National Insurance Law Forum

60 Day Notice Provision in Expanded Coverage was Enforceable; California's Notice-Prejudice Rule Did Not Apply

sthorpe@gordonrees.com (Sara Thorpe) — Thu, 02 Jul 2009 12:48:43 -0500

The insured had to comply with the notice provision in the “special” “expanded” coverage under a “pollution buy-back” endorsement to a policy, which policy otherwise excluded coverage for property damage or bodily injury caused by pollution. In Venoco, Inc. v. Gulf Underwriters Ins. Co. (2009) __ Cal.App.4th __ (2009 WL 1875640), California’s appellate court held there was no coverage for claims by students and administrators at Beverly Hills High School who claimed injuries from oil wells drilled at what became the site of their school.

Gulf Insurance Company’s policy excluded coverage for pollution. The policy was endorsed with pollution coverage if the claims stemmed from an accident and the claim was reported to Gulf within 60 day of discovery of the accident. (Provisions with similar timing requirements are also found in automobile liability policies and in other coverage add-ons.)

The insured did not report any accident nor did it report any such accident within the 60 day time requirement. The court found the policy provision to be conspicuous and reporting requirements like this one to be enforceable. The court further held there was no requirement that the insurer show prejudice due to late notice of the claim. The notice-prejudice rule, the court explained, pertained to late reporting of a claim otherwise covered by the policy. Here the timing requirement was one of the conditions for coverage, as was that there be an accident that caused the pollution.

Nonetheless, the insured argued there was a duty to defend because the policy provided the insurer would defend “groundless” claims. Not so, explained the court. “Groundless” claims must still be claims potentially covered by the policy, and this claim was not.

Blanket AI Endorsement Triggered by Language Requiring Insurance for "Mutual Benefit" of Parties

ktm@wnhr.com (Kevin Merriman) — Sun, 28 Jun 2009 08:26:41 -0500

In Kassis v. The Ohio Casualty Company, 2009 NY Slip Op 05207 (June 25, 2009), the New York Court of Appeals considered whether a provision in a lease agreement requiring insurance for the “mutual benefit” of landlord and tenant was sufficient to trigger coverage under the terms of a blanket additional insured endorsement extending coverage to “any person or organization whom [the named insured is] required to name as an additional insured on this policy under a written contract or agreement.” The Court answered in the affirmative.

Under the terms of a lease, the insured tenant was obligated to pay for snow removal services and to “indemnify, defend, and hold harmless Landlord from any and all damages, costs, expenses, and liabilities for anything arising out of the occupancy of the Premises caused by Tenant or its agents and from any loss or damage arising out of the acts of Tenant or its agents or the failure of Tenant to comply with the terms and conditions” of the lease. The lease also required that the tenant, “at its sole cost and expense and for the mutual benefit of Landlord and Tenant, shall maintain a general liability policy . . . providing coverage against claims for bodily injury, personal injury and property damage.”

The tenant obtained a CGL policy from Ohio Casualty, which provided coverage where “the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The policy also included a blanket additional insured endorsement extending coverage to “any person or organization whom [the named insured is] required to name as an additional insured on this policy under a written contract or agreement.”

The tenant’s employee was injured when he slipped and fell on ice and snow. The claimant sued the landlord for damages, and the landlord tendered the claim to Ohio Casualty for defense and indemnification. Ohio Casualty denied coverage for the claim. At issue was whether the additional insured endorsement extended coverage to the landlord, such that Ohio Casualty was required to defend and indemnify the landlord in the underlying personal injury action.

The Court concluded the landlord did qualify as additional insured under the endorsement. The insurance procurement language in the lease did not use the term “additional insured”; however, the Court focused on whether the lease required the tenant to “ensure that [landlord] received general liability insurance coverage equivalent to the coverage [tenant] enjoyed.” Here, the lease obligated the tenant to obtain coverage for “claims for bodily injury, personal injury and property damage, at its sole cost and expense and for the mutual benefit of [landlord] and [tenant].” “The natural and intended meaning of the term ‘mutual benefit’ as used in this provision,” reasoned the Court, “is that [landlord] and [tenant] are intended to enjoy the same level of coverage,” an intent and meaning reinforced by other insurance language in the lease expressly noting where disparities in the coverage were contemplated. Since the term “additional insured” is well-understood to mean an entity enjoying the same protection as the named insured, the Court concluded that the landlord qualified as such under the policy.

No Duty to Defend Affirmative Defenses

ktm@wnhr.com (Kevin Merriman) — Fri, 19 Jun 2009 16:07:05 -0500

In P.J.P. Mechanical Corporation v. Commerce and Industry Insurance Company, 2009 N.Y. Slip Op. 04984 (June 18, 2009), New York’s Appellate Division, First Department, held that an insurer has no duty to defend its insured against an affirmative defense based on a claim of offset raised in the responsive pleadings. Imposing such a duty, held the court, was counter to long-established business practices and would lead to uncertainty.

In this case, the policyholder had entered into contracts with a general and subcontractor to perform heating and ventilation work. When a pipe separated from a water riser and caused damage to the building, the general contractor claimed the policyholder and subcontractor were solely responsible. The policyholder notified its insurer, who retained counsel to conduct pre-action discovery to preserve evidence in connection with the loss.

Litigation over the property damage did not materialize; however, the general contractor ultimately withheld final payment on the contract for the policyholder’s negligence. The policyholder tendered the claim to its insurer, demanding a defense, but the insurer declined on the basis that the claim did not qualify as a “suit.” Therefore, the policyholder retained its own counsel and sued the general contractor and others to recover the disputed contract balance.

The general contractor responded by asserting as an affirmative defense the right of offset against recovery based on damages caused by the policyholder’s negligence. It subsequently asserted counterclaims to recover for the property damage. The policyholder again demanded a defense, to which the insurer acquiesced, but only as required to defend the counterclaim of negligence; the insurer refused to reimburse for legal fees and expenses incurred in connection with the prosecution of the action, or in connection with the affirmative defense.

The policyholder brought a declaratory judgment action seeking reimbursement of legal expenses incurred in the underlying collection action. In cross-motions for summary judgment, the insurer argued that it was obligated only to defend against the counterclaim because the affirmative defense was not an “occurrence” that triggered coverage. It further argued that because the collection action was ultimately settled, plaintiff's demand for reimbursement did not constitute a claim for property damage and defendant was under no obligation to pay. Plaintiff argued that coverage was triggered because the policy did not differentiate among a pre-suit claim of negligence, an affirmative defense of negligence, and a counterclaim for negligence, arguing further that while the matter initially was not in suit, the insurer should have settled the property damage claim.

The court found in favor of the insurer, concluding that the policy required only the defense of “suits,” not the prosecution of, or reimbursement of costs incurred in connection with, a policyholder’s affirmative claims. In other words, in the courts view, the duty to defend “does not envision affirmative litigation.”

The court also held that the duty to defend was not triggered by the affirmative defense of offset. The court noted a substantive distinction between counterclaims, which it characterized as causes of action seeking affirmative relief, and affirmative defenses, which do not seek affirmative relief but merely dismissal of claims. In the court’s view, to impose a duty to defend such an affirmative defense would eliminate these pleading distinctions, and “would impact the long-established business practices of insurers, and lead to uncertainty in the drafting of insurance contracts.” In so holding, the court declined to follow Construction Protective Services v. TIG Specialty Ins. Co., 29 Cal.4th 189 (2002).

The policyholder would have been entitled to a defense had the general contractor sued the policyholder for property damage, rather than withhold final payment on the contract, and it was the policyholder’s filing of suit that precluded defense for the claim of offset. Could the policyholder have done something different to obtain a defense for the negligence claim given the procedural posture of the case? The court observed that if the policyholder believed the affirmative defense was in fact a counterclaim, it might have moved to dismiss the affirmative defense, thereby forcing the general contractor to assert the counterclaim sooner.

Ninth Circuit Addresses Timing of Notice of Claim to Insured Under Claims-Made CGL policy

dpolscer@gordon-polscer.com (Diane Polscer) — Fri, 05 Jun 2009 20:38:38 -0500

In Evanston Insurance Company v. OEA, Inc., 2009 U.S. App. LEXIS 10921 (May 21, 2009), the Court of Appeals for the Ninth Circuit addressed the issue of “notice” under a claims-made policy. The Ninth Circuit upheld the decision of the U.S. District Court for the District of California, holding that, under a claims-made policy, the insured’s unreasonable subjective belief that a complaint does not evidence an intent to hold the insured liable for injuries will not create a genuine factual dispute as to when the insured’ received “notice” of the claim where the complaint clearly names the insured and specifically alleges that the insured is liable for injuries.

In Evanston, the insured, OEA, Inc., obtained a commercial general liability policy with an effective period of May 1, 1998 through May 1, 1999. The policy provided coverage for “CLAIMS FIRST MADE…DURING THE POLICY PERIOD,” defining a claim as “a notice received by the insured of an intention to hold the insured responsible for an Occurrence involving the policy and shall include service of suit or institution of arbitration proceedings against the insured.” Id. at *4.

In 1996 and 1997, two employees of OEA’s wholly-owned subsidiary, Aerospace, were injured in an accident and filed separate lawsuits against OEA and Aerospace. Their complaints alleged liability under theories of negligence, products liability, premises liability, and strict liability. Aerospace, which was not an insured under the Evanston policy, was served with the first complaint on June 10, 1997, and forwarded the complaint immediately to OEA. OEA was served with the second complaint on November 3, 1997. Upon receipt of both complaints, OEA claimed that it decided that the claims were exclusively workers compensation claims and notified its workers compensation carrier.

OEA settled both suits. Under a full reservation of rights, Evanston paid $1,544,924.32 in defense and settlement costs. Evanston then filed suit against OEA to recover the amounts paid. The U.S. District Court for the Eastern District of California granted Evanston’s motion for partial summary judgment, holding that the claims were not covered because they were first made in 1997, before the Evanston policy period began. The court also granted Evanston’s subsequent summary judgment motion, awarding Evanston reimbursement of the amounts it paid for settlement and defense of the claims plus prejudgment interest.

On appeal, OEA asserted that the district court wrongly decided a disputed fact. OEA asserted that OEA did not have notice of the complaints until the policy period began because it did not realize that the plaintiffs intended to hold OEA liable for their injuries until October 1998. OEA presented evidence that OEA and Aerospace were frequently confused as corporate entities, that the plaintiffs did not seek to serve OEA and Aerospace as separate entities in 1997, and that various individuals at OEA held subjective beliefs that the complaints did not state a cause of action against OEA. Relying on the district court’s statement that the policy’s definition of “claim” as a “notice” “incorporates a reasonable person standard,” OEA argued that the issue of “whether it was reasonable for OEA to read the complaints as not evincing an intent to hold OEA liable for injures” was a disputed fact, making summary judgment improper. Id. at * 8.

Based on the undisputed content of the complaints, along with the undisputed fact that OEA received both complaints before the policy period began, the Ninth Circuit held that there was no genuine dispute as to when OEA received notice of the plaintiffs’ intent to hold OEA responsible for their injuries. The court noted in particular that both OEA and Aerospace were clearly named as defendants and that the products liability claim “alleged that OEA alone sold the gunpowder, storage bins, and trays, protective gear, and other products that contributed to their injuries.” Id. at *10. OEA’s subjective beliefs were unreasonable, and the Ninth Circuit determined that summary judgment on the issue was proper because there was no room for a reasonable difference of opinion on the issue.

The Ninth Circuit also upheld the award of reimbursement of the defense and settlement costs that Evanston paid, stating that because the claims were made prior to the policy period, OEA received more than its bargained-for coverage. The Ninth Circuit rejected OEA’s argument that prejudgment interest should not apply in the insurer-insured context, holding, under Levy-Zentner Co. v. Southern Pac. Trans. Co., 74 Cal. App. 3d 762 (1977), “prejudgment interest is available to every person who is entitled to recover damages that are certain.” Evanston, supra, at * 15.

In affirming Evanston decision, the Ninth Circuit emphasized that “a foolish or overly sophisticated failure or refusal to realize that one is the intended object of suit would be of no assistance to an insured.” Id. at * 9. Conversely, notifications that are vague, confusing, or indefinite to a reasonable insured do not amount to a claim.

New York Court of Appeals Affirms Trigger of SUM Coverage

ktm@wnhr.com (Kevin Merriman) — Thu, 04 Jun 2009 17:47:28 -0500

In a 5-2 decision, the New York Court of Appeals held in Matter of Allstate Insurance Company, 2009 N.Y. Slip Op. 04300 (June 4, 2009) that Supplemental Uninsured/Underinsured Motorists (“SUM”) coverage is not triggered where payments to multiple insureds reduces the liability limits of the tortfeasor’s policy. Thus, SUM benefits were unavailable to co-occupants of a covered vehicle.

In companion cases, Matter of Allstate Insurance Company v. Rivera and Matter of Clarendon National Insurance Company v. Nunez, insurers issued auto policies with liability limits equal to that of the tortfeasors’ liability policies. After paying the liability limits to the injured driver and co-occupants of the covered vehicles, co-occupants sought SUM coverage under the drivers’ policies. Insurers denied the claims, arguing that the SUM coverage was not triggered. SUM claimants argued that each should be allowed to deduct the payments made to other co-occupants, thereby reducing the tortfeasor's liability coverage to an amount less than the coverage limits on their vehicle, triggering SUM coverage.

The Court disagreed, reasoning that the provision for SUM coverage under section 3420(f)(2)(A) of New York’s Insurance Law, enacted to allow policyholders to acquire the same level of protection for themselves and their passengers as they purchased to protect themselves against liability to others, is only triggered when the liability limit of the policy covering the tortfeasor's vehicle is less than the third-party liability limit of the policy under which a party is seeking SUM benefits. The Court explained that the “statute calls for a facial comparison of the limits without reduction from the judgment of other claims arising from the accident.”

New York Insurance Department Regulation 35-D (“Regulation 35-D”) (codified at 11 NYCRR § 60-2) did not support a contrary result. The Court observed that Regulation 35-D, which prescribes the terms of the SUM endorsement, defines an “uninsured motor vehicle” as:

“a motor vehicle that, through its ownership, maintenance or use, results in bodily injury to an insured, and for which . . . there is a bodily injury liability insurance coverage or bond applicable to such motor vehicle at the time of the accident, but . . . the amount of such insurance coverage or bond has been reduced, by payments to other persons injured in the accident, to an amount less than the third-party bodily injury liability limit of this policy.”

11 NYCRR § 60-2 (emphasis added).

The term “insured” includes “any other person while occupying: (i) a motor vehicle insured for SUM under this policy ….”

The Court held that the “payments to other persons” that may be deducted from the tortfeasor’s coverage limits for purposes of rendering the tortfeasor “uninsured” under the SUM endorsement do not encompass payments made to insureds under the endorsement, a result that in the Court’s view is consistent with the statutory purpose of SUM coverage to guarantee “that those who have purchased SUM coverage will receive the same recovery they have made available to third parties they injure — but no more.”

In dissent, Judge Ciparick concluded that claimants meet the stated criteria for SUM coverage under Regulation 35-D, as they are "other persons injured in the accident." Since the regulation does not limit or qualify the phrase “other persons,” and does not exclude as “other persons” a passenger of the covered vehicle, co-occupants should qualify for benefits. Indeed, the dissent reasoned, “[t]he majority's rendering of an artificial and strained distinction between co-vehicle occupants and strangers to the insured vehicle in the definition of ‘other persons injured in the accident’ is unwarranted and inconsistent with the plain language of the regulation as incorporated into these insurance policies.”

Oregon Court of Appeals Addresses CGL Policy's Definition of 'Temporary Worker'

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 01 Jun 2009 20:36:44 -0500

In Rhiner v. Red Shield Insurance Co., issued May 27, 2009, the Oregon Court of Appeals addressed the issue of whether an individual whom an insured hired directly, and who filed a workers’ compensation claim against the insured for on-the-job injuries is an “employee” or a “temporary worker” within the meaning of the policy. The appeals court reversed the trial court’s grant of summary judgment in favor of the insured, and remanded for entry of judgment for insurer holding that because the insured hired the individual directly, and not with the aid of a third party, the individual was not a “temporary worker” within the meaning of the policy, and the policy did not provide coverage of his claims against the insured.

The policy defines “employee” to include a “leased worker,” but not to include a “temporary worker.” “Temporary worker” is defined as “a person who is furnished to you to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.”

The insured contended that the policy definition of “temporary worker” is ambiguous as it could be read to apply to any person who was hired to meet seasonal or short-term workload conditions, regardless of who furnished the worker. The insured also contended that the policy is unclear as to whether the worker may “furnish” himself. In addition, the insured contended that the record supported that the individual was hired to meet short-term workload needs.

Employing Oregon’s rules to interpret the terms of an insurance contract, the Oregon Court of Appeals found that the policy’s definition of “temporary worker” plainly and unambiguously provided that a temporary worker is “a person who is furnished to you” either to substitute for a permanent employee or to meet seasonal or short-term workload conditions. The court then turned to the question of the meaning of “a person who is furnished to you,” and whether it encompasses an individual who plaintiff hired directly and whether a person can “furnish” himself or herself to an employer. As the policy does not define “furnished,” the court looked to the plain meaning of the term. Utilizing Webster’s Third New Int’l Dictionary, the court found that, in the context of human labor, the definition of “furnish” could conceivably mean that a person could provide or supply himself or herself to an employer. The court found, however, that ambiguity is not determined by what a single word in a policy means in the abstract, but what that term most likely was intended to mean when viewed in the context in which the term is used in the policy as a whole.

The court held that the insured’s proposed reading of the term “furnished” becomes untenable in the context of the whole policy because it renders the entire phrase “a person furnished to you” superfluous. Oregon courts do not lightly assume that contract language is superfluous in determining whether a phrase is ambiguous. For that reason, the court concluded that the phrase “a person who is furnished to you” as used in the definition of temporary worker means a person who is referred from, or provided by, a third party. Because the insured hired the individual directly and not with the aid of a third party, he was not a “temporary worker” within the meaning of the policy, and coverage of his claims against the insured is excluded.

In so holding, the Court of Appeals affirmed Oregon’s rules to interpret the terms of an insurance contract, and confirmed that when determining whether a term is ambiguous the issue is not what a single word in a policy means in the abstract, but what that term most likely was intended to mean when viewed in the context in which the term is used in the policy as a whole.

Insurer Estopped from Seeking Recission of Life Policy for Collection and Retention of Premiums

ktm@wnhr.com (Kevin Merriman) — Sat, 30 May 2009 08:00:00 -0500

In an action to rescind life insurance policies for fraud and misrepresentation, a New York appellate court recently held that although the action was timely filed within the statutory two-year incontestability period, the insurer was estopped from seeking rescission for having collected and retained nine premium payments after commencing suit.

In Security Mutual Life Insurance Company of New York v. Rodriguez, defendants purportedly purchased three life insurance policies worth $20 million from Security Mutual agents who, prior to the commencement of the action, had pled guilty to insurance law crimes in connection with the issuance of life insurance policies. 2009 WL 1444524 (1st Dep’t May 26, 2009). The action for rescission and fraud alleged that defendants, in conjunction with the agents, procured the policies by providing false and misleading financial and medical information. On a motion to dismiss the complaint, defendants argued the action was untimely and that the insurer had waived its right to rescind the policy and had failed to plead fraud with sufficient particularity.

With respect to timeliness, the policies contained a two-year incontestability clause as required by Section 3203(a) of the New York Insurance Law; however, the action was commenced two years and two days after the policies were dated. Security Mutual argued that since the two-year anniversary fell on a Saturday, New York General Construction Law § 25 (extending contractual deadlines falling on weekends and holidays) and § 25-a (extending statutory deadlines falling on weekends and holidays), applied to extend the time to file the action by two days. Defendants countered that § 25-a was only applicable to statutory deadlines and since the incontestability clause was written into the contract, the only applicable provision was § 25, which applies to contractual deadlines. Defendants further argued that there was no applicable extension under § 25 because it only applies to performance of a contractual "condition," and the incontestability clause was not a “condition” within the meaning of the General Construction Law.

The Appellate Division agreed with Security Mutual, holding that §25-a applied because the incontestability clause was required by statute. The Court reasoned that if the insurance policy had failed to contain the incontestability provision, it would have been read into the policy since it is required by statute. Under this reasoning, a ruling that §25 (as opposed to §25-a) governed would produce an anomalous result: “[A]n insurer that complies with the law and includes in its life insurance policies the clause it is required by law to include will have a shorter period of time in which to contest the policies than it would have if it omitted the clause from the policies.” Therefore, the Court concluded the action was timely filed.

Defendants argued that the rescission claim should be dismissed, reasoning that Security Mutual was estopped from seeking that relief because it had accepted premiums after learning of grounds for rescission. Finding that Security Mutual had collected and retained nine premium payments totaling $40,000 since the action was commenced, the Appellate Division agreed. The Court rejected arguments that commencement of a rescission action prevented estoppel as contrary to N.Y. precedent. Rodriguez, 2009 WL 144524 (discussing Continental Ins. Co. v. Helmsley Enters., 211 A.D.2d 589 (1st Dep’t 1995) (holding that plaintiff waived right to seek rescission of insurance contract when it knowingly accepted premium payments for several months following discovery of alleged misrepresentations) and Scalia v Equitable Life Assurance Soc’y, 251 A.D.2d 315 (2d Dep’t 1998) (holding that that insurer’s continued acceptance of premiums after learning of facts permitting rescission of policy constitutes an estoppel against right to rescind)).

As for the fraud claims, the Court held that they were pled with sufficient detail under CPLR 3016(b), since the complaint included allegations of misstatements of net worth, falsity of medical statements, and the proffering of fictitious accountant and medical records. Thus, the Court concluded that the motion to dismiss the fraud claims was properly denied.

Number of Occurrences - Devil's in the Details

sthorpe@gordonrees.com (Sara Thorpe) — Fri, 29 May 2009 13:13:05 -0500

A California federal trial court decision adds to the growing body of law of how much the facts (and how those facts are presented) determine the number of occurrences question. Evanston Ins. Co. v. Ghillie Suits.Com, Inc., 2009 U.S. Lexis 22256 (N.D.Cal. 2009).

Cases examining number of occurrences (for purposes of determining the number of limits available on (often) non-aggregated claims or how many deductibles an insured may have to pay) are decidedly fact-driven. See, for instance, recent case examples where the courts have concluded there is more than one occurrence: London Market Insurers v. Truck Ins. Exchange, 146 Cal.App.4th 648 (Ct. App. 2007) (“Kaiser Cement”) (in inter-insurer dispute, asbestos liabilities that arose out at many different locations from different products and situations creating exposure, were not all a single occurrence); Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651 (Tex. App. 2006) (in examining claims based on defective stucco, the court noted that “under the ‘cause’ analysis, the proper focus . . . is on the number of events that cause the injuries and give rise to the insured's liability, rather than the number of injurious effects”); Nicor, Inc. v. Associated Electric and Gas Ins. Services Ltd, 223 Ill. 2d 407, 413 (Ill. 2006) (mercury spills in 195 homes were separate occurrences because different acts of negligence and not common methodology, thus requiring insured to pay multiple self insured retentions).

In the Evanston case, during a U.S. Marine training session, two marines were badly burned after their “fireproof” clothing caught fire. The parties, in presenting the issue to the court, stipulated that when the first marine’s suit caught fire from a flash from a gun - that was a single occurrence. The question was whether the ignition of the second marine’s clothing was part of that same occurrence or a separate occurrence. The court painstakingly went through the details of the event (all of which happened in a matter of minutes) and the various theories as to whether there were different causes for the two fires even though close in time and space. In the end, what the court appeared to find most compelling was that the second marine was safe, and it is only that he decided to assist the first marine that caused the second marine’s clothing to ignite. Thus, the court found there were two occurrences (and two occurrence limits applied).

California Limits Causes of Action Against Life Insurers

sthorpe@gordonrees.com (Sara Thorpe) — Tue, 26 May 2009 12:42:50 -0500

In Fairbanks v. Superior Court of Los Angeles County (Farmers New World Life Insurance Co.) 46 Cal.4th 56 [2009 WL 1035264] (2009), the California Supreme Court held life insurance is not a service subject to the protections of California’s Consumer Legal Remedies Act (“CLRA”). The decision provides life insurance companies with a solid defense against CLRA lawsuits alleging unfair or deceptive acts and practices in the marketing or sale of life insurance policies.

The CLRA (Calif. Civ. Code § 1750 et seq.) provides a nonexclusive statutory remedy for unfair methods of competition and unfair or deceptive acts undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer. The Act provided a means to recover damages, punitive damages, and attorneys fees.

Absence of this remedy does not preclude other causes of action, namely under California’s Business & Professions Code Section 17200 for unfair competition (limited to injunctive relief and restitution), or a “bad faith” claim (if there has been a breach of contract).

In reaching its decision in Fairbanks, the California Court rejected decisions from other jurisdictions (namely Texas and Colorado), which held life insurance does come within the meaning of services under similar consumer protection statutes. The California Court determined that, unlike the broadly worded statutes in other states, the CLRA “contains a restrictive definition of ‘services’ that excludes life insurance.”

CGL Doesn't Cover Torture Claims Arising Out Of Abu Ghraig

maylward@mail.mm-m.com (Mike Aylward) — Fri, 15 May 2009 09:04:01 -0500

The Fourth Circuit ruled yesterday that allegations that employees of an American security firm that abetted the torture of detainees at the Abu Ghraib prison in Iraq are outside the Coverage Territory of a CGL policy issued by St. Paul. In CACI, International, Inc. v. St. Paul Fire & Marine Ins. Co., No. 08-1885 (4th Cir. May 14, 2009), the court voted 2-1 to affirm the findings of a West Virginia District Court that the alleged abuses did not occur within the territory of the United States and its possessions. The court declined to find that allegations that conduct that did occur in the United States wherein the insured was allegedly negligent in hiring these employees triggered coverage. Apart from the fact that the Complaint did not expressly allege where these acts occurred, the court ruled that it is the place of injury, not of the insured’s negligent acts, that governs the application of the Coverage Territory clause. Justice Shedd authored a brief dissent, arguing that the claims fell within the exception for insureds working outside the territory for a “short period.”

Kudos to Walter Andrews of Hunton & Williams!

Massachusetts Court Delays Issuance of Allocation Opinion

maylward@mail.mm-m.com (Mike Aylward) — Tue, 12 May 2009 07:02:15 -0500

The Supreme Judicial Court of Massachusetts issued a brief order yesterday in Boston Gas v. Century Indemnity announcing that it is waiving an internal court guideline that requires issuance of rulings within 130 days of oral argument. At issue in Boston Gas is whether the cost of cleaning up pollution from a former manufactured gas plant can be allocated to an excess insurer on an "all sums" basis or must be allocated to multiple years on some basis. As the case was argued on January 8, the 130 day period was due to expire this week.

Ambiguous Instructions from the Ninth Circuit Result in a Potentially Problematic Ruling for Insurers in Allocation Cases

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 11 May 2009 20:41:45 -0500

In MW Builders, Inc. v. Safeco Ins. Co. of America, District Court Judge Haggerty held that an insurance company must bear the burden of establishing which portions of an arbitration award were reasonably allocable to covered claims where “circumstances of the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one.”

MW Builders, the general contractor for the construction of the Candlewood Suites Hotel in Hillsboro Oregon, tendered the defense to and sought indemnity from subcontractor Portland Plastering and its insurer, Safeco, for claims for water damage caused by faulty work on the hotel’s exterior siding (EIFS). Safeco denied the tender and refused to defend or indemnify MW Builders. MW Builders settled with the hotel owner for $2 million, then filed a separate demand for arbitration against Portland Plastering. Safeco defended Portland Plastering at the arbitration, where the arbitrator determined that Portland Plastering was 31% at fault for the damages sustained by the hotel, awarding MW Builders $620,000 in damages, plus defense costs and attorney fees.

In the subsequent coverage action, the district court initially awarded MW Builders the full $620,000 arbitration award. On appeal, the Ninth Circuit held that Safeco was obligated to provide coverage for damage to the hotel, but not for the costs associated with replacing the EIFS. 267 Fed. Appx. 552, 555 (9th Cir. 2008). Because the arbitration award was not partitioned into costs associated with repair of the EIFS and other damages to the hotel, the Ninth Circuit remanded the issue to the district court for a determination of this issue. Id.

On remand, Magistrate Judge Acosta interpreted the Ninth Circuit’s instructions as requiring him to “calculate what portion of the $620,000 award is attributed to the hotel damage claim, excluding the EIFS repair claim.” Based on information submitted by the parties, the Magistrate Judge issued a Findings and Recommendation that MW Builders was entitled to recover 60% of the arbitration award, or $372,000.

Reviewing MW Builders’ objections to the Findings and Recommendation, the district court held that the Ninth Circuit’s instructions were ambiguous. Instead of relying on the Magistrate Judge’s interpretation of the instructions, the court adopted MW Builders’ proposed alternative interpretation, “that the Ninth Circuit remanded the case ‘for this court to conduct a factual inquiry into the extent of the covered damages sustained by the hotel to ensure that these damages were equal to or greater than $620,000.’”

Relying on this alternative interpretation of the Ninth Circuit’s instructions, the court concluded that the Magistrate Judge’s partition of the arbitration award unfairly rewarded Safeco. While the insured generally bears the burden of establishing what portion of a settlement is reasonably allocable to covered claims, there are exceptions to the rule that will shift the burden to the insurer. Shifting the burden of proof is appropriate where “circumstances in the underlying action should have compelled the insurer to seek an allocated verdict or advise the insured of the need for one, or the insurer failed to adequately apprise the insured of the importance of apportionment.”

The court concluded that this exception applied here, citing Safeco’s refusal to defend MW Builders, which compelled MW Builders to negotiate settlement of the claims against it, and noting, “[d]efendant Safeco subsequently retained counsel to defend Portland Plastering in the subsequent arbitration and neglected to seek an allocation of damages in the resulting Knoll award.”

Having placed the burden on Safeco to prove allocation of the arbitration award, the court relied on its alternate interpretation of the Ninth Circuit’s instructions to hold that Safeco could not meet its burden because “such an apportionment at this point in the litigation is unavoidably and unfairly speculative and arbitrary.” Finding no dispute that the total property damaged incurred by the hotel exceeded $620,000, the court awarded MW Builders the full arbitration award amount.

The MW Builders decision appears alarming at first glance, but its applicability may be limited. The outcome springs from the district court’s conclusion that the Ninth Circuit’s remand instructions were ambiguous. That conclusion allowed the district court to bypass Safeco’s evidence of how the arbitration award should have been allocated because the court had already concluded that the only remaining question was whether the hotel sustained covered damages greater than $620,000. Because of this, the district court’s foray into the question of burden of proof is puzzling, and may constitute mere dicta.

Despite the opinion’s questionable general applicability, the court’s decision does raise questions about burden of proof in allocation cases. The district court’s conclusion that Safeco should bear the burden of proof because it should have sought an allocated verdict or advised the insured of the need for one relies mainly on an unpublished Delaware case, Premier Parks, Inc. v. TIG Ins. Co., C.A. No. 02C-04-126, 2006 Del. Super. LEXIS 383 (September 21, 2006). Assuming that Safeco appeals the decision, the Ninth Circuit could resolve the issue by simply clarifying its instructions and remanding the case again.

Whither Minnesota On Recouping Defense Costs?

maylward@mail.mm-m.com (Mike Aylward) — Mon, 11 May 2009 17:06:11 -0500

The Eighth Circuit's recent opinion in Westchester Fire Ins. Co. v. Wallerich, No. 07-3624 (8th Cir. April 24, 2009) has added further confusion to the conflicting law in Minnesota as to whether liability insurers can sue their insurers to recoup defense costs if they are adjudged not to have owed a defense, Although Minnesota’s state appellate courts have yet to weigh in on this issue, it appeared up until now that federal courts were recognizing a right of recoupment. Now it’s unclear.

In the earliest Minnesota case to address this issue, a federal district court ruled in Knapp v. Commonwealth Land Title Insurance Co., 932 F. Supp. 1169 (D. Minn. 1996) that a title insurer could recoup defense costs that it had paid pending a determination that it did not, in fact, owe coverage for the underlying title dispute. The court focused on the fact that the insurer had expressly reserved a right of recoupment when it agreed to defend and that the insured had not protested this claimed right. The court concluded, “Under these circumstances, the Court finds it appropriate to determine that Knapp’s silence in response to Commonwealth’s reservations of rights letter, and subsequent acceptance of the defense provided by Commonwealth, constitutes an implied agreement to the reservation of rights.”

The Eighth Circuit seemed to follow this line of reasoning a decade later in a Texas case. Despite the insured’s argument that Texas law, as exemplified by the Texas Supreme Court’s opinion in Matagorda County v. Texas Association of Counties Risk Management Pool, 52 S.W.3d 128 (Tex. 2000) precludes insurers from unilaterally asserting a right to recoupment of defense costs, the Eighth Circuit ruled in St. Paul Fire & Marine Ins. Co. v. Compaq Computer Corp., 457 F.3d 766 (8th Cir. 2006) that St. Paul’s assertion of a right to recoupment was not “unilateral” but rather was impliedly agreed to by Compaq when it accepted St. Paul’s partial payment of its defense costs after the insured itself had demanded a defense beyond that provided for under the policy. As a result, the court found that the insured had, in effect, created a supplemental agreement that required payments beyond those contemplated in the original agreement but that also gave St. Paul both rights asserted in the reservation of rights letter pursuant to which it had agreed to make any such payments.

Since then, however, it appears that the Eighth Circuit has gotten cold feet (or been taken aback by emerging case law in other jurisdictions rejecting a right of recoupment). In any event, the court’s recent opinion in Westchester Fire Ins. Co. v. Wallerich, No. 07-3624 (8th Cir. April 24, 2009) declined to find a right of recoupment and narrowly distinguished Knapp and Compaq.
In Wallerich, a directors and officers carrier agreed to provide a defense under a reservation of rights but stated that it would seek reimbursement for any sums advanced if a court later ruled that it did not have a duty to defend. Westchester Fire proceeded to bring a DJ and ultimately obtained a ruling that the “insured v. insured” exclusion in its policy precluded any duty to defend. The Minnesota District Court ruled that Westchester Fire was entitled to recoup the defense costs that it had paid in the interim.

On appeal, the Eighth Circuit affirmed the lower court’s ruling that Westchester Fire had no duty to defend but rejected its claims to recoup defense costs.. The court took note of the split in authority around the country and the growing number of courts that have rejected the insurers’ position and concluded that it was persuaded by the more recent state and federal court opinions from other jurisdictions that have adopted the “minority” position barring reimbursement for defense costs.
The court also distinguished the facts in Knapp and Compaq. In particular, the Eighth Circuit emphasized that Wallerich had not acquiesced in the insurer’s assertion of this right and, indeed, had loudly protested at the time that it should not have to repay Westchester Fire.

Under the circumstances, the court ruled that Westchester’s decision to still go forward with a defense despite the insured’s rejection of the terms in its reservation of rights letter constituted an implied acceptance of the insured’s terms. Furthermore, unlike Compaq, the court held that the insurer had never explicitly agreed to forego any rights that it otherwise had in return for tendering a defense.

Is Wallerich a complete repudiation of Compaq or just a refinement of the court’s earlier analysis in a different fact pattern where the insured’s objection at the time invalidates the “implied in fact” contract that insurers have argued to advantage in other cases.

From the author’s own point of view, the defense cost recoupment cases are much more difficult to prove than is the case where an insurer agrees to pay a settlement on its insured’s behalf and later seeks repayment after it is held not to owe coverage. The real issue with the defense cost recoupment cases is that courts are increasingly viewing these claims as subverting the promise to defend set forth in the policy’s insuring agreement. What value is the duty to defend, so goes this argument, if the insurer demands its money back later?

In fact, there is real merit to insurer arguments for recoupment where the absence of a defense obligation is apparent on the face of the pleadings or uncontroverted facts and the defense being provided to the insured is truly a “courtesy” defense that may minimize any liability that the insured may otherwise face. Where an insurer does have a duty to defend, however, it may only recoup defense costs that are attributable to non-covered claims (as in Buss) or that were incurred after it was found not to owe a defense.

New York Clarifies Presumption Against Suicide

ktm@wnhr.com (Kevin Merriman) — Sat, 09 May 2009 07:35:47 -0500

In Green v. William Penn Life Ins. Co. of NY, the court reviewed New York’s presumption against suicide, clarifying that decisional law and New York’s Pattern Jury instruction merely articulate guides for finders of fact, not rules of law that compel dismissal of claims as a matter of law.

In this case, a claim for life insurance was rejected on the basis that the insured committed suicide. After a non-jury trial, the court found that the insured had committed suicide and dismissed the complaint. Evidence at trial supported a finding that the insured committed suicide, but there was also evidence that suicide was not the cause of death. In a 3-2 decision, an appellate court reversed, holding that “the evidence failed as a matter of law to overcome the presumption against suicide.” The appellate court reasoned that because “there are other reasonable conclusions that may be drawn from the evidence, aside from suicide," the "application of the law regarding the presumption against suicide necessitated a directed verdict in this case.”

New York’s high court reversed, holding that the presumption against suicide, which “springs from strong policy considerations as well as embodying natural probability,” is not a rule that requires rejection of suicide as a matter of law, but is merely a guide for the fact finder. ... Where the evidence leaves open two possible findings, it is the jury's business to resolve the doubt.”

The court clarified the New York Pattern Jury Instructions, which state: "You may make a finding of suicide only if you are satisfied from the evidence, and taking into consideration the presumption against suicide, that no conclusion other than suicide may reasonably be drawn.” “This language,” held the court, “should not be taken to mean that, where more than one conclusion is reasonably possible, suicide is excluded as a matter of law.” Instead, the instruction “is directed at jurors deciding facts, not at judges deciding the law; it is a way of impressing on jurors' minds that the presumption against suicide is a strong one—of telling them they should not find suicide unless the evidence shows suicide to be highly probable.”

Thus, because there was evidence legally sufficient to support the trial court’s decision, the appellate court was found in error for rejecting the finding of suicide as a matter of law.

Insurer's Obligation To Search For Coverage - Expanding The Insurer's Duties

sthorpe@gordonrees.com (Sara Thorpe) — Thu, 07 May 2009 17:31:56 -0500

A recent case in California, takes an insurer’s duty to search for coverage a step farther than required to date and, while the insurer acted correctly on the coverage of which it was aware and acted promptly as it discovered additional coverage, that was not enough – it was found liable to the tune of $3.2 million (damages, interest, and attorneys fees).

Safeco Ins. Co. v. Parks (2009) 170 Cal.App.4th 992 (“Safeco II”), is a case every insurer should review. The court’s decision flows from a rather bizarre set of facts, and a convoluted legal history, which will not be fully summarized here. The claimant was 16 year old Michelle Park’s boyfriend who was left by the side of the road in February 1999 to make his way home following his rude behavior towards his girlfriend. He was hit by a car which resulted in the need to amputate one of his legs.

Michelle’s parents were divorced. She lived with her father, Charles, and grandmother, Evelyn. Her mother lived with a man (Barnett) that had a homeowners policy with Safeco. The claim by the injured boyfriend was tendered under Barnett’s policy. Safeco denied, was sued, and was ultimately (years and a court decision later) found to be correct. See Safeco Ins. Co. v. Parks (2004)122 Cal.App.4th 779 (“Safeco I”).

During that bad faith case, discovery was sought of other policies issued by Safeco “providing coverage for the nature and extent of the damages alleged.” Safeco objected to the discovery. Parks did not move to compel.

Behind the scenes (the Safeco II court tells us), Safeco knew Miller lived with her father. Safeco’s unit manager had apparently instructed the adjuster to determine whether Michelle had other applicable insurance. The court noted that Safeco’s claim file did not show it searched for policies for the adults with whom Michelle resided “nor did Safeco interview Michelle’s father or grandmother to determine whether they had Safeco policies that might cover her claim.” No mention is made of whether the claimant’s lawyer deposed the father or grandmother or conducted any discovery for policies other than sending the request to Safeco, which the lawyer failed to pursue.

As it turns out the grandmother owned the home in which Michelle lived and had a homeowners policy with Safeco. Once this came to Safeco’s attention, Safeco acted promptly and paid policy limits. But too much water was already under the bridge. There had been a policy limits demand and an excess judgment.

The lesson in all of this? Follow the claim supervisor’s instructions. Search for logical sources of insurance coverage for a claim. Document any search conducted. Hindsight is always 20/20.

Oregon's Court of Appeals Rules for Insurer on Products - Completed Operations Hazard Exclusion

dpolscer@gordon-polscer.com (Diane Polscer) — Wed, 06 May 2009 20:22:51 -0500

In Bresee Homes, Inc. v. Farmers, the Oregon Court of Appeals ruled that the trial court properly granted summary judgment to Farmers based on an exclusion for damages within the products-completed operations hazard in the context of a construction defect claim involving water intrusion. The insured, a general contractor, constructed a residence in 1999. Claims were brought against the insured in 2005. Farmers denied coverage for the loss based on an endorsement excluding coverage for property damage included within the products-completed operations hazard. On summary judgment in the trial court, the insured failed to submit any evidence as to the timing of the property damage, arguing that a material issue of fact existed and the insurer had failed to prove otherwise. The insured further argued that the court should consider evidence, in determining whether the exclusion was ambiguous, that Farmers had paid on similar claims. Finally, Bresee argued that Farmers waived the ability to rely on the exclusion.

In affirming the trial court’s order granting summary judgment in favor of Farmers, the Oregon Court of Appeals addressed the meaning of the products-completed operations hazard in the context of a claim for water intrusion arising from defective construction, in turn affirming a number of key legal concepts in Oregon relating to insurance coverage. As to the exclusion, the court held that the “products-completed operations” hazard unambiguously includes all damages arising away from premises owned or rented by the insured and arising out of the insured’s work, unless one of the exceptions relating to ongoing operations applies. “Your work”, defined to include work done on the insured’s behalf, was interpreted as plainly including work performed on the insured’s behalf by subcontractors. Significantly, the Court of Appeals rejected an argument that the subcontractor exception in the separate “your work” exclusion expressed an intent for the policy as a whole to cover damages caused by the work of subcontractors, holding that an exception to one exclusion does not modify other aspects of the policy. Because the insured presented no evidence as to the timing of the water damage, the insured failed to meets its burden of proof to present any evidence indicating the applicability of the exception for damages taking place during ongoing operations.

In so holding, the Court of Appeals affirmed a number of key concepts. The court confirmed that, under Oregon’s rules for interpretation of insurance contracts, extrinsic evidence is irrelevant to determining the rights and obligations of the parties to an insurance contract, which is based solely on the terms of the policy. The Court further confirmed that the insured bears the burden of proving the applicability of an exception to an exclusion. Perhaps more significantly, the Court of Appeals held that the insured had the burden to submit proof that the property damage took place during ongoing operations. Although determined in the context of an exception to an exclusion, this holding will likely be useful in asserting that the insured also bears the burden of affirmatively submitting evidence as to the timing of the property damage for purposes of triggering the coverage grant, which is often a significant issue in water intrusion cases. Finally, the Court of Appeals confirmed that insureds cannot attempt to create ambiguity in an insurance contract by presenting evidence of an insurer’s claims handling practices and that the doctrine of waiver does not apply to exclusions in insurance contracts.

Oregon's Court of Appeals Defines "Collapse"; Rules on Scope of Coverage

dpolscer@gordon-polscer.com (Diane Polscer) — Mon, 04 May 2009 18:05:30 -0500

In Hennessy v. Mutual of Enumclaw Ins. Co., A133592 (April 29, 2009), Oregon's Court of Appeals adopted a “none of the above” approach to first-party “collapse” claims. The majority of jurisdictions that have considered the undefined term “collapse” have found coverage to be triggered by one of the following three circumstances: (1) a finding of substantial impairment to structural integrity, (2) a finding of an imminent collapse, or (3) an actual collapse, being an actual falling down and/or reduction to rubble. In Hennessy, Oregon’s Court of Appeals held that the undefined term “collapse” “requires only that an object fall some distance.” Thus, in Hennessy, a collapse was found where a portion of a building’s stucco exterior had separated from the building wall but had not yet fallen to the ground.

While some may criticize Hennessy as a liberal interpretation of “collapse” coverage, see dissenting opinion by Judge Landau (“I respectfully disagree with the majority that what is essentially a crack between a piece of stucco and the building to which it is adhered is a ‘collapse’ of that stucco”), the decision also represents a substantial victory for insurers with respect to the scope of coverage. Specifically, whereas the trial court had awarded the insured $98,859.03 to entirely replace the failed stucco system, the Court of Appeals reduced the award to $2,469.68 to reflect only those costs directly associated with repairing the “collapsed” portion of the stucco. Even though the parties had agreed that it was “reasonable and prudent” to replace all of the stucco that “was no longer attached to the underlying walls,” the court found that no “collapse” had occurred where the stucco was no longer properly adhered to the building but “had not moved or fallen.” Thus, repairs to those areas of the building were not necessitated by any “collapse” but by the hysteresis (grout decay) that had caused the adhesion to fail.

Prior to the Hennessy decision, insureds repeatedly argued in Oregon that once coverage is found the insurer must pay for all work that is necessary to complete the repair job in a “good and workmanlike fashion.” Thus, if, as the parties agreed in Hennessy, it was “reasonable and prudent” to repair all stucco while repairing the portion that had actually separated from the building, the insured would argue that the entire repair project should be covered. Hennessy stands for the proposition that although a broad scope of work may be “reasonable and prudent,” or even required in order for a contractor to complete the job in a workmanlike manner, coverage only extends to those repairs actually necessitated by a covered event. "Logically, this rule should not be limited to "collapse" claims but should extend to all first-party property claims, and potentially even to third-party liability claims. In most cases, a reasoned expert opinion will likely be helpful to properly limit an insured’s recovery pursuant to the Hennessy standard.

Is There A Court More Fun Than The Seventh Circuit?

maylward@mail.mm-m.com (Mike Aylward) — Mon, 04 May 2009 13:53:55 -0500

In recent years, the Seventh Circuit has emerged as a beacon of sanity in the morass of federal insurance jurisprudence (well, yes, there was Eljer butr everyone makes a mistake occasionally). As among the judges on the court, Posner and Easterbrook are particularly interesting to read. So it is with pleasure that we commend to your consideration a savage new opinion from Judge Easterbrook saving a policyholder who had the effrontery to challenge the scope of the "your work" exclusion in a recent Indiana case.

The dispute at issue in Westfield Ins. Co. v. Sheehan Construction Co., No. 08-3463 (7th Cir. April 29, 2009) arose out of the now familiar scenario of a lawsuit brought by property owners whose homes had acquired moisture and mold as a result of defective workmanship by the insured’s subcontractors. In this case, Sheehan Construction settled the claims for $2.8 million and assigned its coverage rights to the homeowners. In the interim, the contractor’s general liability insurer had brought an action for declaratory relief in Indiana seeking a declaration that the claims were subject to the “your work” exclusion.

The Westfield coverage was notable in that its “your work” exclusion did not contain the endorsement that has been contained in standard CGL policies since 1986 stating that, “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.” The only issue, therefore, was whether the property damage had arisen out of “work or operations performed by you or on your behalf.”
Justice Easterbrook concluded that the “on your behalf” language clearly extended to work performed by subcontractors.

In a footnote, the Seventh Circuit also approved the action of the federal district court in dismissing the testimony of a former insurance adjuster who stated that he would have paid Sheehan’s claim where this “expert” conceded on the stand that he knew nothing about Indiana law and was merely opining with respect to legal issues that were properly the province of the judge.

The Seventh Circuit rejected the insured’s argument that various Indiana cases supporting this limited construction of coverage for faulty workmanship claims were “out-dated” observing with some asperity that judicial decisions do not come “stamped with expiration dates.”

The court observed that the policy was intended to indemnify a contractor for losses caused by construction machinery that damaged adjacent property or for an injury to a passer by as by a misplaced nail. On the other hand, the court held that such policies were not meant to indemnify a contractor for negligent work. In such circumstances, “The moral hazard would be considerable: the prospect of indemnity would lead the general contractor to save money by hiring sub-standard contractors, then turning to the insurer to fix the customer’s home.”

Justice Easterbrook concluded by chastising the insured’s lawyers who, even after losing in the district court in Indiana, had argued in their briefs to the Seventh Circuit that Westfield’s denial of coverage was in bad faith for which punitive damages should be awarded. The court questioned how an insurer could exhibit bad faith by taking a position that not only followed the policy language but had been endorsed by a lower court.

The Seventh Circuit concluded that the insured’s arguments were no more than a strategy “to strong arm a settlement by in terrorem claims rather than to vindicate its legal entitlements. Lawyers should think carefully about the message that their contentions convey to this court, as well as the effect they may have on the other litigants.”

Pigs Fly: Insurers Win on Pre-Tender Issue in Indiana

maylward@mail.mm-m.com (Mike Aylward) — Sun, 03 May 2009 19:43:01 -0500

There was a time back in the 1980’s when Indiana was viewed as a relatively conservative jurisdiction as far as insurance law went. During this era, there was also a general view that the duty to defend did not arise until such time as a claim was presented to an insurance company to defend. Since then, however, Indiana has become a notoriously difficult jurisdiction for insurers and courts around the country have warmed to the idea that insureds can recover “pre-tender” defense costs unless their delay in giving notice caused prejudice to the insurer.

Now, in an astonishing turn of events, the Indiana Supreme Court has turned the clock back and has adopted a sensible analysis of an insurance policy that clearly distinguishes between the prejudice rules that most jurisdictions have adopted in the context of an insured’s failure to give timely notice of an accident or suit, and the requirement of tender as being a pre-condition to the duty to defend in the first instance.

The insured in Dreaded, Inc. v. St. Paul Guardian Ins. Co., had received cleanup demands from the Indiana Department of Environmental Management in November of 2000 and again in August 2003 but failed to alert its CGL carriers to these claims until March 2004. St. Paul thereafter agreed to provide a defense under a reservation of rights but declined to reimburse its insured for costs incurred prior to March 2004. The trial court entered summary judgment for St. Paul, declaring that even if a showing of prejudice was required, a delay of three and a half years in tendering the underlying claims was unreasonable as a matter of law and gave rise to a presumption of prejudice.

In December 2007, the Indiana Court of Appeals reversed, declaring that although the insured’s delay was unreasonable, the insured had raised sufficient facts to rebut any presumption that St. Paul had been prejudiced by its delay. The court took note of the fact that St. Paul did nothing after receiving notice to alter the manner in which the case was being defended and retained the same attorneys and environmental consultants. Further, the court was persuaded by evidence presented by the insured that its defense up to that point had been reasonable and appropriate. As a result, the Appeals Court held that the trial court should not have granted summary judgment to St. Paul.

On April 29, 2009, however, the Indiana Supreme Court held that although the “presumption of prejudice” rule applied with respect to an insured’s failure to give notice of an accident, in this case what was at issue was the insurer’s duty to defend. The court ruled that an insurer cannot defend a claim of which it has no knowledge and that, “The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement. Until an insurer receives such enabling information, it cannot be held accountable for breaching this duty.” As a result, the Supreme Court ruled that the insurers were not liable for reimbursing Dreaded for its pre-tender costs.

It should be admitted that some of the confusion that courts have engendered in this area arose in part from the advocacy of insurance coverage lawyers who relied on case precedents involving the voluntary payment prohibition and other breaches of the cooperation clause as a basis for arguing that insurers had no duty to reimburse for costs incurred prior to the date of tender. See, e.g. Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 976 (4th Dept. 2000).

This new opinion from the Indiana Supreme Court should remind us, however, that the stronger argument in such cases is that the requirement of tender is a condition precedent to any defense obligation arising as a matter of contract and that, as no defense obligation can exist prior to a lawsuit being tendered for defense, an insurer should have no obligation to reimburse pre-tender defense costs.

Horsing Around With Coverage

maylward@mail.mm-m.com (Mike Aylward) — Wed, 29 Apr 2009 18:14:12 -0500

There is a quaint notion in northern New England that insurance policies exist to pay claims. This is abundantly true in the State of Maine, where courts have been remarkably liberal over the years in finding coverage for liability claims.

In the most recent case of this sort, the First Circuit ruled last week in Centennial Ins. Co. v. Patterson, 08-1521 (1st Cir. April 23, 2009) that a professional liability insurer had a duty to defend a veterinarian for allegedly giving false testimony at a public hearing involving the plaintiff.

The coverage dispute arose out of a pro se law suit brought by Carol Murphy, a local farmer who alleged that dozens of state officials and other defendants (80 in all) had conspired to take away her animals by pursuing animal cruelty charges against her for failing to provide them with proper food, care and shelter. Among the defendants was Dr. Robert Patterson, who had examined the animals and testified about their condition at an Animal Possession hearing.

Patterson tendered the defense of Murphy's suit to Centennial, which had insured him under a Veterinarian's Professional Liability policy. Centennial denied that testifying at a public hearing involved rendering "veterinary professional services" and commenced an action for declaratory relief in federal court. Although Murphy's suit was soon thereafter dismissed with prejudice, Centennial's efforts to withdraw its coverage litigation as moot were denied by the U.S. District Court were denied owing to the fact that Dr. Patterson had incurred the cost of engaging his own defense counsel. In 2006, the District Court ruled that Centennial owed coverage for the insured's defense costs ($121--hey, this is Maine) and DJ fees ($3036). Centennial appealed.

On April 23, 2009, the First Circuit issued its opinion, affirming the lower court's finding of coverage. Crucially, the court found that the conduct giving rise to Patterson's claimed liability was not just his public testimony but the examination and care for Murphy's animals that formed the basis for his testimony. As a result, the court found that these actions involved his special training as a veterinarian and were properly the subject of coverage for "professional veterinary services” within the policy’s definition of a covered “veterinary incident.”

The court also observed that the policy would be triggered by the underlying complaint’s allegation that Dr. Patterson had committed libel and slander despite the fact that such allegations were apparently limited to various media outlets that were named as co-defendants in the Complaint. Furthermore, despite the fact that Centennial suggested that any covered libel or slander must occur in connection with the furnishing of professional veterinary services, the First Circuit observed that such events were unlikely to occur in the course of treating an animal and must therefore reasonably be given broader applicability to testimony that the insured was giving in the course of his special expertise and training as a veterinarian.

Finally, despite the fact that the underlying suit alleged that the statements were made with fraudulent intent, the First Circuit held that an exclusion to the policy for making knowingly false statements did not apply since allegations in a pro se Complaint characterizing Dr. Patterson’s actions as “criminal” for which he was “guilty” did not necessarily mean what they stated and might result in an ultimate determination that the insured was merely negligent.