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

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

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

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

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

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

Florida Court Holds Notice After Default Not Necessarily Prejudicial

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

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

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

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

Third Circuit Holds Interrelated Claims Provision Is An Exclusion to Coverage

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

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

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

The Policy defined the term Related Claims as:

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

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

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

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

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

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

Illinois Court Holds Junk Fax Claim Not Within Products Coverage

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

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

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

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

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

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

California Court Holds Food Truck Constitutes Mobile Equipment

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

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

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

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

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

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

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

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

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

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

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

Texas Supreme Court Holds Exclusion Inapplicable to Construction Defect Claim

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

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

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

2.   Exclusions

      This insurance does not apply to:

                                    …

b.   Contractual Liability

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

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

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

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

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

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

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

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

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

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