National Insurance Law Forum

$500 Statutory Damages for TCPA Violation is a Penalty and Does not Fall Constitute Damages Payable under the CGL Policy

Shaun McParland Baldwin — Tue, 15 May 2012 13:43:57 -0500

In Olsen v. Siddiqi, No. ED97455 (May 9, 2012), the insured agreed to settle a TCPA class action suit for $4,917,500 - recoverable solely from the insured’s CGL insurance policy. The Missouri Court of Appeals held that the CGL insurer had no duty to pay that settlement as the sums were not paid as damages because of property damage but were a statutory penalty that was not covered by the policy. (There was one dissenting justice). The Court observed that the claimants elected to seek statutory damages in the underlying TCPA suit (of $500 per violation), as opposed to actual damages. The Court noted that, under Missouri law, unless bargained for, the term “damages” does not include fines and penalties.

In determining whether the statutory damages provided under the TCPA constituted a penalty, the Court made the following observations:

A “penalty” is a forfeiture inflicted by penal statute…. Missouri law distinguishes between remedial and penal statutes. … A penal statute is a law “which inflicts a forfeiture of money or goods by way of penalty for breach of its provisions.” …. [T]he broad definition of ‘penal statutes’ encompasses laws that permit recovery of a penalty by an individual as well as by public prosecution.”… Laws which allow individuals to recover statutory damages have been declared to be penal…. It follows that those statutory damages are in the nature of penalties. “Where a statute is remedial in one part and penal in another, it should be considered as penal when enforcement of the penalty is sought.”… “Where the sum given by the statute is called damages by it, the fact will not prevent it being a penalty to be recovered by a penal action, if such is its real nature.”…

(citations omitted). The Court concluded that the TCPA is both remedial – when an individual seeks recovery for actual monetary loss – and penal – when an individual seeks the statutory damages of $500 for each violation. The insurer conceded that had the claimants elected to pursue actual damages, e.g., the paper and the ink and loss of use of the fax machine while the offending fax was being received, such an award would be covered under the policy. However, in this case, the class plaintiffs opted to recovery statutory damages. As such, the Court determined that those damages were penal in nature and, as penalties, they did not constitute “damages” under the terms of the insurance policy.

"Stacking" Issue to be Heard by California Supreme Court

Sara Thorpe — Mon, 07 May 2012 09:21:28 -0500

The California Supreme Court will hear arguments on May 30, 2012 on all sums, stacking, and number of occurrences in State of Calif. v. Continental Ins. Co. (2009) [170 Cal.App.4th 160].

This case presents the following issues:

(1) When continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer's policy limits?

(2) If so, is the "stacking" of limits - i.e., obtaining the limits of successive policies - permitted?

As we reported a few years ago, the California appellate court rulings in this environmental coverage case were that:

"All sums" - In a continuous loss situation, each insurer that covers any part of the claim has an obligation to pay the entire claim, and then seek reimbursement from other insurers.
The insured can stack policy limits across policy periods (absent policy language on the issues) - There was nothing in the policies before the court or law that precluded stacking of policies across applicable policy periods. This was a rejection of FMC Corp. v. Plaisted & Cos. (1998) 61 Cal.App.4th 1132.
Self-insured retentions (“SIRs”) must be paid under each excess policy (dicta) - If multiple policies each with an SIR are implicated, the court should require each SIR to be paid prior to coverage being available under the excess policy.
Distinction between deductibles and SIRs (dicta) - Deductibles are typically found in personal liability policies whereas SIRs are found in commercial policies. In policies with SIRs, limits are paid after payment of SIR but deductibles reduce policy limits.
Single occurrence – There were not four occurrences (i.e., (1) escape of contaminants through fractures in the rocks; (2) escape through the barrier; (3) escape through the underground streambed; and (4) an overflow from the pit). The single occurrence was the continuing exposure to the conditions (plural) at the site which combined to cause on-going contamination when the waste was put into the site. The court likened the site to a sieve with multiple holes; each hole is not a separate occurrence. The overflow from the pit did not constitute a separate occurrence because the State failed to show it resulted in separate damage.
No annualization of limits - There was no language in the multi-year policies indicating the limits were intended to apply annually.
The trial court's "set off" ruling was moot in light of the reversal of the trial court's no-stacking ruling and the size of the total loss.
Mitigation of damages doctrine did not apply - This defense is not available to insurers who claim the insured failed to take steps which would have reduced its damages (and inured to the insurer's benefit).
The trial court did not abuse its discretion in declining to apply the ancient documents or business records exceptions to the hearsay rule. Documents located in the excess insurers underwriting file could not be properly authenticated and presented in order to meet the requirements of those evidentiary rules.

$500 per fax TCPA Penalty is in the Nature of Punitive Damages and Uninsurable

Shaun McParland Baldwin — Mon, 23 Apr 2012 10:24:27 -0500

The Illinois Appellate Court rocked the TCPA world on Friday when it issued its decision in Standard Mutual Insurance Company v. Lay, 2012 IL App (4th) 110527 (April 20, 2012). The Court determined that the $500 liquidated damages assessed against a real estate agency for each ad faxed to a recipient without its permission, in violation of the Telephone Consumer Protection Act (TCPA), is a penalty in the nature of punitive damages, not insurable as a matter of Illinois law and public policy. The faxes in question had actually been disseminated by a fax broadcaster, Business 2 Business, which had represented to the insured that the faxes would only be sent to recipients who had consented to receive faxes of the nature contemplated by the insured. Unbeknownst to the insured, that was not the case. A class action suit was filed against the insured. The insurer agreed to defend under a reservation of rights. Because of a conflict of interest, the insured was given the option to select its own counsel. Ultimately, the insured agreed to settle with the class plaintiffs for over $1.7 million.

Under the settlement agreement, the plaintiffs agreed not to execute on any property or assets of the insured other than on its insurance policies and agreed to seek recovery to satisfy the judgment only from those insurance policies. In its order approving the settlement, the district court found the settlement was made in reasonable anticipation of liability; the amount was fair and reasonable; the insured sent 3,478 unsolicited faxes, that it believed it had the consent of the fax recipients and that the insured did not intend to injure the recipients. On cross motions for summary judgment in the declaratory judgment proceeding, the trial court found that the insurer owed no duty to defend or indemnify the insured in connection with the stipulated judgment entered in the underlying case.

A number of arguments were raised by the insurer, most notably that the insured had no right to settle without the insurer’s consent and that the statutory rate of $500 per fax is far in excess of actual damages incurred by any recipient and are equivalent to punitive damages. On the latter argument, the appellate court held that the purpose of the TCPA is to deter future sending of unwanted fax transmissions by those sending the faxes and to deter others from doing the same by shifting the cost and imposing penalties on those sending the unwanted fax transmissions. The court found that the actual cost to a recipient of the unwanted fax is a piece of paper, some toner, and the brief time involved in an employee taking the unwanted fax from the fax machine. The Court held: “The cost to the sender of the unwanted fax is far in excess of the cost to the recipient. It is a penalty to the sender.”

Viewing the purposes of punitive damages in Illinois, as retribution and deterrence, the court found the penalty imposed by the TCPA fell within those purposes and that any damages in excess of the actual damages suffered by the recipients is a windfall – which is contrary to the purpose of compensatory damages. The Court held that shifting the responsibility for payment beyond actual compensatory damages to the insurer frustrates the TCPA’s purpose of deterrence and preventing the sending of unwanted faxes. “There is no incentive for a current or future fax sender to comply with the TCPA if a violation is covered by insurance.” The court found that the TCPA penalty was a “statutory penalty” that imposed: (a) automatic liability for violation of its terms, (2) set forth a pre-determined amount of damages; and (3) imposes damages without regard to the actual damages suffered by the plaintiff. This is distinct from a remedial statute, which is contingent on damages proven by the plaintiff.

Ongoing Debate Over The Ongoing Operations Limitation On Additional Insured Coverage

Diane Polscer — Thu, 05 Apr 2012 13:07:00 -0500

In the context of “additional insured” coverage, the question of whether a tendering party qualifies as an insured is often complicated by restrictions in additional insured endorsements that limit who qualifies for “additional insured” status. Of these restrictions, one of the most debated is the “ongoing operations” limitation, commonly stated as follows: “Such person or organization is an additional insured only with respect to liability . . . caused, in whole or in part, by . . . your acts or omissions . . . in the performance of your ongoing operations for the additional insured.”

Although it appears that the insurance industry’s intent in adding the “ongoing operations” limitation was to clearly avoid coverage “for liability arising out of products-completed operations exposure,” Pardee Constr. Co. v. Ins. Co. of the West, 77 Cal. App. 4th 1340, 1359 (2000), that goal has not been accomplished, as the Ninth Circuit recently found that a standard “ongoing operations” limitation was ineffective to eliminate coverage for liability arising out of completed operations, Tri-Star Theme Builders, Inc. v. OneBeacon Ins. Co., 426 Fed. Appx. 507, 511 (9th Cir. 2011)(unpublished).

In Tri-Star, the Ninth Circuit held that the timing of damages was irrelevant to the analysis of an “ongoing operations” limitation, reasoning that: “The ongoing operations clause . . . addresses only the type of activity . . . from which the . . . liability must arise in order to be covered, not when the injury or damage must occur.” Id. (internal quotations omitted). In other words, if the named insured is engaged in siding operations at the time of acquiring the additional insured endorsement, then the only effect of the “ongoing operations” limitation is to restrict additional insured coverage to liability arising out of siding operations—regardless of when that work or resulting damage occurred. Under this rationale, the “ongoing operations” limitation is hardly any limitation at all.

While several courts have interpreted the “ongoing operations” limitation to specifically exclude additional insured coverage for liability arising out of products-completed operations exposure, the Ninth Circuit’s reasoning is already catching on in other courts. Compare, Pardee, supra; United Fire & Casualty Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951 (10th Cir. Colo. 2011); Duininck Brothers, Inc. v. Howe Precast, Inc., Case No. 4:06-cv-441, 2008 U.S. Dist. LEXIS 70938 (E.D. Tex. Sept. 19, 2008); American International Specialty Lines Insurance Co. v. KinderCare Learning Centers, Case No. 07-642-KI, 2010 U.S. Dist. LEXIS 78374 (D. Or. July 30, 2010) (excluding additional insured coverage for liability arising out of products-completed operations exposure), with McMillin Constr. Servs., L.P. v. Arch Specialty Ins. Co., 2012 U.S. Dist. LEXIS 8339 (S.D. Cal. Jan. 25, 2012) (“Finding the reasoning of Tri-Star persuasive, this Court finds there is an ambiguity in the Additional Insured Endorsement at issue in this case”).

Thus, attorneys representing carriers (or policyholders) in additional insured disputes need to be keenly aware of whether or not the applicable state’s law recognizes the ongoing operations limitation as an effective bar to coverage for liability arising out of completed operations.

First Circuit Adopts Broad Illlinois View Of Insurer's Right To Access Privileged Defense Reports

Mike Aylward — Wed, 21 Mar 2012 17:39:52 -0500

A recurring issue in coverage litigation is the extent to which insurers are entitled to obtain the file of defense counsel in cases where the insurer has either denied coverage or is at least reserving rights with respect to whether certain claims are covered.

This is an issue of particular consequence in cases involving intellectual property, products liability claims and other cases where the insured settles for a large gross sum without any allocation between those amounts that are covered and other categories of damages that are not. Absent an express allocation that could be relied on in the underlying settlement (or one that is not completely self-serving) insurers have sought access to the reports and analyses of defense counsel in an effort to determine what portions of such settlements may be covered or excluded.

Policyholders have argued with considerable success that insurers are not entitled to such information and that such communications are privileged. A singular exception to this rule has been the opinion of the Illinois Supreme Court in Waste Management, Inc. v. International Surplus Lines Ins. Co., 579 N.E.2d 322 (Ill. 1991), in which the court ruled that under the common interest doctrine, “when an attorney acts for two different parties who each have a common interest, communications by either party to the attorney are not necessarily privileged in a subsequent controversy between the two parties.” As a result, in Illinois, policyholders are required to turn over communications from defense counsel even if the dispute involves excess insurers that are disputing coverage. In a new opinion from the U.S. Court of Appeals for the First Circuit, Massachusetts has joined Illinois in adopting this expansive view of the common interest doctrine in coverage disputes.

In Vicor Corp. v. Vigilant Ins. Co., No. 09-1470 (1st Cir. March 16, 2012), a power converter manufacturer sought reimbursement from its liability insurers for $50 million that it had paid to resolve claims by cellular network operators that their networks had failed owing to a defect in the component manufactured by the insured. There was a significant dispute with respect to what portions of the settlement might be recoverable as “loss of use” damages insured under the various policies at issue. When the insurers deposed Vicor’s point man on the settlements, he claimed that the entire $50 million was covered as loss of use damages.

Vicor's insurers, being skeptical of this assertion, sought discovery of all reports from defense counsel which the insured had previously withheld on the basis of the attorney/client privilege and work product doctrine. Although the District Court (Young, J.) quashed these requests, the First Circuit has ruled, in remanding the case for further proceedings, that the insurers were entitled to this information.

As a preliminary matter, the First Circuit noted that in Massachusetts defense counsel that has been engaged to represent a policyholder has two clients and therefore communications to either party will not be privileged as to the other.

The court rejected Vicor’s argument that the insurers’ reservations of rights defeated any claim of a common interest. Even though the insurers were reserving rights, the First Circuit noted that they had paid for the defense and had partially funded a part of its settlement. Further, the court took note of the fact that the insured had supplied the insurers with numerous letters, reports and other communications setting forth counsel’s assessment of liability, strategic litigation planning and calculations of potential damage outcomes. All these were marked as “privileged and confidential” so as to foreclose their being disclosed to third parties on the basis of a claimed waiver. The court held that in such circumstances, the insured could not have it both ways and could not “make use of the benefit of the common interest exception to avoid waiver of the attorney/client privilege as to third parties and simultaneously assert the privilege against the parties with whom they share a common interest.”

As to the work product doctrine, the First Circuit declared that documents produced while the insurers were providing a defense were unlikely to be protected whereas those produced during the periods when the insurers denied coverage or refused to provide indemnity were likely to be protected. In this case, the court declared that, “Given the fact that the precise nature of the Ericsson-Vicor settlement is crucial to a determination of which of Ericsson’s claims are covered, the record supports the insurers’ substantial need for at least some of the documents at issue. . . .”

Under the circumstances, the First Circuit found that Judge Young had abused his discretion in denying the insurers’ motion to compel in its entirety and that the district court, on remand, should tailor a discovery order consistent with the First Circuit’s analysis of the issues.

This is a ruling of enormous potential importance. Up to this point, the common interest doctrine has only been explicitly acknowledged by Massachusetts court as applying to cases involving co-defendants with overlapping legal interests. See Hanover Ins. Co. v. Rapo & Jepsen Ins. Services, Inc., 449 Mass. 609 (2007). While it has been assumed to also clear apply in "full coverage" cases, this is the first Massachusetts case where it has been held to also apply in cases where the insured and insurers not only have conflicting interests but are actually in litigation against each other. It remains to be seen, however, whether it will be given equally broad application in cases where insurers have denied coverage outright or whether the claims involve excess insurers that have not been participating in the insured's defense.

In acknowledging the applicability of the common interest doctrine in cases where there are also conflicting interests among the parties, the First Circuit has also given a boost to efforts by insurers and reinsurers to protect shared case analyses and other privileged reports from being subject to disclosure to third parties.

Does the Pollution Exclusion Apply to Emissions that are Released Pursuant to Permit?

Shaun McParland Baldwin — Tue, 13 Mar 2012 16:00:07 -0500

In American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 489 (1997), the Illinois Supreme Court determined that the pollution exclusion only applies to injuries caused by “traditional environmental pollution.” If the emissions released by the insured are under a permit issued by the Illinois Protection Agency, are they still “pollutants”? Even if “pollutants,” can it be argued that such emissions are not “traditional environmental pollution?" The outcome might depend on whether the action is pending in state or federal court.

Yesterday, the Seventh Circuit held the pollution exclusion precluded coverage for claims against a municipality that had supplied contaminated water (containing perc) to its residents, notwithstanding the insured’s argument that the amount of perc in the water supply was below the maximum level permitted by environmental regulations. The Court in Scottsdale Indemnity Co. v. Village of Crestwood, Nos. 11-2385 et al. cons. (7^th Cir. March 12, 2012), began its analysis with a lengthy discussion concerning the source and reason for the pollution exclusion, the rationale for its limitation to traditional environmental pollution, and the difficulty that insurers have in calculating losses stemming from pollution.

In upholding the pollution exclusion’s applicability to the facts at issue, the Court found irrelevant that the municipality itself did not contaminate the wells from which it pumped the water. The Court reasoned: “The exclusion is for liability for harms resulting from the “dispersal,” “migration” or “release” of contaminants, not their creation or just their first distribution.” The Court also rejected the Village’s “core business activity” argument in which the insured suggested that where its core business activity consists of the manufacture or distribution of the contaminated product that the pollution exclusion should not apply, as otherwise the policy would not protect the insured against foreseeable risks run by such a supplier. Finally, the Court determined that the fact that the amount of perc in the Village’s water supply was below the maximum level permitted by environmental regulations did not affect the application of the pollution exclusion or its determination that the complaint filed against the insured municipality did not trigger a duty to defend. The complaint alleged that the perc caused injuries for which the plaintiffs were seeking damages. The duty to defend is based on the allegations of the complaint and not on the facts that emerge over the course of the litigation that might or might not give rise to a duty to indemnify.

The Seventh Circuit’s ruling (which this blogger believes was correct) could “arguably” be viewed as inconsistent with the September 14, 2011 Second District Illinois Appellate court decision in Erie Ins. Exchange v. Imperial Marble Corp., 2011 IL App (3d) 100380 (2^nd Dist., Sept. 15, 2011). In that case the court found that the policy’s pollution exclusion was “arguably ambiguous” and, therefore, the insurer owed a duty to defend the class action suit filed against the insured that alleged personal injuries and property damage resulting from the invasion of the plaintiffs' person and property "by noxious odors, volatile organic materials and hazardous air pollutants including, but not limited to STYRENE and Methyl Methacrylate (MMA), air contaminants and other hazardous material" in the emissions generated as part of Imperial's normal business operations." The insured, Imperial Marble, manufactured cultured marble vanities, countertops and other synthetic products at its facility. Along with other chemicals, it used styrene and MMA in its manufacturing processes which created odorous emissions that were dispersed into the atmosphere. The emissions were authorized under a permit issued by the Illinois Environmental Protection Agency (IEPA) in compliance with the federal Clean Air Act.

The insured argued that its emissions did not fall within the policy’s pollution exclusion because the emissions were not pollution due to the fact that they were allowed under a permit issued by the Illinois Environmental Protection. The insured also argued that the pollution exclusion was inapplicable because the underlying complaint alleged, in part, injury resulting from its normal business operations conducted in accordance with its permit. [The court did not comment on the fact that the complaint itself alleged that the insured emitted VOMs and HAPs in violation of the IEPA regulations and in amounts in excess of that allowed under its permit.]

The insurer maintained that the emissions constituted “traditional environmental pollution” and that coverage was precluded under the terms of the policy’s pollution exclusion. The Appellate Court held that the policy's pollution exclusion was arguably ambiguous as to whether the emission of hazardous materials in levels permitted by an IEPA permit constitute traditional environmental pollution excluded under the policy. Because the court determined it must resolve ambiguities in the complaint and policy in favor of the insured, it found that the insurer owed a duty to defend.

Interestingly, a month after the Imperial Marble decision was issued, the Second District Illinois Appellate Court, in Pekin Insurance Co. v. Pharmasyn, Inc., No 2-10-1000, (2^nd Dist. Oct. 19, 2011)(www.state.il.us/court/r23_orders/appellatecourt/2011/2nddistrict/october/2101000_r23.pdf ) issued an unpublished opinion, finding that the same pollution exclusion was not ambiguous, albeit in a scenario that did not involve emissions allowed by IEPA permit. The court held that the pollution exclusion applied to preclude coverage to an insured organic compound maker for several personal injury lawsuits filed by individuals who either worked for or in the same building as the insured. The insured was alleged to have negligently allowed “dangerous and toxic substances, including but not limited to, isocyanate chemicals to be released from open containers at the property, creating toxic fumes and seepage of hazardous material into the common areas, the environment, and into the premises occupied by the Plaintiffs.”

The insured argued that the underlying complaint did not allege “traditional environmental pollution” and that the pollution exclusion should not bar its claims. The court held that the factual scenario before it was not controlled by whether the dispersion of fumes constituted ‘traditional environmental pollution;’ rather, the question was whether the dispersion of pollutant fumes that caused injury to others at or from the premises was the type of accident specifically excluded by the insurance policy purchased by Pharmasyn.” The court determined that the policy language "at or from the premises" was not ambiguous. It further noted that the exclusion was broad, covering both pollution "at" the location of the business and pollution leaking "from" the location of the business. Since the Policy included "premises" in its pollution exclusion, the court found that the pollution exclusion precluded a defense and indemnity obligation.

Update on Coverage for Copyright, Trade dress and Slogan Infringement Actions - 2011 Decisions

Shaun McParland Baldwin — Tue, 13 Mar 2012 09:46:37 -0500

Coverage B of the CGL policy provides coverage for “personal and advertising injury.” That term is usually defined to include “infringing upon another’s copyright, trade dress or slogan in your [the named insured’s] ‘advertisement.’” The term “advertisement” is generally defined as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” Below are some of the 2011 cases that addressed those offenses.

Copyright infringement claims were at issue in PetroNet LLC v. Hartford Cas. Ins. Co., Civil No. 10-3675 (DWF/JJK).2011 U.S. Dist. LEXIS 79893 (D. Minn. Jul. 21, 2011) (applying Minnesota law). The insured had been hired by the claimant to construct a software interface between the claimant’s billing and accounting software. The insured then began offering for sale an internet-based system that was similar to the claimant’s billing software. The court held that the copyright infringement offense was not implicated because the infringement was not alleged to have taken place in the insured’s “advertisement.” The court also found that to the extent the insured’s advertisement on its website contained the claimant’s unique “numbering code convention,” such use was not the direct or proximate cause of the alleged injury and, thus, did not implicate the policy’s “advertising injury” coverage.

In Sunham Home Fashions, LLC v. Diamond State Ins. Co., No. 11 Civ. 372 (DLC). 2011 U.S.Dist.LEXIS 96416 (S.D.N.Y. Aug. 29, 2011) (applying New York law) the insured was alleged by its competitors to have infringed upon the copyright of its quilt designs. The court held that the copyright infringement claims did not allege the infringement of copyrighted advertising materials in the course of “your advertising activities.” The court rejected the insured’s argument that the claim alleged an advertising injury merely because the quilt designs were found in catalogues distributed by the insured or because the claimant sought an injunction against the insured’s continued advertisement of its infringing quilts. The court reasoned that the policy was intended to cover infringement of advertising concepts, not copyright infringement more generally.

Both copyright and trade dress infringement claims were addressed in Feldman Law Group P.C. v. Liberty Mut. Ins. Co., No. 11 Civ. 425 (SAS). 2011 U.S. Dist. LEXIS 71440 (S.D.N.Y. Jun. 30, 2011) (applying Pennsylvania law) (on reconsideration, 2011 U.S.Dist.LEXIS 88561, Aug. 6, 2011). The insured allegedly infringed upon the claimant’s copyright and trade dress by selling jewelry containing elements of the claimant’s jewelry designs. The court found that the action stemmed from an alleged misappropriation of a product, rather than an advertising concept and, thus, the claim could not be fairly characterized as alleging advertising injury. The court further reasoned that the policy’s coverage for the “use of another’s advertising idea” and “infringing upon another’s . . . trade dress . . . in your advertisement” offenses, along with the exception in the IP exclusion to trade dress in an advertisement, require that an injury be directly caused by advertisement, which was not alleged. On reconsideration, the court rejected the insured’s argument that a claim of trade dress infringement automatically implicates a policy’s advertising injury coverage.

There were a number of other trade dress claims addressed by the courts last year:

In Bridge Metal Indus., L.L.C. v. Travelers Indem. Co., Case No. 10-CV-5235 (KMK). 2011 U.S. Dist. LEXIS 101093 (S.D.N.Y. Sept. 7, 2011) (applying New York law), the insured was sued by National Lighting Company, Inc. ("National") for, among other things, trade dress infringement, false advertising and labeling, and breach of contract. The claims arose out of a relationship in which the insured manufactured lighting fixtures exclusively for National, pursuant to a confidentiality agreement. When the relationship ended, the insured was obligated to destroy or return the confidential information. However, instead, the insured allegedly used the confidential information to manufacture, market, and sell products identical to National's. The policy did not include trade dress infringement within the advertising injury definition. The insured argued that the claims asserted against it alleged the “advertising injury” offense of “infringement of title.” The court noted that neither the term “infringement” nor “title” were defined. It found the policy to be ambiguous and accordingly found a duty to defend. Notably, the insurer argued, in part, that the breach of contract exclusion applied to preclude any “advertising injury” liability coverage, because the trade dress claims arose out of the insured’s breach of its confidentiality agreement with the plaintiff. The court, however, disagreed. The court reasoned that the trade dress claims were independent of any contract and that such trade dress claims would exist even if the insured never entered into, or breached, the confidentiality agreement.

A claim against the insured for its creation and marketing of a “knock off” product was found not to trigger coverage in International Chem. Corp. v. Nautilus Ins. Co., No. 09-CV-359S. December 30, 2011 (U.S. Dist. Ct., W.D. NY). In that case, Medallion Products created and marketed a urine removal product aimed at eliminating pet stains and odors. It entered into a contract with McAlister whereby Medallion was to serve as the sole manufacturer and McAlister as the sole distributor of the product. They worked together to develop a television infomercial praising the effectiveness of the product and demonstrating its capabilities.

McAlister thereafter conspired with ICC to create a "knock-off" product. ICC represented to McAlister that it had reverse engineered the Medallion formulation and that its product was even better than the original. But, in fact, the ICC product contained no special enzyme found in Medallion's product and, unlike the original, it did not make the urine glow under blacklight. ICC created a new label and added the "AS SEEN ON TV" emblem. Further, ICC approved a label listing ingredients that it knew its product did not contain. In sum, ICC allegedly created a deficient knock-off product and falsely represented to McAlister that it could act as a substitute for the Medallion product. Medallion alleges that this substitute ICC product was eventually sold fraudulently in place of its product.

ICC sought coverage from Nautilus, claiming that the alleged fraudulent product which it manufactured, was sold in the marketplace under Medallion's "trade dress" and advertised in an infomercial, and thus, it was being accused of "advertising injury" for which Nautilus owed a duty to defend. Nautilus denied coverage, based on the exclusion for “advertising injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict "personal and advertising injury." ICC argued that the exclusion should not apply because there were causes of action that could be sustained against ICC that do not require intentional conduct. The court rejected this argument for two reasons. First, the Court held it must look to the facts alleged, not the causes of action brought. All of the facts accuse ICC of intentional conduct and the causes of action alleged require intentional conduct. Second, no such reasonable probability of coverage existed on the face of the complaint.

Infringement of slogan claims are always interesting. The ISO CGL policy forms do not define the term “slogan.” Courts have often struggled with determining whether certain phrases, names or references qualify as a slogan so as to trigger coverage. For example, in Interstate Bakeries Corp. v. OneBeacon Ins. Co., Case No. 09-00809-CV-W-SWH. 773 F. Supp. 2d 799 (W.D. Mo. Feb. 25, 2011) (applying Missouri law), the insured was sued for allegedly using the phrases “Nature's Pride” and “Nature's Choice” to advertise and promote its bread products, thereby allegedly infringing the claimant’s trademark “Nature's Own.” The insured argued that the underlying suit alleged claims for infringement of slogan and infringement of title, thereby implicating the “personal and advertising injury” liability coverage of an “Advertiser Advantage Policy” issued by OneBeacon. Specifically, the insured argued that the phrase “Nature’s Own” constituted both a slogan and title. Relying primarily on the decision in Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2d Cir. 2001), the court first determined that “Nature’s Own” constituted a trademarked named, and not a slogan. Additionally, because the subject policy defined the term “title” as “the caption or name of [any communication, regardless of its nature or form, including but not limited to advertising….],” the court determined that the phrase “Nature’s Own” constituted a brand name of a product, not the name of a communication as required by the policy’s definition of “title.” The Interstate Bakeries court also found that the policy’s unfair competition and infringement of trademark exclusions applied to preclude liability coverage for the insured.

Update on Coverage for Trademark Infringement Claims: 2011 was a busy year!

Shaun McParland Baldwin — Thu, 08 Mar 2012 15:38:07 -0500

In the past year, numerous courts have addressed whether various intellectual property claims were covered under the commercial general liability (“CGL”) policy. There is no question that Coverage B, the “personal and advertising injury” liability coverage of the CGL policy, covers some intellectual property claims. For example, the enumerated offenses set forth in the definition of “personal and advertising injury” include infringement of another’s copyright, trade dress, or slogan in the named insured’s “advertisement,” and use of another’s advertising idea in the named insured’s “advertisement.” Various intellectual property claims might also implicate coverage under the libel, slander, disparagement and violation of privacy offenses. I have set forth below a couple of recent decisions that address trademark infringement claims. I promise to provide an ongoing discussion of some of the recent cases addressing coverage for other intellectual property claims.

IP exclusions began to be used in Coverage B CGL policy forms in 2001. Among other intellectual property claims, the IP exclusion expressly excludes coverage for trademark infringement. The exclusion, however, has an exception for “infringing upon another’s trade dress, copyright or slogan in your [the named insured’s] “advertisement.” As a result, many policyholders have attempted to shoehorn trademark claims into one of the offenses set forth in the exception to the IP exclusion. This attempt was successful in Tower Ins. Co. v. Capurro Enters. Inc., No. C 11-03806 SI, 2011 U.S.Dist.LEXIS 144436 (N.D. Cal. Dec. 15, 2011) (applying California law). In that case, a number of claims were alleged against the insured, including trademark infringement, unfair competition, breach of contract, and unjust enrichment. The claims were based on the insured’s alleged use of its franchisor’s proprietary marks in the promotion of its paint products and services after termination of the parties’ franchise agreement. For example, the insured represented itself on its website, e-mail address, and telephone greeting as a former franchisee who had received franchise training. The court held that the suit alleged a potential claim for trade dress infringement in the insured’s “advertisement” and fell within the exception to the IP exclusion. The complaint explicitly stated that the insured wrongfully benefited from the use of the claimant’s trade dress and, while the court recognized that there may be some doubt as to whether this took place in the insured’s “advertisement,” it held that any such doubt must be resolved in the insured’s favor as concerns the duty to defend.

(2) Trademark infringement claim found covered under “disparagement” offense; trademark exclusion found not to preclude a duty to defend.

Burgett, Inc. v. American Zurich Ins. Co., No. 2:11-cv-01554-MCE-JFM. 2011 U.S.Dist.LEXIS 135449 (E.D. Cal. Nov. 23, 2011) (applying California law), provides an example of a policyholder seeking coverage under the “disparagement” offense for trademark infringement and unfair competition claims. The insured allegedly held itself out as the rightful owner of the claimant’s trademark and licensed the trademark to its co-defendant. The co-defendant then used the trademark in conjunction with the sale of pianos. The court held that the allegations stated a potential claim for disparagement, which can be satisfied by a derogatory statement that makes an indirect reference to a claimant’s products. The court concluded that the insured’s statement that it owned the trademark suggested that the claimant did not have a right to it and, as a result, degraded the claimant’s products by implication. Significantly, the court held that the trademark exclusion did not preclude coverage, stating: “while the underlying complaint does not explicitly state a claim for disparagement, the Court finds that the complaint could be amended to state a claim for the same. Thus, the trademark exclusion does not apply to bar coverage.”

(3) Trademark infringement claim found not to involve a “slogan” or “title”

The CGL policy at issue in Interstate Bakeries Corp. v. OneBeacon Ins. Co., Case No. 09-00809-CV-W-SWH., 773 F. Supp. 2d 799 (W.D. Mo. Feb. 25, 2011) (applying Missouri law), included infringement of slogan and infringement of title as covered offenses under the “personal and advertising injury” definition. The insured was sued for allegedly using the phrases “Nature's Pride” and “Nature's Choice” to advertise and promote its bread products, thereby allegedly infringing the claimant’s trademark “Nature's Own.” The insured argued that the underlying suit alleged claims for infringement of slogan and infringement of title, thereby implicating its insurer’s “personal and advertising injury” coverage. Specifically, the insured argued that the phrase “Nature’s Own” constituted both a slogan and title. Relying primarily on the Second Circuit decision in Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2d Cir. 2001), the court first determined that “Nature’s Own” constituted a trademarked named, and not a slogan. Additionally, because the subject policy defined the term “title” as “the caption or name of [any communication, regardless of its nature or form, including but not limited to advertising….],” the court determined that the phrase “Nature’s Own” constituted a brand name of a product, not the name of a communication as required by the policy’s definition of “title.” The Interstate Bakeries court also found that the policy’s unfair competition and infringement of trademark exclusions applied to preclude liability coverage for the insured.

In Citizen’s Ins. Co. v. Uncommon LLC, No. 10 C 7764. No. 10 C 7764, 2011 WL 3876936 (N.D. Ill. Aug. 31 2011) (applying Illinois law) the insured, Uncommon, was sued for infringement of its trademarked phrases “Uncommon Gifts” and “Uncommon Goods” in relation to its sale of customizable, mobile phone cases. The court concluded that the unfair competition and unjust enrichment claims would not have arisen but for the trademark infringement allegations and, thus, were precluded by the IP exclusion. The court also rejected the insured’s argument that the exception to the exclusion for the infringement of another’s slogan applied, finding that “Uncommon” was not a mere slogan or catchphrase but, rather, was the central component of the company name and brand.

(4) The IP exclusion precludes coverage for trademark claims

In Marvin J. Perry, Inc. v. Hartford Cas. Ins. Co., No. 09-1639., 2011 U.S. App. LEXIS 4237 (4th Cir. Feb. 25, 2011) (applying Maryland law), the insured allegedly accessed the claimant’s website to make it appear as if it was doing business under the claimant’s trade name and that it was the owner of the website. The court held that the “IP exclusion” precluded coverage for both counts and that there was no duty to defend.

In T.C. Dev. & Design Inc., v. Discount Ramps.com, LLC, Case No. 07-C-0861. 2011 U.S. Dist. LEXIS 36031 (E.D. Wis. Mar. 31, 2011) (applying Wisconsin law), the insureds allegedly infringed upon the patents and trademarks of T.C. Dev. & Design (“T.C.”) when they willfully manufactured, used, and offered for sale products that directly copied and infringed upon T.C.’s products. Because each of the causes of action was predicated on patent and trademark infringement, the court found that exclusion for intellectual property rights applied to preclude “personal and advertising injury” liability coverage. Further, based on the willful, deliberate and intentional conduct alleged in each of the causes of action, the court also found that the “knowing violations” and “known falsity” exclusions applied to preclude “personal and advertising injury” liability coverage.

(5) The breach of contract exclusion precludes coverage for trademark claim

In Advance Watch Co., Ltd. v. Travelers Prop. Cas. Co. of Am., No. 10 Civ. 3305, 2010 U.S. Dist. LEXIS 10974 (S.D.N.Y. Jan. 21, 2011), the claimant brought claims for breach of contract against the insured, arising out of a contract in which the claimant granted the insured a non-exclusive license of its trademark for use in the insured’s products. It was alleged that the insured failed to protect and preserve the claimant’s trademarks, designs and trade dress, protect its goodwill, and pay royalties. After the trial in the underlying suit, the claimant attempted, unsuccessfully, to seek leave to amend the complaint to conform to the proof in order to add claims under the Connecticut Unfair Trade Practices Act. The court in the insurance dispute held that because the claims arose solely out of the breach of contract dispute, coverage was excluded by the “breach of contract” exclusion. The court noted that the principles of judicial estoppel supported its decision, as the insured argued in its opposition to the post trial motion that its defense was based solely upon claims for breach of contract.

(1) Trademark infringement claim found to fall within the exception to the Intellectual Property (“IP”) exclusion.

Where A "Known Loss" Defense Fails, A CGL Insurer May Be Estopped from Relying on its Defenses To Coverage.

Shaun McParland Baldwin — Thu, 08 Mar 2012 12:34:08 -0500

After writing on the known loss issue presented by the Nipponkoa case (which was the subject of my Feb. 21, 2012 blog), I was alerted to a January 15, 2011 decision rendered by US District Court Judge Lefkow in Zurich Specialties London Ltd. v. Village of Bellwood, et. al, No. 07 CV 2171, US. Dist. Ct., ND IL (Jan. 15, 2011). The Nipponkoa case addressed the known loss doctrine under a first party property policy. The Zurich Specialties case involved two third party liability policies, both of which contained duty to defend provisions. The insurers denied any duty to defend, relying upon the known loss doctrine. The court, addressing Illinois law, found that the known loss doctrine did not preclude coverage under the earlier of the two policies because the insured did not have notice of a substantial probabability of a loss prior to the inception of that policy. That insurer was found to be estopped from relying of its policy defenses because it failed to defend or timely file a declaratory judgment action. The court found a question of fact existed as to whether the later insurer intended to cover what it acknowledged was a known loss.

The Village of Bellwood was an insured under a 1999- 2000 CGL policy issued by St. Paul Mercury and a 2000-2001 CGL policy issued by St. Paul Fire. In 1994, the Village Police Department began taping phone lines assigned to the Village Finance Department. The Village mayor and the Village police chief were aware of the taping at that time. On February 28, 2000, Narducci, then the Village comptroller, attended a Village meeting during which he allegedly first learned that Finance Department phone lines were being taped. As he believed that this taping was illegal, Narducci drafted a memorandum to Moore on March 1, 2000, demanding that the taping stop and inquiring about who had access to the tapes. Narducci also met with the mayor and police chief about the taping at some point between March 1, 2000 and May 10, 2000.

On May 10, 2000, the wiretapping was discussed at a Village Board of Trustees meeting. The police chief disclaimed knowing of the wiretapping. On January 9, 2001, an attorney for Narducci wrote to the Village mayor, regarding the wiretapping. The letter outlined the Village's potential liability for violating Narducci's and others' privacy and civil rights. While estimating that damages could exceed $210,000, Narducci requested $175,000 and assurance that the wiretaps had been removed to settle his claims prior to filing a lawsuit.

On February 28, 2001, Narducci brought suit against the insureds for violation of his fourth and fourteenth amendment rights. Narducci amended his complaint, adding class allegations and claims for violation of Title III of the Omnibus Crime Control and Safe Streets Act of 1968, the Illinois Eavesdropping Act, and Illinois common law intrusion into the seclusion of another. A class was certified and summary judgment was granted in the insureds' favor on the state law claims and any Title III claims involving calls made after Narducci learned of the wiretapping. See Narducci v. Moore, 444 F. Supp. 2d 924 (N.D. Ill. 2006), aff'd, 572 F.3d 313 (7th Cir. 2009).

St. Paul Mercury and St. Paul Fire both disclaimed coverage. They were ultimately sued by Zurich, who had undertaken the Village’s defense. In the coverage suit, St. Paul Mercury and St. Paul Fire argued that they had no duty to defend because the underlying complaint in Narducci made clear that the Village had been wiretapping its Finance Department's phone lines for at least five years prior to the inception of the policies. Zurich and the insureds responded that the existence of a known loss was not clear from the face of the Narducci complaint and, even if it were, St. Paul Mercury and St. Paul Fire were estopped from asserting this defense as they failed to timely seek a declaration of their obligations.

The Court noted that the underlying complaint provided several details regarding notice to the insureds of a substantial probability of a loss prior to Narducci's filing of the complaint, including: (1) Narducci's March 1, 2000 letter to the police chief asking the Village Police Department to stop taping the Finance Department phone lines; (2) Narducci's subsequent discussions with the police chief and mayor revealing that he had discussed the taping with the Will County State's Attorney; and (3) the mayor's and police chief’s acknowledgments that the wiretapping had been going on for approximately eight years prior to the filing of the complaint. St. Paul Mercury and St. Paul Fire contended that the allegation that the taping had been occurring for years prior to the inception of either policy and that the mayor and police chief knew of the taping prior to the inception of the policies means that the known loss doctrine applies.

The court held that mere knowledge of the taping by the Village did not clearly establish that the insureds knew of a substantial probability of loss as of June 1, 1999, when the St. Paul Mercury policy incepted. The issue was not whether the insureds knew of the taping but rather whether they knew or had reason to know that a probable loss would occur due to the taping. Because that question was left open by the complaint with respect to the St, Paul Mercury policy, the potential for coverage existed and St. Paul Mercury's duty to defend was triggered.

Notably, although St. Paul Mercury had initially declined coverage, it nonetheless belatedly agreed to pay 50% of the insured’s defense costs. The court ruled that St. Paul’s belated acceptance of the defense did not preclude application of Illinois’ estoppel doctrine. The court held that estoppel applies if an insurer breaches the duty to defend by not defending the insured under a reservation of rights or seeking a declaratory judgment in a timely manner. The court held that the proper test for application of the estoppel doctrine is whether a declaratory judgment action was sought within a reasonable time of the insurer learning of the underlying suit. The court determined St. Paul Mercury learned of the underlying suit at the latest by September 2001. The declaratory judgment action was filed by Zurich over five and a half years later in April 2007. The court held that five and a half year delay cannot be considered a reasonable time and, thus, St. Paul Mercury could not rely on any defenses subject to estoppel to avoid coverage.

As to the St. Paul Fire Policy, the court held that the Narducci complaint did demonstrate that the wiretapping became a known loss prior to July 1, 2000 inception of that policy. The court noted that once Narducci began making noise about the wiretapping around March 1, 2000, the insureds knew or at least had reason to know that there was a substantial probability that loss or liability would result from the wiretapping.

The court , however, also noted that an exception to the known loss doctrine exists where the parties intended for the known loss to be covered. Thus, if St. Paul Fire knew of the substantial probability of loss prior to the inception of the 00-01 policy and intended for it to be covered, the known loss doctrine does not exempt St. Paul Fire from the duty to defend. There was some evidence presented that St. Paul Fire might have known about the illegal wiretapping prior to issuing its policy. The court found that there was a question of fact as to whether St. Paul Fire intended to exclude any loss related to the wiretapping from coverage. Because it was not evident from the pleadings whether the parties intended to cover the loss, the court held it could not conclude at this stage whether St. Paul Fire has the duty to defend the insureds in Narducci.

The Fortuity And Known Loss Doctrines In Oregon

Diane Polscer — Thu, 23 Feb 2012 13:32:33 -0500

With respect to the fortuity doctrine, Oregon courts generally recognize that there is a public policy against providing insurance for intentionally inflicted injury. A-1 Sandblasting v. Baiden, 293 Or. 17, 26, 643 P.2d 1260 (1982) (although painter acted intentionally, his act was not the kind of purposeful infliction of injury that public policy places outside of insurance indemnification); Isenhart v. General Casualty Co., 233 Or. 49, 53-54, 377 P.2d 26 (1962) (same). The Oregon Supreme Court has held that where the “fortuity” concept is expressed in the coverage grant (e.g., where the coverage grant specifically limits coverage to liability arising from unexpected and unintended damages) the burden is on the insured to show that the damages were not expected or intended. ZRZ Realty Co. v. Beneficial Fire & Cas. Ins. Co., 349 Or. 117, 132 (2010). However, where the fortuity concept is embodied in an exclusion, is merely implied or depends on public policy, the burden is on the insurer. Id., at 138. This methodology reflects the general rule that the insured has the initial burden of proving coverage but the insurer has the burden of proving the application of an exclusion. Employers Ins. of Wausau v. Tektronix, Inc., 211 Or. App. 485, 509 (2007). This methodology also highlights the importance, in Oregon, of expressly barring coverage for expected or intended injuries, preferably by a clause in the coverage grant rather than through an exclusion.

With respect to the known loss doctrine, Oregon state courts have not specifically answered whether insurance coverage can exist for a loss known to the insured prior to acquiring insurance, but federal courts applying Oregon law provide some guidance. In Generali-U.S. Branch v. Bank of Montreal, 46 F.3d 1141, 1995 U.S. App. LEXIS 930, *2-4 (9th Cir. 1995) (unpublished), the court acknowledged that “there is no Oregon authority explicitly recognizing or rejecting the known risk/known loss defense,” but ruled that “absent any showing that the insured fraudulently misrepresented or concealed a material fact, knowledge on the part of the insured of a risk of loss would not render the policy void.” Similarly, in Malbco Holdings, LLC v. AMCO Ins. Co., 629 F. Supp. 2d 1185, 1201 (D. Or. 2008), which relied on a state court decision discussing life insurance, Commercial Bankers Life Ins. Co. v. Kirk, 66 Or. App. 359, 364, 675 P.2d 1069 (1984), the court wrote: “[I]t is likely that Oregon courts would align themselves with those jurisdictions which only allow use of the ‘known loss’ doctrine to invalidate coverage where the insurer shows that the insured fraudulently misrepresented or concealed a material fact.” Compare with City of Corvallis v. Hartford Accident & Indem. Co., 1991 U.S. Dist. LEXIS 21892, at *24 (D. Or. May 30, 1991) (unpublished) (holding that the "known loss doctrine disallows coverage where the loss to be insured is in progress or substantially likely to occur when the insurance contract is issued."). As it can be exceedingly difficult (and costly) to prove fraudulent misrepresentation by an insured, these rulings suggest the importance of expressly barring coverage for known losses. Given how Oregon courts have treated the fortuity doctrine – making a distinction between fortuity clauses embodied in the coverage grant and exclusions which express the concept – it would be wisest to include the known loss prohibition in the coverage grant itself, as is often seen in newer versions of standard liability forms.

In Oregon, the courts consistently focus on actual policy language rather than upon general concepts of insurance law. Interstate Fire & Cas. Co. v. Archdiocese of Portland, 318 Or. 110, 113-17 (1993). This practice is reflected in the decisions, above, concerning the fortuity and known loss doctrines. Thus, a carrier who wishes to rely on either of these doctrines in Oregon courts would be wise to pay close attention to the actual policy language and to tie its arguments to the language actually used. Reliance on the general insurance concepts of “fortuity” and “known loss,” as applied in other jurisdictions, is not likely to gain traction in an Oregon court absent specific policy language supporting application of those doctrines to the specific circumstances presented.

Does an Insurer "Waive" the Fortuity Requirement under an All Risk Policy By Failing to Exclude a Risk It Knows About?

Shaun McParland Baldwin — Tue, 21 Feb 2012 15:17:56 -0500

It is black letter law that in order to recover under an all risk policy, the insured has the burden of showing that its loss resulted from a fortuitous event. "Fortuitous" means happening by chance or accident, or occurring unexpectedly or without known cause. Black's Law Dictionary 664 (7th ed. 1999). If the insurer knows of a substantial risk of loss at the time it issues its policy and fails to exclude that risk, does the insurer thereby “waive” the fortuity requirement under its policy if a loss subsequently (and predictably) occurs? Yes, according to one federal district court in Illinois. Nipponkoa Ins. Co., Ltd. v. NDK Crystal, Inc., 3:11-cv-50205 (N.D. Ill. Dec. 29, 2011). Can that determination be made on the pleadings? Yes again.

The following facts were set forth in the insurer’s complaint: The insured operated pressurized vessels – called “autoclaves” - in its manufacturing facility. In early 2007, a pressurized caustic solution began spraying and leaking from one of the eight autoclaves in use at the facility. An inspection revealed a large crack in five of the autoclave lids, while the remaining three lids had indications of potential cracks. The first party property insurer and the insured participated in a joint metallurgical investigation to determine the cause of the lid failure. That investigation revealed - and the metallurgist advised the insured - that all of the autoclaves were at risk of catastrophic failure from stress corrosion cracking due to design and material defects. While the investigation was pending, the insured resumed operations with the three autoclaves whose lids did not yet have confirmed cracks, despite the warning from both the metallurgist and the design firm that there was a risk of serious injury or death should one of the autoclaves fail. The insurer also sent the insured a letter, stating that it would not provide insurance coverage in the event of loss or damage sustained as a result of returning the autoclaves to service in their current condition. The insurer advised the insured it was reserving the right to deny any claim for such loss or damage on the basis that the loss or damage did not result from a fortuitous event, but rather from a known loss and/or a loss in progress. Prior to receiving the insurer’s letter, the insured had already filed a lawsuit against the design firm; it amended the complaint in mid July of 2008- alleging that the heat treatment and fabrication of the autoclaves were negligently performed, that the design firm failed to comply with the implied warranties of merchantability or fitness for a particular purpose, and that the autoclave bodies and covers would require replacement. The insured did not, however, replace the autoclaves. On Aug. 1, 2009 a (renewal) policy was issued by the insurer.

On December 7, 2009 one of the autoclaves failed and exploded, resulting in significant damage to the facility as well as a fatality. After the insured put its insurer on notice, the insurer commenced an investigation under a reservation of rights. Its investigation determined that there had been a single failure of the steel wall in the autoclave, caused by a major and progressive stress corrosion crack. The insurer filed a complaint seeking, in Count I, a determination that the insured was not entitled to coverage because the claim did not arise from a fortuitous event, but was the result of the insured’s business decision to continue operating the autoclaves the they knew or should have known, prior to the start of the Policy’s coverage, that the autoclaves were defective and susceptible to catastrophic failure from stress corrosion cracking.

The insured contended that the insurer was barred from invoking a claim of “non-fortuity” or “known loss” under Illinois law because it provided insurance coverage with knowledge of the risks. The District Court agreed. The court also accepted the insured’s argument that a policy exclusion was necessary to shield the insurer from liability for claims arising from the autoclave explosion. As the policy did not contain such an exclusion, the insurer was barred from making a non-fortuity claim. Thus the court granted the insured’s motion to dismiss on the pleadings. The insurer has filed a motion for reconsideration, which is in the briefing stage right now. So the saga is not over.

A Close Shave

Mike Aylward — Fri, 17 Feb 2012 22:52:03 -0500

After thirty years in this business, there are a few colleagues who have both earned my respect and still have a full head of hair that they can call their own. One is Michael Blair of Gen Re, who has now agreed to shave his head to raise funds for the St. Baldrick's Foundation for childhood cancer research. If you're curious what Blair will look like bald or just think that this is an unusually decent thing for a reinsurance guy to do, go on line to support Mike's bid:

http://www.stbaldricks.org/participants/mypage/521362/2012

Mississippi Court Recognizes Right of Excess Insurer to Sue Defense Counsel for Malpractice

Mike Aylward — Fri, 17 Feb 2012 13:23:04 -0500

Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer is relatively new. The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel’s client relationship with the insured? A new opinion from the Mississippi Court of Appeals has ruled, however, that a client relationship may be implied where the carrier's cause of action is based upon direct dealings with defense counsel.

For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel. As a result, some states have ruled that excess counsel has no right of action at all. Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured. Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice.

In several of these cases, courts have ruled that the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)(" 'when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client' "); Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship"); Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ( "[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).

A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit. Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz. 2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide." Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith." In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications. The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide. This duty exists even if the insurer is a non-client."

Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation. However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however. In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.

In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier. In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident. The primary insurer (Royal) engaged local counsel to defend the case. A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense. The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm. This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos’ partners or trial attorneys were licensed to practice law in Mississippi. Although Royal insisted on continuing to use the Quintairos law firm despite its insured’s concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel’s belated designation of a physician as an expert witness. Thereafter, the law firm issued an updated evaluation of the case. Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American’s excess policy might be implicated. Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.

In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm. In 2009, the trial court granted the defendants’ motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm.

In 2011, the Court of Appeal affirmed the trial court’s dismissal of Great American’s negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation. In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage. The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm. The court declined to allow a direct claim based upon the excess insurer’s reliance on alleged misrepresentations with respect to case valuation. Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation.

It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured’s place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. “The only winner produced by an analysis precluding liability would be the malpracticing attorney.” Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation – Shady Lawn’s competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases.

Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm. Although the court “denied” Great American’s motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking. Whereas the Court’s earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American. Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a “stranger” to the attorney/client relationship. The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel’s claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.

Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American would support a claim for malpractice and that the trial court had therefore erred in granting counsel’s motion to dismiss. Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,

Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, “Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship.”

It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship. What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers. It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.

SJC Drops The Hammer On MA Bad Faith Claims

Mike Aylward — Fri, 10 Feb 2012 17:42:11 -0500

Massachusetts is one of a handful of states that allow third party claimants to sue liability insurers for failing to promptly settle their claims. It is unique in allowing tort claimants to recover punitive damages in such cases. In the wake of the Supreme Judicial Court's ruling this week in Rhodes v. AIG Domestic Claims it is evident that the price of failing to settle claims in which liability is reasonably clear can be high indeed.

In 1989, the Massachusetts legislature amended two sections of the state Consumer Protection Act (G.L. c. 93A) to read: “For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim.”

As these amendments were prompted by a series of case in which 93A awards against first party insurers were based on the insured's lost interest on the amount owed, it has been unclear ever since whether this language was also meant to apply to claims against liability insurers, who may be subject to 93A liability in Massachusetts if they fail to make a reasonable offer of settlement in a case in which their insured's liability is reasonably clear. In such cases, should the doubled or trebled award be based on the damage caused by the insurer's delay in effectuating a settlement or did these statutory amendments mandate that the insurer's liability reflect the injuries suffered by the tort claimant as the result of the insured's actions?

Marcia Rhodes had become a paraplegic after her vehicle was rear-ended by an 18 wheel truck. The truck was owned by Penske and leased to GAF, which had a $2 million primary policy with Zurich and a $50 million excess policy with National Union. Nearly two years after the accident, a representative of Zurich asked for permission to offer its full policy limit. Even so, settlement discussions dragged on, due in part to the positions adopted by National Union.

After efforts at mediation collapsed, the case went to trial and resulted in a $7.4 million verdict against GAF. A few months later, the carriers $9.4 million to settle, leaving open their claimed 93A exposure for not settling once the liability of GAF had become reasonably clear.

In the ensuing bench trial, the Superior Court found Zurich blameless but concluded that National Union had failed to make a timely offer of settlement. Nevertheless, the Superior Court declined to award damages as the plaintiff had testified that he never would accepted anything less than $8 million, more than what the court had deemed to be a reasonable offer.

This finding was reversed by the Appeals Court of Massachusetts in 2010. Although the trial judge had declined to find c. 176D liability on the part of the insurer for its failure to make a reasonable offer of settlement until the very eve of trial, given testimony by the plaintiff that he never would have accepted anything less than $8 million anyway, the Appeals Court found that this testimony was not dispositive, declaring that, “The causal link between AIGDC’s unfair settlement practices and injury to the plaintiffs was sufficiently established by showing that the insurer failed to initiate the settlement process once the merits of the plaintiffs’ claims were clear, thus depriving the plaintiffs of the opportunity to engage in a timely settlement process, and thereby forcing them to pursue recovery through the courts.”

The Appeals Court also awarded double damages based on AIGDC’s initial failure to make a reasonable offer of settlement after the jury awarded $9.4 million to the plaintiff, rejecting the insurer’s argument that the issues in the case and its grounds for appealing the verdict were so complex that the plaintiff should have been required to present expert testimony to support its extra-contractual argument. However, the court declined to base this doubled award on the $9 million settlement and limited the award to 1% for each of the five months in which AIGDC had delayed in settling post-verdict.

AIGDC appealed from these findings. The plaintiffs cross-appealed from the holding that they could only recover lost interest on the value of the settlement. Although the Supreme Judicial Court accepts very few requests for further appellate review, it took this case, setting the stage for a final clarification of the rules governing how damages should be awarded in such cases.

In its February 10, 2012 opinion, the SJC agreed that National Union had acted in bad faith in failing to settle the case before trial. The court refused to find that the insurer's failure to make a reasonable offer of settlement was excused by the apparent futility of such an offer, declaring that:

the plaintiffs need only prove that they suffered a loss, or an adverse consequence, due to the insurer's failure to make a timely, reasonable offer; the plaintiffs need not speculate about what they would have done with a hypothetical offer that the insurers might have, but in fact did not, make on a timely basis

Further, the SJC ruled that the Appeals Court had erred in refusing to give literal effect to the 1989 amendments to 93A, ruling that the double damages owed by AIGDC should be based on the multi-million dollar award rendered by the jury against GAF, not based on the loss of use of these settlement funds for a few months. The court rejected AIGDC's distinction between first and third party cases, declaring that 93A "does not require a causal relationship between the unfair practice and the underlying judgment itself; rather, the statutory causation requirement focuses on the relationship between the unfair practice and injury to the plaintiff." Similarly, the court rejected AIGDC's argument that the accident caused by its insured involved a different transaction or occurrence than that resulting in its 93A liability for failing to settle.

The court also declined to find that an award of damages in this manner exceed the due process standards for punitive damages awards enunciated by the U.S. Supreme Court in State Farm v. Campbell and other recent cases. The SJC questioned whether Campbell even applied to cases where judges issued awards (runaway judges are presumed not to be a concern) and declared that, in any event, the award in this case was two times the actual damages and therefore well within the Supreme Court's dicta concerning ratios. (This particular issue was highlighted in the amicus brief that our law firm filed on behalf of the American Insurance Association in support of AIGDC 's position).

Although 93A claims have been a ubiquitous feature of insurance litigation in the Commonwealth of Massachusetts since the 1980s, cases such as Rhodes illustrate the extent to which the liabilities that insurers may face in such cases are not limited to coverage disputes with policyholders.

The SJC declined to impose liability on Zurich, however, declaring that it had acted properly in tendering its limits to the excess insurer once liability became clear. This holding was of interest since at least one judge had suggested at oral argument that Zurich had an independent duty to offer its limits directly to the plaintiffs and could not merely tender to the excess insurer. In this case, however, the SJC took note of the grievous injuries suffered by Rhodes and opined that Zurich's primary limit was clearly not enough to effect a complete settlement.

In the wake of Rhodes, liability insurers face heightened risk if they dare to take severe injury cases to trial. While the SJC has doubtless acted with the best of intentions in creating such severe penalties for failing to settle, it is unclear whether the Court has thought through the long-term consequences of its ruling on the insurance marketplace or the cost of such rulings to policyholders, both in terms of increased costs of insurance and sums that insureds may now be forced to pay through self-insured retentions, deductibles and retro-rated premiums.

Insurer Standing in Asbestos Bankruptcy Proceedings

Sara Thorpe — Sat, 04 Feb 2012 15:21:00 -0500

We are into a new year and with it comes a glimmer of hope that insurers will be heard (at least to some extent) in asbestos bankruptcy proceedings. However, two new decisions from the Ninth Circuit are a mixed bag, on the one hand allowing insurers standing to be heard on a debtor’s reorganization plan, but holding that insurance policy anti-assignment clauses and pre-petition agreements to arbitrate are not enforceable when they “conflict” with the purposes of the bankruptcy code.

The Ninth Circuit in In Re Thorpe Insulation, (January 24, 2012) __ F.3d _ (12 C.D.O.S. 939), reversed a district court’s finding that non-settling insurers lacked standing to challenge the asbestos debtor’s reorganization plan under 11 U.S.C.§ 524(g). The Ninth Circuit found the plan has a financial impact on the insurers despite the bankruptcy court’s decision the plan was “insurance neutral.” The Ninth Circuit held the insurers’ appeal was not moot even though the plan was already in force and operational. However, the Ninth Circuit held California law upholding an insurance policy’s anti-assignment clause is preempted by federal bankruptcy law.

In In Re Thorpe Insulation, (January 31, 2012) F.3d (2012 US App Lexis 1691), the Ninth Circuit held the insurer (Continental) could not enforce its pre-petition agreements with Thorpe to arbitrate disputes because the issues to be arbitrated were core issues, intertwined with other issues to be decided in the reorganization. Further, the bankruptcy court had discretion to deny the request for arbitration where in conflict with the purposes of the bankruptcy code.

Thorpe Insulation Company and its related companies distributed, installed and repaired asbestos insulation products. There have been over 12,000 suits against Thorpe from claimants alleging injury from asbestos exposure. Thorpe’s insurers defended and settled many of the suits, paying more than $180 million in settlement before exhausting their policies’ aggregate limits. Thorpe then claimed the asbestos claims should implicate the insurers’ non-aggregate limits for “operations” claims. Many insurers settled with Thorpe with the settlement proceeds being used to fund a trust established pursuant to 11 U.S.C. § 524(g).

Thorpe obtained bankruptcy court approval for its reorganization plan. Insurance companies that had not settled with Thorpe attempted to challenge the plan but were denied standing by the bankruptcy court. Among other things, the plan purported to be insurance neutral and preserve all defenses of the non-settling insurers. The non-settling insurers disagreed, alleging the plan economically impacted them and that, by allowing Thorpe to assign their policies to the trust, the plan violated anti-assignment provisions in the insurers’ polices.

The district court confirmed the plan in September 2010. The plan became effective and operational on October 22, 2010 and the trust began paying claims.

The non-settling insurers sought an emergency stay challenging the plan which was denied. The insurers appealed. In this decision, the Ninth Circuit reversed and remanded.

Standing

To have standing in bankruptcy court, a party must meet three requirements: (1) be a “party in interest” under 11 U.S.C.§ 1109(b); (2) have a traceable interest in the outcome as required by Article III of the U.S. Constitution; and (3) meet the federal court’s prudential (“zone of interest”) test.

The Ninth Circuit found the insurers met the “party in interest” requirement, agreeing with the insurers that the plan could have a negative financial impact on non-settling insurers under several scenarios, including that the plan vests the trustee with power to make liability decisions without input from the insurers on the reasonableness of the trustee’s decision. Further, the plan authorizes the trustee to order claim payments from the insurers that may be higher than what they would pay absent the plan. In addition, the plan restricts the insurers’ contribution rights as well as contractual rights to seek reinsurance against settling insurers. It also impacts the insurers’ potential to recover in the event the plan’s trust were to become insufficiently funded. Finally, the plan allows asbestos claimants to file suits against the insurers, which is direct evidence the insurers are a party in interest to the bankruptcy proceeding.

The Ninth Circuit also found the insurers met the constitutional and prudential standing requirements because they were able to show: (1) an injury in fact traceable to the challenged action; and (2) that they were within the prudential zone of interest as they were subject to the plan’s payment structure.

Mootness

The Ninth Circuit rejected Thorpe’s argument that the appeal was moot since the plan was already operational and had begun to pay claims. The Ninth Circuit held the appeal was not constitutionally moot because an appellate court was able to give effective relief to the insurers by reversing the plan confirmation or requiring modification of the plan to address the insurers’ legitimate economic and contractual concerns.

The Ninth Circuit held the appeal was not equitably moot based on four factors: 1) the insurers had actively pursued their rights by seeking a stay that was refused by the Ninth Circuit and district court; 2) the plan had not been substantially consummated because only $135 million of the $600 million in settlement proceeds had been transferred to the trust with only a portion of trust proceeds distributed to claimants; 3) the bankruptcy court could fashion a remedy that adequately protects the rights of all parties; and 4) the bankruptcy court could also modify the plan and devise a remedy that addressed the relief sought by insurers.

Examples, according to the Ninth Circuit, of how the plan could be modified included the following. First, Thorpe could be ordered to contribute more to the trust. Second, the plan could be amended to make clear trust distribution procedures were not binding on direct suits filed against the non-settling insurers. Third, the bankruptcy court could allow the non-settling insurers to present evidence and argue for modification of the trust distribution procedure. Fourth, the bankruptcy court could place the trust under new governance if the non-settling insurers were able to show the trust was in the hands of biased parties.

Anti-assignment

However, the Ninth Circuit upheld the district court’s ruling that federal bankruptcy law preempted state law on the insurers’ anti-assignment clause issue. The bankruptcy code provides that a debtor’s property becomes the property of the estate notwithstanding a contract provision that restricts transfer of the debtor’s interest. (11 U.S.C. § 541(c).) This provision expressly contemplates the inclusion of a debtor’s insurance policy in the bankruptcy estate.

Arbitration

In a decision the following week, the Ninth Circuit upheld the bankruptcy court’s and district court’s rulings that Continental could not compel arbitration. Continental had sought to enforce its agreement with Thorpe, pursuant to the Wellington Agreement of 1998 and a Settlement Agreement entered in 2003, that disputes would be arbitrated. Continental’s dispute with Thorpe related to that Thorpe had: 1) acquired settling insurers’ contribution, indemnity and subrogation rights against Continental; 2) assigned rights to the bankruptcy trust; and 3) negotiated, structured, and confirmed a plan for claimants to pursue direct actions against Continental. All of this was in contravention of the Settlement Agreement.

The Ninth Circuit found the bankruptcy court was within its rights to deny the motion to compel arbitration because Continental’s claims were a core matter. According to the Ninth Circuit, Continental’s claims would have to be coordinated with the plan confirmation process, Continental’s challenges to Thorpe’s actions involved Thorpe’s exercise of rights in bankruptcy, and Continental’s claim could not stand alone.

Further, the Ninth Circuit held the bankruptcy court had discretion to decline to enforce an otherwise valid arbitration clause in order to further the purposes of the bankruptcy code.

A Review Of Significant Oregon Appellate Decisions Of 2011

Diane Polscer — Wed, 25 Jan 2012 14:05:17 -0500

2011 is not likely to be remembered as a year during which Oregon’s Supreme Court or Court of Appeals issued opinions that have a dramatic impact on insurance coverage litigation in Oregon. But two related environmental cases that have long histories continued to provide Oregon’s appellate courts with opportunities to address, if not necessarily answer, issues concerning ORS 742.061. This statute is significant to insurance coverage matters because it provides that an insured who brings an action on any policy of insurance may recover its attorney fees if two conditions are met: first, that the insurer does not settle within six months of the insured’s filing of a proof of loss, and second, that the insured recovers more than the insurer tendered.

In Certain Underwriters at Lloyd’s London v. Mass. Bonding & Ins. Co., the insureds in an underlying coverage action had obtained a judgment against the plaintiff insurers, London, for the insureds’ attorney fees pursuant to ORS 742.061. London then filed this action for inter-insurer contribution against the defendant insurers who had also provided policies to, but subsequently settled with, the insureds. In granting the defendant insurers’ motion for partial summary judgment, the trial court ruled that London was not entitled to inter-insurer contribution from the defendant insurers for the attorney fees awarded to the insureds, and London appealed that ruling. In August 2011, in Certain Underwriters at Lloyd’s London v. Mass. Bonding & Ins. Co., 245 Or App 101 (2011), the Oregon Court of Appeals affirmed the trial court’s ruling by finding that London’s liability for a statutory award of attorney fees did not arise out of a contractual obligation it shared with the other insurers. Rather, the statutory obligation arises only after the insured prevails at trial and obtains a recovery that exceeds the insurer’s highest tender. The Court of Appeals noted that in the underlying coverage action the insureds settled with the defendant insurers and thus never satisfied the statutory prerequisite that it obtain a recovery that exceeded the defendant insurers’ highest tenders. As the insureds accepted the defendant insurers’ highest tenders, the insureds never met the terms of the statute regarding the defendant insurers, and thus the defendant insurers did not share the liability for the insureds’ attorney fees with London.

In October 2011, in the underlying coverage action noted in the opinion addressed above, the Oregon Supreme Court considered whether a 2005 amendment to ORS 742.001 that excepts “surplus lines insurance policies” from ORS Chapter 742, applies to modify the scope of ORS 742.061. ZRZ Realty Co. v. Beneficial Fire and Casualty Insurance Company, 351 Or 255 (2011). While the ZRZ Realty court did not expressly state that the amendment excepting surplus lines policies modifies ORS 742.061, the Court did find that “to the extent the 2005 amendment applies to ORS 742.061, that amendment does not apply to actions filed before its effective date.” As the ZRZ Realty case was filed prior to the effective date of the amendment, and as the Court held that the 2005 amendment does not apply retroactively, the Court found that the amendment had no application to this action.

The ZRZ Realty court then considered whether the plaintiff insureds were entitled to attorney fees they sought under ORS 742.061. The Court held that because the insureds had timely submitted a proof of loss regarding the insurer’s duty to defend, and because the insureds recovered more defense costs than the insurer had tendered, then the insureds were entitled to recover their costs for establishing the duty to defend. But, as the insureds had not yet recovered any indemnification costs from the insurer, the ZRZ Realty court held that the insureds were not entitled to recover attorney fees related to the duty to indemnify. The ZRZ Realty court noted, though, that this decision does not preclude the insureds from recovering attorney fees in the future for the work that their attorneys have done, both at trial and on appeal, to establish the insurer’s duty to indemnify if the insureds meet the terms of the statute. It is reasonable to anticipate, then, that these cases may continue to provide Oregon’s appellate courts with additional opportunities to address issues regarding ORS 742.061.

Trolling for Tech Toys

Mike Aylward — Tue, 06 Dec 2011 18:55:46 -0500

OK. I admit it--I didn't wait for Santa Claus this year. I am now the ecstatic owner of a new IPad. Having spent much of Thansgiving weekend playing Scrabble on line with a friend in Mississippi and listening to Bob Dylan on Pandora, I am also discovering the wealth of useful legal applications that this new technology presents for coverage practicioners.

A particularly cool new app is "Picture It Settled", a free program designed by a San Antonio lawyer that allows you to automatically track all the demands and offers in a settlement negotiation. Anyone who has sat through a construction defect mediation can immediately grasp the value of this app. It also has a particularly cool alogrithm that creates a predictive capability once you've entered the numbers from several past mediations, allowing you to more accurately guess the ultimate cost of settlement and the most likely response to settlement offers and demands.

The Oregon Supreme Court Examines The Application Of An Statutory Amendment Excepting "Surplus Lines Insurance Policies" To Oregon's Statute Allowing A Plaintiff Bringing An Action On An Insurance Policy To Recover Attorney Fees

Diane Polscer — Mon, 21 Nov 2011 14:58:32 -0500

In ZRZ Realty Co., et al. v. Beneficial Fire and Casualty Insurance Company, et al. (OR SC S057155), the Oregon Supreme Court allowed the plaintiffs to recover part of their attorney fees incurred to establish insurance coverage in a dispute regarding environmental contamination resulting from the plaintiffs’ activities dismantling U.S. Navy and merchant marine vessels at a site on the bank of the Willamette River in Portland, Oregon.

In reaching its decision, the Court considered whether a 2005 amendment to ORS 742.001 that excepts “surplus lines insurance policies” from ORS chapter 742, applies to modify the scope of ORS 742.061. ORS 742.061 provides that a plaintiff who brings an action on any policy of insurance may recover its attorney fees if the insurer does not settle within six months of the plaintiff’s filing of a proof of loss, and if the plaintiff recovers more than the insurer tendered. Significantly, the Court did not expressly state that the 2005 amendment applies to ORS 742.061. Instead, the Court held that “to the extent the 2005 amendment applies to ORS 742.061, that amendment does not apply to actions filed before its effective date.” The Court also noted that it expressed no opinion on how the 2005 amendment applies to other provisions of ORS chapter 742. As the plaintiffs’ action in the case at issue was filed prior to the effective date of the amendment, and as the Court held that the 2005 amendment does not apply retroactively, the amendment had no application to the plaintiffs’ action.

The Court then considered whether plaintiffs were entitled to attorney fees they sought under ORS 742.061. The Court held that because the plaintiffs had timely submitted a proof of loss regarding the insurer’s duty to defend, and because the plaintiffs recovered more defense costs than the insurer had tendered, the plaintiffs were entitled to recover their costs for establishing the duty to defend. As the plaintiffs have not recovered any indemnification costs from the insurer, however, the Court held that the plaintiffs are not entitled to recover attorney fees related to the duty to indemnify.

The Court noted, though, that this decision does not preclude plaintiffs from recovering attorney fees in the future for the work that its attorneys have done, both at trial and on appeal, to establish the insurer’s duty to indemnify if the insurer did not settle with plaintiffs within six months of their filing a proof of loss and if plaintiffs recover on remand more indemnification costs than the insurer had tendered.

Forum Selected as LexisNexis Top 50 Insurance Blog for 2011

Kevin Merriman — Mon, 14 Nov 2011 14:40:40 -0500

We're pleased to learn that the National Insurance Law Forum has been selected as a Top Insurance Blog for 2011 by the LexisNexis Insurance Law Community. Many thanks to LexisNexis staff, the Insurance Law Community's Advisory Board and our readers for your continued interest in our blog. A complete list of Top Inusrance Blogs for 2011 can be found here.

The District Court For The Western District Of Washington Finds A Certificate Of Insurance Does Not Satisfy The Written Contract Or Agreement Requirement Of A CGL Policy's Additional Insured Provision

Diane Polscer — Wed, 12 Oct 2011 13:23:36 -0500

In Ohio Cas. Ins. Co. v. Chugach Support Servs., 2011 U.S. Dist. LEXIS 115759 (W.D. Wash. Oct. 6, 2011), the District Court for the Western District of Washington, applying Washington law, found that an insurance certificate only evidences the existence of a policy, and, as a matter of law, it cannot satisfy the written contract or written agreement requirement of a CGL policy’s additional insured provision.

In this case, Chugach Support Services, Inc. (“Chugach”), a general contractor, entered into a subcontract with Security Resources International (“SRI”) for SRI to provide certain services. The subcontract required SRI to secure, maintain, and file proper and acceptable evidence of insurance with Chugach.

SRI did not obtain the required insurance, but subsequently SRI signed and accepted a proposal for work by Ohio Casualty’s insured, R-Custom Excavation (“R-Custom”). That proposal did not contain insurance requirements. After executing the SRI/R-Custom agreement, SRI requested R-Custom to provide certificates of insurance naming SRI and Chugach as additional insureds on R-Custom’s Ohio Casualty CGL policy, which it appears R-Custom did.

In response to an underlying lawsuit, Chugach took the position that it was an additional insured under R-Custom’s Ohio Casualty policy and entitled to a defense and indemnity under that policy as to the underlying lawsuit. Ohio Casualty then brought this action for a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend Chugach and SRI or indemnify them for the money they paid as a result of the underlying suit.

After considering and disregarding Chugach’s assertions that the Ohio Casualty policy’s additional insured provisions were ambiguous, the District Court found that for Chugach to be an additional insured under that policy, “you,” meaning the named insured R-Custom, not someone else, would have had to be “required” to name Chugach as an additional insured in a written contract or written agreement. R-Custom had no written agreement with Chugach (and no written agreement with SRI that contained any insurance requirement). The District Court then found Chugach’s further argument that the certificate of insurance issued by a broker can be the “written agreement” required under the policy to be manifestly unreasonable. The District Court held that a certificate of insurance does not contain all the elements of a “written contract” or “written agreement” under Washington law. Instead, the certificate of insurance expressly disclaimed any promise of coverage. On its face, the certificate stated that it is issued as a matter of information only and confers no rights upon the certificate holder, and does not amend, extend, or alter the coverage afforded by the policy. By its own terms, it does not “agree” to anything except the existence of a policy. An insurance certificate, under Washington law, therefore, is only evidence of the existence of a policy, and it follows that, as a matter of law, it cannot satisfy the requirements of a written contract or written agreement.

The District Court thus granted summary judgment in favor of Ohio Casualty, entitling it to a declaratory judgment that under its policy issued to R-Custom, Ohio Casualty had no duty to defend or indemnify Chugach and SRI for the money they paid as a result of the underlying suit.