion dated November 4, 2011, a three-judge panel for the United States Court of Appeals for the Second Circuit affirmed the lower court’s decision. See Barney Greengrass, Inc. v. Lumbermens Mut. Cas. Co., 2011 U.S. App. LEXIS 22442 (2d Cir. Nov. 4, 2011). The court rejected Lumbermens’ argument on appeal that fumes, as used in the policy definition of “pollutants,” should be interpreted to include odors. The court explained that Lumbermens could have worded the policy language to include a specific definition of fumes, or could have included odors within the broader definition of “pollutants,” but elected not to. The court further noted that under New York law, the terms used in the definition of “pollutants” (i.e., smoke, vapors, soot, fumes, acids, etc.) have been construed to mean industrial pollution. As such, the court agreed that odors from industrial facilities, such as was the case in Town of Harrison and Tri-Municipal Sewer Commission, fall within the pollution exclusion, whereas restaurant odors do not.

Coincidentally, Barney Greengrass is not the only federal circuit decision in 2011 to address whether the pollution exclusion applies to restaurant odors. In Maxine Furs, Inc. v. Auto-Owners Ins. Co., 2011 U.S. App. LEXIS 6706 (11th Cir. March 31, 2011), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, held that the pollution exclusion applied to the emanation of curry odors from an Indian food restaurant. Under Alabama law, however, unlike New York law, the pollution exclusion is broadly construed to apply to matters not considered traditional environmental pollution.

California Court Holds Non-Owned Site Disposal Exclusion Is Ambiguous

2011-11-06T20:12:00.002-05:00

In its recent decision Sierra Recycling & Demolition v. Chartis Specialty Insurance Co., 2011 U.S. Dist. LEXIS 127354 (E.D. Cal. Nov. 3, 2011), the United States District Court for the Eastern District of California considered the scope a non-owned site disposal exclusion, a form of exclusion commonly found in pollution liability insurance policies.

Sierra Recycling concerned coverage under a contractors pollution liability insurance policy issued by Chartis (formerly known as American International Specialty Lines Insurance Company) to Sierra, which provided coverage for bodily injury, property damage or environmental damage resulting from pollution conditions caused by Sierra’s contracting operations. The policy contained a non-owned site disposal exclusion, barring coverage for:

Bodily injury, property damage or environmental damage arising from the final disposal of material and/or substances of any type (including but not limited to any waste) at any site or location which is not owned, leased or rented by you.

Sierra was hired to transport construction debris from a demolition site. It hauled some three hundred tons of debris to a facility that it did not own, lease or rent. Of significance, the facility to which Sierra hauled the debris was not a landfill, but instead a recycling facility that sold, recycled, or otherwise transferred all material brought to its facility. Sometime after Sierra transported the debris, it was advised by the facility that the debris contained elevated levels of zinc and mercury. Sierra sought coverage for necessary cleanup costs under the Chartis policy, but Chartis disclaimed coverage on the basis of the non-owned site disposal exclusion.

In the ensuing coverage litigation, Chartis moved for summary judgment on the basis of the policy’s non-owned site disposal exclusion. Chartis argued that the exclusion applied to an insured’s “final disposal” of material at any site, regardless of its nature, as long as the site is not owned, leased or rented by Sierra. Sierra relinquishment of the debris at the facility, Chartis asserted, constituted “final disposal” for the purpose of the exclusion. Sierra, on the other hand, argued that the exclusion was ambiguous, at least as applied to the facts before the court, because “final disposal” connoted disposal at a landfill (i.e. a place of final disposal), not at a recycling facility where material and waste will be resold, recycled or subsequently transferred to another facility or landfill. Under Sierra’s interpretation, the exclusion does not apply to disposal of waste or material at an intermediary facility, even if the insured has otherwise relinquished control of the waste or material.

Without citing to any particular line of authority, court concluded that Sierra’s construction of the phrase “final disposal” was “in line with the ordinary and popular understanding of the term ‘final disposal, and … therefore reasonable.” The court further held that Chartis’ construction of the exclusion as applying to an insured’s final relinquishment of waste or material also was reasonable. Thus, under California law, explained the court, since both sides presented reasonable interpretations of the exclusion, it was necessarily was ambiguous and to be construed against the insurer.

7th Circuit Addresses Coverage for Alleged Antitrust Violation

2011-11-03T22:56:00.002-04:00

In its recent decision Rose Acre Farms, Inc. v. Columbia Casualty Co., 2011 U.S. App. LEXIS 22063 (7^th Cir. Nov. 1, 2011), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, had occasion to consider whether an insured was entitled to coverage under its general liability policies for alleged conspiracy to price fix.

The insured, Rose Acre, is one of the nation’s largest producers of eggs and was named as a defendant in a class action alleging violations of the Sherman Act for conspiracy to fix the price of eggs. Rose Acre sought coverage under its general liability policies’ “personal and advertising injury” coverage for the offense of “use of another’s advertising idea in your ‘advertisement.’” Specifically, Rose Acre claimed that it belonged to a trade association of egg producers that maintained a website advertising the benefits of free range chickens, which Rose Acre argued could be used to make customers believe that the high price of eggs “was the result not of a conspiracy among egg producers but instead of the chickens’ healthful and humane living conditions.”

Judge Posner, writing the opinion for the court, characterized Rose Acre’s theory as “convoluted,” particularly since the underlying suit contained no mention of Rose Acre’s advertising on any website. More significantly, Judge Posner explained that even if the underlying suit could be read to allege that advertising was used as part of the antitrust conspiracy, the policies provided coverage only for the offense of misappropriation of another’s advertising idea. That is the essence of an advertising injury, which the court explained, was not alleged in the underlying suit. Rather, the underlying suit related to an alleged antitrust violation, which as Judge Posner wrote, is not within the contemplated coverage of a general liability policy:

Antitrust liability … is a major business risk, especially for one of the largest companies in a major market. It is hardly likely that parties to an insurance contract would seek to cover such a serious risk indirectly through an “advertising injury” provision aimed at misappropriation and other intellectual-property torts.

Judge Posner further noted that the policies’ personal and advertising injury coverage contained exclusions applicable to knowing and criminal conduct, both of which necessarily are present in an alleged conspiracy to violate federal antitrust law.

Alabama Supreme Court Addresses Coverage for Faulty Workmanship

2011-10-25T06:13:00.000-04:00

In its recent decision Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 2011 Ala. LEXIS 183 (Ala. Oct. 21, 2011), the Supreme Court of Alabama had occasion to consider whether an underlying suit for defective workmanship triggered coverage under a general liability policy.

The insured, a general contractor, had been hired to construct an automobile sales and service facility. Shortly after completion of the project, the project owner discovered several defects. Frustrated by the insured’s subsequent inability to repair the defects, the owner commenced suit, alleging various causes of action based on theories of tort and breach of contract. Amerisure provided a defense to its insured under a reservation of rights. The matter ultimately resulted in a judgment against the insured for approximately $650,000. Shortly after judgment was rendered, Amerisure denied a liability to indemnify its insured on the basis that the suit did not allege an occurrence, and that even if it did, the policy’s exclusion applicable to property damage to “your work” barred coverage. Plaintiffs in the underlying matter, standing in the shoes of the insured, contended that the allegations of faulty workmanship constituted an occurrence and that the exclusion was inapplicable because the property damage alleged was caused by the insured’s subcontractors rather than by work actually performed by the insured.

The Court looked to its two prior decisions on the issue of what constitutes an occurrence in the context of faulty workmanship claims. In United States Fid. & Guar. Co. v. Warwick Dev. Co., 446 So. 2d 1021 (Ala. 1984), the Court had held that an underlying claim did not allege an occurrence where the damage alleged was limited solely to faulty workmanship. By contrast, in Moss v. Champion Ins. Co., 442 So. 2d 26 (Ala. 1983), the Court found an occurrence where the insured’s failure to properly construct a roof allowed for water intrusion to the plaintiff’s home, causing damage to plaintiff’s attic and ceilings. The Court harmonized these two decisions by explaining that “faulty workmanship itself is not an occurrence but that faulty workmanship may lead to an occurrence if it subjects personal property or other parts of the structure to "continuous or repeated exposure" to some other "general harmful condition" (e.g., the rain in Moss) and, as a result of that exposure, personal property or other parts of the structure are damaged.”

The Court therefore held that to the extent that the underlying suit was limited to allegations of faulty workmanship, there could be no occurrence. It nevertheless remanded the matter for further findings to determine whether the plaintiffs experienced any subsequent property damage, such as resulting damage to computers or furnishings. In passing, the Court noted that if plaintiff did experience such property damage, it would necessarily follow that such damage was caused by an occurrence, and that the policy’s “your work” exclusion would not apply because of the exception applicable to work performed by subcontractors.

Application of Exclusion to Drywall Claim Does Not Render Coverage Illusory

2011-10-20T06:18:00.002-04:00

The United States District Court for the Southern District of Florida has held on several occasions that the pollution exclusion applies to Chinese drywall claims. See, e.g., CDC Builders, Inc. v. Amerisure Mut. Ins. Co., 2011 U.S. Dist. LEXIS 114509 (S.D. Fla. Aug. 16, 2011); Gen. Fid. Ins. Co. v. Foster, 2011 U.S. Dist. LEXIS 103618 (S.D. Fla. Mar. 24, 2011). In its recent decision Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 129269 (S.D. Fla. Oct. 18, 2011), the Southern District of Florida added to this line of cases by holding that a hazardous materials exclusion applied to drywall claims. In doing so, the court rejected the insured’s argument that application of the exclusion rendered coverage illusory.

The insured, Total Contracting, was sued for having allegedly installed defective drywall in a home that it renovated. Underlying plaintiffs alleged that the drywall emitted sulfides and other noxious gases, resulting in property damage and bodily injury. Total Contracting’s insurer, Colony, denied coverage under a series of consecutively renewed general liability policies on the basis of a hazardous materials exclusion, applicable to bodily injury or property damage “which would not have occurred in whole or in part but for the actual or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.” “Hazardous materials” was defined as “‘pollutants’, lead, asbestos, silica and materials containing them.” Thus, the exclusion tracked the language of a total pollution exclusion, but applied to a broader range of substances.

The underlying plaintiffs, who were parties to the declaratory judgment action, essentially conceded that the hazardous materials exclusion applied, as their suit against Total Contracting alleged that the drywall emitted gases that resulted in bodily injury and property damage. Instead of challenging the applicability of the exclusion, underlying plaintiffs argued that application of the exclusion under the circumstances would render the policies illusory and thus violative of public policy. The basis for this argument was that the exclusion contradicted in whole the coverage otherwise afforded under the policies.

The court initially agreed that based on Florida law concerning the pollution exclusion, as well as case law applying the pollution exclusion in the context of Chinese drywall, the policies’ hazardous materials exclusion had clear application to the underlying suit. The court went on to hold that the exclusion did not render coverage illusory, since the policies provided “coverage for a seemingly wide-range of business activities described as ‘the contractors-subcontractors work.’” The hazardous materials exclusion barred coverage for only a small portion of claims that otherwise fell within this coverage, and as such the exclusion could not be said to completely “contradict” the policies’ insuring agreements. In other words, the exclusion did not completely negate coverage under the policies. In passing, the court noted that if underlying plaintiffs’ argument were correct, then any policy with a hazardous materials exclusion (or a pollution exclusion) must be considered illusory, which would be an absurd result.

Eleventh Circuit Affirms Regulatory Investigation Not a Claim Under D&O Policies

2011-10-17T06:35:00.000-04:00

In its recent decision in Office Depot, Inc. v. Nat'l Union Fire Ins. Co., 2011 U.S. App. LEXIS 20759 (11^th Cir. Oct. 13, 2011), the Eleventh Circuit Court of Appeals, applying Florida law, affirmed a lower court decision finding that Office Depot was not entitled to coverage under a primary and excess “organization insurance” policy for attorneys’ fees associated with an SEC investigation.

In July 2007, Office Depot gave notice to its insurers of an article from the Dow Jones Newswire reporting that Office Depot may have violated federal securities laws by selectively disclosing nonpublic information. A week later, the SEC sent a letter to Office Depot advising that it would be undertaking an investigation into whether Office Depot had, in fact, violated federal securities laws. A few weeks later, the SEC informally asked Office Depot to produce various communications relevant to its investigation. It was not until January 2008, however, that the SEC issued a formal order of investigation. This investigation lasted over two years, and included subpoenas being issued to various Office Depot directors and officers, and Wells Notices being issued. In December 2009, the SEC filed a formal complaint and the matter was later settled. At issue before the Eleventh Circuit was whether Office Depot was entitled to coverage for its attorneys’ fees associated with the SEC investigation during the period between the first letter in July 2007 and the issuance of the formal subpoenas and Wells Notices.

Office Depot argued, among other things, that its policies provided coverage for all defense costs incurred following its receipt of the SEC notice in July 2007, i.e., for the SEC’s informal investigation. The policies’ insuring agreement applicable to organization insurance provided coverage for:

(i) Organization Liability. This policy shall pay the Loss of any Organization arising from a Securities Claim made against such Organization for any Wrongful Act of such Organization. . . .

Securities Claim was defined by the policies as:

…a Claim, other than an administrative or regulatory proceeding against, or investigation of an Organization, made against any Insured:

(1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities . . .; or

(2) brought derivatively on the behalf of an Organization by a security holder of such Organization.

Notwithstanding the foregoing, the term "Securities Claim" shall include an administrative or regulatory proceeding against an Organization, but only if and only during the time such proceeding is also commenced and continuously maintained against an Insured Person. (Emphasis supplied.)

Office Depot contended that it was entitled to defense costs dating back to the SEC’s July 2007 letter because the definition of Securities Claim did not expressly exclude informal SEC investigations. Office Depot further argued that the carve-back provision of the definition of Securities Claim brought back into coverage an “administrative or regulatory proceeding.”

The Eleventh Circuit disagreed, explaining that the initial portion of the definition of Securities Claim, through the use of the disjunctive term “or,” eliminated coverage for two types of potential Securities Claims: those involving administrative or regulatory proceedings and those involving administrative or regulatory investigations. The court determined that while the carve-back portion of the definition of Securities Claims gave back coverage for administrative or regulatory proceedings under certain circumstances, it did not restore coverage for investigations. Thus, concluding that the SEC’s July 2007 was an investigation, the court held that Office Depot was not entitled to coverage for attorneys’ fees associated with responding to same. It was not until the SEC issued subpoenas and Wells Notices to covered individuals that that the policies’ coverage was triggered.

The court considered several secondary arguments raised by Office Depot, most notably its argument that the policies’ notice provision operated to bring defense costs back into coverage. This provision stated, in pertinent part, that if during the policy period Office Depot gave notice of circumstances that might result in a claim, then any future claim would be considered made at the time notice of circumstances was given. Office Depot argued that by providing notice of the Dow Jones article to its insurers, it gave notice of circumstances, such that when the Claim was later made, “any costs incurred between the notice of circumstances and the date a Claim was made” was brought back into coverage. The court rejected this bootstrapping argument, explaining that the notice of circumstances provision serves only to bookmark coverage under the policies for when a Claim is later made, even if outside the policy period, and does not operate to bring into coverage pre-Claim defense costs, particularly those relating to a non-covered regulatory investigation.

Florida Court Holds Insurer Has Duty to Indemnify Legionella Bacteria Claim

2011-10-13T06:00:00.002-04:00

In Westport Ins. Corp. v. VN Hotel Group, LLC, 761 F. Supp. 2d 1337 (M.D. Fla. 2010), the United States District Court for the Middle District of Florida held that a general liability carrier had a duty to defend its insured in connection with a wrongful death lawsuit arising out of a hotel guest’s exposure to Legionella bacteria. Among other things, the court held that such bacteria did not fall within the policy’s pollution exclusion. More recently, in its decision Westport Ins. Corp. v. VN Hotel Group, LLC, 2011 U.S. Dist. LEXIS 117215 (M.D. Fla. Oct. 11, 2011), the court considered joint motions for summary judgment as to whether the insurer had a duty to indemnify with respect to such claims.

The insurer, Westport, argued that Legionella bacteria qualifies as a contaminant for the purpose of its policy’s pollution exclusion. While the court rejected this very argument in its prior ruling, Westport argued that reconsideration was warranted based on recent decisions by the Eleventh Circuit Court of Appeals in Maxine Furs, Inc. v. Auto-Owners Ins. Co., 426 F. App’x. 687 (11^th Cir. 2011) (holding that curry aroma constituted a contaminant for the purpose of a pollution exclusion) and the Middle District of Florida in Markel Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, No. 8:09-cv-2427-T-27TGW (M.D. Fla. Mar. 9, 2011), aff’d, 2011 U.S. App. LEXIS 16552 (holding that pollution exclusion applied to bacterial infection caused by millings from roadwork). The Westport court nevertheless distinguished both cases on the basis that neither involved bacteria. Bacteria, explained the court, are living organisms not readily classified as solid, liquid, gaseous or thermal substances as required by the policy’s pollution exclusion. Accordingly, the court reiterated its prior ruling that the pollution exclusion did not apply to the underlying suit.

The Westport court also revisited its prior ruling on the policy’s Fungi or Bacteria exclusion, which by its title alone seemed applicable to a claim arising out of exposure to Legionella bacteria. The exclusion, however, applied only to “… bacteria on or within a building or structure, including its contents … .” The underlying plaintiff was exposed to Legionella bacteria while in the hotel’s spa tub. The court held that a spa tub did not qualify as a “structure,” which the court defined as “an edifice or building of any kind.” The court further held that even if the spa tub could qualify as a “structure” for the purpose of the Fungi or Bacteria exclusion, the exclusion had an exception for bacteria “that are, are on, or are contained in, a good or product intended for bodily consumption.” The court reasoned that the term “consumption” in this exclusion was not limited to actual ingestion, but instead meant “the utilization of economic goods in the satisfaction of wants.” Thus, explained the court, the underlying plaintiff had consumed the hot tub water not in the sense of drinking it, but “to satisfy a desire or want.” As such, the court held that the exception to the exclusion was applicable even if the tub could be considered a structure.

Illinois Court Holds Abstention Doctrine Does Not Require Dismissal of Insurance-Related Declaratory Judgment Action

2011-10-07T06:11:00.000-04:00

Under Illinois law, an insurer has two options when it is unsure as to whether an underlying claim triggers a defense obligation under a liability policy: it can provide a defense under a reservation of rights or it can seek a declaratory judgment as to its coverage obligations prior to trial. Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999). The recent decision by the United States District Court for the Northern District of Illinois in Cincinnati Ins. Co. v. Silvestri Paving Co., 2011 U.S. Dist. LEXIS 114273 (N.D. Ill. Oct. 4, 2011) addressed the appropriateness of a declaratory judgment action under such circumstances.

Cincinnati Insurance Company’s insured, Silvestri, was named as a defendant or third-party defendant in three consolidated lawsuits alleging dumping of waste in violation of the Illinois Environmental Protection Act. After initially disclaiming coverage, Cincinnati agreed to defend Silvestri in these matters under a reservation of rights. Cincinnati then brought suit against Silvestri in federal court pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaration that it had no duty to defend or indemnify Silvestri on the basis of several coverage defenses, including the application of its policies’ pollution exclusion, the lack of an occurrence, and Silvestri’s failure to comply with the policies’ notice provisions.

Silvestri subsequently moved to dismiss pursuant to the Wilton/Brillhart abstention doctrine, which provides a district court with the discretion to stay or dismiss a declaratory judgment action when a parallel case is pending in state court that involves the same parties and identical legal issues. Where, however, the declaratory judgment presents an issue distinct from the state court proceeding, abstention is inappropriate. Silvestri argued that abstention was proper since the issues presented for adjudication in Cincinnati’s declaratory judgment action would also be resolved in the underlying suits and because Cincinnati’s duty to indemnify necessarily required a finding of fact in the underlying suits. Silvestri further argued that Cincinnati was engaging in improper forum shopping since the judges in the underlying consolidated cases had ruled on certain issues relating to the duty to defend and indemnify involving other defendants and their respective insurers.

The court rejected each of Silvestri’s arguments. Most pertinently, the court held that the underlying state court cases could not be considered parallel actions for the purpose of the Wilton/Brillhart doctrine because Cincinnati was not a defendant in those suits and because the coverage issues would not be addressed in those suits. While the underlying suits would be determinative of Silvestri’s liability under the Illinois statute, those suits would not address Silvestri’s right to coverage for its liability. As the court explained, “[w]hether Silvestri dumped ‘waste’ in violation of the IEPA [and] is liable for damages to the State of Illinois, is … independent from the issue of whether the allegations in the underlying case are covered by Silvestri's insurance policies with Cincinnati.” The court further held that it was irrelevant that the underlying courts addressed insurance coverage issues as to parties other than Silvestri and Cincinnati under entirely different insurance policies. Such would have no effect on the insurance coverage dispute between Silvestri and Cincinnati and, at the very least, did not merit abstention under the Wilton/Brillhart doctrine.

Eleventh Circuit Holds No Duty to Defend Credit Card Transaction Claim

2011-10-06T03:30:00.000-04:00

In its recent decision in Creative Hospital Ventures, Inc. v. E.T. Limited, Inc., 2011 U.S. App. LEXIS 19990 (11^th Cir. Sept. 30, 2011), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, addressed whether the issuance of a credit card receipt to a customer constitutes “publication” for the purpose of a general liability policy’s “personal and advertising injury” coverage.

The insured, ETL, was named as a defendant in a class action suit alleging that defendants violated the Fair and Accurate Credit Card Transaction Act (“FACTA”) by issuing credit card receipts to customers that revealed more than five digits of their credit card numbers. ETL claimed that the underlying suit constituted the personal and advertising injury offense of “oral or written publication, in any manner, of material that violates a person’s right of privacy,” thus triggering a defense obligation under a policy issued by Essex Insurance Company. Essex argued, and the federal district court agreed, that ETL’s issuance of a credit card receipt did not constitute “publication” as that term is used in a general liability policy. Relying on the Florida Supreme Court decision in Penzer v. Transportation Ins. Co., 29 So. 3d 1000 (Fla. 2010), the lower court held that “publication” requires dissemination of information to the public rather than to the individual cardholder.

On appeal, the Eleventh Circuit agreed that the Penzer decision was determinative of what constitutes “publication” under Florida law. Penzer involved an alleged violation of the Telephone Consumer Protection Act (“TCPA”) resulting from the insured’s transmittal of unsolicited facsimiles, or “blast faxes.” Relying on a standard dictionary definition of the word, the Florida Supreme Court held that publication involves some act of communication or dissemination of information to the public at large. This definition, explained the court, necessarily encompassed the act of faxing an advertisement to 24,000 people at the same time “because it constitutes a communication of information disseminated to the public and it is ‘the act or process of issuing copies … for general distribution to the public.’” Penzer at 1005-06.

With this definition in mind, the Eleventh Circuit held that distributing a credit card receipt to a customer is not “publication.” Rather, the receipt “is a contemporaneous record of a private transaction between ETL and the customer, and ETL neither broadcasted nor disseminated the receipt or the credit card information to the general public.” The court distinguished a credit card receipt from the blast-faxes in Penzer on the basis that plaintiffs in Penzer did not solicit the facsimiles whereas in the underlying class action, the plaintiffs initiated the purchase that generated a credit card receipt. The court further rejected ETL’s argument that the use of the phrase “in any manner” as used in the defined offense of “oral or written publication” expanded the definition of “publication” to include credit card receipts. As the court explained, the phrase “‘in any manner’ merely expands the categories of publication (such as e-mail, handwritten letters, and, perhaps, ‘blast-faxes’) covered by the Policy” but did not dispense with the requirement that the publication itself be directed to the public at large.

2011-10-06T03:11:00.002-04:00

The Traub Lieberman Insurance Law Blog is pleased to announce that it has been nominated as a Top 50 Blog in the LexisNexis Insurance Law Community for 2011. If you are a member of the Community (it is free), we would appreciate any support you can offer by leaving a favorable comment concerning the blog. Comment Here

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Louisiana Court Holds Allegation of Negligence Did Not Trigger Duty to Defend

2011-10-03T06:35:00.000-04:00

In its recent decision New Orleans Deli & Dining v. Cont'l Cas. Co., 2011 U.S. Dist. LEXIS 111928 (E.D. La. Sept. 30, 2011), the United States District Court for the Eastern District of Louisiana had occasion to consider whether under Louisiana law, an underlying suit pertaining to the insured’s alleged practice of depriving its employees of tips triggered a duty to defend under a commercial general liability policy.

The underlying suit was brought by current and former employees of New Orleans Deli & Dining (“NODD”). Plaintiffs alleged that customers deposited tips directly into a tip jar or otherwise paid tips directly a credit card slip, and that restaurant management had agreed to evenly distribute these tips to the employees. Plaintiffs claimed, however, that management either kept the tips or otherwise donated the tips to charity. The underlying suit alleged causes of action for breach of contract, negligence, fraud, unjust enrichment, and conversion.

The insurer, Continental, argued that it had no duty to defend the underlying suit because plaintiffs did not allege property damage arising out of an occurrence, but instead alleged intentional conduct resulting in pure economic loss, which cannot be considered property damage as that term is defined in a standard form general liability policy. NODD, on the other hand, contended that the loss alleged in the underlying suit constituted property damage since it could be considered loss of use of tangible property not physically injured. In this regard, NODD argued that the underlying plaintiffs claimed “that they lost the use of cash, which is a corporeal movable, and thus, tangible property.” NODD further claimed that Continental at the very least owed a defense since the underlying suit alleged that NODD acted negligently in depriving its employees of their tip money, thus raising the possibility that NODD’s conduct was accidental.

The court held against NODD, finding that even if the alleged loss could qualify as property damage, the underlying suit did not allege an occurrence. Looking to the complaint in the underlying matter, the court concluded that notwithstanding the general allegation of negligence, “[t]he alleged acts of implementing the tip policy and taking the tips were done intentionally, not accidentally nor negligently.” As such, explained the court, the underlying suit did not sound in negligence but rather intentional tort, for which no duty to defend triggered under a general liability policy.

Pennsylvania Federal Court Addresses Coverage for Blast Fax Suit

2011-09-27T06:19:00.002-04:00

In Maryland Casualty Co. v. Express Products, Inc., 2011 U.S. Dist. LEXIS 108048 (E.D. Pa. Sept. 22, 2011), the United States District Court for the Eastern District of Pennsylvania considered whether an insured was entitled to coverage under a series of general liability policies for an underlying “blast fax” suit.

The insured, Express Products, Inc. (“Express”), was as a defendant in a class action filed in an Illinois state court alleging violations of the Telephone Consumer Protection Act (“TCPA”) and the Illinois Consumer Fraud Act based on Express’ transmittal of thousands of unsolicited advertisements via facsimile. Express’ insurers, Cumberland Mutual Fire Ins. Co. and Maryland Casualty Company, denied coverage under their respective policies’ property damage coverage (Coverage A) on the basis that the underlying suit did not allege an occurrence. The insurers also denied coverage under their policies’ advertising injury coverage (Coverage B) on the basis that the underlying suit did not fall within the definition of any of enumerated offenses constituting “advertising injury.”

After determining that Pennsylvania law governed the policies, the court turned to the coverage issues under the policies two coverages. In considering Coverage A, the court agreed that the underlying suit alleged property damage “through the use of paper and toner, and the loss of use of tangible property that is not physically injured, by tying up the fax.” The court nevertheless concluded that the underlying suit did not allege property damage arising out of an “occurrence” because the suit alleged that Express intentionally sent the faxes. While the underlying suit did allege that Express knew or should have known that it would cause property damage to the plaintiff class, such an allegation, in and of itself did not preclude a finding of intentional conduct since the suit also alleged that Express intentionally sent unsolicited facsimiles. The court also rejected the insured’s argument that the mere inclusion of the word negligence in the underlying suit triggered a defense obligation. Plaintiffs’ use of this word, explained the court, was to allege that even if Express’ conduct was negligent, its conduct was still in violation of the TCPA. This did not rise to the level of an actual allegation of negligent conduct. The court further held in passing that the policies’ expected and intended exclusions applied, since the complaint alleged that Express sent the facsimiles knowing that such would result in the use of plaintiffs’ fax, toner, paper and ink.

New York Court Addresses Number of Occurrences for Molestation Claim

2011-09-26T06:35:00.002-04:00

In its recent decision Roman Catholic Diocese of Brooklyn v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2011 N.Y. App. Div. LEXIS 6432 (2d Dep’t. Sept. 20, 2011), a New York appellate level court had occasion to consider various coverage issues arising out of a sexual molestation claim; specifically, number of occurrences and allocation of loss.

The claimant in the underlying suit alleged that she had been molested for a period of seven years “at different times during the day and week, and at multiple locations.” While the insured had primary general liability coverage available for each of these years, each of the policies had a sizable self-insured retention. This prompted the insured to contend to the position that the underlying matter, which settled for $2 million, could be allocated solely to two of the triggered policy periods, based on a “joint and several” allocation theory. The trial court held against the insured, holding that the loss was properly allocated among all triggered policy years, and that the insured was responsible to pay the fully retention amount in each of those years.

On appeal, the court agreed with the lower court, noting that a “joint and several” theory of allocation had long since been rejected by New York courts (see e.g., Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 746 N.Y.S.2d 622 (N.Y. 2002)) and was “inconsistent with the unambiguous language of the … policies providing coverage for bodily injury that resulted from an occurrence ‘during the policy period.’” The court explained that it was not possible to isolate what extent of the underlying plaintiff’s injury happened during any single policy period, and as such, the appropriate method of allocation was on a pro rata basis across each of the policy periods. Central to the court’s decision in this regard was its finding that the molestation could not be considered a single occurrence, but rather multiple occurrences since “it cannot be said that there was a close temporal and spatial relationship between the acts of sexual abuse.” As such, the court concluded, each of the insured’s policies over the entire seven-year period was triggered and the insured was be responsible for satisfying a full self-insured retention in each of these periods.

Virginia Supreme Court Holds Coverage Unavailable for Climate Change Suit

2011-09-22T06:29:00.000-04:00

In AES Corp. v. Steadfast Ins. Co., 2011 Va. LEXIS 185 (Va. Sept. 16, 2011), the Supreme Court for Virginia addressed the issue of whether an insured was entitled to coverage for an underlying climate change lawsuit.

The Steadfast litigation arose out of the climate change suit Native Village of Kivalina v. ExxonMobil Corp., et al., filed in the United States District Court for the Northern District of California. The Kivalina lawsuit was brought by the Native Village of Kivalina against various energy-industry defendants, and alleged that defendants’ various operations resulted in the emissions of carbon dioxide and other greenhouse gases into the atmosphere, which in turn contributed to global warming. Plaintiffs further claimed that climate change would result in rising ocean levels, which in the near future would cause their native village in Alaska to be completely submerged and rendered uninhabitable. Notably, the Village’s complaint alleged that the defendants intentionally emitted such greenhouse gases, and that defendants knew or should have known of the impacts that would result from such emissions. In fact, the complaint alleged that the defendants engaged in a conspiracy to mislead the public about the science and dangers of global warming.

The lower court had held that the AES Corporation (“AES”), one of the defendants in Kivalina’s lawsuit, was not entitled to a defense in connection with the Kivalina lawsuit as the complaint did not allege an occurrence, which under Virginia law is a term synonymous with accident. On appeal, the Virginia Supreme Court noted that while intentional acts generally are not considered occurrences under Virginia law, coverage can be available for intentional acts when the injury or damage resulting form such acts is not intentional. Under such circumstances, noted the court, the inquiry “is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been a reasonably anticipated consequence of the insured’s intentional act.” The Village of Kivalina’s lawsuit alleged that all defendants, including AES, intentionally emitted greenhouse gases into the atmosphere. As such, explained the court, AES’ right to coverage hinged on whether the alleged harms resulting from the emissions was reasonably expected.

AES argued that for the purpose of determining a duty to defend, the underlying suit at least potentially stated an occurrence, since the complaint alleged both intentional and negligent conduct and since the complaint alleged that AES knew or should have known of the harms that would result from its emissions, thus implying that AES was not aware of the harms. The court disagreed and in doing so, relied on the allegation in Kivalina’s complaint that “there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered.” This allegation, explained the court, in tandem with the allegation that AES intentionally emitted greenhouse gases, established that the underlying suit did not allege accidental conduct but rather intentional conduct. As such, the court disagreed that the allegations of negligence could be construed as alleging an occurrence, explaining:

Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases is something that AES knew or should have known about. Inherent in such an allegation is the assertion that the results were a consequence of AES’s intentional actions that a reasonable person would anticipate. … Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

The court’s decision, and in particular its reliance on plaintiff’s assertion that there is a clear scientific consensus on global warming is likely to be considered controversial in some quarters. It is unlikely that there will be further coverage litigation on this point, however, at least in the near future, in light of the United State Supreme Court’s April 2011 decision in American Electric Power Co. v. State of Connecticut, 131 S. Ct. 2527, (2011) holding that climate change suits such as Kivalina’s do not state a cause of action under federal law.

Vermont Supreme Court Rejects Joint and Several Liability Theory

2011-09-18T14:43:00.002-04:00

In its recent decision Bradford Oil Company, Inc. v. Stonington Ins. Co., 2011 Vt. LEXIS 102 (Vt. Sept. 11, 2011), the Supreme Court of Vermont had occasion to revisit the issue of whether a time-on-the-risk allocation methodology should apply to pollution condition that occurred over a period of several decades.

The site in Bradford Oil was a filing station that was the source of an underground petroleum leak believed to have commenced in the 1960s or 1970s and continued through the 1990s. The station was placed on the Vermont Hazardous Waste Sites List in 1997 when the petroleum contamination was first discovered. The insured undertook an investigation and clean up, the majority of which costs were paid through the Vermont Petroleum Cleanup Fund (“VPCF”). Bradford had four general liability policies through Stonington covering the period 1994 through 1997. While Stonington agreed that the policies provided coverage for the cleanup, a coverage dispute arose as to extent of coverage afforded under the policies.

In the ensuing coverage litigation, in which the State of Vermont was a party, Stonington argued that based on the decision in Towns v. Northern Security Ins. Co., 964 A.2d 1150 (Vt. 2008), the proper methodology for allocation in Vermont is time-on-the-risk. As such, Stonington contended that based on a simple time-on-the-risk allocation, it should only be responsible for 4/27, or 15% of total cleanup costs. The State, however, argued that a joint and several liability methodology should apply, leaving Stonington responsible for the all cleanup costs up to the limits of its policies. Specifically, the State contended that Towns should not apply to a situation where the insured’s liability, by statute, is joint and several. The State also claimed that Towns should not apply where the VPCF is a party to the litigation. The Vermont Supreme Court rejected both of the State’s arguments.

First, the court refused to expand the policies’ coverage merely because the insured’s statutory liability was joint and several. The court concluded that because the policies required that the “property damage” occur during the policy periods, it would be an inequitable result if Stonington was held responsible for cleanup costs associated with contamination pre-dating the policies. Further, the mere fact that the insured’s liability was described by the statute as joint and several was irrelevant, since “the contribution of insurers is different from the tort concept of contribution among joint tortfeasors.” The court also rejected the State’s position that Towns should not apply when the VPCF is the plaintiff in interest, explaining that coverage is based on the terms of the policy, not any statutory or public policy rationale. In passing, the court held that the insurer should not have the burden of showing that the insured elected to be self-insured for any gaps in coverage rather than placing the burden on the insured to show that it could not obtain coverage for such periods. In doing so, the court explained “we do not want to adopt a methodology that rewards inaction, failure to obtain appropriate coverage, or failure to keep track of insurance policies.”

North Carolina Court Holds Multiple Injuries Arose from a Single Occurrence

2011-09-15T06:08:00.002-04:00

In its recent decision in Mitsui Sumitomo Ins. Co. of Am. v. Automatic Elevator Co., Inc., 2011 U.S. Dist. LEXIS 103165 (M.D.N.C. Sept. 13, 2011), the United States District Court for the Middle District of North Carolina had occasion to consider whether multiple injuries arising from the same act of negligence constituted a single occurrence, or multiple occurrences, for the purpose of a general liability policy.

The incident giving rise to the coverage dispute in Automatic Elevator involves particularly shocking and disturbing facts. Automatic Elevator had been an elevator contractor for the Duke University Health System. During the course of working on an elevator project, Automatic Elevator removed used hydraulic fluid from an elevator and stored it in a number of storage barrels made available by Duke. The barrels had previously contained surgical cleaning and lubricating fluids and were marked as such. The barrels were then stored at Duke’s facility and intended to be picked up at a later date for disposal. Before the barrels could be retrieved, however, a Duke employee mistook the barrels for unopened barrels of cleaning fluid and had the barrels returned to the original vendor as overstock. Sometime later, the vendor sold the barrels containing the hydraulic fluid back to Duke. Duke, believing that barrels contained surgical cleaning fluid rather than spent hydraulic fuel, allowed its surgical equipment to be washed in the fluid and used for surgeries. Duke subsequently identified over three thousand individuals who were operated on with contaminated surgical equipment. Duke was sued by one hundred fifty individuals and ultimately settled with one hundred twenty-seven individuals for an amount in excess of $6 million.

Automatic Elevator’s insurer, Mitsui Sumitomo, and Duke subsequently engaged in coverage litigation as to Duke’s rights to coverage as an additional insured. Among other things, the court was required to consider whether the underlying matter arose out of a single or multiple occurrences. This issue had relevance in light of the fact that the Automatic Elevator policy had limits of liability of $1 million per occurrence and $3 million in the aggregate. Mitsui argued that the underlying claims arose out of a single occurrence; specifically, Automatic Elevator’s negligence in failing to properly dispose of the used hydraulic fluid. Duke, on the other hand, argued that the underlying suits arose out of the one hundred twenty-seven separate occurrences, viz., each individual surgery involving contaminated surgical equipment.

The court determined that for number of occurrences questions, North Carolina courts apply a “cause” test, but a question remained as to “which negligent act, or continuum of negligent acts, on the part of the insured gave rise to liability.” Looking to all relevant North Carolina precedent on the issue, as well as case law from other jurisdictions, the court concluded that liability flowed from Automatic Elevator’s negligent handling of the hydraulic fluid, which in turn allowed for it to be mistaken as surgical cleanser. The court rejected Duke’s theory as to multiple occurrences, explaining that “[a] finding that each of the 127 surgeries constitutes a separate occurrence would blur the line between the cause approach and the effect approach. Such a ruling thus would effectively ignore the North Carolina courts' explicit adoption of a cause rather than an effects standard, something this Court declines to do.”

Rhode Island Court Holds Settlement Does Not Preclude Equitable Contribution Claim

2011-09-09T06:14:00.002-04:00

In its recent decision in Century Indemnity Co. v. Liberty Mutual Ins. Co., 2011 U.S. Dist. LEXIS 100088 (D.R.I. Sept. 6, 2011), the United States District Court for the District of Rhode Island had occasion to consider whether an insurer’s settlement with its insured had the effect of barring an equitable contribution claim by a co-insurer.

Liberty Mutual and Century both insured Emhart, which was alleged to have contaminated a site in Rhode Island. Emhart filed a coverage action against Liberty and Century, seeking a declaration of coverage with respect to any claims, administrative proceedings and lawsuits arising from the release of hazardous materials at the site. Liberty Mutual opted to settle with Emhart, paying $250,000 for a full release of any coverage obligations under several policies it had issued to Emhart. Century, on the other hand, took the matter to trial and ultimately prevailed on the issue of whether it had a duty to indemnify. The jury, however, held that Century had a duty to defend Emhart with respect to the various underlying matters. As a result, Century became obligated to reimburse Emhart for over $6 million in defense costs.

Century subsequently brought suit against Liberty on a theory of equitable contribution. Liberty Mutual argued that it had no duty to defend Emhart and that even if it did, its settlement with Emhart satisfied its defense obligation such that Century did not have a valid claim for equitable contribution. After an initial finding that Liberty Mutual did have a duty to defend, the court considered what it described as “two difficult and important issues regarding risk allocation among insurers, particularly in large-scale environmental claims like this one,” namely, the effect of Liberty Mutual’s settlement with Emhart and how defense costs should be allocated between the two insurers.

With respect to the first issue, Liberty Mutual argued that allowing an equitable contribution claim despite the settlement would frustrate the important public policy of favoring early settlements. The court noted that courts and commentators to have considered the issue “roundly rejected Liberty Mutual’s proposed bright line rule that ‘one insurer’s settlement with the insured is [always] a bar to a separate action against that insurer by the other insurer or insurers for equitable contribution or indemnity.’” The court acknowledged, however, that there was no bright line rule to the contrary. Rather, the prevailing sentiment, explained the court, was to uphold equity and prevent unjust enrichment. Toward this end, the court found that Liberty Mutual’s settlement with Emhart did not advance any public policy goals pertaining to settlements since the terms of the settlement reflected a mutual understanding that no settlement would occur between Emhart and Century since Liberty Mutual’s settlement payment was so disproportionately small in comparison to the entirety of Emhart’s defense costs. Thus, concluded the court, “[f]ar from being a litigation killer, Liberty Mutual’s settlement essentially ensured that this litigation would not die.” Given this, and given the fact that Liberty Mutual had substantially larger policy limits at interest than Century, the court concluded that the equities favored allowing Century’s contribution claim.

The court next considered how Emhart’s defense costs should be allocated. Liberty Mutual argued that defense costs should be divided equally between it and Century as a result of their policies’ respective other insurance clauses. Century, on the other hand, argued in favor of a time on the risk allocation, which would result in Liberty Mutual being required to pay the majority of defense costs since Liberty Mutual insured Emhart for a period of eighty-six months whereas Century insured Emhart for only thirteen months. The court held that Liberty Mutual’s argument concerning other insurance clauses only applied to insurers covering the same risk, not to insurers that issued successive policies. Relying on case law from other jurisdictions, the court concluded that the most equitable means of allocations would be a time on the risk allocation that it explained “serves to align insurers’ defense costs expectations with the proportion of risk that they assume based on the duration of their policy.” As a result, the court held that in light of the number of years that Liberty Mutual insured Emhart, as comparison to the number of years that Century insured Emhart, Liberty was required to pay 86% of Emhart’s defense costs, or approximately $5.2 million of the defense costs, less the $250,000 it initially paid pursuant to its settlement agreement.

California Court Holds “Genuine Dispute Rule” Not Proper Basis for Motion to Dismiss

2011-09-07T06:52:00.002-04:00

In its recent decision titled Essex Marina City Club, L.P. v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 97382 (N.D. Cal. Aug. 30, 2011), the United States District Court for the Northern District of California addressed an insurer’s argument that California’s “genuine dispute rule” warranted dismissal of an insured’s bad faith claim.

The insured, Essex Marina, had sought a defense and indemnification under a professional liability policy issued by Continental for an underlying lawsuit. At issue in the Essex Marina’s lawsuit was Continental’s handling of the claim following the initial tender. The matter passed hands through five different claims adjusters and was the subject of numerous requests for information from Continental to Essex Marina, prompting the court to characterize Continental’s conduct as a game of “hot potato.” In all, it took Continental over two years before it finally denied coverage to Essex Marina during which time Essex Marina allegedly incurred hundreds of thousands of dollars in attorneys’ fees in the underlying litigation.

Essex Marina later sued for a declaration of coverage as well as for bad faith on the basis that Continental “consciously and unreasonably … failed to make a timely ruling on its claim [and] failed to properly investigate its claim.” Citing to Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), Continental moved to dismiss the bad faith cause of action on the basis that it was not a plausible claim. Continental argued, among other things, that such a claim was negated by California’s “genuine dispute rule,” which “operates as an exception to the general rule that an unreasonable delay in payment of benefits due under an insurance policy gives rise to tort liability.” The court held that while there may have been a genuine dispute as to the validity of Essex Marina’s bad faith claim, “this is an intensely factual issue not suitable for resolution on a Rule 12(b)(6) motion.”

A Michigan Federal District Court Significantly Limits the Scope of a Coverage Settlement Agreement

2011-08-18T07:50:00.001-04:00

Pitfalls associated with drafting settlement agreements, particularly as to coverage matters, are illustrated by the recent decision in Harvard Drug Group, LLC v. Twin City Fire Insurance Co., 2011 U.S. Dist. Lexis 86556 (E.D. Mich. Aug. 5, 2011). The insurer in that case issued a claims-made policy to the insured, which provided employment practices liability coverage. During the term of the policy, the insured tendered a harassment claim and discrimination lawsuit by one of its employees to the insurer. The insurer and the insured eventually reached a settlement as to coverage for the underlying action, which was memorialized in an agreement. After the settlement was finalized and the policy terminated, and apparently was not renewed, the employee filed a second lawsuit against the insured, based on the same facts, but this time alleging wrongful termination. The insurer denied coverage for the second action, on the grounds that it was not made during the policy period, as required by the insuring agreements, and was included in the terms of the settlement agreement. The insured did not accept this position, and commenced a coverage action against the insurer.

The insurer filed a motion to dismiss the action, which the insured opposed. The insured also filed a cross motion for summary judgment. The court denied the insurer’s motion, and granted the insured’s cross motion. In reaching this decision, the court first considered whether the second action by the same employee was covered under the policy’s insuring agreements, which mandated that claims be first made during the policy period. The court determined that, although the second claim was first made after the policy terminated, it arose from “interrelated wrongful acts,” and hence was deemed a single claim with the prior one that was made during the policy period. The court relied on provisions contained in the policy which stated that claims arising from the same or interrelated wrongful acts represent single claims. Despite holding that the two actions were essentially one, the court determined that the settlement agreement did not apply to the second action. According to the court, the policy’s interrelated wrongful act provisions could not be read into the settlement agreement. The court also found that the unambiguous language of the settlement agreement did not support the insurer’s position. The agreement contained standard provisions which stated that the insured released any and all rights and claims under the policy, “whether known or unknown, suspected or unsuspected, fixed or contingent,” arising out of or related to the first action. The court determined that these provisions could not be read to apply to a claim that was not yet in existence at the time of the settlement. They were instead construed to apply to unknown liabilities and damages only, which were associated with the first action filed by the employee against the insured. The court, therefore, determined that the insurer had to provide coverage for the second action.

The court’s holdings in this case are highly questionable, and appear to be based on pro-insured inclinations. The insurer, however, could have avoided this outcome by the inclusion of more specific language in the settlement agreement, which would have applied to any future claims, whether in existence or not, that arose from the same or related facts as the first action.

Connecticut Federal Court Split On Recoupment of Defense Costs

2011-08-17T06:10:00.002-04:00

In Nationwide Mutual Ins. Co. v. Mortensen, 2011 U.S. Dist. LEXIS 77356 (D. Conn. July 18, 2011), the United States District Court for the District of Connecticut affirmed its earlier decision that an insurer was not entitled to recoupment of defense costs despite receiving an adjudication that it had no duty to defend. Nearly one month later, in its recent decision in Scottsdale Ins. Co. v. R.I. Pools, Inc., 2011 U.S. Dist. LEXIS 90380 (D. Conn. Aug. 15, 2011), a different judge from the same federal district court ruled that an insurer is entitled to reimbursement of defense costs under such circumstances.

In both matters, the insurers cited primarily to the 2003 decision by the Connecticut Supreme Court in Security Ins. Co. of Hartford v. Lumbermans Mutual Casualty Co., 826 A.2d 107 (Conn. 2003), in which the court stated that it is proper to “order reimbursement for the cost of defending the uncovered claims in order to prevent the insured from receiving a windfall.” Lumbermans involved an insured’s asbestos liabilities over a seventeen-year period, several years of which it was uninsured. The Connecticut Supreme Court held that in light of Connecticut’s pro rata methodology for allocating defense costs, the insured should be required to pay its prorated share of the defense for uninsured periods.

The federal judge in Mortensen limited Lumbermans to its facts, reasoning that recoupment of defense costs was proper in that case since there was no potential for coverage in the uninsured periods. The Mortensen court distinguished the facts in Lumbermans from those before it, where “there was at least a potential that the defendants’ claims [for breach of contract and trademark infringement] would be covered.” (Emphasis in original.) Given this potential for coverage, explained the court, “Nationwide had a temporary duty to defend until a determination on coverage was made,” and as such, it would be improper for Nationwide to recoup its defense costs incurred during this period. The court further held that absent a policy provision to the contrary, or an explicit assent by the insured, an insurer would never be entitled to recoupment under such circumstances.

By contrast, in the more recent decision in R.I. Pools, a different judge from the same court held that the insurer was entitled to recoupment of defense costs following an adjudication of non-coverage. Looking to the general liability policy’s supplementary payments provision, the judge concluded that the insurer is entitled to reimbursement of all defense costs associated with defending suits deemed not covered, although it would not be entitled to reimbursement of costs associated with investigating or settling any such suits. Of note, the judge in R.I. Pools cited only to the Lumbermans decision in support of its holding, and did not address the court’s earlier decision in Mortensen. Moreover, the judge did not discuss whether the policy must have a recoupment provision or whether the insured must assent to the possibility of recoupment of defense costs.

The contrasting decisions in Mortensen and R.I. Pools makes it very likely this issue will continue to be litigated in Connecticut, at least at the federal level.

11th Circuit Holds Millings from Roadwork Fall Within Pollution Exclusion

2011-08-15T06:08:00.000-04:00

In its seminal decision Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998), the Florida Supreme Court held that the terms “irritants” and “contaminants” as used in an absolute pollution exclusion, are not ambiguous, and that the exclusion is not restricted to matters traditionally thought of as industrial or environmental pollution. The United States Court of Appeals for the Eleventh Circuit, in a matter involving Florida law, recently had occasion to address the Deni decision in Markel Int'l Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, 2011 U.S. App. LEXIS 16552 (11^th Cir. Aug. 11, 2011), a case involving the issue of whether millings resulting from road work constituted “contaminants” or “irritants” for the purpose of the pollution exclusion.

The insured, Florida West, was sued by an individual claiming to have suffered severe bacterial poisoning as a result of being required to wade through retained flood waters at the insured’s facility. Plaintiff claimed that the water had been contaminated by millings from nearby roadwork, and that these millings specifically were the source of his bacterial poisoning. The insurer, Markel, denied coverage based on the policy’s pollution exclusion, as well as another exclusion not relevant to the appeal. The federal district court held in favor of Markel, relying in large part on the decision in Deni.

On appeal, Florida West argued that the lower court erred by failing to consider whether “millings are irritants or contaminants under environmental regulations” and by failing to consider case law from other jurisdictions. Florida West also argued that the underlying plaintiff’s injuries were not caused by the millings, but rather by bacteria. The Eleventh Circuit rejected each of these contentions. The court stated that based on the holding in Deni, the lower court properly relied on a standard dictionary to defined the term “irritant” as anything that causes an “irritating effect”; it was not necessary to look to environmental regulations to further limit this term. The court further agreed that plaintiff alleged that his injuries resulted from the millings, since the underlying complaint alleged that:

… he contracted bacterial poisoning and infection from millings, which Florida West allowed to mix with flood water. We agree with the district court that "[w]hile millings may not inflict injury under normal circumstances, millings are alleged to have produced bacterial poisoning and infection, which certainly are 'irritating effects.'" Thus, under the facts alleged in [the underlying] complaint, the millings constituted a pollutant.

Nevada Supreme Court Addresses Late Notice

2011-08-11T07:09:00.002-04:00

In Las Vegas Metropolitan Police Dep’t. v. Coregis Ins. Co., 2011 Nev. LEXIS 52 (Aug. 4, 2011), the Supreme Court of Nevada addressed whether an insurer must be prejudiced in order to disclaim coverage based on late notice, and if so, which party has the burden of demonstrating prejudice or the lack thereof.

The insured, Las Vegas Metropolitan Police Department, was named as a defendant in an underlying civil rights lawsuit. The Department did not give notice to Coregis of its potential liability until ten years after the incident giving rise to the litigation. Coregis denied coverage for the matter on the basis of the insured’s late notice. In subsequent coverage litigation, the lower court granted summary judgment in favor of Coregis, concluding that the Department’s notice was late and that Coregis was prejudiced as a result.

On appeal, the Supreme Court of Nevada initially concluded that there was a genuine issue of material fact as to whether the Department’s notice was late, since there was a question as to which of the policy’s notice requirements applied. More significantly, the court addressed which standard should apply for late notice disputes under Nevada law. Citing to what it considered the “majority rule,” the court held that an insurer must be prejudiced in order to deny coverage based on late notice and that it is the insurer’s burden to demonstrate prejudice. Prejudice, explained the court, exists “where the delay materially impairs an insurer’s ability to contest its liability to an insured or the liability of the insured to a third party.” The court further noted that prejudice is necessarily an issue of fact.

Fifth Circuit Holds Settlement With Primary Insurer Did Not Result In Exhaustion

2011-08-09T06:12:00.000-04:00

In Citigroup Inc. v. Federal Ins. Co., 2011 U.S. App. LEXIS 16316 (5^th Cir. Aug. 8, 2011), the United States Court of Appeals for the Fifth Circuit, applying Texas law, considered whether a settlement between an insured and a primary layer insurer for an amount less than the policy’s limits could be considered exhaustion of that policy for the purpose of triggering excess policies in the insured’s tower of coverage.

Citigroup, as successor to Associates First Capital Corporation, sought coverage under a $200 million tower of directors and officers coverage for underlying consumer lending practices claims. While Citigroup provided timely notice of the claims, it later settled the matters without the consent of its insurers, prompting an initial denial of coverage from each of the insurers in the tower. Citigroup’s primary insurer, Lloyd’s, later changed its coverage determination and agreed to a $15 million settlement with Citigroup, notwithstanding the fact that the policy had a $50 million limit of liability. The remaining insurers maintained their denial of coverage, resulting in coverage litigation.

The Fifth Circuit considered whether the lower court properly granted summary judgment to the insurers on the basis that there was no exhaustion of the primary Lloyd’s policy. Citing to New York law, Citigroup argued that if an excess policy ambiguously defines “exhaustion,” then settlement with an underlying insurer, even if for an amount less than full policy limits, necessarily constitutes exhaustion for the purpose of determining excess layer attachment. The court disagreed that there was any ambiguity, holding that each excess policy plainly defined when and under what circumstances underlying insurance would be considered exhausted. Specifically, each policy required payment of the “full” or “total” amount of underlying limits. As such, the court held that Citigroup’s settlement with Lloyd’s, for an amount less than the full policy limits of that policy, could not be considered exhaustion for the purpose of triggering Citigroup’s excess insurance policies.

Third Circuit Court of Appeals Addresses Reformation of Insurance Policy

2011-08-05T05:59:00.002-04:00

In Illinois National Ins. Co. v. Wyndham Worldwide Operations, 2011 U.S. App. LEXIS 15894 (3d Cir. Aug. 3, 2011), the United States Court of Appeals for the Third Circuit had occasion to consider whether the doctrine of mutual mistake allows for reformation of an insurance policy against a party that was not part of the insurance procurement process.

Illinois National had issued several years of successive aircraft fleet insurance policies to Jet Aviation, an aircraft maintenance and charter services company. While the policies were negotiated exclusively between Illinois National and Jet Aviation, the policies extended coverage to certain qualifying Jet Aviation clients, but only when Jet Aviation managed the client’s aircraft and aircraft usage. In the fifth year of the program, Jet Aviation and Illinois National negotiated a revised managed aircraft endorsement, which was the endorsement extending coverage to third parties such as Wyndham. While Jet Aviation and Illinois National intended for the endorsement to provide broader coverage for entities affiliated with Jet Aviation, the actual wording of the endorsement also had the unintended effect of providing broad coverage to clients of Jet Aviation, such as Wyndham, even when using aircraft without Jet Aviation’s management. Wyndham was not aware of the change to the endorsement when issued.

During the period of the policy with the revised endorsement, a Wyndham employee rented a Cessna aircraft from a company other than Jet Aviation. The aircraft subsequently crashed, resulting in the death of five people on the ground. While Jet Aviation had no involvement with the involved plane, the wording of the revised management aircraft endorsement nevertheless would have provided liability coverage to Wyndham for the matter. Illinois National subsequently brought a declaratory judgment action against Wyndham arguing, among other things, that the policy should be reformed to reflect the mutual intent of Illinois National and Jet Aviation. Wyndham argued, and the United States District Court for the District of New Jersey agreed, that because Wyndham was not involved “in the negotiation and drafting” of the policy, the standard for reformation would not be one of mutual mistake, but rather the more stringent standard of unilateral mistake under which a party’s own negligence cannot serve as a basis for reformation.

In a majority panel decision, however, the Third Circuit concluded that notwithstanding the fact that Wyndham did not participate in the underwriting process, “[r]eformation on the basis of mutual mistake can be granted even when it is to the disadvantage of a third party.” In light of the testimony from Illinois National and Jet Aviation that their mutual intent was to limit coverage for non-owned aircraft to aircraft used by or at the direction of Jet Aviation, the Third Circuit held that the lower court erred by analyzing Illinois National’s claim under the unilateral mistake standard rather than the less severe standard of mutual mistake. Accordingly, the Third Circuit remanded the matter for further evaluation of Illinois National’s and Jet Aviation’s intent, as well as Wyndham’s argument that reformation, even in light of a mutual mistake, would be inequitable under the circumstances.

Nevada Court Denies Insured’s Demand for Refund of Advance Premium

2011-08-04T06:32:00.000-04:00

In its recent decision Crestdale Associates, Inc. v. Everest Indemnity Ins. Co., 2011 U.S. Dist. LEXIS 84380 (D. Nev. Aug. 1, 2011), the United States District Court for the District of Nevada addressed the issue of whether an insured is entitled to a refund of earned advanced premium on the grounds that the risk intended to be covered under the policy never came to fruition.

The insured, Crestdale, had purchased three commercial general liability policies from Everest, each covering a different planned residential development. An advance premium was calculated for each of the policies based on anticipated receipts from the sales of the homes. Each policy contained an endorsement stating that the advance premium would be fully earned twelve months after the policy’s date of inception. A final premium amount would be determined based on a subsequent audit. The endorsement expressly stated that:

Premium audit adjustment calculations will be made to determine additional premiums only. There will be no downward adjustments of the advance premium resulting from the premium audit provisions of this policy. … There will be no return of any portion of the advance premium in the event of cancellation of the policy after [the date the advance premium becomes fully earned].

Notwithstanding this express language of this provision, the insured argued that it should be entitled to a refund of premium since the anticipated receipts from the developments never happened. The advance premium had been calculated at the height of the real estate market. Just after the policies were issued, however, the market collapsed, causing Crestdale to dramatically alter its plans for the developments. In fact, Crestdale completely abandoned one of the developments and ended up selling the vacant lots to a competitor. It was this abandoned development – referred to as the “Hacienda” development – that was the subject of competing summary judgment motions before the Crestdale court.

The policy covering the Hacienda development had a thirty-six month policy period. Pursuant to the policy’s premium endorsement, the advance premium became fully earned after twelve months. Crestdale cancelled the policy just prior to the two-year anniversary of the policy. Crestdale claimed that it was entitled to a full refund of the advance premium paid on the Hacienda policy, claiming that the policy could not be considered a valid contract since the necessary risk never attached. In other words, argued Crestdale, there was no consideration for the premium paid. Crestdale also argued that Everest would be unjustly enriched if it retained the advance premium among under such circumstances.

The court disagreed, holding that an actual risk did attach to the policy since the policy was issued, thereby binding Everest to provide coverage for the Hacienda development for the period that it was in effect. During this period, the court explained, Everest “remained contractually obligated to anticipate risks resulting from the fact that Crestdale could have begun construction at any time … .” That Crestdale never commenced such construction did not render the policy invalid for lack of consideration. The court further rejected Crestdale’s claim for unjust enrichment, holding that Nevada law does not recognize such a cause of action when there is an express written contract, such as the Hacienda policy.

First Circuit Limits Definition of “You” to Policy’s Named Insured

2011-08-02T06:13:00.002-04:00

In its recent decision in Wright-Ryan Constr., Inc. v. AIG Ins. Co. of Can., 2011 U.S. App. LEXIS 15502 (1^st Cir. July 27, 2011), the United States Court of Appeals for the First Circuit, applying Maine law, had occasion to consider whether the term “you” as used in a general liability policy is limited to the policy’s named insured, or whether it includes additional insureds.

This issue in Wright-Ryan arose out of a priority of coverage dispute involving two primary policies under which Wright-Ryan qualified as an insured. The first policy, issued by Acadia Insurance Company, was issued directly to Wright-Ryan. The second policy, issued by AIG to a subcontractor of Wright-Ryan’s, provided additional insured coverage to Wright-Ryan on a primary and non-contributory basis for all liability “arising out of [the subcontractor’s] premises or operations.” Wright-Ryan was sued in a bodily injury lawsuit brought by an employee of the subcontractor. Wright-Ryan tendered the matter to the subcontractor and to AIG directly, but when neither responded, Acadia defended the matter directly and ultimately settled the case. Acadia and Wright-Ryan then commenced a declaratory judgment action against AIG to recover the settlement amount as well as Wright-Ryan’s defense costs.

The Maine federal district court concluded that Wright-Ryan qualified as an additional insured under the AIG policy, but that the AIG policy was excess to the Acadia policy. Looking to the policies’ other insurance clauses, the First Circuit disagreed. Both policies contained the following excess other insurance provision:

a. Primary Insurance This insurance is primary except when b., below, applies.

. . .

b. Excess Insurance

This insurance is excess over:

(1) Any of the other insurance, whether primary, excess, contingent, or on any other basis . . . (a) That is . . . coverage for "your work"; . . .

(2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

When this insurance is excess, we will have no duty . . . to defend the insured against any "suit" if any other insurer has a duty to defend the insured against that "suit".

The First Circuit focused on the word “you” as used in these provisions. Acadia and Wright-Ryan argued that the AIG policy could not be considered excess over the Acadia policy since the word “you” in the AIG policy was limited to that policy’s named insured. As such, they argued that the excess other insurance provision in the AIG policy should not even be considered in terms of the coverage afforded to Wright-Ryan. AIG, however, argued that the word “you” as used in its policy should be read to include additional insureds, in which case the AIG policy would be excess to any other policy providing coverage for Wright-Ryan’s work. The court rejected AIG’s contention, noting that the first page of each policy expressly stated that “[t]hroughout this policy the words 'you' and 'your' refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy.” Further, Section II. of the policies, titled “WHO IS AN INSURED” extended coverage to certain individuals and entities not otherwise identified in the policies’ declarations, such as officers, employees and newly acquired organizations. Absent from Section II. was any reference to additional insureds. Thus, held the court:

Reading these provisions together, we find the definition of "you" to be unambiguous: it refers solely to a person or organization listed as a Named Insured in the policy Declarations or “qualifying as Named Insured” by virtue of being newly formed or acquired by a Named Insured.

Applying this definition to the AIG and Acadia policies, the court concluded that the AIG policy could not be considered excess to the Acadia policy, since the word “you” in the AIG policy referred not to Wright-Ryan, but rather to the subcontractor. On the other hand, because the word “you” in the Acadia policy referred solely to Wright-Ryan, the coverage afforded under Acadia policy necessarily was excess to the coverage afforded to Wright-Ryan under the AIG policy.

Washington Court Holds Insurer Not Entitled to Reimbursement of Defense Costs

2011-07-29T06:39:00.000-04:00

The Court of Appeals for the State of Washington, in its recent decision National Surety Corp. v. Immunex Corporation, 2011 Wash. App. LEXIS 1695 (Wash. App. July 25, 2011), had occasion to consider whether an insurer is entitled to recoupment of defense costs incurred prior to receiving a judgment declaring that it owed no duty to defend.

National Surety insured Immunex under an umbrella and excess liability policy. Immunex was named as a defendant in a number of suits alleging that it participated in a conspiracy with other prescription drug manufacturers to artificially inflate the average wholesale price of its products. While the first of the suits was filed in 2001, Immunex did not provide first notice of the suits to National Surety until 2006. National Surety initially denied coverage based on late notice, but later agreed to provide a defense under a reservation of rights and to seek a declaratory judgment. Among other things, National Surety reserved its right to recoup defense costs paid in the event it was determined that National Surety had no duty to defend.

Both the trial court and the appellate court agreed that the underlying suits filed against the insured, alleging price discrimination arising out of the insured’s alleged participation in the fraudulent pricing scheme, did not constitute “personal and advertising injury” under the policy, which included the offense of “discrimination.” While the term “discrimination” was not defined by National Surety’s policy, the appellate court agreed that the underlying suits “originate[d] not from discriminatory actions but from fraudulently inflating” the price of its products. Although this conduct “might have impacted some consumers more than others, that does not mean the offenses originated from discrimination.” Thus, the court agreed that National Surety did not have a duty to defend the underlying suits.

While the court held that National Surety had no duty to defend, it disagreed that National Surety was entitled to recoupment of defense costs it had already incurred. The court acknowledged that lack of Washington case law on the issue, but found guidance from the line of cases holding that an insurer has a duty to defend whenever a complaint alleges a potentially covered claim. While it was ultimately determined that National Surety had no duty to defend, there was no certainty of that outcome until the trial court ruled in National Surety’s favor. Accordingly, National Surety had a duty to defend from the time the underlying complaint was filed through the time it received summary judgment in the coverage litigation, and as such, it was proper for National Surety to pay defense costs during that period.

The court addressed at length an insurer’s options when it is not clear from the face of the pleading as to whether a defense obligation is triggered. Under such circumstances, the insurer can deny coverage outright or provide a defense under a reservation of rights and seek a declaratory judgment. By providing a defense under a reservation of rights, the insurer avoids the potential for having breached any subsequently determined defense obligation. By opting for the latter, explained the court, the insured is not unjustly enriched by receiving a defense:

… National Surety had the benefit of insulating itself from a bad faith claim and possible coverage by estoppel. Therefore, the payment of the defense costs is not purely a gratuity to the insured and no unjust enrichment occurs if National Surety covers the cost of defense until the trial court ordered otherwise.

Thus, the court held that an insurer’s reservation of rights to recoup defense costs will not be enforced absent express language in the policy allowing for such relief.

South Dakota Supreme Court Addresses Sudden and Accidental Pollution Exclusion Language

2011-07-28T05:37:00.002-04:00

In its recent decision in Demaray v. De Smet Farm Mut. Ins. Co., 2011 S.D. LEXIS 98 (S.Dak. July 20, 2011), the South Dakota Supreme Court addressed whether the phrase “sudden and accidental,” as used in a pollution exclusion, is ambiguous.

The insureds, who ran a cattle operation, were sued for alleged intermittent, repeated and continuing discharge of animal and other wastes and process waste water into lakes and streams on the claimant’s property. The insureds sought coverage under the liability coverage of a policy issued by De Smet Fam Mutual Insurance Company. De Smet, in turn, denied coverage on the basis of the policy’s pollution exclusion applicable to the “the discharge, dispersal, release, or the escape of pollutants into or upon land, water or air.” The exclusion, however, contained an exception for “bodily injury or property damage arising out of the sudden and accidental discharge, dispersal, release or escape into or upon land . . . of pollutants used in or intended for use in normal and usual farming activities[.]” The insureds argued that the exception applies because the pollution alleged in the underlying complaint failed to allege that the pollution was the result of intentional conduct.

The court acknowledged that matter was one of first impression as no South Dakota court previously addressed the phrase “sudden and accidental” in the context of a pollution exclusion. The court therefore looked to the two lines of “sudden and accidental” case law in other jurisdictions. The first line of cases holds that the phrase “sudden and accidental” is ambiguous since the word sudden can have several meanings, including accidental and abrupt. In light of this ambiguity, these courts construe the phrase in the insured’s favor to mean accidental, and as such, the phrase “sudden and accidental” means “unexpected or unintended.” By contrast, the other line of cases holds that the phrase is unambiguous and that the term “sudden” refers solely to a temporal element. The court agreed with the latter line of cases.

Thus, agreeing that the phrase “sudden and accidental” has a temporal element, the court looked to the allegations in the underlying complaint to determine whether any of the alleged discharges could be describe as “abrupt or immediate and unexpected or unintended.” The court held that no such conduct was alleged. Rather, the underlying complaint alleged intermittent and continuous discharges which the court explained was not “sudden and accidental”:

No language in the Alvine complaint arguably supported a cause of action for a "sudden and accidental" discharge of pollutants. "Intermittently" cannot be construed to mean abrupt or immediate. The complaint clearly made claims against Demaray and Hagemann for "past and continuing" and "repeated" discharges that "will continue." There is no immediacy or abruptness with a discharge that is intermittent, repeated, and likely to continue.

The court further rejected the insureds’ attempt to point to single “sudden and accidental” events within the larger course of systemic conduct, such as a sudden and violent rainstorm that caused waste to be discharged onto the claimant’s property. The court explained that it would not engage in “microanalyzing” the insureds’ long-term routine of waste disposal in order to find one single, discrete instance of a “sudden and accidental” discharge.

Fifth Circuit Agrees: Duty to Indemnify Broader than Duty to Defend Under Texas Law

2011-07-26T07:13:00.002-04:00

In D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., 300 S.W. 3d 740 (Tex. 2009) and Burlington Northern & Santa Fe Railway Co. v. Nat'l Union Fire Ins. Co., 334 S.W.3d 217 (Tex. 2010), the Texas Supreme Court established the rule that an insurer can have a duty to indemnify even in the absence of a corresponding duty to defend. The United States Court of Appeals for the Fifth Circuit recently addressed this concept in Colony Ins. Co. v. Peachtree Construction, Ltd., 2011 U.S. App. LEXIS 14740 (July 19, 2011).

Peachtree was a general contractor hired by the State of Texas for a highway-repaving project. Peachtree contracted with a third party, CrossRoads, to provide construction signs, barricades and warning devices. Pursuant to this contract, CrossRoads was required to name Peachtree as an additional insured under its primary and excess liability policies. Colony was CrossRoads’ primary liability carrier.

Peachtree was later sued in a wrongful death action arising out of a motorcycle crash that happened at the construction site. While the suit alleged that Peachtree failed to use proper signage and warnings, CrossRoads was not named as a defendant nor did it contain any allegations concerning CrossRoad’s negligence. Peachtree tendered the matter to CrossRoad’s insurers. Colony provided Peachtree with a defense under a reservation of rights, but commenced a declaratory judgment action, arguing that it had no duty to defend or indemnify since the underlying matter did not allege negligence on the part of CrossRoads. The federal district court granted summary judgment in favor of Colony, holding that because the underlying suit did not allege any negligent arising out of CrossRoads’ work, Colony had no duty to defend Peachtree, and as such, it could not have a duty to defend.

Peachtree did not appeal the aspect of the district court’s concerning the duty to defend. Rather, its appeal was limited to the issue of whether in light of the D.R. Horton decision (the matter apparently was briefed before the Burlington Northern decision), Colony could have a duty to indemnify even though its defense obligation was not triggered. The Fifth Circuit, citing to D.R. Horton, agreed that indemnity obligation could arise even in the absence of a defense obligation, explaining that under Texas law, the duty to indemnify is not subordinate to the duty to defend and, in fact, requires a separate factual analysis. Even though the underlying suit did not contain any allegations concerning CrossRoads’ own negligence that would trigger a defense obligation, the district court was still required to consider whether Colony had a duty to indemnify. As the Fifth Circuit explained, “[w]here there has been an underlying trial on the issue of liability, the facts adduced at trial might differ from the allegations, and thus, a duty to indemnify could be shown notwithstanding the absence of a duty to defend.” Thus, the lower court was required to consider any factual evidence offered by Peachtree, including evidence extrinsic to the underlying complaint, to determine whether the accident arose out of CrossRoads’ work performed on behalf of Peachtree such that Colony’s indemnity obligation was triggered.

Seventh Circuit Affirms Cost of Capital Improvements Not Covered Under GL Policy

2011-07-24T08:14:00.001-04:00

In its recent decision, Continental Cas. Co. v. Sycamore Springs Homeowners Association, 2011 U.S. App. LEXIS 15005 (July 22, 2011), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, had occasion to consider whether an underlying suit demanding that the insured undertake measures to prevent future “property damage” triggered coverage under a general liability policy.

The insured, Courtyard Homes, was the developer of a residential subdivision constructed in a flood plain in Indianapolis, Indiana. In fact, both Courtyards Homes, and the homeowners’ association, Sycamore Springs, knew of the flood risks associated with the area. Courtyard Homes addressed this risk by constructing various flood-protection elements such as levees and retention ponds. It was alleged, however, that Courtyard Homes overdeveloped the property, placing too much strain on these preventative measures, and that as a result, they failed during an extended period of heavy rains.

Sycamore Springs later sued Courtyard Homes, but not for damage resulting from the flooding. Rather, Sycamore Springs sought relief in the form of requiring Courtyard Homes to construct improved measures to reduce the chances of future flooding. Courtyard Homes’ carrier, Continental, denied coverage primarily on the basis that “any loss was the expected result of a deliberate reduction in the subdivision's ability to deal with heavy rain or a rising river” and thus did not allege "property damage" arising out of an occurrence. In the ensuing coverage action, the district court did not reach the issue of whether the underlying suit alleged an occurrence. Rather, the court found in favor of Continental on the basis that the suit did not allege loss arising out of “property damage,” but instead sought to prevent future “property damage.” Costs associated with preventing future, hypothetical “property damage,” held the court, did not fall within the policy’s coverage.

On appeal, the Seventh Circuit affirmed the lower court’s decision, and in doing so, rejected the insured’s argument that costs of capital improvements can qualify for coverage under a liability policy. The court reasoned that the moral hazards involved would prevent general liability insurers from writing such coverage:

Protected by a policy covering the costs of improvements, a builder would produce a substandard project and demand that the insurer finish the job; builder and buyers could split the savings. Insurers, recognizing this incentive, would raise the price of their policies so high that no builder planning to do the job right would find the offer attractive. The result would be the collapse of the insurance market. No one would gain, and honest builders would lose because insurance would no longer be available. That's why Continental's policy does not cover the expense of improving the subdivision's flood defenses.

Thus, held the Seventh Circuit, because the underlying suit did not involve any amounts that could be considered covered “property damage,” the lower court’s ruling was proper. The Seventh Circuit nevertheless considered and rejected Continental’s argument that the underlying matter did not allege an “occurrence,” explaining that the unintended and unanticipated consequence of an intentional choice (i.e., constructing a housing development in a flood zone without proper precautions) can be an accident for the purpose of a liability policy. Notwithstanding, a general liability policy provides coverage only for “property damage” resulting from such an accident, not for costs associated with preventing future “property damage.”

California Court Holds Groin Punch Not an Occurrence

2011-07-21T17:47:00.001-04:00

The California Appellate Court for the Second Appellate District recently issued a ballsy decision that can only be described a low blow to insureds. In State Farm General Ins. Co. v. Frake, 2011 Cal. App. LEXIS 911 (Cal. App. July 13, 2011), the court was asked to consider whether the insured’s intentional battery of his friend’s nether regions constituted an “occurrence” for the purpose of a renter’s liability policy.

The fracas in Frake reads like an episode of Jackass. The insured, Frake, was visited by two former high school classmates in Chicago for a weekend of “partying and drinking” to be highlighted by a Cubs game. These friends, immune to all fears of future fertility, enjoyed the age-old tradition of sucker punching each other in the groin which, to be frank, is best described by the court:

Frake explained that, since high school, his friends had engaged in “a cycle of horseplay[,] specifically … hitting each other in the groin.” During this “consensual” ritual, one person would normally try to “slap or hit [another person] in … the groin area,” and the recipient would then “attempt to return [the slap or hit].” According to Frake, the practice was so common that his friends would “greet each other with a one arm hug,” while covering their “groin area” with the other arm for “protection in case [someone] decided to … instigate th[e] horseplay.”

That weekend, after enjoying a ballgame of a more traditional sort at Wrigley Field, and after all involved had consumed excessive amounts of alcohol, King attempted to punch Frake’s “friends,” but his aim was wide and his hand redirected by Frake. Having protected his flank, Frake fisted his former friend in the front, lending new meaning to taking the King’s bishop. King later sued Frake alleging that “Frake deliberately struck King in the groin,” although the complaint did not contain any allegations as to whether Frake intended injury. King was eventually awarded $400,000 for injuries way too painful for these authors to describe.

State Farm provided Frake with a defense under a reservation of rights, but later commenced a declaratory judgment action on the issue of whether the underlying suit alleged an “occurrence,” defined by the policy as an accident. Frake argued that that while he intended to strike his buddy’s bullocks, he did not intend to cause harm, and as such, his conduct should not be considered anything but accidental. The court’s response to this argument can best be described as testy. The court rejected the concept that the consequences determines whether one’s conduct is an accident, explaining:

The language of the policy at issue here, which is the same language used in most standard liability policies, supports the conclusion that the term “accident” refers to the insured's conduct, rather than the unintended consequences of that conduct. The policy provides coverage for “bodily injury … caused by an occurrence.” The term “occurrence” is defined as “an accident.” Therefore, under the policy, “an ‘occurrence’ is a causal event, defined as an ‘accident.’ In this context, an ‘accident’ cannot mean unintended damage because the causal event also would be the result. Logically, a consequence cannot cause itself.” (Citations omitted.)

Moreover, the court rejected the insured’s arguments that the decision by the California Supreme Court in Delgado v. Interinsurance Exchange of Automobile Club of Southern California, 47 Cal. 4th 302 (Cal. 2009) and by the Second Appellate Division in State Farm Fire & Casualty Co. v. Superior Court, 164 Cal. App. 4th 317 (Cal. App. 2008) dictated the result that unintended consequences of an intentional act constitute an “occurrence” for the purpose of a liability policy. These cases, explained the court, are consistent with the notion that absent “an intervening act of fortuity,” it is the injury-producing act that is dispositive of whether an occurrence happened. Thus, cocksure of its decision, each member of the court ruled that State Farm did not owe a duty to defend or to indemnify Frake under the policy.

EDS. NOTE: FOR OBVIOUS REASONS, THE IDENTITY OF THE AUTHORS OF THIS POST SHALL REMAIN CONFIDENTIAL.

Connecticut Court Holds Insurer Not Entitled to Recoupment of Defense Costs

2011-07-19T22:07:00.000-04:00

In Security Ins. Co. of Hartford v. Lumbermans Mutual Casualty Co., 826 A.2d 107 (Conn. 2003), the Connecticut Supreme Court held that when an insurer “defends the insured against an action that includes claims not even potentially covered by the insurance policy, a court will order reimbursement for the cost of defending the uncovered claims in order to prevent the insured from receiving a windfall.” The United States District Court for the District of Connecticut recently had occasion to address the bounds of this rule in Nationwide Mutual Ins. Co. v. Mortensen, 2011 U.S. Dist. LEXIS 77356 (D. Conn. July 18, 2011).

The insureds in Nationwide were former insurance agents for Nationwide and its affiliated companies. These individuals also happened to be insured by Nationwide under Business Provider Insurance Policies. In the underlying suits, Nationwide sued the individuals on several grounds, including breach of contract, breach of fiduciary duty, unfair trade practices and trademark infringement. These individuals, in turn, sought coverage for the underlying suits under their Nationwide policies. Nationwide agreed to provide a defense subject to a reservation of rights, including the right to seek recovery of defense costs associated with non-covered claims. It subsequently filed coverage litigation action against the insureds and successfully obtained a declaratory judgment that it had no coverage obligation with respect to the underlying suits. In a 2009 decision, however, the court held that Nationwide was not entitled to reimbursement of defense costs incurred prior to the declaratory judgment, explaining that:

It was in Nationwide's own interest to provide a defense under the reservation of rights in order to avoid exposure had the Court held it did have a duty to defend. If the Court were to now allow Nationwide to recoup defense costs, the defendants would be required to pay for the action Nationwide took to protect itself. In these circumstances, in the absence of a policy provision pointed to by Nationwide or active assent to the reservation by the defendants, the reservation of rights letters were not enough to impose a burden on the defendants to reimburse Nationwide for defense costs. Nationwide Mut. Ins. Co. v. Mortensen, 2009 U.S. Dist. LEXIS 74870 at *18-19 (D. Conn. Aug. 24, 2009).

Nationwide subsequently moved for reconsideration, arguing that decision by the Connecticut Supreme Court in Security Ins. Co. established a general rule that an insurer could recover defense costs associated with non-covered claims. The Nationwide court disagreed with Nationwide, explaining that Security Ins. Co. should be limited to its facts. The Security Ins. Co. matter concerned an insured’s asbestos liabilities over a seventeen-year period, several years of which it was uninsured. The Connecticut Supreme Court held that in light of Connecticut’s pro rata methodology for allocating defense costs, the insured should be required to pay its prorated share of the defense for uninsured periods. As such, the insurers were entitled to reimbursement of defense costs they had already paid for these periods. The Nationwide court reasoned that recoupment of defense costs was proper in Security Ins. Co., since there was no potential for coverage in the uninsured periods. By contrast, explained the court, while it was determined that the underlying suits brought by Nationwide were not covered, “there was at least a potential that the defendants’ claims would be covered.” (Emphasis in original.) Given this potential, explained the court, “Nationwide had a temporary duty to defend until a determination on coverage was made,” and as such, it would be improper for Nationwide to recoup its defense costs incurred during this period.

Eleventh Circuit Holds Repair of Insured’s Work Not Covered Property Damage

2011-07-18T21:31:00.001-04:00

In its recent decision Palm Beach Grading, Inc. v. Nautilus Ins. Co., 2011 U.S. App. LEXIS 14576 (11^th Cir. July 14, 2011), the Eleventh Circuit affirmed a holding by the United States District Court for the Southern District of Florida that costs associated with repair of the insured’s own work does not constitute “property damage” under a general liability policy.

The insured, A-1 Underground, had been subcontracted to construct water utilities and sanitary sewer utilities in connection with a larger construction project. A-1 later abandoned the project, forcing the general contractor, Palm Beach Grading (“PBG”) to hire a second subcontractor to complete the work. The second subcontractor determined that A-1’s work associated with a sewer line was defective, requiring the subcontractor to dig up and replace the line. PBG later sued and obtained a judgment against A-1. PBG then commenced suit against A-1’s general liability carrier, Nautilus, seeking recovery of the repair costs.

The Eleventh Circuit acknowledged that under Florida law, faulty work can constitute an “occurrence.” The court nevertheless agreed with the lower court that the repair costs associated with A-1’s faulty work did not constitute third-party property damage as required under the policy. In so holding, the Eleventh Circuit relied on the decisions by the Florida Supreme Court in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So.2d 1241 (Fla. 2008), in which the courts concluded that a general liability policy only covers the costs of repairing damage resulting from an insured’s defective work, not the cost of repairing the or removing the defective work itself. Because PGB’s claim was limited to repairing the sewer line, as opposed to damage caused by the sewer line (such as resulting sinkholes or back-ups), the underlying suit did not allege “property damage” triggering coverage under the Nautilus policy.

Sixth Circuit Holds Supplier is a Subcontractor Under Business Risk Exclusion

2011-07-17T17:21:00.003-04:00

In its recent decision Mosser Constr. v. Travelers Indem. Co., 2011 FED App. 0481N (6^th Cir. July 14, 2011), the United States Court of Appeals for the Sixth Circuit, applying Ohio law, had occasion to consider what constitutes a “subcontractor” for the purpose of a “your work” exclusion in a general liability policy.

The insured, Mosser, was a general contractor hired to construct an addition to a waste water facility plant. As part of its work, Mosser was required to place structural backfill beneath and around the new building. The contract specifically required that Mosser use backfill meeting the size and grading requirements for AASHTO #57 coarse aggregate. Mosser contracted with a supplier for the purchase of the required fill, which the supplier happened to have available in stock. The supplier never visited the construction site and, in fact, was not even involved in the delivery of the fill to the site. The backfill ultimately proved to be defective, resulting in damage to the newly constructed facility.

Mosser’s general liability carrier, Travelers, denied coverage for the resulting property damage claim made against Mosser based on a standard “your work” exclusion applicable to:

l. Damage To Your Work

"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard".

The exclusion, however, is subject to the following standard exception:

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

Mosser argued that the exception applied to the exclusion since the supplier of the fill should be considered a subcontractor. Travelers, on the other hand, argued that subcontractor has a well-understood meaning within the construction industry that is typically limited to contractors that actually perform work on a project. As such, argued Travelers, a supplier of materials to be used in a construction project cannot qualify as a subcontractor.

Noting that no Ohio court had addressed the definition of subcontractor for the purpose of the “your work” exclusion, the Sixth Circuit looked to case law in other jurisdictions. The court acknowledged that several courts had concluded that a material supplier can qualify as a subcontractor when that supplier fabricates the purchased material to some degree of customization, or otherwise performs some work on site. In other words, a supplier must do something more than merely provide standard inventory items.

In light of this case law, the Sixth Circuit concluded that the undefined term “subcontractor” was ambiguous and therefore must be construed in a manner most favorable to Mosser. The court, however, refused to draw a bright line, as argued by Mosser, that all suppliers of material are necessarily subcontractors. For example, explained the court, a hardware store selling standard-inventory nails is not a subcontractor. Rather, when a supplier does not perform any actual work on site, it will be considered a subcontractor only when it “must manufacture the material according to specifications supplied by the general contractor, and, its materials contract with the general contractor must explicitly incorporate terms from the master contract or otherwise explicitly indicate that the materials at issue are manufactured or supplied specifically for the master contract's project.”

Turning to the specific facts in Mosser, the court concluded that while the supplier happened to have the requested fill in stock, such was a mere coincidence and that the supplier would have had to custom fabricate such fill had it not been in stock. Just as significant for the court was the fact that the purchase order entered into between Mosser and the supplier specifically referenced the underlying general contract for which the fill would be required. Thus, “[a]lthough [the supplier] may have produced all or part of the backfill before entering into the purchase order with Mosser, the circumstances of this case are enough to nudge [the supplier] over the line separating mere material suppliers from subcontractors.”

While the Mosser court was careful to avoid the bright-line advocated by the insured, i.e., that all suppliers are subcontractors, the court’s decision nevertheless has the potential to have significant insurance coverage ramifications, both in terms of the business-risk exclusions as well as for additional insured issues.

D.C. Court Holds No Prejudice Resulting From Insurer’s Control of Defense

2011-07-16T18:57:00.000-04:00

In its recent decision in Capitol Specialty Ins. Corp. v. Sanford Wittels & Heisler, LLP, 2011 U.S. Dist. LEXIS 68171 (D.D.C. June 27, 2011), the United States District Court for the District of Columbia had occasion to consider whether the insurer, as a result of its actions, was estopped from denying coverage to its insured.

The policy at issue in Capitol Specialty was a lawyers’ professional liability policy issued to a firm that was sued for malpractice in connection with its prosecution of a class action. The insurer, Capitol Specialty, agreed to provide the firm with a defense in the malpractice suit under a reservation of rights. While the insured initially selected defense counsel of its own choice, Capitol Specialty subsequently exercised its right under the policy to pick counsel. In doing so, Capitol Specialty specifically advised that if the insured did not want to cede control of the defense, Capitol Specialty would “disengage counsel and close this matter.” Capitol Specialty’s letter regarding selection of counsel reiterated its earlier reservation of rights. Nearly seven months later, Capitol Specialty denied coverage for the matter based on the policy’s prior knowledge exclusion.

In a subsequent declaratory judgment action, Capitol Specialty was successful in showing that the exclusion operated to preclude coverage. The insured, however, argued that Capitol Specialty was estopped from denying coverage after having controlled the defense. The court noted that while Capitol Specialty did control the insured’s defense, it did so under a proper reservation of rights. Under the circumstances, explained the court, estoppel will lie only where the insured can show that it was actually prejudiced as a result of the insurer’s conduct. Such prejudice could be shown by demonstrating that the insurer’s control of the defense harmed or hindered the insured by undermining its ability to defend itself.

The insured argued that Capitol Specialty was estopped from denying coverage because: (1) it initially advised that coverage was available for the underlying suit; (2) it assumed the defense of the underlying suit; (3) it waited too long before disclaiming coverage and (4) it prejudiced the insured’s defense. The court easily rejected the first three points, explaining that these arguments were “not evidence of prejudice” in light of Capitol Specialty’s proper reservation of rights. Turning to the fourth point, the court held that the insured failed to demonstrate that it had been actually prejudiced. While Capitol Specialty did cause the insured to terminate its initial counsel, the court explained that this would be prejudicial only if the insured could demonstrate that counsel selected by the insurer performed demonstrably worse than preferred counsel would have performed. Because the insured alleged no facts of “poor representation or malpractice” and because the insured never objected to Capitol Specialty’s conditional defense, the court concluded that the insured failed to show that it had been prejudiced.

Michigan Court Holds No Coverage Under Successive UST Policies

2011-07-16T18:56:00.002-04:00

In its recent decision Webb Operating Co. v. Zurich American Ins. Co., 2011 U.S. Dist. LEXIS 73675 (E.D.Mich. July 8, 2011), the United States District Court for the Eastern District of Michigan had occasion to consider whether an insured under a series of consecutive claims made and reported underground storage tank policies was entitled to coverage for remediation costs where it failed to report the “claim” during the proper policy period.

The policies at issue insured a gas station operated by the insured for cleanup costs as required by governmental authorities resulting from releases from covered underground storage tanks, but only to the extent discovered during the policy period and only to the extent the “claim” was reported to Zurich during the policy period. The relevant policy defined “claim” as notice given by the insured, during the “policy period” seeking payment of “cleanup costs” required by a “governmental authority.” The preamble to the policies expressly identified the policies as “claims made and reported” policies.

During the period the insured’s 2005-2006 policy was in effect, one of its covered underground storage tanks failed a tank tightness test. The insured subsequently decided to close its tank, but chose not to report the matter to Zurich at the time because the costs associated with the tank closure barely exceeded the policy’s deductible. The insured, however, continued to incur monitoring and remediation costs over the next three years, ultimately leading to its decision to give notice to Zurich when its policy for the 2009-2010 period was in effect. The insured argued that coverage should be afforded under the 05-06 policy, or at the very least, under the 09-10 policy, since that was when it gave notice of claim. Among other things, the insured argued that Zurich could not disclaim coverage under the 05-06 policy unless it could show it had been prejudiced as a result of the insured’s delayed notice.

The court rejected the insured’s prejudice argument, explaining that prejudice is a consideration only with respect to occurrence-based policies, not claims made and reported policies. Because the Zurich policies were claims made and reported policies, wrote the court, Zurich was not required to show that it was prejudiced under the 05-06 policy in order to disclaim coverage. Rather, Zurich only needed to show that the insured failed to comply with the policy’s condition precedent to coverage; namely, giving notice of “claim” during the same policy period in which the release was first discovered. The court concluded for the same reason that coverage was unavailable under the 09-10 policy since the release was not first discovered during the time that policy was in effect.